Will Issue 3 bring jobs or bankruptcy taxes? Issue 3 proposes to allow local governments to appropriate tax dollars directly to private companies for economic development projects and to pay private organizations for economic development consulting work. Issue 3 would also expand the type of projects for which local debt can be issued as well as increase the number of taxes that can be authorized to retire economic development bonds.

The proposal to loosen the restraints on municipalities stems from a that payments made by the cities of Little Rock and North Little Rock to local chambers of commerce were unconstitutional. Proponents argue that passing Issue 3 will resolve the legal question and enable local governments to offer enough incentives to attract businesses.

, executive director of the Arkansas Economic Development Commission, claims that “when a local community has no defined ability to spend funds for economic development purposes, it is at an immediate disadvantage versus communities that have this ability.” Issue 3 would allow all communities to develop defined spending plans that might help cities and counties develop both direct and indirect employment.

Randy Zook, president and CEO of the Arkansas State Chamber of Commerce/Associated Industries of Arkansas, that “ambiguities in our state Constitution have left our communities with their hands tied when it comes to using local resources to recruit employers.” However, voters should remember that constitutions are put in place to limit government power. Expanding government officials’ ability to use local tax dollars and public debt to finance private economic development projects comes with costs.

For example, Fayetteville city attorney that allowing cities and counties to finance private economic development projects means that “Arkansas cities will likely be invited into bidding wars with each other for new ‘economic development’.” Businesses could threaten to leave for the neighboring town if their current host city did not provide more incentives. This would put Arkansas cities into contests with each other to see who can write the biggest check, which ultimately drives up local tax burdens. Little Rock would compete not just with Oklahoma City and Nashville, but also with Conway and Rogers. Rather than spurring job creation, existing jobs would simply be moved from one Arkansas city to the next.

Furthermore, local governments take on significant financial risk when tax dollars and local debt are used to finance private businesses. , provides a cautionary tale. In March 2015, more than one-third of Port St. Lucie’s debt ($335.5 million) was from “failed or faltering economic-development deals for which the city fronted money with a promise of repayment.” This means that taxpayers in Port St. Lucie are being forced to pay $335.5 million (plus interest) for projects they will see little to no economic benefit from. The city’s struggle with economic development debt led to a If Issue 3 passes, how many Arkansas cities would follow the path of Port St. Lucie?

While many government officials are cautious about such projects, others might not be as diligent – or they might be mistaken. There is always the chance that city and county officials would take risks hoping that they will pay off and, perhaps, also gambling that if their bet fails, the state might step in and pick up the bill. After all, Arkansas taxpayers have seen this before.

In the 1920s, Arkansas’s municipalities to finance road construction projects. Yet, the debt burden quickly became insurmountable for municipalities. In an effort to rescue the failing road districts, the State of Arkansas assumed local road debts. However, Arkansas was hit hard by the 1927 flooding of the Mississippi River system and the Great Depression that followed a few years later. By 1933, Arkansas was drowning in its debts and became the first and only state to declare bankruptcy during the Depression.

Using local tax dollars and public debt to finance economic development projects brings both risks and rewards. Relaxing the constitutional restraints on local governments may enable Arkansas’s communities to attract new economic development, but at what expense? Arkansas voters must ultimately weigh the cost of higher tax burdens and the risk of bankruptcy against the possibility of new employers.

Issue 3 is a complicated ballot measure. The bill runs 9 pages of legal text and it amends at least six sections of the Arkansas Constitution. No wonder voters are confused! In this blog post, we will discuss the benefits and costs of Issue 3’s major change: removing the cap on bonds the state may issue for economic development.

How Issue 3 Impacts Amendment 82 Bonds

Amendment 82 of the Arkansas Constitution allows the state to issue general obligation bonds for the purpose of funding economic development projects. These bonds are generally reserved for large projects such as the . For a company to receive Amendment 82 bonds, the general assembly must approve the bonds’ issuance by a vote.

Currently, the state is only authorized to issue bonds of up to five percent of the state’s general revenues collected during the most recent fiscal year. However, Issue 3 proposes to completely remove this cap, expanding the state’s ability to fund economic development projects.

What are the Pros?

By expanding Amendment 82 bonds, Arkansas could attract huge economic development projects that are not possible under the current Constitutional restrictions. For example, Arkansas may be able to draw an automobile assembly plant that the state hasn’t been able to land because of the five percent cap. Mississippi was able to beat out Arkansas for Toyota in 2007 because worth of incentives for the project. Removing the cap on Amendment 82 bonds would give Arkansas the ability to write a check big enough to attract an auto factory or any other super project that would likely never come to Arkansas without incentives.

An additional benefit is that Arkansas may be able to secure mega projects without incurring fiscal costs. If Arkansas disperses Amendment 82 bond proceeds as a loan rather than a grant, there is no cost to the state’s budget, provided that the company continues to make its payments. The firm pays the state and the state uses those payments to repay the Amendment 82 bonds. Arkansas may even come out on top if the interest rate the firm pays the state is higher than the interest rate the state pays bond holders. Attracting firms that Arkansas would not otherwise draw without using tax dollars means no fiscal cost to the state.

However, history has proven it an unrealistic expectation for Amendment 82 bond proceeds to be delivered solely as loans. The entire (a project which ultimately did not come to fruition) was approved as a grant and just $50 million of the $125 million given to Big River Steel was in the form of a loan.

What are the Cons?

Famed economist that “the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” Arkansas may be able to land large economic development projects with Amendment 82 bonds, but doing so comes with hidden costs.

Arkansas takes on significant risk when it issues economic development bonds. Consider the following hypothetical example:

Arkansas legislators approve a $300 million Amendment 82 bond issue to lure an auto assembly plant. The bonds are sold to the public and the proceeds are provided to the auto company: $180 million as a grant and $120 million as a loan. Arkansas taxpayers are on the hook to repay bond holders for the $180 million grant and the auto company is responsible for the $120 million provided as a loan. Now, imagine that the auto manufacturer files for bankruptcy, which is not hard to do since GM and Chrysler both essentially did so in 2009. Arkansas no longer receives payments from the business and must find another way to repay the Amendment 82 bond holders. Who do officials turn to? That’s right, taxpayers. Taxpayers must now pay for the entire $300 million issue.

Supporters of Issue 3 have argued that the five percent cap on Amendment 82 bonds puts some economic development projects just out of reach. But it’s important to recognize that the proposed amendment does not simply raise the cap to 10 percent or 15 percent of state revenue, it eliminates the cap completely. There will effectively be no limit on how much the Legislature can issue in bonds.

How much debt would Arkansas issue to attract a few companies? 100% of state revenues? $10 billion? While giving $1 billion in incentives seems crazy and hyperbolic, (after Missouri offered them a measly $1.7 billion). Removing the cap on Amendment 82 bonds opens the door for Arkansas to do the same. It provides Arkansas officials an avenue to gamble limitlessly on economic development projects with the backing of the citizens of Arkansas.

Conclusion

Issue 3 is a complex, but important ballot measure. Its major change, removing the cap on economic development bonds, has both pros and cons for the Arkansas economy. On one hand, it may provide the state what it needs to attract major economic development projects. But, in doing so, Arkansas would be taking on significant amounts of debt, risking the solvency of the state.

In a future blog post we will discuss another aspect of Issue 3: its impact on economic development at the local level. A lays out some interesting costs and benefits which we will expand on.