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Interest and energy



Proposed Amendment 2, which will be submitted to the voters at the general election Nov. 2, would raise the constitutional limit on interest that can be charged by retailers, remove entirely the interest limit on government bonds, and provide a new way for government agencies to finance bonds for energy-efficiency projects. That the amendment seems to cover a lot of ground is not accidental – it started out as three separate proposals.

The legislature can refer three amendments to the voters at each general election. As the legislators met in regular session last year, it became apparent that two of those three would be an amendment to establish a constitutional right to hunt and fish, of which Sen. Steve Faris of Malvern was the lead sponsor, and an amendment making it easier for the state to issue bonds for new industrial plants, sponsored by House Speaker Robbie Wills of Conway. Rather than fight over the last remaining slot, Rep. Eddie Cheatham of Crossett, Rep. Bruce Maloch of Magnolia and Sen. Shane Broadway of Bryant decided to merge their proposals.

The situation is complicated. Arkansas is the only state that has an interest rate cap tied to the federal discount rate. The Arkansas Constitution allows retail lenders to charge interest of five percent more than the federal discount rate, up to a maximum of 17 percent. The maximum rate for government bonds is two percent above the federal discount rate. But, those limitations have been temporarily overridden by federal legislation that was sponsored by Sen. Blanche Lincoln. (With the support of all other members of the Arkansas congressional delegation and Gov. Mike Beebe.) However, that federal legislation is set to expire Dec. 31, and the constitutional limit will be back in play.

Cheatham said he was responding primarily to complaints from auto dealers, furniture dealers and people who buy and sell land on installment, all fearful of losing their exemption from the interest limit. When the discount rate fell to one-half of one percent (.5), the maximum rate these retailers could charge without their exemption would be 5.5 percent, Cheatham said, but when retailers borrow money from a bank, they have to pay a higher rate. Banks used to be subject to the constitutional limit, but they were exempted under federal legislation enacted in 1999.

Amendment 2 would retain the 17 percent maximum, but remove the lower cap on non-bank consumer loans.

Amendment 2 also would remove all limits on interest for government bonds. When the maximum interest rate is only 2.5 percent, "You can't issue a 30-year bond," Maloch said, because people won't buy 30-year bonds with that rate of return. If Amendment 2 isn't approved by Arkansas voters, or the federal law extended, "Capital improvement projects by cities and counties will be out until interest rates go up," Maloch said. To the argument that interest rates will reach intolerable heights without a government-imposed maximum, Maloch says competition in the marketplace will keep that from happening. Unlike Arkansas, most states don't put a maximum allowable interest rate in their state constitutions.

If Amendment 2 is rejected by the voters, is it possible that Congress would extend Lincoln's law? Possible, but not likely, according to Maloch. That law was enacted with the idea that Arkansans would get a chance to vote on the issue. Members of Congress prefer that matters such as this be resolved at the state level, rather than exposing themselves to criticism for using federal muscle on a state, Maloch said. An exception was made because Arkansas was in a unique situation after the discount rate fell so low. But it would be hard for a member from Arkansas to ask Congress to immediately override a vote of the people.

Section 4 of Amendment 2 is Broadway's work. It deals specifically with government bond issues for energy-efficiency projects. It says that such bonds can be secured by the savings resulting from the new efficiency, in addition to such other sources of revenue as the issuer may have.

Government agencies dependent solely on tax revenue are hampered in making improvements to save energy, Broadway said, because of a constitutional question about whether general-revenue tax dollars can be used to secure bonds. The University of Arkansas at Fayetteville was able to do extensive retrofitting because it has a source of revenue – student tuition and fees – other than taxes, Broadway said. Similarly, the Correction Department can pursue energy-efficiency projects because it has farm income. Amendment 2 will allow other state, city and county agencies to increase their energy efficiency by using the savings from the improvements to secure the necessary bond issues. "The taxpayer gains because the agency isn't spending as much money on energy," Broadway said, and over a period of time, the savings could amount to thousands or even millions of dollars.

Retailers who would benefit from higher interest rates will presumably support Amendment 2. Cheatham said the state Chamber of Commerce was interested, and he expected to see ads in support of the amendment as the election draws near. City and county governments, through their respective associations, are likely to support Amendment 2 as well. All three legislators said they were unaware of organized opposition to the amendment.

But the potential is there. Christopher D. Brockett, a Little Rock lawyer, told the Arkansas Times that the popular name of the amendment is misleading: The popular name is "Proposing an amendment to the Constitution of Arkansas concerning the interest rate limits and the issuance of governmental bonds to finance energy-efficiency projects."

Brockett said he was in favor of energy efficiency, "but we don't see how raising the interest on all loans would benefit energy-efficiency programs." Asked if there would be organized opposition to the amendment, he said that he and others, as yet unnamed, were studying it to determine what their next action should be. "We're hoping that groups who were opposed to payday lenders will rally around this issue too."

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