1.6.1 Initiative Power and its Impact on Debt

Under the initiative power, the electorate in California may propose amendments to the Constitution, statutes, and other legislation. Qualifying initiative proposals, also called propositions, are frequently placed on the ballot for enactment or rejection by voters. Initiatives generally become effective upon adoption.

The impact of the initiative power on debt issuance can be major. Through constitutional amendments, for example, the electorate may authorize or prohibit particular types of debt or alter the procedures for approving debt. Further, the electorate by initiative may impose substantive and procedural limitations on the ability of governmental agencies to levy, charge, and collect the taxes, fees, and charges, and assessments required to pay debt service.

California Constitution, Article XIIIC, Section 3 provides that “the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment fee, or charge.” This provision has the potential for a significant impact on both a public agency’s credit generally and the security for particular obligations. It is, however, subject to two important limitations:

The initiative power is an exercise—by the electorate rather than the governing board—of a municipal entity’s legislative power. The electorate’s initiative power should not extend beyond the legislative power of the governing board. Where statutes provide that legislative action cannot reduce or eliminate the security for debt lawfully issued, such as assessment bonds, general obligation bonds, Mello Roos Bonds, and certain revenue bonds, the security (pledge of repayment) may not be reduced through an initiative.
The Contracts Clause in Article I, Section 10, of the United States Constitution, which prohibits states and local governments from impairing contractual obligations through legislative acts, offers a degree of protection. Because Contract Clause impairment analysis is a balancing test, an initiative may adversely affect a public agency’s revenue raising capacity and weaken the security for its debt obligations. The initiative power cannot, however, be used to impair a public agency’s payment obligation or deprive debt holders of fundamental security.61