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Should the North Carolina state government be allowed to issue new debt without voter approval?

These are the responses from a Civitas Poll held in March 2012.  Oddly enough, it is exactly what the North Carolina Constitution says as well, "The General Assembly shall have no power to contract debts secured by a pledge of the faith and credit of the State, unless approved by a majority of the qualified voters of the State who vote thereon."  This is why North Carolina issued debt for the majority of its history through statewide bond referendums, where the voting public determined if debt should be issued for specific projects.  The last statewide bond referendum in North Carolina was during the November 2000 election when $3.1 billion was approved for the Higher Education Improvement Bond.

In 2003 a new form of debt was created in the final pages of the 250+ page budget through the State Facilities Finance Act.  This new form of debt is commonly known as non-voter approved debt or special indebtedness.  It has been used since 2003 with the first issuance of debt amounting to $300 million and the total of outstanding special indebtedness now reaching over $2.5 billion.

Special Indebtedness

This term includes an assortment of different debt instruments: certificates of participation, lease purchase revenue bonds, and limited obligation bonds.  Their creation was spurred on by the search for alternative financing methods to allow more flexibility and the ability to take advantage of changing financial and economical environments.  In the original document, it was confirmed the state would continue to issue debt through general obligation bonds, which has not happened, and there was no rule established for accountability. 

Certificates of Participation

The most popular of the special indebtedness basket, these are often referred to as ‘COPs,’ though the term is also sometimes used to refer collectively to this and all other forms of special indebtedness.  Specifically, COPs are a specialized form of lease-purchase contract that resemble bonds and are sold as securities.  COPs pledge property as collateral for a loan and are financed through a complex system that resembles bond financing.  The current outstanding balance for COPs is $512.9 million.

Lease Purchase Revenue Bonds

This form of debt is used for local governments to acquire real property or personal property by paying, over its full term, a renewable contract for the use and acquisition of the property.  This debt was used to purchase three close-security correctional facilities located in Alexander, Anson, and Scotland counties in 2003 and two additional facilities in Avery and Pamlico counties in 2004.  The initial purchases were for $272 million and now have an outstanding balance of $20.9 million.

Limited Obligation Bonds

These operate as typical bonds, have flexibility to be serial or term, and may mature in any amount at any time with the restriction that none may mature past 40 years from their issue date.  The current outstanding debt from this form of special indebtedness is from funding projects such as the NC Zoo, Universities, DHHS and the Art Museum and has an outstanding balance of $2.045 billion.

Current Legislation

Legislation was introduced during the last biennium to completely remove special indebtedness and require all debt to be approved by voters through referenda.  This bill did not get much attention because the complete elimination of special indebtedness would negatively affect North Carolina’s bond ratings.  A ban on these financial vehicles could cause investors to believe the state unwilling to pay for the debt with General Fund appropriations and result in a drop in bond valuation.

This biennium the Senate has introduced a bill that is guaranteed to get traction.  It has already created some discussion amongst lawmakers and has broad support.  The bill does not eliminate special indebtedness altogether, but limits the amount of this debt the state may have outstanding at any one time.  The current ratio of special indebtedness to general obligation debt is nearing 40%; this bill would cap that amount to a maximum of 25.

Hopefully we will see this bill move smoothly through the committee process and result in a law signed by the governor later this year.  Using more expensive forms of debt without getting voter approval is not something our state needs to expand upon, but to rein in to make government more responsible and transparent.  Senate Bill 129 will only help North Carolina and needs to be a priority this legislative session.

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