COPs and Robbers: Certificates of Participation Replace Bond Referendums

In light of the rapid expansion of long-term state debt and changes in how capital projects are being financed in North Carolina, it is imperative that legislators restore public input on major financing questions. Addressing the state’s increasing reliance on certificates of participation (COPs) is a good place to start.

Over the past 20 years, state spending has increased by 318 percent. During the same period, per capita debt — in particular bond issuances used to finance capital projects — has skyrocketed. From 1997 to 2006, for example, such bond issuances increased from $1.5 billion to $5.7 billion. According to figures from the state controller’s office, outstanding state debt has also more than doubled over the last five years, rising from about $3 billion in 2001 to approximately $6.5 billion in 2006. As a result, the per capita debt burden in North Carolina Total Outstanding Debt, 2001 - 2005has increased from $372 (as of 2001) to more than $730. In fact, between 1985 and 2005, per capita debt in North Carolina increased by 465 percent.

This year’s budget does nothing to rectify these trends. The proposed FY2008-09 House budget includes $170 million in capital projects. In addition, the budget contains more than $449 million in “special indebtedness authorizations” or “appropriation supported debt.”

As disturbing as these numbers are, taxpayers should be just as concerned about how this debt is financed. Special indebtedness authorizations represent one of two forms of taxpayer-supported debt issued by the state, the other being general obligation bonds. Unlike general obligations bonds, this debt is technically not guaranteed by the state, but by liens on property or equipment. Special indebtedness authorizations, unlike general obligation bonds, do not require voter approval.

No Voter Approval Required. Among state and municipal governments, certificates of participation (COPs) are the most popular form of appropriation-supported debt. COPs are tax exempt lease-financing agreements that promise investors a share of whatever revenue is derived from the lease (or lease-purchase) of the property or equipment to which the COP is tied.

Expanding Use of COPs. COPs represent a sea change in previous borrowing. Prior to 2001, the state employed a “pay as you go” approach or issued general obligation (GO) bonds to finance capital projects. At first, COPs were primarily used by the legislature to finance select projects in justice & public safety (prisons, for instance) and health & human services.

Over the past few years, however, legislators seem to have come to prefer COPs over other financing methods. In fact, the state has not authorized a general obligation bond package since 2000. The legislature’s preference for COPs is attributable to the fact that such certificates do not require voter approval and also can be issued more quickly than referendum bonds. Thus the legislature has expanded the use of COPs to other entities, most notably the University of North Carolina system. The proposed House budget includes more than $150 million in COPs financing for the UNC system and authorizes more than $449 million in COPs related debt statewide.

Future Burdens. Taxpayers should be rightly concerned about the state’s continued borrowing. Higher debt levels burden taxpayers and governments alike and reduce options on how the state can spend current and future resources. More important, COPs void the public’s right to participate in the decision-making process regarding questions of public debt. Taxation without representation always weakens the democratic process.

Today COPs comprise almost 14 percent of total outstanding state debt. But the party can’t go on forever. In response to growing concerns about the state’s bond rating, the Office of the State Treasurer released a report earlier this year that criticized the state for its “exclusive reliance” on the authorization of special indebtedness (i.e., COPS) to finance capital projects. The report recommended that the state “balance its approach and consider the issuance of general obligation debt as the preferred, if no longer exclusive method, to finance capital projects.”

Constitutional Concerns. COPs may also violate the North Carolina Constitution. The constitution establishes the principle that debt can be incurred only if approved by voters in a referendum. While some exceptions to this principle of public participation are specifically mentioned in the constitution (e.g., the replacement of old debt with new or in case of critical emergencies), the principle of voter control over the incursion of debt has a solid constitutional basis. Let’s hope legislators, if not the courts, soon return to the people rightful control over questions of taxation and debt.

This article was posted in Budget & Taxes, Economy by Bob Luebke on May 22, 2007 at 11:18 AM.

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