The late Harlan Boyles, who served with honor and distinction as North Carolina State Treasurer for nearly a quarter century, had a simple definition for good public debt as”… that which serves the public purpose and can be paid back in cheaper dollars.”
The hundreds of millions of dollars of new public debt, perhaps billions, that would be added to the burden of future generation of North Carolinians if Constitutional Amendment #1 passes Nov 2 does not fit into the definition good public debt. It would be a good thing, however, for a few property owners, real estate agents, developers, bankers, a few politicians and other deal makers who benefit at the public expense.
Proponents of the Constitutional Amendment argue that North Carolina has a low ratio of public debt to state budget compared to other states and say we can afford more debt. That is true which you consider only the state’s general obligation bond debt of $6.3 billion. But when you look at the total amount of public debt ($45.6 billion) already owed by North Carolinians, the picture is quite dismal.
At issue is a provision in the state constitution requiring public officials at both the state and local level to get voter approval for any major borrowing initiative carrying the “full faith and credit of local government. Amendment #1 would change the constitution to allow public officials to borrow funds for the benefit of special interests without voter approval.
Passage of this amendment would also be a drastic philosophical change in our public finance policy which until now limits the expenditure of public funds strictly for the public purpose. Amendment #1 would allow public funds to be spent for private investments.
Passage of Amendment #1 would accelerate North Carolina’s public debt which has been growing at the rate of $3 billion a year in recent years because it would remove the cumbersome and time consuming process of having to explain to taxpayers in a open and public debate about the merits of proposed projects.
Bad Debt History
North Carolina has a history with bad debt. Following the Civil War corrupt politicians invented a scheme to sell North Carolina railroad bonds. Expanding the railroad was the big buzz then like economic development is today. The problem was that the entrepreneurs didn’t build any railroads, they just pocketed the money. The state later repudiated the bonds and left the investors holding the loss.
At the onset of the Great Depression, most North Carolina units of local government were so bloated with public debt that they defaulted. In all, 214 units of local government, plus some 200 special tax districts in this state defaulted on bonds, giving North Carolina the dubious distinction of having the highest number of defaults in the entire nation. It took 30 years, an entire generation of taxpayers, to clean up that mess.
Restoring North Carolina’s fiscal credibility was the first task assigned to Mr. Boyles when he joined the staff of then State Treasurer, the late Edwin Gill in the early 1960s. Because of his experience with so many municipal and county defaults, no one was more sensitive to the need for good fiscal policy than Harlan Boyles.
In 1994, after a lifetime devoted to achieving and keeping a sound fiscal policy for the state, he wrote, “North Carolina has one of the best records of any state in the country in controlling and managing our public debt,” in his book, Keeper of the Public Purse. “Our low debt is a major factor in our Triple-A credit rating, ‘he continued. “That policy has contributed significantly to our fiscal integrity, now the envy of the nation.”
That was written a decade ago. The state’s financial picture has changed drastically since then. North Carolina’s public debt has almost tripled. We lost the state’s coveted Triple-A credit rating when Moody’s down graded our bonds. Now our public officials want to change the State Constitution so that public debt can be levied faster and without the traditional accountability features and safeguards.
The proposed change to the North Carolina Constitution reads:
( ) FOR ( ) AGAINST
Constitutional amendment to promote local economic and community development projects by (i)permitting the General Assembly to enact general laws giving counties, cities and towns the power to finance public improvements associated with qualified private economic and community improvements within development districts, as long as the financing is secured by the additional tax revenues resulting from the enhanced property value within the development district and is not secured by a pledge of the local government’s faith and credit or general taxing authority, which financing is not subject to a referendum; and (ii) permitting the owners of property in the development district to agree to a minimum tax value for their property, which is binding on future owners as long as the development district is in existence.”
The financing, in the form of bonds issued by the state, could be used for airports, auditoriums and arenas, hospitals, parking facilities, sewer systems, storm sewers and flood control facilities, affordable housing, land development for industrial or commercial purposes, utilities, and redevelopment. The commercial purpose would include privately owned hotels, motels, restaurants, shopping centers and other investments now built with private funds.
