By Dr. Jeremy Horpedahl and Mr. Jacob Bundrick
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 $125 million bond issue to Big River Steel in Osceola. 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 Mississippi was able to pony up more than $383 million 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 $87 million approved for Lockheed Martin (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 Frédéric Bastiat noted long ago 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, Nevada recently gave $1.3 billion to Tesla and Washington state gave $8.7 billion to Boeing (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 letter from Fayetteville city attorney Kit Williams lays out some interesting costs and benefits which we will expand on.