As Senate and House lawmakers meet to negotiate and pass a new state budget, one area likely to receive additional scrutiny is the Senate budget plan to fund $1.1 billion in new construction and renovation projects at the University of North Carolina (UNC). Senators and university officials are counting, not only on strong public support for the UNC building projects, but also − and equally important − on public indifference over how the billion-dollar building plan is financed.
To finance these projects, the Senate authorizes the issuance of certificates of participation (COPs) over four years. Unlike general obligation bonds, the state’s traditional method of financing capital improvement projects, COPs do not require voter approval. This means that under the Senate budget plan, UNC can finance $1.1 billion in capital projects without a public vote.
All this sounds familiar. Voters already agreed to $2.5 billion in UNC debt in 2000. In 1999, faced with rising enrollments and deteriorating physical plant, UNC sought legislation (SB 912) authorizing $2.5 billion in limited obligation bonds to finance numerous capital improvement projects. UNC’s request for limited obligation bonding was significant. Unlike general obligation bonds, that pledge the full faith and taxing authority of the state for the repayment of bonds, limited obligation bonding requires only that the university or community pledge various kinds of assets for security of the bonds. Therefore, no vote of the public is required. As might be expected, opposition to the scope of the UNC request and its lack of public approval quickly emerged in the House. As part of the compromise that followed, a new bill (S.L. 2000-3) was drafted that changed the form of financing from limited obligation bonding to general obligation bonding. In so doing, the legislation made the UNC debt subject to voter approval. The bill later passed both chambers of the Legislature and was signed by the governor. In November of 2000, after months of public discussion, voters approved the referendum, authorizing $2.5 billion in general obligation bonds for UNC capital improvements.
Today’s UNC Capital Improvement Plan: Differences & Questions
Seven years later, UNC is again requesting billions of dollars in public financing. Once again, there is a proposal to finance UNC’s capital plans without voter approval. But the parallels seem to end there. The 2000 UNC general obligation bond referendum was intended to redress the problems of rising enrollments, inadequate facilities and outdated infrastructure. Today, a similar request for $1.1 billion in COPs financing for UNC capital projects seems far from persuasive. Yes, UNC enrollment continues to grow. But greater investment in capital improvements and changes in long-term facility planning have helped address the UNC system’s most urgent needs. In brief, the Senate budget plan, which would build libraries, labs and classroom-additions, raises some difficult questions. Why does the Senate insist on avoiding the public approval process? Does the use of COPs funding reflect a private belief that another bond referendum lacks public support?
Comparisons of Senate and House Capital Budget Plans
The Senate plan also seems to lack support from the House. Differences with the House plan are significant. The House capital budget includes $449 million in COPs-financed capital projects for UNC: $637 million less than the Senate budget. The House targets only top UNC building projects that are ready for construction by late summer 2008. Priority is also given to projects that already have previously committed funds. By contrast, the Senate budget plan includes all but four capital projects in the UNC Board of Governor’s Tier 1 category, plus projects from lower priority second and third tier lists. Also, unlike the House, the Senate capital budget plan fully funds most of the Tier 1 UNC building and renovation requests.
COPs and Long-term Debt
If approved, the Senate budget plan to provide $1.1 billion in COPs financing for UNC building and renovation projects will be a setback for those committed to restoring the public’s authority to decide questions of public debt. It is hard to ignore the impact that COPs have had on state finances. As we’ve reported previously, lawmakers’ increasing dependence on COPs financing has helped to fuel the expansion of state debt in recent years. Since 2000, the state’s long-term debt has more than doubled, rising from $3 billion to more than $6.5 billion today. In addition, outstanding state debt issued without voter approval increased from $17.5 million in 2003 to a whopping $454 million in 2006. If we also include lease-purchase revenue bonds, another form of non-voter approved public financing, outstanding state debt swelled from $519.5 million in 2004 to $699 million in 2006. Conservatives are not the only ones concerned about the long-term impact of COPs. In a recent letter to legislators, State Treasurer Richard Moore cautioned: “The increasing reliance on COPs in recent years is a departure from our history of responsible management. Instead we should return to the use of General Obligation debt which costs taxpayers less.” Moore urged the General Assembly not to issue more than $2 billion in debt over the next five years, or $384 million next year.
Impact on Debt Service
The Fiscal Research Division (FRD) of the North Carolina General Assembly has advised lawmakers about the Senate budget plan’s potential impacts on debt capacity. FRD estimates the Senate budget plan will increase debt service by $26.2 million in FY2008-09 and by $122 million in FY2011-12. North Carolina debt service, principal and interest, is currently $656 million annually. Over the next four years, the Senate budget plan would increase debt service each year by an average of 14 percent.
10 Largest COPs UNC Building Projects Senate Capital Improvement Budget FY2007-08
|Project||Debt Principle||Total Project Cost Principal & Interest)|
|UNCCH-School of Dentistry||$96,000,000||$139,200,000|
|UNC-ECU Dental School||$87,000,000||$139,200,000|
|UNC-Energy Prod. Info. Ctr.||$76,218,000||$121,948,800|
|UNC- Millennium Campus Nanoscience Bldg.||$58,000,000||$92,800,000|
|UNC-WCU-Health and Gerontological Bldg.||$43,805,000||$70,088,000|
|UNC-ASU Education Bldg.||$34,000,000||$55,400,000|
|Percentage Increase||+ 58 %|
Real Project Costs
Lawmakers are becoming increasingly attached to the buy-now-pay-later philosophy that COPs encourages. North Carolina taxpayers need to remember that if we don’t pay now, we usually pay much more later. Current estimates for COPs UNC projects only include debt principal. Total project costs also include interest. The Fiscal Research Division estimates a 6 percent average interest rate on a 20-year maturity bond. Table I compares current project costs (debt principal) with total project costs (principal and interest) for the 10 largest UNC-Senate budget projects. When interest and principal are included, costs increase by 58 percent.