A bill substantially scaling back the amount of debt the state can assume without voter approval has passed the state Senate and is now before the House. Senate Bill 129, sponsored by Sen. Tommy Tucker, R-Union, would limit “special indebtedness” incurred through the State Capital Facilities Finance Act to 25 percent of all General Fund debt. It is currently at 40 percent.
A companion measure, House Bill 35, was moving through the House but was pulled after the Senate approved S.B. 129 May 1 by a 47-1 margin. The Senate version passed the House Finance Committee May 30 and awaits a vote from the full House.
“This is an act to limit the issuance of debt under the State Capital Facilities Finance Act,” which sets up “special indebtedness” mechanisms that allow the state to assume debt by raising taxes without a vote being put before the voters in the form of a ballot referendum, Tucker said at an April 30 meeting of the Senate Finance Committee. Many of the projects are funded on behalf of local governments.
Certificates of participation are the best known of the three types of special indebtedness permitted under the Capital Facilities Finance Act. The other two are lease purchase revenue bonds and limited obligation bonds.
General obligation bonds, whose repayments come from the General Fund, usually are linked to a state tax and require approval by voters. Special indebtedness requires nothing more than General Assembly approval, removing direct public approval from the process.
Because special indebtedness instruments are not backed by the “full faith and credit” of the state, they carry higher interest rates and higher costs.
As of Feb. 28, the state had $551.8 million in certificates of participation, and more than $2 billion in the other two special indebtedness categories. Combined, those debts equal about 40 percent of the state’s overall general fund debt. General obligation bonds total $4.4 billion and make up 60 percent of the general fund indebtedness.
Special indebtedness is activated “to hastily receive money when you have major capital projects within the state,” Tucker said. It normally is used for “worthy causes, prisons, and schools, and primarily the university system.”
The bill prohibits any further debt being incurred through special indebtedness until that debt level is reduced to 25 percent or below of the General Fund debt.
“Up until 2001, the state had never issued any COPs in the history of the state, and then from 2001 on up until roughly 2009 we issued about $3 billion worth of COPs,” Tucker said.
“This was done without people knowing it. We incurred $3 billion in debt over the last decade without voter approval,” Tucker said.
“They don’t even know we’ve got $7.2 billion in General Fund debt,” he said. “They don’t have any idea we’re going to pay $706 million in principal and interest this year. That’s a lot of teachers’ raises, a lot of money this debt’s incurred.”
“Moving forward, it will probably be eight or nine years before we can use COPs again in our debt service, so we’ll have to go before the people to get a vote to incur any debt,” Tucker said.
“And, of course, the constitution allows us to get money in an emergency, so I think we’ll be OK. We lasted a couple hundred years without COPs, we can probably last a little longer,” Tucker said.
“The reason we couldn’t do away with COPs — the best way to do that is a constitutional amendment. I didn’t have support for that,” Tucker said.
“Secondly, we needed to protect the Capital Facilities Act and leave that in place for the bondholders,” he said. “They didn’t want to wipe it out because the bondholders get nervous when we take away the vehicle the debt is going to be paid through.”
Tony Solari, director of government relations with the Department of State Treasurer, also spoke in favor of the legislation at the Senate Finance Committee meeting.
“We are in full support of the bill. The legislation would do a couple of things. It brings us in line with other AAA-rated entities that have about a 25 percent debt of COPs or special indebtedness,” Solari said. And “it’s been a recommendation of the Debt Affordability Study that the state rely more on general obligation debt than on COPs, and this is in line with that as well.”
“This bill accomplishes so much of what we fought so hard for in 2011 — to get a handle on the state’s debt,” said Rep. Rayne Brown, R-Davidson, the primary sponsor of the companion bill, H.B. 35. What is “so disturbing to me and so dangerous to this state” is how the debt is acquired by avoiding public referendums required for other general obligation debt paid for from the state’s General Fund.
Brown introduced a bill that passed the House in 2011 repealing the Capital Facilities Finance Act through a constitutional amendment.
The treasurer’s office opposed that bill on the grounds that financial markets would react negatively to a repeal out of worry that the state would no longer pay special indebtedness with general appropriations. That could trigger a drop in value of bondholders’ investments.
There are seven other states that have a AAA bond rating from all rating agencies, and their average amount of special indebtedness is about 25 percent, Solari said. Deliberately lowering and capping North Carolina’s special indebtedness at 25 percent “brings us in line with most of the other AAA-rated entities,” he said.
General obligation debt is less expensive than special indebtedness and is viewed more favorably by bond rating agencies.
General obligation debt involves floating bonds, with a promise to bond purchasers that the state will back the bonds with the full faith and credit of its taxing power. A portion of a property tax is a popular method of repaying bonds. A referendum on the bond must gain voter approval before bonds can be issued.
State Sen. Floyd McKissick, D-Durham, asked Tucker whether there might be an occasion when special indebtedness funding might be needed and could be used again.
“If you want to go before the voters and tell them you want to incur debt without their approval, [then] go for it,” Tucker replied.
Dan Way is an associate editor of Carolina Journal.