North Carolina municipalities and counties issue debt or bonds to pay for specific projects such as schools, jails, county or municipal buildings, libraries, water treatment plants, streets, and sidewalks, among other things. Historically, all debt issued by local governments was voted on in referenda and issued as General Obligation or ‘GO’ bonds. Over time, local governments throughout North Carolina found ways to incur more debt through easier and faster methods than the traditional bond referendum. Many started by moving away from the tradition of voting on bonds during normal elections and towards less popular election times such as primaries or special elections. In the early 2000s, state legislation was passed that allowed local governments to use methods of borrowing money without asking for the approval of voters and taxpayers. That legislation has caused a lack of accountability and transparency when it comes to local government debt.
Today, many of the large cities in North Carolina have a higher reliance on non-voter approved debt than on voter approved. As of the end of fiscal year 2012, the cities of Rocky Mount, Jacksonville, and Concord only had non-voter approved debt in their financial reports. The city of Asheville has used over one hundred times more non-voter approved debt than voter-approved. Fayetteville has used non-voter approved debt eleven times more than it has used GO debt.
Per capita debt service payments have risen in counties from $113 in 2005 to $147 in 2012 and in municipalities from $180 to $226. A family of four spent an average $320 more per year on debt payments for local government in fiscal year 2012 than in fiscal year 2005. In some jurisdictions, this may not include diverted revenue used to pay debt.
In addition to the lack of accountability to the taxpayer, there are also major cost differences when local governments choose non-voter approved financing methods. GO bonds are paid through the taxing power of the local government and, as a result, investors face very little chance of default. Non-voter approved debt, on the other hand, is sometimes issued on an unsecured basis, for example by using a specific stream of revenue or a lease payment or financing agreement. Depending on economic fluctuations in county or city revenue, the local government has more chance of default on these types of loan repayments thus making this form of debt more risky and worthy of a higher interest rate to investors.
Local governments are not the only ones using these forms of debt. Starting in 2003, legislation allowed the state to issue non-voter approved debt to finance a number of different projects. Just ten years after the legislation was approved, over 40% of North Carolina’s state debt is comprised of non-voter approved debt, which amounts to more than $2.3 billion. Thankfully legislation was passed during the last session that placed a moratorium on the issuance of new non-voter approved debt at the state level. Hopefully local officials will see that the same should be done at the local level.
The top fiscal concern about using this form of debt is that many local governments have had to divert more and more funds each year to pay for their debt service. As a result, these funds are not available for other needed services in the communities these local governments serve. For example, Watauga County’s debt service amounts to $1,321 per person. If they need to upgrade road, water, or sewer systems, those are new costs that must take a back seat to the current debt and the interest it incurs. Whatever new tax revenue is dedicated to debt service is not available for other projects such as those.
Lowering taxpayer exposure to municipal debt starts with two key rules: (1) all debt should be put to a referendum vote concurrent with a general election, and (2) governments should report the full financing costs and expected repayment plan for any debt before a vote or put the tax increase amount associated with such debt on the ballot.
This Week in Financial History:
Fifty years ago this week, the U.S. Surgeon General reported that smoking is hazardous to human health. The report was issued on Saturday, January 11, 1964 to minimize the effect on the stock market and to maximize coverage in the Sunday papers. Monday, January 13th, was the first trading day after the report and the news was expected to affect many of North Carolina’s tobacco companies.
R.J. Reynolds of Winston-Salem closed the trading day up 25 cents to close at $42.75 on 127,500 shares, making it the most active stock of the day. Durham based American Tobacco Company stocks closed unchanged at $28.50 per share while Liggett & Myers Tobacco Company closed with shares trading slightly lower; Greensboro based P. Lorillard Company also closed with shares down a hair.
The Wall Street Journal reported that the solid stocks reflect "investors’ belief that the Federal report…probably won’t have a major impact on cigarette smoking."
Source: The Wall Street Journal, January 14, 1964, pp. 8, 24.
Click here for the Fiscal Update archive.
You can unsubscribe to this and all future e-mails from the John Locke Foundation by clicking the "Manage Subscriptions" button at the top of this newsletter.
