Now that North Carolina knows how much it can borrow, politicians are arguing about how much the state should borrow.
But while the legislature and Gov. Roy Cooper wrestle over “credit card limits,” they are ignoring the red flags raised in the most recent Debt Affordability Study unanimously approved by the Debt Affordability Advisory Committee. North Carolina can afford to borrow $11 billion over the next 10 years, says the committee. But the N.C. Department of Transportation and state employee benefit programs both have financial woes. The NCDOT has no remaining debt capacity for the next decade. And the state has a $42 billion hole in its pension plan and benefits for retired employees.
The committee is chaired by state Treasurer Dale Folwell. Members include Auditor Beth Wood, the state controller, the governor’s budget director, and officials picked by legislative leaders. It was created to advise the General Assembly and the governor on the state’s capacity to take on debt.
Cooper wants to borrow $3.9 billion to ramp up school construction and fix aging sewer systems.
“We must build schools to get our children out of trailers and reduce class sizes,” Cooper said. “Our state is growing at a remarkable pace, and we should let the people vote on a bond that would help us keep up with the demands of that growth.”
Republicans aren’t so keen on the idea, saying the vetoed budget would have been a better way to finance school construction.
“A debt-financed bond would waste $1 billion in unnecessary interest payments,” Sen. Harry Brown, R-Onslow, said in a statement. “Why in the world would we max out the credit card when we can just use cash to build new schools instead? It doesn’t make a lick of sense.”
While they argue, problems with state employees’ benefit programs are simmering. The study recommended the state “recognize the magnitude” of its unfunded promises to state employees. But, so far, they remain mostly unmentioned in the debate over spending.
North Carolina’s boasts the sixth best-funded state pension plan in the nation, with a 90.7% funded ratio in 2017, according to Public Plans Data. But it still has a $10.4 billion gap.
And the state fares much worse when it comes to employee benefits. The Retiree Health Benefit Fund is only 4.4% funded. Along with other retiree benefits, that makes for a $31.6 billion liability.
That could start hurting the state’s credit. Traditionally, credit-rating agencies gave states a pass on their unfunded employee benefits. Pensions alone were seen as “iron-clad” promises to employees, whereas other benefits had more flexibility. But that is starting to change, said Zachary Christensen, Reason Foundation senior policy analyst.
“The credit-rating agency is starting to focus more on these unfunded liabilities,” Christensen said. “Meaning they’re going to take it into account more as something you’re going to pay. … This report is advising that the state should start to take it more seriously, and set aside more money for the other post-employment benefits.”
Folwell frequently quotes former Treasurer Harlan Boyles, who warned nearly 40 years ago that the “unrecognized obligations for pension and health care will eventually equal, surpass, and dwarf the state debt.”
Folwell said he recognizes the pressing need for rural school construction, but opposes borrowing billions of dollars.
“I don’t think it’s prudent at all. With the governor maxing out the credit card for transportation, the last thing we need for that is to occur for the whole state,” Folwell said.
The DOT ran into trouble when it blew a $2 billion hole in its 2019 budget. The department blamed natural disasters and the Map Act, a repealed law that once allowed the NCDOT to seize private land mapped for future roads without immediately paying homeowners.
The department did spend $246 million on disasters, but a “culture of cash” also accounted for $262 million in the department’s “recent pressure to reduce cash balances,” says a report commissioned by the Office of State Budget and Management.
Folwell blasted the department for careless overspending, and criticized NCDOT for loaning $1.1 billion from the Highway Trust Fund to the Highway Fund between April 2018 and April 2019. HTF money is meant for capital projects, while the Highway Fund is meant for maintenance.
“That’s so important to me as a treasurer, because when we borrow money — and we have borrowed billions over the past year — they ask us where the money is going to come from to repay it,” Folwell said. “And the answer is the Highway Trust Fund, which is almost completely depleted.”
The report recommends addressing the pension liabilities and retiree health care costs by appropriating $100 million into the Unfunded Liability Solvency Reserve each year.
“The state should not borrow more money. The state should continue to pay off the debt that it has,” said Joseph Coletti, John Locke Foundation senior fellow. “We have more than $40 billion in unfunded liabilities for retired state employee pensions and health benefits. We’re already made that promise to retirees.”