LOS ANGELES - Voter approval of two anti-tax measures on Washington State's Nov. 2 election ballot would throttle the government's financial flexibility and provoke credit-rating concerns, Ann Daley, the state's assistant treasurer, said Friday.
If passed, Initiative 601 and Initiative 602 would also probably curb long-term debt issuance because the measures would hamstring the government's taxing and spending authority, Daley said.
The state would issue fewer general obligation bonds and conduct "a little less business with investment bankers" if the initiatives are approved, Daley said.
"The rating agencies will watch how we respond to the challenge" if the initiatives win at the ballot box, Daley said. Each measure needs a simple majority vote for approval.
"Do we resort to gimmicks that are not fiscally responsible or do we pass solid budgets?" Daley said. "In the long term, passage of the initiatives would not help our credit rating."
Renee Boicourt, a vice president with Moody's Investors Service, said, "We're watching [the initiatives] closely. This injects a new uncertainty" into the state's outlook, she said.
Standard & Poor's Corp. in yesterday's CreditWeek Municipal said, "The state's AA rating and stable outlook are unchanged, but the state government's response to the measures, if they are approved, could become a long-term rating factor."
Washington State is also rated double-A by Moody's Investors Service and Fitch Investors Service.
Of the two measures, Initiative 602 has received most of the attention because it contains a controversial rollback provision.
Initiative 602 would immediately roll back about $995 million in state tax and fee increases approved by the state Legislature in its 1993 session, which ended in May. The loss of planned revenues would force the Legislature to rewrite the $16.1 billion 1993-95 biennial state budget plan, causing the state to "become cash-strapped," Daley said.
Capping Revenues
She said Initiative 602 also establishes a limit on future revenue growth based on personal income, and it requires a 60% vote of the legislature to enact future tax increases.
Initiative 601, in the meantime, also has a revenue limit based on general inflation and population growth. The measure also contains a super majority vote requirement of the Legislature which Daley said "is much more restrictive in terms of passing new taxes" than Initiative 602. Initiative 601 requires a 75% vote of the Legislature and a vote of the people in some cases.
Washington State public finance professionals are closely following debate about the initiatives, said Robin Goldston, a vice president for Seattle-Northwest Securities Corp. Goldston said if either or both initiatives are approved, the impact on public finance cannot be predicted with any certainty.
However Goldston said, "Anyone in the public finance industry would be hard-pressed to support something that could have such a detrimental effect on an entity that issues bonds."
Marjorie Hufault, campaign manager for the pro-Initiative 602 Committee to Limit Taxes Now, said the two initiatives were placed on the statewide ballot by signature petition drives conducted by unrelated organizations. Hufault said the competing measures contain conflicting provisions that would need to be clarified in court should both initiatives win.
No matter what occurs on Election Day, Daley said the legislature is obligated to continue to appropriate for the payment of the principal and interest on state GO bonds from general state revenues. Such payments have first priority on the state general fund.
Washington State has $5.76 billion total debt outstanding and nearly $2.5 billion in authorized but unissued debt.
Daley said she is very concerned that passage of Initiative 602 would "slow the pace" of capital budget financing. It could "force the Legislature to reexamine priorities in terms of what projects get funded and how much we afford to do," Daley said.
The state Office of Financial Management's budget division issued a report recently that says Initiative 602 "would reduce the amount of debt the state could incur to finance capital projects."
The report says, "Based on preliminary calculations, [the office] estimates that the rollback proposed by Initiative 602 would require the legislature to reduce planned bond sales by approximately $200 million to $300 million [over the next four years]."
To date this fiscal year, Washington State has sold $300 million in GO bonds and expects to conduct two more GO bond issues totaling $600 million, said Scott Sheeran, deputy treasurer for Washington State. The state sold $1.34 billion in GO bonds last fiscal year. Of the total, refundings were $743 million and new-money issues were $600 million, Sheeran said.
"This means that fewer capital projects could be funded in the 1993-95 or the 1995-97 budgets," the report says.
Gov. Mike Lowry, who took office Jan. 13 and signed his first two-year state budget in May, is worried about the two initiatives' possible impact on the state's credit reputation, Lowry spokesman Clarence Moriwaki said.
The governor "has said the bond market wants to see predictability with debt repayments," Moriwaki said. Lowry believes passage of the initiatives "would take away some of that predictability, which would have a negative affect on the state rating," Moriwaki said.
Moriwaki said a rating downgrade "would trigger higher interest payments in bonds, costing more to taxpayers."
Hufault, the Initiative 602 campaign spokeswoman, said she doubted the state's credit rating would drop a notch if either or both initiatives are approved.
Speculation about a downgrade is "just another scare tactic" by opponents of the initiatives, Hufault said. The opponents "have no basis for saying that," she said. "The bottom line is that taxes and spending in this state have gotten out of control."
Hufault said the tax and spending limitation in Initiative 602 would establish a new revenue reserve fund. If the reserve fund balance is more than 2.5% of the previous year's revenue limit, the excess would be transferred to a new GO debt-reduction account.
Hufault said the GO debt account could only be used to reduce outstanding principal and interest on state GO indebtedness. As a result, Hufault said, tax and spending limitations "really might have a positive effect on [Washington State's] bond rating."
Whether the initiatives' passage would impact local governments is uncertain, said Hugh Spitzer, a partner with Foster Pepper & Shefelman, a Seattle-based law firm.
Because the initiatives apply to state spending, Spitzer said he does not believe if they win voter approval there would be "substantial or immediate" problems for local agencies.
"It is possible that the state will attempt to shift some costs of programs on to the local governments or will reduce grants in some areas that [localities] now are receiving," Spitzer said.
However, Initiative 601 prohibits the Legislature from imposing responsibility for new programs on local governments, an analysis by the state Senate Ways & Means Committee says. The analysis says the state could force local governments to increase service levels in such programs if "the Legislature fully reimburses the local government for the cost of the programs."
Support Teetering
Opinions differ on what chances the initiatives have of winning.
Last week Hufault of the pro-Initiative 602 campaign said her internal polling showed both initiatives ahead by 15-point margins. Hufault dismissed reports that the momentum appears to be gaining against passage of the initiatives.
The Seattle Post-Intelligencer recently reported that a survey conducted by an independent firm in mid-September showed wavering support for the initiatives. Forty percent of those respondents said they were likely to vote for the ballot measures, down about 10 percentage points from a June survey.
Both sides in the debate over the initiatives agree that the measures would make major changes in state government.
Andy Grow, spokesman for the anti-Initiative 602 Committee for Washington's Future, described the initiative as "a meat ax." Grow said it would "hit squarely across the head of state government."
Initiative 601, in contrast, is more like a two-by-four board, Grow said. Passage of Initiative 601 "would be a more subtle nudge - but more painful over time," Grow said. "We call 602 the sharp stick and 601 the blunt one."
