An overwhelming 77 percent of voters believe that the North Carolina General Assembly should not be allowed to borrow money without voter approval. In spite of such massive public opposition, state lawmakers have issued billions in new debt over the last decade without one penny of it being approved by voters.
Indeed, the last time voters were given a voice on new state government debt was 2000. This hardly seems fair, given the fact that it is voters who will be forced to hand over the tax dollars to pay back this debt.
How do they get away with this?
- Article V, section 3 (1) of the North Carolina state constitution states the General Assembly must first seek voter approval for “debts secured by a pledge of the faith and credit of the State.”
- Lawmakers have exploited the phrase “secured by a pledge of the faith and credit of the State” to develop a funding mechanism known as Certificates of Participation (COPs).
- COPs are legally “secured” by the value of the asset being financed – typically a new building. Thus, COPs technically are not required to receive voter approval.
No voter approval means exploding debt
- Since abandoning the bond referenda process in 2000 in favor of COPs, state debt has predictably exploded.
Such reckless debt spending has maxed out state’s line of credit, threatens bond rating
- In the 2010 Debt Affordability Study, the State Treasurer concluded that North Carolina has “substantially exhausted” its General Fund-supported debt limits until after fiscal year 2012.4
- The study further recommended using voter-approved debt as “the preferred method to provide debt financing for its capital needs” if it wishes to maintain its current bond rating.
Responding to Critics
Defenders of unrestrained debt spending generally mount one argument against ensuring a vote of the people on new borrowing: requiring a vote on new debt can delay debt authorizations, reducing the state’s ability to take advantage of low interest rates.
Pay-as-you-go saves hundreds of millions in interest payments
If lawmakers are truly interested in avoiding substantial interest payments, they should avoid debt financing by adhering to a pay-as-you-go method for capital projects.
- For instance, from fiscal year 2004 to 2009, the General Assembly authorized a total of $3.2 billion in new debt for capital projects.
- But from FY 2005 to 2009, the state collected more than $3.4 billion in total surplus revenue.
- If the surplus revenue had been dedicated to paying up front for capital projects rather than being used to expand operational expenditures, the state could be saving hundreds of millions in interest payments.
COPs have higher interest rate than voter-approved debt
- Because there is no pledge of the state backing COPs, they bear a slightly higher risk for investors, and therefore carry a higher interest rate.
- Lawmakers are knowingly paying a higher interest rate for COPs debt on the chance that interest rates on voter-approved debt may rise while waiting a couple of months for a bond referendum.
- Even if interest rates do creep up while awaiting a bond referendum, the higher COPs interest rate may very well still be higher than the interest rate on voter-approved debt.
Continued use of COPs threatens state’s credit rating
- As noted above, the continued use of COPs may threaten the state’s bond rating.
- A lower bond rating means higher interest rates on future issues of state debt.
Last minute, non-voter approved bond issuances to exploit low interest rates are unnecessary
- G.S. 143C-8-5 outlines the “six year capital improvements plan.” Each even-numbered year the General Assembly is presented with this plan outlining capital needs and priorities for the next six years.
- Clearly, state budget writers are well aware of the capital projects that will require funding well ahead of time.
- Often times, new issues of debt are authorized several months, and occasionally years, before the debt is actually issued.
- Therefore, securing voter approval well ahead of time of before debt is actually issued can become routine practice.
- These factors undercut the claim that lawmakers have to rush the approval of COPs in order to hurriedly take advantage of low interest rates to finance capital projects.
1 North Carolina Office of State Controller, “Comprehensive Annual Financial Report for Fiscal Year Ended June 30, 2009” Available at: http://www.osc.nc.gov/financial/09_cafr/StatisticalSection/Table10.pdf
2 Debt Service was $193 M in FY 2000, and $644 M in FY 2010 – up 234%. Sources: “Fiscal and Budgetary Actions, 1999 Session,” The Fiscal Research Division of the North Carolina General Assembly. Available at: http://www.ncleg.net/fiscalresearch/highlights/highlights_pdfs/Overview_1999.pdf
“The Joint Conference Committee Report on the Continuation, Expansion and Capital Budgets” for 2009, North Carolina General Assembly. Available at: http://www.ncleg.net/sessions/2009/budget/2009/JointConferenceCommitteeReport_SB202_2009_08_03.pdf
3 Richard Moore, State Treasurer. “The State Treasurer’s Annual Report, 2008” North Carolina Department of State Treasurer. Table T7. Available at: http://www.nctreasurer.com/NR/rdonlyres/29552D80-F5CF-4A14-A99E-D6A95827F37B/0/08Annual.pdf
4 Debt Affordability Advisory Committee. “Debt Affordability Study” North Carolina Department of State Treasurer. Feb. 1, 2010. Available at: http://www.nctreasurer.com/NR/rdonlyres/328AA62B-F3C5-47D5-9593-009862F780A4/0/2010_DAAC_Final_1.pdf