DALLAS — Voters in Arkansas will decide in November whether to remove the constitutional limit on the interest rate on public debt and loosen other restrictions on governmental finance.
If approved, the constitutional amendments would become effective Jan. 1, 2011.
Issue No. 2 on the November ballot would repeal existing provisions that limit the maximum lawful interest rates on bonds issued by governmental units. Approval of the issue would also enable local governments to finance energy improvements at public facilities with bonds supported by the savings in utility costs.
The state’s constitution, which was first adopted in 1874, currently limits the interest rate on governmental bonds supported by tax revenue — including general obligation debt and road bonds that rely on gasoline tax revenue — to no more than 500 basis points above the primary rate of the Federal Reserve Bank of St. Louis. The interest rate on local capital improvement bonds supported by sales tax revenue is constitutionally limited to no more than 200 basis points above the primary rate.
U.S. Sen. Blanche Lincoln, D-Ark., sponsored federal legislation in 2009 that exempted Arkansas issuers from the interest rate limit, but that exemption will expire at the end of 2010.
Mark McBryde, director of public finance at Stephens Inc. in Little Rock, said it is important that the constitutional limit on interest rates be eliminated.
“Cities and counties in Arkansas have financed every sort of capital improvement, from roads to civic centers to jails, with sales and use tax bonds,” McBryde said. “With long-term rates as low as they are, a lot of them have forgotten that it was impossible to issue those bonds in the 1980s.”
The three-part Issue No. 2 includes a provision that authorizes bonds to finance energy-efficiency projects. The bonds can be supported by a pledge of the savings realized with more efficient electrical equipment or any other source of revenue.
The General Assembly passed legislation in 2005 that gave cities and counties the authority to issue revenue bonds to finance energy-saving improvements at public facilities through energy cost savings.
However, Attorney General Dustin McDaniel issued an opinion in June 2008 that the bonds violated the constitutional requirements for voter-authorized debt and none have been issued.
McDaniel said the constitution requires revenue bonds to be supported by income derived from projects financed by the debt, and lowering an existing cost is not revenue.
Issue No. 3 would make it easier for the state to issue general obligation bonds to attract economic development. The proposed amendment would replace the current minimum project size with unspecified requirements to be determined by the General Assembly.
The current threshold in Amendment 82 allows bonds to be issued only for project that provide at least $500 million in private investment and the creation of at least 500 jobs.
The requirements are so high that no project has ever qualified for bonds under the six-year-old program, according to Kurt Naumann, assistant director for strategic planning at the Arkansas Economic Development Commission.
“When Amendment 82 was approved by voters in 2004, we were competing for super projects such as steel mills and car assembly plants,” Naumann said. “Now we’re competing for projects that may not be as large, but are still significant.”
If the bond question is approved, he said, the state could be able to issue up to $200 million of bonds a year to build roads, utility lines, and other infrastructure to serve new or expanded commercial facilities.