Let’s spend our way out of this recession; that’s the thoroughly discredited but ever-present message behind SB 1378, “Build North Carolina’s Future Act.” The legislation authorizes the state to borrow $451 million to build engineering schools at NC State University and North Carolina A&T State University that will also provide for capital equipment purchases for University of North Carolina school system and the Community College System.
Sen. Tony Foriest (D-Alamance), the bill’s primary sponsor, is singing an all too familiar tune: we need to spend money now to create jobs and make North Carolina competitive globally. Think you’ve heard this before? Well, it’s still wrong. SB 1378 is as bad as it is expensive.
Proponents of the bill claim the additional spending still allows the state to remain “under the debt affordability guidelines set forth in the North Carolina’s annual Debt Affordability Study.” Not so fast. North Carolina currently uses a ratio of debt service as a percentage of revenues as the state’s metric for gauging debt affordability. The state’s current guideline is 4 percent ratio of debt to revenue. According to state’s own Affordability Study, “the state has substantially exhausted its General Fund capacity until FY 2012.”
At a recent Finance Committee hearing on the bill, Deputy Treasurer Vance Holloman, said while the study puts a ceiling on debt payments at 4.75 percent, the additional debt raises the limit to about 4.25. When it’s obvious the state’s borrowing limit has been reached, do we really need to be bickering over tenths of a percent?
Supporters of SB 1378 tout the bill’s public purpose. To keep North Carolina competitive, it is necessary to invest in public education and capital facilities. I wonder if Sen. Foriest really believes the bill enjoys such widespread public support, why finance the legislation through special indebtedness Certificates of Participation (COPs)? Unlike the other major forms of public financing – general obligation bonds – certificates of obligation allow governments to bypass that pesky referendum process that require governmental entities to go before the voters to decide issues of public debt.
The Office of the State Treasurer has also voiced its concern about the tendency of state and municipal governments to employ COPs. The Debt Affordability Study reported:
“The State’s General Fund percentage of non-voter approved Special Indebtedness is projected to exceed the median level for states in its peer group. Therefore, the committee recommends that the state consider the authorization of General Obligation debt as the preferred method to provide debt financing for its capital needs.”
Considering the state’s $3 billion dollar budget deficit, high unemployment rate (10.8 percent) and sluggish economy, is it too much to give tax payers an up-or-down vote on such a massive spending plan?
Supporter of the bill counter criticism by saying SB 1378 is about job creation and making North Carolina competitive globally. The only problem: we’ve heard it all before and it hasn’t worked. In July 2008, Sen. Marc Basnight (D-Dare) defended a state budget that contained a whopping $857 million in construction – much of it on UNC campuses – by saying the spending would help to provide jobs. Similarly, in January 2009, former Democratic Gov. Easley fast-tracked nearly $750 million in capital projects on the same premise.
Has any of this worked? Since July 2008, the state’s unemployment rate has gone from 6.2 percent to over 11 percent earlier this year to now about 10.8 percent. Did state spending help the construction industry? Since January of 2009, North Carolina has lost 38,000 construction jobs. Of areas where construction is underway, much of it is in the Triangle area where unemployment is already considerably lower than the statewide average.
Undeterred by facts and logic, lawmakers press on. Sen. Richard Stevens (R-Wake County) – who voted with Democrats against an amendment to bring the issue before a vote of the people — continues to insist that now is the time to “invest”. Interest rates are low and costs are cheap. Such thinking has two problems. First, it falsely assumes this buyer – the state — has the means to borrow.
Second, it says SB 1378 holds down costs. This is not true. The costs of financing Special indebtedness Certificates of Participation are — in general — about a half to a whole percentage point higher than the costs of conventional general obligation bonds. The fiscal estimate for SB 1378 assumes a 6.0 percent interest rate over twenty years. The legislation would add $18 million in debt service this year and an average of about $38 million in debt for the next four years.
So let’s see. UNC has spent over $4 billion on facilities since 2000. Unemployment is almost 11 percent and the state’s credit card is maxxed out. Yet lawmakers want to slap taxpayers – who aren’t even given the chance to vote on the issue — with a whopping $450 million more in debt for yet another failed jobs scheme?
Did I tell you which bill gets my vote for bad bill of the week – SB 1378!