Referendums 2009: Gains for Government Spending, Gambling

updated 7:00 p.m. ET Nov. 8, 2009

By S&P Ratings

The 26 measures considered by voters in six states on Nov. 3 were a fraction of the 153 measures in 2008, but typical for off-year elections, according to the Initiative & Referendum Institute. From a credit perspective, the most significant signal, in our opinion, came from voters in Maine and Washington State who rejected measures that would have limited growth in government revenues or spending. Overall, Standard & Poor's Ratings Services does not anticipate any immediate credit impact as a result of the passage or failure of this year's ballot measures.

Major Ballot Topics

This year's results, in our view, showed continued support for debt authorizations, use of gambling to generate revenues, and a reluctance to change frameworks for setting budgets.

Voters authorized bond measures in Maine, New Jersey, and Ohio that would allow these states to issue a combined $671.3 million in new debt. In Texas, voters approved all 11 ballot measures, the highest number among all states. The Texas measures authorized bond issuances for acquisition of land by local governments near military bases, amended the appraisal system for property taxes, and allowed the state to create and maintain veterans' hospitals. Ohio voters affirmed a proposal to create casinos that, if built as intended, will generate tax revenues that will primarily flow to local governments.

Looking to 2010, Oregon voters will in January consider rescinding tax increases that were adopted as part of the state's fiscal 2010 and 2011 budget and in May expanding the state's ability to support the financing of school districts' capital projects.

State-By-State Ballot Measures

Maine [S&P credit rating AA; outlook, stable)
Maine voters turned down Question 2, which proposed a reduction in excise taxes on motor vehicles and an exemption for hybrid and highly fuel-efficient vehicles from sales tax and three years of excise taxes. We understand that this could have significantly affected revenues that municipalities use for road maintenance.

Voters also rejected Question 4, a form of Taxpayer Bill of Rights, which would have restricted government spending at both the state and local level to the rate of inflation plus population changes. Voters turned down similar measures in 2004 and 2006.

Voters approved Question 6, which authorizes a $71.3 million bond issue for transportation improvements and, we understand, positions the state to receive $148 million in federal and other matching funds.

New Jersey [AA; stable)
Voters approved Bond Question 1, which authorizes the issuance of $400 million in general obligation bonds for funding open spaces like green acres, water supply and floodplain protection, and farmland and historic preservation projects.

Ohio [AA+; negative)
Voters approved Issue 1, which authorizes the state to issue up to $200 million of bonds to provide compensation for residents [including certain surviving family members] who served in the armed forces during conflicts in the Persian Gulf, Afghanistan, and Iraq.

Voters also approved Issue 3, which authorizes a casino to be built within each of the cities of Cincinnati, Cleveland, Columbus, and Toledo as long as the initial investment exceeds $250 million at each site. A "permanent, guaranteed" tax of 33% will be charged on gross casino revenues, which would be split among counties and cities, school districts, racing and casino commissions, and law enforcement. We understand that the measure provides for the scope of permitted games at the casinos to expand to match future liberalizations of gambling laws in adjacent states, should they occur. The state estimates that the casinos would generate $643.4 million in tax revenue each year, with an aggregate $547 million going to counties, school districts, and in some cases the largest city within a county.

The host cities would receive an estimated $32.2 million per year, with the allocation proportional to the gross revenues of the casino in each city. Based on these projections, we do not anticipate that the new revenues, should they materialize, will significantly change local government revenue structures but they could make budgeting easier in some cases, in our opinion.

Texas [AA+; stable)
Texas voters approved all 11 measures, including two on bond issuance, two on the collection of ad valorem taxes on real property, and one related to higher education. We do not believe that any of the measures have significant credit implications.

Measures affecting bonding at the state and local levels included:

-- Proposition 1, which allows a local government to issue bonds to acquire land that is adjacent to military bases. Cities or counties could sell bonds or use tax increment financing to pay for the land acquisition of buffer areas near or open spaces adjacent to military installations.

-- Proposition 6 authorizes the Veterans' Land Board to issue general obligation bonds to sell land or mortgages to residents who are military veterans.

Affecting the property tax system were:

-- Proposition 2, which allows the legislature to require that a residence homestead be taxed based on its current use rather than on the market value associated with its potential for redevelopment. We understand that the measure could, over time, result in lower taxable property values in some cases, with implications for local property tax revenues for municipalities, school districts, and counties. The state may also need to increase equalization funding to school districts in cases where property valuations decline.

-- Proposition 3, which allows the state to assume enforcement authority and oversight over local appraisals from counties to attain uniformity and equity of appraisal processes throughout the state.

Texas voters also backed measures relating to funding of national research universities and veterans' hospitals. Proposition 4 transfers the balance of an already established higher-education fund to create a new long-term source of research grants for seven second-tier state universities, while Proposition 8 allows the state to establish, maintain, and operate veterans' hospitals.

Washington [AA+; stable)
Voters turned down Initiative 1033, which would have limited growth of certain state, county, and city revenues to annual inflation and population growth rates, unless overridden by public vote. The state and local government would have rebated any revenues collected above the formula to property-tax payers. We believe that the measure would have significantly slowed revenue growth at the state and local level as the state emerged from the recession.

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