Friday Interview: Restoring Voter Input to State Debt
Gov. Pat McCrory has signed into law a bill substantially scaling back the amount of debt the state can assume without voter approval. Supporters say the new law will ensure taxpayers have a say in key long-term debt decisions. Rick Henderson, Carolina Journal managing editor, discussed the issue with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Martinez: Up until now, what has the state been able to do without voter approval?
Henderson: The state could issue what’s called special indebtedness. The most popular or the most well-known form of that is called certificates of participation.
Henderson: Exactly. And COPs are simply a form of indebtedness that is not backed by … the full faith and credit of the state; it’s repaid out of General Fund money. These are often used to finance expansions of university campuses or small infrastructure projects and that sort of thing. And they don’t require voter approval because they do not have the full faith and credit of the state backing them. Because of that, they’re easier to issue because if you have something that you wish to build and you don’t know if the voters would actually approve it, then you go forward with COPs and just obligate the state to pay for it.
Martinez: So up until now, members of the legislature have been able to decide this on their own. What does the new law do?
Henderson: The bill, which was sponsored by Sen. Tommy Tucker, a Republican from Union County, would basically limit the amount of special indebtedness the state could take on, until it is scaled back to 25 percent of the state’s total indebtedness. Right now, it stands at about 40 percent. We’ve got somewhere in the neighborhood of about $2.5 billion in special indebtedness statewide, and this bill says that the state can’t assume any more until that percentage goes down to 25 percent. And, of course, debt gets retired over time, so you may still see some issues over the next few years, but it may be in a decade or more before you see any more of the special indebtedness issued.
Martinez: Supporters of this change say it protects taxpayers and gives taxpayers more of a voice. How so?
Henderson: Well, for one thing, it prevents the state from going into debt and assuming a form of debt that’s more expensive to repay. … Taxpayers never had a say in this at all. In some cases, these projects might have been approved by taxpayers, had they had the opportunity to look at them. But these were simply done without their authority. And there are people who will argue that the idea of special indebtedness so violates the spirit of the state constitution that they should never have been allowed in the first place.
Martinez: And the last decade or so, we’ve been doing a lot of this in North Carolina.
Henderson: That’s correct. … And as Sen. Tucker said, we survived just fine 200 years without them, so why do we need to have them now? Well, the reason, of course, that they’re perceived to be needed now is because taxpayers are a lot more careful with their dollars, and they certainly are likely to view issues of infrastructure and improvements and things like that with much higher scrutiny than they might have at one time.
Martinez: But that’s a good thing.
Henderson: Yes, it certainly is. And it was nice to see, I think, that the treasurer’s office supported this proposal. Sen. Tucker originally had attempted to run a measure that would have essentially ended this indebtedness now. The treasurer’s office weighed in against that proposal, arguing, for one thing, that it might require a constitutional amendment to do that, and, secondly, that it might spook financial markets because the financial markets might have said, “Wait a minute. Maybe a future General Assembly would simply say we’re not going to repay this debt since we’re not obligated to do so. We’re just doing it sort of out of the goodness of our own hearts and to maintain our credit rating, but if we hit some sort of emergency, then maybe we wouldn’t do that.” And so Sen. Tucker came with this compromise, which simply said we’re not going to issue any more right now, and we’re going to scale back the amount.
Martinez: Interesting that you bring up the treasurer’s office, because there might be some who are listening to us talk and say, “Well, this is just something the Republicans wanted to do.” But the treasurer, Janet Cowell, is a Democrat. This is more of a fiscal issue, not a political issue, is it not?
Henderson: Yes, it is, very much. And the treasurer very much wants to maintain the state’s good bond rating, which stands at AAA right now. She faces some other pressures because of our investment strategy for … state pension funds and by other sorts of investments that she manages, because she is the sole fiduciary for all this investment. And I think getting into the special indebtedness is sort of one item off her plate, if you will — one headache she doesn’t have to worry about anymore.
And so, if some sort of emergency arose and it might not be possible to get voter approval for something, then the General Assembly could come in and modify this bill if need be. If there was some drastic emergency that required this bill to be modified, it could be. But in this case, she was very happy to see that the state was going to pare back this form of indebtedness so that she could worry about other things.
Martinez: So over the last decade or so, we have been seeing a lot of this go through without voter approval. How do we pay for it? Does it just get lumped into the General Fund budget? Where does that money come from?
Henderson: That’s right. It comes out of General Fund revenues. And it’s quite possible that the General Assembly might dedicate a specific excise tax, or something like that, toward debt reduction. But … they don’t have to do that. All they’re doing is, they are promising to repay it, and the people who are assuming the debt and are issuing the debt are banking on the fact that the state can do that. But of course, that comes with a price — that’s in higher interest rates.
Martinez: And the more debt you have — it’s just like in your personal debt — as you build up more and more debt, and you’re paying more interest and more payments to pay off your debt, that’s money you can’t use on other things. Is it essentially the same when it comes to state programs and services, or even giving money back to taxpayers?
Henderson: Sure, that’s right. And that’s one thing Sen. Tucker pointed out, that there are a number of other public programs of perhaps greater need that can’t be dealt with because we’re paying interest on this debt and we’re servicing this debt. So doing something like limiting special obligation debt, or basically requiring taxpayers to approve any new debt, is a way of making sure that essential services get funded.
Martinez: Certainly, every state has to have some debt, borrow some money, to do certain things. Is North Carolina in the minority or the majority in the way it’s handling this debt?
Henderson: COPs are very popular. … The place held out as the paragon of fiscal conservatism, which is Colorado, which has the Taxpayer Bill of Rights — they’ve gone to COPs often. And they do that because not only do they have to have taxpayer approval to increase debt, they have to have taxpayer approval to increase taxes and to increase spending. So it’s very, very difficult for them to get any new debt issuance, and so they go to COPs quite often because they don’t require voter approval. And then at that point, you have legislative bodies that are at the point of truly scrambling to see how they can make ends meet.
Martinez: And now, with this change in North Carolina law, there will be a lower level of debt that can be done without voter approval.
Henderson: That’s correct.