Fitch believes the results of ballot measures in large states with many Fitch-rated local entities were generally positive for local government credit quality. Although statewide ballots were mixed, those in large states, including California and Florida, went in a direction that will help maintain, if not improve, local government finances. Additionally, press reports indicate that a large majority of both the number and dollar amount of bond referenda were approved, including many in California and Texas.
California Proposition 30 was approved, giving the state’s school districts a reprieve from the midyear trigger cuts included in the state budget. We believe the school districts that planned for the trigger cuts in their budgets are likely to outperform this year while those that planned on implementing contingency plans or drawing down reserves to cover funding cuts to generally meet budgetary expectations. Beyond fiscal 2012, California school districts will continue to face general funding constraints, including the possibility of cuts, if the fiscal cliff is not averted and the potentially large cost increases should the California State Teachers’ Retirement System’s large liability be allocated to the districts.
The failure of Florida Amendment 4 removed one risk for local governments in the state’s recently recovering real estate markets. It would have allowed the legislature to repeal the “recapture” rule that allows taxable values on certain homes to continue to rise even if market values are declining until both valuations are equal. If Amendment 4 had passed and taxable values continued to decline, reductions could have added to the pressure on local governments to maintain services and balance operations.
In contrast, a more restrictive initiative passed in Arizona. Arizona Proposal 117 limits the annual growth rate of assessed property values to 5% beginning in 2015. We believe this will also limit the debt capacity of local governments, as the state constitution limits debt totals to a percentage of taxable value. A number of local governments are approaching or have reached these caps as a result of the dramatic declines in taxable values over the past several years.
Results in Michigan were mixed. Proposal 1 failed, reducing the powers of state-imposed emergency financial managers to those that applied prior to the 2011 passage of Public Act 4. Under the prior law, Public Act 72, managers cannot break existing collective-bargaining agreements that could forestall a municipality’s emergence from bankruptcy. Michigan Proposal 2 also failed. If it had passed, we believed it could have limited localities’ financial flexibility because it would have guaranteed collective bargaining in the state’s constitution and made current or future challenges to collective bargaining invalid.