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Opinion,Taxes and Budget

Time to Start Filling Holes

Mar. 30th, 2012
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RALEIGH – The next time you hear a North Carolina politician talk about the “need” to use tax dollars or public debt to build a new ballpark, convention center, rail line, or similar luxury, ask them this simple question: how much more do you think we can afford?

If North Carolinians weren’t already saddled with massive financial liabilities, it might be reasonable to discuss how much more we should go into debt, and for what. But the fact of the matter is that we are saddled with massive liabilities. Set aside the huge and escalating federal debt. State and local obligations are large and growing, as well.

When policymakers talk about North Carolina fiscal policy, they tend to focus primarily on the income statement (annual state and local budgets) rather than on the balance sheet (total assets accumulated minus total liabilities incurred). They ought to be paying close attention to both.

North Carolina used to be known for its cautious approach to government debt, but in recent years the situation has changed. In 2012 the cost of servicing state debt will be nearly $900 million – an amount larger than the annual budgets of many of the state’s best-known agencies and departments. Add in the rising obligations of many cities and counties, and you find that North Carolina’s total government debt exceeds $53 billion.

Furthermore, an increasing share of it was never approved by voter referendum. Policymakers have evaded the state constitution’s referendum requirement by issuing certificates-of-participation and other “special obligations” that do not technically pledge government’s full faith and credit, but in practice offer an implicit promise to tap general revenues. Special-obligation debt now far exceeds general-obligation debt on North Carolina’s balance sheet.

Unfortunately, even this official balance sheet understates government liabilities. Consider the state’s promise to provide health benefits for retired public employees, a promise for which legislators have set aside no assets. According to a 2010 estimate, this one unfunded liability exceeded $33 billion. It is surely larger than that today.

There are other liabilities. Most analysts now rate North Carolina’s pension fund for teachers and public employees as underfunded, although they differ widely about the extent of the problem. While the official estimate is only a few billion dollars, a 2011 analysis found that adopting a somewhat-lower projection of future investment return would boost the unfunded liability to $12 billion. And an earlier study co-written by Northwestern University’s Joshua Rauh went even further, arguing that states should use federal treasuries as the benchmark. By that measure, North Carolina’s unfunded pension liability would be a staggering $58 billion. Even the midpoint between these two estimates would put the state’s pension exposure as roughly equal to its retiree-health exposure.

Nor is the problem limited to financial liabilities. Many departments and localities have managed their physical capital poorly, failing to keep their buildings and infrastructure networks in good repair. About 30 percent of North Carolina’s bridges are structurally deficient or functionally obsolete. More than a quarter of our major roads are in poor or mediocre condition. The liability for deferred maintenance in North Carolina’s transportation assets alone exceeds $1 billion, and similar liabilities exist in other state and local agencies. For example, to repair or replace all the deficient water and sewer systems across the state would cost more than $10 billion over the next two decades, according to a recent estimate.

In order to build up enough reserves to meet all these obligations, North Carolina governments would have to set aside more than $2 billion a year for many years – more than tripling our current state spending on debt service. Does that sound realistic to you?

In truth, some of the obligations will never be met. Others will have to be met by cutting spending elsewhere. At the very least, North Carolina policymakers need to stop making the problem worse by issuing new debt for low priorities, such as entertainment and passenger rail, while failing to devote sufficient attention to fulfilling the promises and maintaining the critical public assets already on the government’s books.

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Hood is president of the John Locke Foundation and publisher of CarolinaJournal.com.