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Arkansas goes broke

The New York Times on Sunday published an article with the headline “The State That Went Bust.”

In case you’re wondering, that state was Arkansas.

Here was the subhead: “In 1933, Arkansas went ‘plain, flat broke.’ The fallout — on roads, spending and image — lasted for decades.”

And here was how the article by Monica Davey put Arkansas’ history into context as states across the nation deal with huge budget deficits: “As the states dream up budget plans for a new year, some find themselves staring at deficits in the billions of dollars, vanishing federal stimulus funds, mounting health care costs, their own struggling cities and a canyon of underfunded pension liabilities ahead.

“That — meshed with images from the European debt crisis — has led some to begin fretting about the possibility, however remote, that a state, unable to pay its bills, might tumble into default. Some policymakers have begun quietly discussing whether states should be allowed to seek bankruptcy protection, a legal status granted to qualifying taxation districts, towns, cities and counties but not to entire states.

“Yet plenty of experts on municipal bonds and government finance — who view as alarmist the notion that a state may default on its obligations — note that it has been decades since any state actually defaulted on its bonds, or, in their view, even came close. As it happens, the most recent such collapse occurred during the Great Depression when Arkansas found itself, in the words of one state historian, ‘plain, flat broke.’ There are familiar threads then and now, not least of all the overlay of a national financial slump.”

It just so happened that I was having an unhealthy but delightful breakfast Monday morning with Justice Robert L. Brown of the Arkansas Supreme Court. Justice Brown is a distinguished jurist and a great writer, having received his bachelor’s degree from the University of the South (Sewanee), his master’s degree from Columbia University and his law degree from the University of Virginia.

The University of Arkansas Press recently published his book “Defining Moments,” which explores how Arkansas governors since Sid McMath have acted in times of crisis. He explores McMath’s battles with the Dixiecrats, Francis Cherry’s attempts to label an opponent a Communist, Orval Faubus’ actions at Little Rock Central High School in 1957, Winthrop Rockefeller’s reaction to the assassination of the Rev. Martin Luther King Jr., Dale Bumpers’ battles against political corruption, David Pryor’s fight against the U.S. Army Corps of Engineers, Frank White’s endorsement of creationism, Bill Clinton’s education reforms, Jim Guy Tucker’s Medicaid reforms and Mike Huckabee’s education reforms.

Brown, who worked for both Bumpers and Tucker, lamented the fact that the Times article, while accurate in its depiction of Arkansas’ past, didn’t do enough to talk about how well the state currently stacks up against other states when it comes to fiscal issues.

The article did go this far: “For the record, Arkansas 2011 is not facing the level of economic misery of some other places. State officials are predicting a slight rise in revenue. Some leaders are talking of cutting the sales tax rate on groceries. And the state owes 2.6 percent of its spending — among the lowest in the country — to debt interest.

“After 1933, Arkansas officials eventually restructured their debt, under pressure from unhappy bondholders who had filed suit. But the fallout would leave its mark for years.”

Indeed, when I was working in the governor’s office, there was a great deal of internal opposition at the state Capitol to passing the massive bond issue in 1999 to rebuild our crumbling interstate highways. Since 1933, there had been a built-in aversion to going into debt.

Davey quoted two of my favorite Arkansas historians, C. Fred Williams of the University of Arkansas at Little Rock and Ben Johnson of Southern Arkansas University at Magnolia.

In an attempt to pull Arkansas out of the economic doldrums and Arkansans out of the mud, state government pushed road building efforts throughout the 1920s. Local road districts borrowed money. When a number of the districts ran into trouble paying off the debts, the state stepped in to help.

Then came the Great Flood of 1927.

Next came the Crash of 1929 and the resulting Great Depression.

Add to that a drought that decimated the state’s cotton crop.

Davey wrote: “By some historians’ estimates, the state owed half its annual revenue to debt payments, and others say the payments were even higher. At one point, the state’s treasurer reported that Arkansas’ general revenue fund showed a balance of $4.62, Dr. Johnson said, and by 1933, Arkansas could not make its bond payments.”

Williams told the Times writer that 1933 “was a good lesson, one of those things that’s hard to learn about debt until it happens to you. But it also held back ambitions.”

Davey concluded: “Whatever political wind had rolled in with so much excitement (and borrowing) in the 1920s turned the other way. New leaders promised to retrench. They adopted rules that required more approval for any borrowing. One state leader even briefly entertained a plan to end the state’s support of education after eighth grade as one more way to save, Dr. Johnson said.

“In the eyes of John A. Dominick, a professor of banking and finance at the University of Arkansas, a series of financial struggles — including the experience of 1933 — has created an unwritten tenet that still ripples through the state’s culture: Never spend more than you have.”

Justice Brown and I share a propensity for focusing on the good things about our state since so many others focus on the negative. Justice Brown, in fact, has gone so far as to refuse to mention in his speeches our state’s supposed inferiority complex.

What we both regretted is that a national audience did not have a chance to read about the 1945 passage of one of the most masterful pieces of legislation in the state’s history, the Arkansas Revenue Stabilization Act.

During Gov. Ben Laney’s first year in office (the new governor from Magnolia became known as Businessman Ben), what’s now simply known as Revenue Stabilization was passed by the Legislature. The act requires the state to prioritize spending in categories. Category A includes the things that must be funded, Category B contains items that are not as high a priority and so on.

When state revenues fall short of projections, items in lower categories simply aren’t funded. In fiscal year 2010, for example, as the Great Recession battered states across the country, Arkansas funded 100 percent of Category A and just 54 percent of Category B.

This innovative model has prevented Arkansas from experiencing the problems of most other states. The model makes it relatively simple to adjust to changes in state revenues.

Think how much better off California would be with its own version of the Arkansas Revenue Stabilization Act.

Arkansas learned its lesson the hard way during the Great Depression.

“Perhaps the largest protection against a repeat of Arkansas 1933 is the simplest: states have straightforward — if not always politically palatable — ways to pay their obligations if problems arise,” Davey wrote. “They can raise taxes or cut spending. Arkansas had those options too, but its costs had grown monstrous (for a while, the state had among the highest per capita debt in the nation), and the prospect of new taxes seemed impossible at a moment when per capita income was among the lowest in the country and the state’s revenues were rapidly shriveling.”

During the current legislative session, you will hear a lot of complaining about how much tighter budgets are now than they were when Gov. Mike Beebe took office in 2007.

But look around the country at what other state legislatures are facing. In a national context, Arkansas shines as a model of fiscal responsibility and restraint.

Part of the credit for that must go to the governor and the legislators who worked at the state Capitol in 1945 during the waning days of World War II.

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