RALEIGH – For advocates of fiscal restraint, being forced to choose between the House and Senate versions of a North Carolina state budget for 2007-09 is like going to the electronics store in search of a DVD player and having the customer-service rep pitch you on the specs of two different VCRs.
Sure, it might be interesting to know that on the one hand, the Senate brand costs a little less than the House brand, and on the other hand, the House brand is more user-friendly. But you’d rather not have to pick between two versions of an outmoded model that doesn’t meet your needs.
The Senate budget brand is, indeed, a bit less expensive than the House brand when it comes to General Fund expenditures on operations – the annual spending devoted to running public schools and colleges, prisons, and other functions. But the difference is modest. The Senate increases the operating budget for FY 2007-08 by $1.3 billion, up 7.1 percent from the previous year. The House hikes the operating budget $1.5 billion, or 7.9 percent. The most praiseworthy element of the Senate plan is what it does not do: block the sunset of the “temporary” income and sales taxes first imposed in 2001. The House budget does reimpose those taxes, which would cost North Carolina taxpayers about $300 million next year.
The Senate package is, however, far more costly when it comes to foisting more debt on taxpayers without bothering to respect the constitutional requirement to subject major debt issuances to a public referendum. Both versions of the budget misuse certificates of participation (COPs), which get around referendum requirements with the fiction that bondholders don’t acquire a claim to general government revenues but instead a share of the value of a government asset, such as a new school or prison, even though that value is entirely dependent on a claim to general government revenues.
State Treasurer Richard Moore, whose office recently received some unwelcome attention from Carolina Journal on an entirely different matter, stated the COPs problem well in an interview last week with the Greensboro News & Record. They are an appropriate tool for issuing debt only in special circumstances where time is truly of the essence and the amount is relatively small. Moore gave the example of rebuilding a school that has burned down. But to use COPs as a large-scale replacement for traditional bonded debt, incurred as a general obligation through a public referendum, is to evade the state constitution and impose excessive costs on the taxpayers in two ways: by allowing government officials to issue debt for building programs voters would likely reject, and by having to pay COPS’ higher interest rates. Regarding the projects that the General Assembly wants to finance with COPs, Moore succinctly asked: “If they’re such great ideas, why can’t we vote?”
Majorities in both the House and Senate have answered, essentially, “Because we say so.” The House budget contains $450 million in COPs, which is bad enough. The Senate’s total is an eye-popping $1.2 billion, much of it devoted to new facilities for the University of North Carolina system. Remember all the brouhaha about a $3.1 billion bond issue for higher education facilities back in 2000, of which UNC got $2.5 billion? Now, just a few years later, the Senate has apparently decided UNC needs another big influx of cash, and shouldn’t have to make its case to voters justifiably concerned about infrastructure needs affecting a far-larger swath of North Carolinians, such as school and road construction.
Remember, either the House’s $450 million or the Senate’s $1.2 billion would be layered on top of the legislature’s unconscionable approval of $762 million in COPs last year. Either budget would bust Moore’s suggested cap on new state debt. More generally, neither is fiscally responsible by any reasonable definition of the term. Providing current services to a growing population in real terms would require only a 3.8 percent increase in state operating spending, or $700 million. JLF’s more-restrained Freedom Budget proposes a 1.8 percent increase, or about $340 million. Obviously, by setting proper priorities, the General Assembly could devote hundreds of millions of additional dollars to legitimate capital expenses without abusing taxpayers by reimposing the 2001 taxes or exploiting the COPs loophole.
To analogize the House and Senate budgets to VCR brands may be unfair to the latter. At least there remains a viable second-hard market for videotapes. But the spend-and-tax, borrow-and-tax mentality on Jones Street is hopelessly out of date. It has moved North Carolina in the wrong direction over the past decade, to big spending on ineffective programs and higher tax burdens than all of our neighbors and that of most of the United States. It’s time for North Carolina to move into the fiscal equivalent of the digital age.
Hood is president of the John Locke Foundation.