RALEIGH—North Carolina’s fiscal 2008-2009 budget, signed into law July 15 by Gov. Mike Easley, contains a record $857 million in non-voter-approved borrowing for capital construction projects, including an oyster hatchery, horse park, and polar bear exhibit.
The unauthorized debt is a small portion of the total $21.4 billion budget, which passed the House, 97-20, and the Senate, 32-14, July 8. The spending plan also allots $42 million in corporate giveaways and $15 million in dropout prevention grants. It adds millions in pork-barrel spending and funds several environmental projects, among them a study on plastic recycling in the state.
Overall, state lawmakers increased spending by 3 percent, down from last year, when negotiators fattened the budget by three times that amount. Although the budget includes unspecified tax cuts and halts transfers out of the Highway Trust Fund, it devotes no money to the state’s rainy day fund and comes $114 million short of meeting recurring expenses.
“The biggest concern I’ve heard expressed by individual members, and by citizens at large, has to do with the level of borrowing that is contained in this budget,” said Senate Minority Leader Phil Berger, an Eden Republican, who voted against the budget.
“We’ve heard a lot of talk about how consumers have gotten in trouble through practices that are employed by predatory lenders. I like to refer to the borrowing that’s taking place in this budget as predatory borrowing,” he said.
In addition to using credit rather than cash to pay for the more than two-dozen capital construction projects, budget negotiators earmarked $217 million during the next two fiscal years for the Biomedical Research Imaging Center at the University of North Carolina at Chapel Hill. The provision obligates future sessions of the General Assembly to devote the funds necessary to pay for the project.
Charge it
Most of the debt is made possible through state-issued certificates of participation, a method of borrowing that does not require legislators to obtain voter approval. Interest rates are higher compared with other forms of debt, such as general obligation bonds.
That’s drawn opposition from some legislators. “We’re leaving our citizens out when they are not given the ability to vote for the general obligation and apply the full faith and credit of the state to those bonds,” said House Minority Whip Bill McGee, R-Forsyth.
Other lawmakers see the new indebtedness differently. “The contractors are hungry and the interest rates are low and we have a big new group of university students on the way,” House Speaker Joe Hackney, D-Orange, told The Associated Press. “Together with the stimulus effect, all that argues in favor with going ahead.”
Most of the COPs went to finance construction projects for universities and prisons. Among a dozen smaller allocations, this year’s debt financing included $50 million to help the Land for Tomorrow fund, operated by the Department of Environment and Natural Resources, to buy land for conservation purposes.
The budget also finances $45 million for “new buildings and pavilions and renovating existing buildings” at the N.C. Museum of Art; $4.3 million for an oyster hatchery at the Center for Marine Science at UNC-Wilmington; $2.4 million for a horse park in Rockingham County; $2.7 million for a polar bear exhibit at the N.C. Zoo; and $10 million to install fire sprinklers in the residence halls of the UNC system.
“That level of borrowing is going to create a situation where we’re either going to have budget shortfalls because of the debt service or we’ve going to see significant increases in taxes in order to cover the debt service,” Berger said.
A smaller portion of the unauthorized debt — $107 million, obtained through two-thirds bonds that also do not require voter approval — funds a new 172,000-square-foot office building for DENR in downtown Raleigh, an expansion of the N.C. Museum of Natural Science, and a parking deck.
Corporate welfare, pork back
Despite the additional debt service, budget crafters kept a tighter rein on the state purse strings this year than in past sessions. Spending increased marginally compared with the last fiscal year. Legislators included an untargeted tax relief fund and authorized an additional $18.7 million in tax credits.
The budget, however, still earmarks tens of millions of dollars in corporate welfare. The Job Development Investment Grants Reserve was the biggest ticket item at $15 million in funding. A combined $9.5 million went to entities that aim to attract industries to the state, including the One North Carolina Fund and the Green Business Fund, and $5 million to the Biofuels Center of North Carolina.
Pork-barrel spending was back as well. Budget crafters devoted $1.5 million to the Charlotte culinary school Johnson & Wales University, state funding for which was committed originally in 2002 by disgraced former House Speaker Jim Black. Smaller amounts went to fund a homestead museum in Penderlea, research on the 18th century shipwreck of the Queen Anne’s Revenge, the Kids Voting program, and the John Coltrane Music Hall in High Point.
The spending and new indebtedness troubled Rep. Dale Folwell, R-Forsyth, who called the budget “generational injustice” and said lawmakers were closing their eyes to the financial hardships facing the state.
“Instead of expanding our balance sheets and income statements during these bad economic times, the state should be doing what every citizen in North Carolina is having to do with their own pocketbook, and that is contracting it to make it smaller,” he said.
Less than half of Republicans in the House voted against the budget, and some praised the final version for reducing transfers out of the Highway Trust Fund by $25 million and putting $700,000 in a tax relief reserve fund.
“The upside of the budget is that the overall spending trend is down considerably from what we have seen the Democrats do in recent years,” said Rep. Nelson Dollar, R-Wake, who joined 32 other House Republicans in voting for the budget.
“There were no tax increases for a change … There is tax relief in there. All those things are provisions that Republicans have been working on this session, and we’re glad to see those in there,” he said.
Among other items, the budget contains a 3 percent pay increase for public school teachers and a 2.75 percent, or $1,100 raise, whichever is greater, for state employees. Both were less than Easley requested in his budget proposal.
The budget anticipates $385.5 million in net revenue from the state lottery for the new fiscal year, a slight increase from last year’s forecast. In addition, legislators took $19.8 million from the Education Lottery Reserve Fund to maintain student-teacher ratios in the early elementary grades.
As in past sessions, some lawmakers and open-government groups complained about the budget-making process, which they say lacks transparency and accountability. A handful of top lawmakers have final say on what goes into the budget, and many members are excluded from the process.
On June 26, House and Senate leaders barred a The News & Observer of Raleigh reporter from a budget negotiations meeting. Senate Majority Leader Tony Rand, D-Cumberland, could not explain why the press would be excluded under the state’s open meetings law, the newspaper reported.
“We need the light of day on the process,” said Rep. John Blust, R-Guilford. “We need more chance for people’s elected representatives, all of them, to influence the final project.”
David N. Bass is an associate editor of Carolina Journal.