Voters should have their say on new debt
The state budget just passed by the General Assembly and presumably to be signed by the governor in short order commits every North Carolinian to an additional $100 in debt.
Specifically, the final budget agreement includes $857 million in new debt, more than the governor, House or Senate had proposed. Divide that amount by the number of people that reside in the Old North State and that comes to an additional $100 per person, not including interest.
Unlike previous occasions when the state assumed this much new debt, these new obligations will not be put to a vote of the people.
Now to be fair, this amount is within the limits of what the state treasurer says the state can borrow and safely expect to have the capacity to pay back. But with any type of new debt, the fact that a bank will lend the money does not mean taking out the loan is a good idea.
The majority of the new debt will be used for projects in the university system such as the new dental school at ECU and a new Energy Production Infrastructure Center at UNC-Charlotte. The rest of the of the money will go toward state agency projects such as adding capacity to several prisons, expanding the North Carolina Museum of Art and a new office complex for the Administrative Office of the Courts.
North Carolina’s constitution requires that debt that is secured by the faith and credit of the state must be approved by voters. Times have changed since the constitution was written. Today, banks and other lenders are perfectly willing to lend governments, particularly governments with stellar credit ratings like the state of North Carolina, large sums of money requiring that only the asset financed be pledged as collateral. To put it in simpler terms, with voter approved debt, or “general obligation” bonds, the interest rate is lower because the lender can legally force the state to raise taxes in order to make the payments. With this new type of financing, known as certificates of participation, lenders cannot force a tax increase but they can repossess the asset itself. Think of a the difference between a lender being able to force you to take an additional part-time job versus being able to foreclose on a home or repossess a car if the borrow doesn’t make the payments.
In recent years it is not unusual for North Carolina state government to borrow tens of millions of dollars in a single year using this new financing mechanism. And some would say. “Why not?” The interest rates are fairly low and why risk allowing citizens to vote down a project?
In fact, there are two important reasons that voters should have their say when it comes to big capital projects and debt. First, there is the little matter of the state constitution which clearly intends for debt to be approved by citizens. Debt isn’t like other kinds of spending that can be adjusted annually if conditions or preferences within the state change. Debt commits future legislatures and future taxpayers to making the payments for in some cases up to twenty years.
The second reason to put this borrowing before the voters is that these projects should have to compete with other needs. Legislative leaders claim that the projects paid for with this new debt will be good “economic development” for the state. That may or may not be true, but the real question be will this spending have economic benefits greater than the other priorities for which the money otherwise could have been used? The potential benefits of these projects are not necessarily greater than the benefits of other potential investments like building better public transportation systems or making community colleges better and more affordable. In an era of limited if not shrinking government resources, this is a debate that must be had.
If these projects are not in fact the best use of available resources then the state is facing a serious problem. For the next several years, making the loan payments and paying the operating costs of these new projects will be the first thing that has to be funded each year before any other priorities can be considered. Citizens and voters should be allowed to judge whether or not such costly, long-term commitments are in their best interests.