Maintaining credit quality.

• Author: Rust, Kenneth L.
• Position: Public finance initiatives

Finance professionals responsible for debt issuance and management are accustomed to dealing with regular change. These include changes in market conditions that affect borrowing costs, changes in federal tax law provisions that affect borrowing plans and the tax status of state and local bonds, and changes in financing practices and methods developed by the investment banking and financial services industry. Effectively managing these change elements becomes more complicated when the underlying legal framework is subject to actual and threatened change by citizen initiatives. Citizen initiatives, or "direct democracy," are an allowed legal practice in more than half of the states in the country. Although this form of law-making is used to address a wide range of state statutory and constitutional issues, it also has been used to limit and control government resources and expenditures. Well-known examples include Proposition 13 in California, Amendment One in Colorado, and Proposition 2-1/2 in Massachusetts.

The impacts of tax limitation measures on the provision of government services are well documented. However, citizen initiatives also have a profound impact on a government's ability to issue and manage debt. These measures not only threaten credit ratings on outstanding debt, but also pose an even greater risk to a local government's ability to access the capital markets in a timely manner and to execute borrowings under the best possible terms. An active initiative environment complicates a debt manager's ability to develop and execute long-term, cost-effective borrowing programs that, if successful, help lower tax and rate impacts on citizens.

Exhibit 1 OREGON CITIZEN INITIATIVES PLACE ON THE BALLOT 1988-1998 Year of Number of Number of General Initiatives Placed Initiatives Election on Ballot Approved by Voters 1988 5 3 1990 8 3 1992 7 0 1994 16 8 1996 23 6 1998 13 8 The Oregon Initiative Environment

Oregon has a long history with the initiative process. Oregon voters approved the state's system of direct legislation in 1902. Under Oregon law, direct voter enactment of laws can occur in one of three ways:

1) referral of statutory changes approved by the legislation via referendum petition,

2) citizen initiatives promulgating statutory or constitutional changes, or

3) legislative referral of statutory or constitutional changes.

Since 1902, the voters of Oregon have passed 99 of the 288 initiative measures that have appeared on the ballot and 25 of the 61 referenda. During this same time period, the Oregon legislature has referred 363 measures to the voters of Oregon, of which 206 have been approved.

During the past 12 years, initiative activity has grown to become an important aspect of the general election environment in Oregon. As Exhibit I shows, the number of citizen initiatives reached a peak of 23 in the 1996 election. Over the past six general elections, an average of 12 citizen initiatives appeared on the ballot with an overall success rate of approximately 39 percent.

Although the range of issues addressed by initiatives has been extremely diverse, regular and repeated efforts have been directed at local governments. The most popular are restrictions on the amount of taxes or revenues that can be collected. Ten different measures affecting government tax and revenue have appeared on the Oregon ballot since 1978.

A brief summary of these key public finance initiatives, in chronological order, is as follows:

1) Measure 5 Property Tax Limitation (approved by voters)

* Limited local government tax rates to $10/$1,000 of real market value of property

* Reduced school district tax rates to $5/$1,000 of real market value of property

* Allowed for voter-approved general obligation (GO) bonds outside of the tax rate limits

2) "Son of 5" Tax Limitation (defeated by voters)

* Would have required voter approval of new taxes and increases in existing taxes

* Local government fees and charges treated as taxes under the measure

3) Measure 20 - the "Equal Tax" (defeated by voters)

* Would have replaced all state and local taxes and most fees with a 2 percent sales tax

* Would have eliminated ability to issue future GO bonds

4) Measure 47 - Cut and Cap Property Tax Reduction (approved by voters)

* Reduced property assessed values, created new definition of "assessed value"

* Limited growth in future property taxes

* Created fixed-rate levies for local governments

* Allowed for voter-approved GO bonds outside fixed tax rate limits but subject to double majority approval if not approved in a general election

5) Measure 50 - Repeal and Replacement of Measure 47 (approved by voters)

* Enabled certain levies to remain "floating-rate levies"

* Provided constitutional authority to impose "special levies" for tax increment districts

Credit Protection Strategies

Because of Oregon's active initiative environment, the City of Portland has engaged in a number of practices to mitigate, defer, or avoid the potential negative financial and credit impacts of citizen initiatives. These strategies have been developed over the years with the help of bond counsel and other public-finance professionals. This has enabled the city to maintain its "Aaa" bond rating while at the same time creating a number of new credits with ratings ranging from "A" to "Aa1." The city has never suffered a credit...