Fiscal conservatives tend to look askance at large issuances of public debt. In this sentiment, they are in good company. “I go on the principle that a public debt is a public curse,” wrote James Madison, “and in a Republican Government a greater curse than any other.” His mentor and friend Thomas Jefferson agreed. “We must not let our rulers load us with perpetual debt,” he said. George Washington warned against “throwing upon posterity the burden which we ourselves ought to bear.” And Benjamin Franklin observed that “when you run in debt, you give to another power over your liberty.”
Of course, not a single one of these American Founders avoided debt entirely. Some were personally indebted for much of their lives, much to their frustration. More to the point, all of them accepted the wisdom of public borrowing in certain circumstances.
To advise against a large accumulation of public debt, in other words, is not to exclude borrowing from the fiscal conservative’s toolkit. Rather, it is to use debt only for large-scale projects with high costs in the short run and high returns in the long run. Which brings me to Gov. Pat McCrory’s recent recommendation that the state issue $1 billion in bonds to finance a package of transportation improvements across the state.
North Carolina has traditionally been a low-debt state. Over the decades, state and local policymakers devoted substantial sums to capital needs on a pay-as-you-go basis while using bonded debt as a supplement. Around the turn of the 21st century, that began to change. Faced with continued population growth and less-than-robust revenue growth, governments made greater use of debt, especially in the form of certificates of participation, special-obligation bonds, and other devices that didn’t require a public referendum.
In 1998, the total cost of servicing North Carolina’s state debt was $166 million, or about $22 per resident. By 2013, debt service had risen to $843 million, or $91 per resident. Counties and municipalities loaded up on more debt at the same time. North Carolina has other long-term fiscal obligations, as well — to pay pension and health benefits to teachers and other public employees, for example, which are currently underfunded by many billions of dollars.
Believe it or not, the deterioration of North Carolina’s balance sheet since the turn of the century has been more than matched by that of other states, where pension funds are in much worse shape and governments borrowed billions of dollars to fund infrastructure projects of little practical value. On a per-person basis, North Carolina had the sixth-lowest debt load in the country as of 2011.
That’s one reason why, according to State Treasurer Janet Cowell’s latest debt-affordability study, North Carolina has the capacity to add $570 million in General Fund debt and $805 million in Highway Fund debt without triggering scrutiny by bond-rating agencies.
To say that we’re not in an Illinois-like debt crisis, however, is not to say that North Carolina ought to take on more debt. Everything else being equal, borrowing is costlier than paying as you go. And every dollar spent on servicing an infrastructure debt is a dollar than can’t be spent on something North Carolinians might value more, such as teacher salaries, community-college training, or tax relief.
Gov. McCrory has yet to formalize the list of projects he’d fund with a $1 billion bond or explain how it would be financed. Conservatives should withhold judgment until he does so. For example, if he proposed to fund light-rail schemes or low-traffic road projects with gas-tax hikes, I’d say no to the deal. If he proposed to fund high-priority roads by ending the annual transfer of Highway Fund revenues to non-highway functions, I might well say yes.
Despite the cost of debt service, borrowing can still be in the interest of taxpayers in the long run if it locks in lower construction costs or speeds the completion of high-value projects with large economic and fiscal payoffs. In such cases, taxpayers gain more in higher incomes than they lose to taxes. But the details matter. Let’s see them.
John Hood is chairman of the John Locke Foundation.