The good and the bad of voter initiatives.

• Author: Moore, Brian

Budgeting and credit quality implications of revenue-limiting initiatives pose an array of management challenges to local governments.

The voter initiative process, part of the American landscape for more than 100 years, appears to be enjoying a resurgence in popularity. Voter initiatives constitutional or statutory amendments launched outside of the legislative process - are being utilized by individuals, organizations, and politicians to submit a wide range of issues to a public vote. Many are directed toward government spending and political reform.

The initiative process has faced strong criticism. Opponents feel that many of the checks and balances inherent in a democratic republic, including public hearing and consensus building, do not operate in the initiative process. On the other hand, proponents argue that the initiative process allows groups and individuals to have a direct and immediate effect on government and that it therefore represents democracy in its truest form.

This article focuses on initiatives that directly limit the revenue-raising capability of municipal entities and highlights the possible credit impact of such initiatives. It provides a brief history of voter initiatives, analyzes both the advantages and disadvantages of a successful initiative effort, and examines several ways in which possible negative credit effects can be avoided or at least minimized. Although there are numerous well-known examples of successful initiatives which cap tax rates, this article will highlight the effect of such initiatives in three states: California (Proposition 13, Proposition 62, and Proposition 218), Massachusetts (Proposition 2 1/2), and Oregon (Measure 5, Measure 47, and, most recently, Measure 50).

History

Voter initiatives provide voters with a vehicle for direct lawmaking. When Switzerland added the constitutional initiative as a means of amending the national constitution in 1891, it spawned advocates in the United States. Western states were strongholds of populists and progressives, who advocated direct legislation because they distrusted politicians and felt unfairly treated. Initiatives echoed the frontier spirit, but eastern politicians saw less advantage to voter initiatives. A primary reason appears to be that the easterners were more elitist and more fearful of political power in the hands of the large immigrant population.

South Dakota, in 1898, was the first state to establish the initiative process. By 1918, 18 more states had authorized statewide initiatives. Since 1918, five additional states have adopted the process. Given the popularity of the initiative process, it is likely that more states will approve it, and those states that have it will see an increase in activity. There is a movement to establish a national initiative; however, it does not currently seem close to success.

Today, 24 states allow voter initiatives, as detailed in Exhibit 1. The list of names, with 18 out of the 24 states located west of the Mississippi, still reflects the western roots of the initiative process. In fact, only six states west of the Mississippi do not have some form of voter initiative.

Revenue-limiting Initiatives

Probably the most prominent voter initiative relating to tax revenue limitations was California's Proposition 13 passed in 1978. Prop 13, as it is known, was sponsored by The People Against Big Government, a group representing homeowners who were disgusted with skyrocketing property taxes. Prop 13, with various exceptions and exclusions, limits the total tax that a property owner has to pay to 1 percent of full market value and limits increases in property value assessments to 2 percent annually. Proceeds from the 1 percent tax are divided among overlapping jurisdictions. Prop 13 also imposes strict voter requirements for raising taxes above these limits and for issuing debt.

Though Prop 13 effectively limited revenues, it did not address the issue of how elected officials were to pay for basic public services. As time passed, California public officials had to become more adept at finding and using alternative revenue raising measures, including the imposition of property transfer taxes and transient occupancy taxes. Consequently, Prop...