In an anti-debt climate, voters in the two states cleared the way for spending on major economic development projects.
In the post-recession era, "debt" is a four-letter word. State debt levels as a whole have been stagnant in recent years and, in 2014, actually recorded the first decline in the 28 years Moody's Investors Service has been tracking them.
It's in this climate that voters in Arkansas and California have cleared the way for more spending on mega projects that could be economic development boons in those states.
In Arkansas, voters overwhelmingly passed a ballot initiative that eliminates the state's current 5 percent cap on debt related to economic development projects. Proponents of Arkansas’ Issue 3, who included Gov. Asa Hutchinson, want the cap lifted so the state can be more competitive in attracting new corporations by helping fund mega projects. Voters easily approved the measure, 65-35.
In California, which has one of the highest taxpayer debt burdens in the country, the results were much closer. Voters narrowly rejected a proposal, 51-49, that could have derailed two of Gov. Jerry Brown's legacy projects. Prop. 53 would have limited the state's ability to issue debt for major projects by requiring voter approval to issue more than $2 billion in revenue bonds.
Brown and the state Chamber of Commerce formed an unlikely duo in opposing the measure, which they said threatened the planned high-speed train from San Francisco to Los Angeles and a pair of giant tunnels to help ferry water across the state.
Each state's history with bond debt has a lot to do with how these proposals got on the ballot in the first place.
In Arkansas’ case, in 1933 it was the first and only state to go bankrupt. That legacy has subtly shaped its fiscally conservative policymaking since then, including the establishment of a cap on economic development bonds in 2004. As a result, taking all types of government debt into account, Arkansas has the 13th lowest taxpayer burden in the country, with $1,400 in debt per resident.
While California never went bankrupt, it did infamously struggle to make ends meet during the Great Recession, issuing IOUs to vendors and then issuing more debt to cover its expenses. The practice led to multiple credit rating downgrades. Things have improved since then, but California still ranks among the lowest-rated states. And, taking all types of government debt into account, it also has the seventh highest taxpayer burden, owing $20,900 per resident.
California doesn’t have a debt cap like Arkansas, but voter approval is already required for general obligation debt, which is paid back through the government’s general tax revenue. But the measure would have added to that approval for major revenue bond projects, which are paid back from dedicated revenue streams like gas taxes.
Meanwhile, proponents of Arkansas’ Issue 3 want more flexibility so it can woo more corporations. It recently won a new steel mill and a new Chinese-owned paper mill but is getting perilously close to its debt cap.
Naysayers have warned that lifting the cap could open the doors to megadeals like Nevada’s $1.3 billion package to Tesla Motors and Washington state’s $8.7 billion in incentives to Boeing. They also worry that eliminating the state’s debt cap entirely will lead it down a path similar to states like California.
But given Arkansas’ long history of fiscal conservatism, observers say it’s unlikely the state will embark upon a bond bonanza.
“Yes, it can be risky eliminating the debt cap but that doesn’t mean it can’t be managed,” said Bill Bergman, director of research for the fiscal transparency group, Truth in Accounting. “Informal mechanisms can be just as effective as formal ones.”