Arkansas gets relief from odd interest rate restriction (UALR Public Radio) - Arkansas has its own, self-inflicted credit crunch, caused by an obscure clause in the state constitution. This week, a special, temporary override of the provision was signed into law by President Obama. FM 89's Kelly MacNeil reports.

The real trouble began at the start of the year. What's called the federal discount rate was dropped to just one-half of one percentage point, which was supposed to help loosen up money. But in Arkansas it has crippled a lot of activity. That's because our state constitution caps interest at a rate that's tied to that federal discount rate. U.S. Senator Blanche Lincoln says this has caused huge problems.

Lincoln: Our state and local governments, universities, airport authorities, any others, are having trouble securing capital financing because investors are going to other states. When you get to half a percent at the federal discount rate, that's really low - not just at disadvantage, you're completely uncompetitive.

Arkansas is the only state that has this kind of cap. Banks aren't affected, but everything else is. For general loans, lenders here can only charge five percentage points over the federal discount rate. The cap is even lower for bonds backed by sales tax. All this makes Arkansas's returns very unappealing to lenders.

Townsell: It's got us boxed out of 23 million dollars of improvements in the city of Conway, and that has us bothered here.

Tab Townsell is the mayor of Conway. He says there are plenty of projects he'd like to get started on, if the city could borrow money at normal rates.

Townsell: Whether it's building new boys and girls baseball complexes, or new street capacity. We need that in Conway, it's a growing city and old street system. We could work to fix that, if we could get to the bond market.

The provision in Arkansas's constitution was intended to prevent predatory lending. Paul Young, the finance director of the Arkansas municipal league, says the floating cap was added in the early nineteen-eighties.

Young: The federal discount rate then was double-digit number, no one could have foreseen that it'd be where it is today. Also, in the eighties and nineties, the feds started using the discount rate to manipulate the economy.

Young says the effect lately has been to freeze development in the state.

Young: No long-term sales tax bonds have probably been issued in the last twelve months

A fix for the problem will be on the Arkansas ballot in November 2010. But meanwhile, there are federal stimulus programs that cities in Arkansas can't take advantage of, like Build America Bonds. That's when Senator Blanche Lincoln stepped in. She attached an amendment to the nation's war funding bill that overrides Arkansas's floating rate cap.

Lincoln: There's a lot of people out there that were starting to see we weren't going to be able to access any of these stimulus dollars that so many other states were getting ready to access. So we wanted to make sure we were able to fix that for the temporary time those stimulus dollars were going to be available.

Lincoln's amendment only lasts through the end of 2010. It sets the interest rate cap at a flat seventeen percent. And like the coming ballot item, it includes more than just municipal bonds. It encompasses lending done by furniture stores and car dealerships. Some critics say that could open the door to predatory lending to retail customers. But institutions wanting to borrow say the state can't afford not to correct its misstep. © Copyright 2009, UALR Public Radio