On Wednesday, May 3 legislative leaders tentatively agreed to a $3.1 billion bond referendum for renovation and expansion of the state’s universities and community colleges. The UNC system would receive $2.5 billion and the community colleges would receive $600 million. If passed, this would be the largest bond issue in North Carolina history.

While both Democrat and Republican leaders seem to be united in favor of aiding universities and community colleges with capital needs, the size of the proposed bond is mind-boggling . Its passage would more than double the total bonded debt of the state. Can such a dramatic increase in debt be afforded without a tax increase? Some, including State Treasurer Harlan Boyles, have stated that the bond issue would not necessarily require a tax hike. According to data provided by his office, servicing the bonds over a 25-year period would cost more than $5.2 billion including $2.1 billion in interest. Annual debt service expenditures would average about $210.3 million during the life of the bonds, rising from $39.1 million the first year (2001-02) to a high of $327.6 million in 2005-06.1

The state is already $2.5 billion in debt. Servicing it next year (2000-01) will cost $274.1 million, with $123 million devoted to interest alone. If the proposed $3.1 billion bond issue is passed, the state’s total bonded indebtedness will rise to $5.6 billion, up 124 percent. Average annual debt service will double to approximately $380 million over the next five fiscal years, up from a $189 million average during the previous five.2

What’s more, according to the Local Government Commission, the state of North Carolina is assuming another $450 million in school bonds will be issued in September of this year as well as another $300 million in Clean Water and Gas Bonds intended to be issued in November. This additional $750 million in bonds, and the projected costs of servicing them, are not included in the above numbers.3

Rep. Martin Nesbitt, D-Buncombe, has properly noted that debt service is the first state priority that must be addressed. He further observed that increasing debt might lead to tax hikes to finance other state obligations. “In my opinion, having been around budgets for 20 years, our state government services right now are pressed to the limit. I think we need to keep that in our minds. I can’t say point-blank that if we do this we won’t have a tax increase in the next ten years.”4 And neither can anyone else. “I was hearing flat statements that taxes would not be raised, and I think that’s a bit dishonest,” Nesbitt said.5

Will There Be A Multiplier Effect?

Senate President Pro-Tem Marc Basnight, D-Dare, suggested that such a large increase in debt service would make it difficult for the state to meet other needs if an economic recession occurred. But he also argued that because of the large construction expenditures to be financed by the bond offering, “the economy would strengthen and you’ll have more revenue.”6

This argument employs a familiar fallacy. As Campbell University economics professor Roy Cordato noted: “[Basnight] assumes that if the government doesn’t use this money, no one else will. If the state borrows this $3 billion, it will be diverting loanable funds away from private markets. The state will not ‘spur increases’ in economic activity, but simply reduce economic activity elsewhere. We will never know what businesses do not get started or what jobs do not get created because of the resources absorbed by this proposed bond issue.”7

State universities and community colleges have serious facility needs, and lawmakers may well decide that a state bond issue is an appropriate way to address them. But the staggering size of the bond amount currently proposed would dramatically increase state debt service expenditures, forcing state leaders either to redirect existing dollars from what may be higher priorities or worse yet, to raise taxes.

Thomas Paul De Witt, Fiscal Policy Analyst


Graph showing state's annual debt service would nearly double

Notes

  1. From “General Obligation Bonded Indebtedness,” data sheet provided by the Office of the N.C. State Treasurer.
  2. From “State of North Carolina Bonded Indebtedness,” data sheet provided by Local Government Commission, May 1, 2000.
  3. Ibid.
  4. “Leaders back university bond package,” Jane Stancill, News & Observer, May 4, 2000.
  5. “Legislature convenes amidst budgetary woes,” Amal Sabi, Carolina Journal Online, May 9, 2000.
  6. “Will Spending on University Campuses Cause Prosperity?” George Leef, Clarion, September/October 1999
  7. Ibid.