A new type of taxable bond intended to help stimulate the economy is helping North Carolina schools and governments expand their debt.
About $909 million in Build America Bonds have been issued for such projects in North Carolina as building schools, creating a toll road in the Triangle, and upgrading a nuclear power plant. Thirty-five percent of the interest costs are subsidized by the federal government, making it cheaper to issue long-term debt with Build America Bonds than with traditional tax-exempt municipal bonds.
Lori Johnson, the director of strategic debt management at North Carolina State University, said N.C. State expects to save $350,000 a year, or $7 million overall, on the $59.6 million in Build America Bonds it issued in April for projects including athletic and dining facilities.
“They’ve been a very good program, and we’ve been able to take advantage of them at a good time to save money,” Johnson said. “I like to borrow money as cheaply as I can.”
But questions have been raised about whether the federal government is encouraging state and local governments to take on debt they could have trouble repaying.
State tax-supported debt nationwide increased by 10.3 percent in 2009 to $460 billion, more than double the rate in 2008, according to Moody’s Investors Service. Moody’s attributed part of this increase to the Build America Bonds program.
North Carolina compares well to other states whose finances also are rated AAA, but it has maxed out its authorized debt limit of 4 percent of general fund revenues.
Joe Coletti, the director of health and fiscal policy studies at the John Locke Foundation, said Build America Bonds are another type of borrowing that doesn’t require voter approval, along with tax increment financing and certificates of participation. The John Locke Foundation publishes Carolina Journal.
“The federal government is encouraging local governments that don’t have money to go out and borrow more money, and they’re doing this without having to ask the taxpayers’ permission,” Coletti said.
The first Build America Bonds issued in North Carolina, amounting to $353 million, allow the North Carolina Turnpike Authority to build an 18.8-mile tollway in Wake and Durham counties. The bonds are secured by an annual $25 million appropriation from the state Highway Trust Fund.
N.C. State and UNC-Chapel Hill, which has issued $141 million in Build America Bonds for construction projects, had to get approval from the General Assembly before issuing the bonds.
“If people knew it was federal subsidy dollars, it would have raised questions about this,” Coletti said of the votes by the General Assembly.
Brian Smith, the director of treasury and risk management services at UNC-Chapel Hill, said the General Assembly authorized construction using funds available, including bonds.
“The university utilized the established Build America Bonds program to obtain the lowest cost of capital at the time of issuance,” Smith said.
The Internal Revenue Service, which has been looking into how some of the bonds were priced, would not answer questions from CJ about the amount of subsidies individual issuers were receiving, citing taxpayer privacy.
At least some of the Build America Bonds have received taxpayer approval. Guilford County issued $82.5 million in Build America Bonds in March for projects including a jail, schools, and parks.
Clay Hicks, Guilford County’s cash and debt manager, said voters approved the debt in referenda in 2004 and 2008.
Guilford County is expected to exceed its guideline for general obligation debt service for fiscal years 2012-16 with debt service peaking at just under 18 percent of the operating budget in fiscal 2012. The guideline calls for a maximum of 15 percent.
“That doesn’t have anything to do with Build America Bonds,” Hicks said. “It wouldn’t make a difference whether it was tax-exempt or Build America Bonds.”
Municipal bonds traditionally have been tax exempt; the federal government does not require investors to pay federal income tax on the interest paid. State and local governments sometimes don’t tax the interest. The market for municipal bonds suffered in 2008 because of the recession, and in early 2009, Congress created Build America Bonds.
About $125 billion in Build America Bonds have been issued so far with California, New York, and Texas issuing the most. North Carolina has issued about 0.7 percent of the total. The bonds accounted for about 19 percent of the municipal bond market from April to December 2009.
Other local North Carolina governments that have issued Build America Bonds include Gaston County, $58 million; Wilmington, $19.27 million; and Charlotte, $20 million.
The bond program is scheduled to expire at the end of this year, but Congress is considering whether to renew it with a lower interest subsidy.
Sarah Okeson is a contributor to Carolina Journal.
Editor’s note: This story was updated after original publication to reflect corrected financial information on the overall amount of Build America Bonds issued by North Carolina and Wilmington’s total BAB amount.