On its face the proposed amendment sounds inviting. Who can argue that North Carolina desperately needs more jobs—having lost some 300,000 textile and furniture jobs in the past few years?
Amendment #1 Will Mean More Public Debt
The immediate impact of passage of this amendment would be more public debt. The winners would be the private developers of these facilities who would benefit from any gain in the value and sale of their property. Taxpayers in general would not benefit since taxes from these properties would be earmarked for paying off the bonds, unlike now where taxes from all property accrue to the benefit of all taxpayers. However, in the case of default, taxpayers would be left holding the financial burden of any unpaid debt.
Of course, taxpayers could throw out the rascals who made the bad investment if they were still around during the next election, but the damage would already have been done.
Under the present Constitutional restriction, public debt requiring the government’s good faith and credit must be approved by voters in a referendum before its issuance requires an open and public debate of the merits of such proposals. The proposed change would allow local officials to negotiate deals with private individuals behind closed doors.
Here’s how it would work. Joe Blokes has a nice tract of land back in the hinterlands that he hasn’t been able to give away. His realtor suggests the property could be enhanced by a museum featuring relics of rare and ancient exotic goats which could be financed by bonds issued under this new scheme. They go for it. The land owner gets his now inflated price for the property. The realtor gets his commission. The banker gets his fee. The developer is handsomely rewarded for his trouble. Eventually, when the bad idea gets its due, local taxpayers get stuck with the bill.
In addition to financing exotic museums which aren’t otherwise economically feasible, this change in North Carolina’s until now staid constitution would loosen the public purse to fund baseball stadiums, arenas, hotels, restaurants, and a multitude of private investments benefitting only a select few at the risk of the many.
The silent kicker in this scheme is that though these bonds are pitched as not requiring the good faith and credit of the local government, any default is going to tarnish the reputation of both local and state entities and public officials will go to great length to hide their errors, including raising taxes to pay for their misdeeds.
In 1994, when Treasurer Boyles found North Carolina’s debt policy to be sound and prudent, the state’s total public debt was $5.1 billion, plus another $11.5 billion outstanding in local revenue bonds for a total obligation of $16.1 billion.
Today, North Carolina’s total public debt has risen to $45.6 billion. That includes all public debt by the state and its various subordinate political divisions, including authorized but unissued obligations. That is a staggering burden that our present and future generation must shoulder In view of North Carolina’s depressed economy and heavy job losses,
Additional Unfunded Liabilities
The total picture is worse. In addition to the our current mountain of public debt , we should consider North Carolina’s deferred infrastructure needs that have been identified but unfunded:
Add the state’s unfunded liabilities to the outstanding public debt and you have a total long term financial burden on the backs of present and future generation of North Carolinians exceeding $100 billion.
If those figures aren’t sobering, consider the public federal debt, pegged this year at $4.3 trillion and growing this year by a $400 billion plus federal budget deficit. The average household’s share of the federal government’s public debt is $473,456.
U.S. consumer debt is at an all time high according to the Federal Reserve Board, exceeding $2 trillion in July. That’s just for cars, boats, and other short term financing. Home mortgage debt is above $7 trillion. That’s an average $84,454 debt per U.S. household.
To propose loosening the strings on our public purse so that public debt might accelerate beyond its present $3 billion a year increase is not fiscally sound policy in view of the mountain of public debt under which we are already buried. Some economists are already pointing to the debt bubble as the next economic catastrophe on the nation’s fiscal horizon.
Summing up a lifetime of public service and heralded as the Best State Treasurer in America, Boyles concluded his 1994 book with a parting thought, “We must…conduct the public’s business in an open way that benefits all citizens fairly. We must never lose sight of the fact that the public purse is what it purports to be. It belongs to the people, not the office holders who have been entrusted with its safekeeping.”
Charles Heatherly is a former Deputy State Treasurer and co-authored Keeper of the Public Purse with State Treasurer Harlan Boyles.