For Amendment No. 2 (Editorial)

by Arkansas Business Editors  on Monday, Oct. 18, 2010 12:00 am  

The state Legislature has referred to the voters in the Nov. 2 general election three proposed amendments to Arkansas' long and unwieldy Constitution. One of these, Amendment No. 2, among other things, would allow the state's interest rate limit to rise.

Unfortunately, any mention of raising the interest rate limit tends to panic voters, who may fail to evaluate the proposal clearly on its considerable merits. So let's try to do just that.

The proposal would:

  • Eliminate the interest rate cap on consumer, or retail, loans of 5 percentage points above the federal discount rate, currently 0.75 percent. However, it would maintain 17 percent as the maximum rate that could be charged.
  • Remove interest rate limits on state and local government bonds.
  • Let government entities issue energy-efficiency project bonds, allowing the bonds to be paid off through the energy savings.
  • Permit the Legislature to set interest rate limits on government debt not secured by specific taxes, but only by a three-fourths vote in both houses.

Tax-secured government bonds, such as general obligation and revenue bonds, would still have to be approved by the voters of Arkansas.

The amendment would not affect credit card rates, which are under federal jurisdiction.

As it now stands, the Arkansas Constitution prevents retail lenders in the state - local businesses - from charging more than 5.75 percent interest, the 5 percentage points above the current federal discount rate. (More evidence of the current problem: The federal discount rate referred to in the Arkansas constitution hasn't really existed for almost seven years.) In addition, different rate restrictions now exist for different kinds of state and local bonds, but none of them can offer investors a yield greater than 5.75 percent, and most offer no more than 2.75 percent.

This is bad public policy and bad economics, which Rep. Eddie Cheatham, D-Crossett, recognized when he sponsored the proposed amendment. "Small-business owners were having trouble because our interest rates were so restrictive," Cheatham told the Arkansas Democrat-Gazette. "They were actually paying more interest to the bank then they were getting from you and I as consumers."

To her credit, U.S. Sen. Blanche Lincoln sought to ameliorate the situation last year, winning backing for a federal provision that temporarily overrode the Arkansas Constitution's interest-rate limit and increasing the ceiling to 17 percent. However, this override expires Dec. 31, and having the federal government messing in the Arkansas constitution isn't a good long-term solution anyway.

And barriers remain for local governments that can't find buyers willing to accept such artificially low yields on bond issues. These barriers are preventing the funding of needed local projects, like fire stations and parks -- the kinds of projects that don't just improve infrastructure but provide jobs.

Amendment No. 2 would not only remove these barriers, it would encourage the issuance of energy-efficiency project bonds, giving the Legislature the freedom to establish the necessary requirements.

Arkansas Business has been a dedicated enemy of predatory lending. But few, if any, states suffer under the interest-rate restrictions that Arkansas endures. For our state to remain competitive, it must be nimble. And the representatives of its people, the Legislature, must have the tools to help Arkansas compete economically. Amendment No. 2 provides those tools.





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