On Thursday, June 24, legislative leaders and Gov. Jim Hunt announced plans to issue $3 billion in state bonds and an additional $1.9 billion in university bonds (backed by non-tax fee receipts) to finance the first stage of an ambitious $5 billion capital improvement plan between now and 2008. Critics, both inside and outside the legislature, zeroed in on the lack of voter approval for such a massive expansion of state indebtedness. But the capital plan itself deserves closer examination.
In a report issued this April, a consulting firm hired by the UNC Board of Governors stated that many campus buildings are in a very poor state of repair. Based on an analysis of 791 buildings, the report found immediate repair and maintenance needs of $434 million and called for total spending of more than $2.4 billion within 5 years, although only about half of that is for the renovation of existing academic facilities. Besides the evident need to attend to deferred repairs and maintenance, the study also concludes that the university system also needs to expand to meet an expected increase in student enrollments over the next decade. The total package of repairs and new construction over the next ten years comes to $4.99 billion.1
The Board of Governors has embraced this spending plan and the consultant’s proposal that the funding for it come in large measure through the sale of bonds. In the past, the university system has relied mostly upon appropriations from the General Assembly — and a relatively small issuance of general obligation bonds approved by voters — for its capital and operating needs. But echoing the consultant’s report, university officials now say that they require new “financial tools” to deal with the imperatives of renovation and growth they face.
In a plan unveiled June 23, leaders in the General Assembly proposed a $3 billion bond issue, with $2.7 billion going to the UNC system and the remaining $300 million for the community college system, about which no analysis was done. These bonds would be “limited obligation” bonds which would be repaid out of state appropriations with the buildings as collateral. Because the taxing power of the state is not pledged behind the bonds, they apparently would not require a vote of the citizens of North Carolina.2
Legislation has also been introduced that would allow the universities themselves to issue “special obligation” bonds for projects where there would be a defined income stream from the project to pay off the bonds — for example fees to pay the cost of a new parking structure. The amount of this bond issue would be $1.9 billion and again would not seem to require a vote of the people.3
Graph: Breakdown of UNC’s Capital Priorities
The UNC proposal for a massive spending program financed largely by bond sales raises several vital issues:
How Much of the Expenditure is Really Necessary?
The consultant’s report confirms what can be readily observed: Many buildings in the UNC system are in a poor state of repair. It states: “The overall average condition, or Facilities Condition Index, for all UNC is in the ‘Poor’ range.” Of the 16 campuses, only UNC-Charlotte and the NC School of the Arts were rated “Good;” Fayetteville State, UNC-Wilmington and Western Carolina rated “Fair.” The other 11 were graded to be “Poor.”4
That there is a backlog of repair and maintenance work that needs to be done seems incontestable. However, only about half of the $2.4 billion that the system wants to spend on the first phase of its capital program, lasting until 2003, is slated for this kind of work (see graph). This “top priority” spending in the UNC plan consists of $1.1 billion (45%) for repair and renovation on classrooms, dorms, dining halls, water systems, heating and cooling and similar educational infrastructure needs where the facilities are in worse than average condition. About $169 million (7%) would go toward repair and renovation of non-academic buildings such as student unions, bookstores, performing arts centers and athletic facilities and for academic facilities that are in better than average condition. Nearly $930 million (38%) would go for new construction of academic buildings and facilities such as classrooms, labs, dormitories and libraries. More than $190 million (8%) would fund new construction of non-academic facilities such as parking decks and athletic facilities, as well as roads, walkways, landscaping and other campus enhancements. Finally, $49 million (2%) would be spent on land acquisition.5
North Carolina leaders should not allow existing UNC buildings to continue to deteriorate. The bills for all the repair and renovation work that must be done will have to be paid. The expenditures for repair and renovation of the academic infrastructure are necessary. Whether borrowing the funds is the best way of paying those bills is a question to be addressed below. Half of the proposed expenditure, however, is not for pressing repairs to academic infrastructure. It comprises projects that would expand the UNC system to accommodate an anticipated increase in enrollment, as well as for projects that make campus “enhancements” ranging from new walkways and landscaping to research labs and athletic facilities. Those expenditures are far more questionable.
In the initial phase of the university’s program, approximately $930 million would go for new construction of academic facilities. The consultant’s report argues that this expansion is needed because of an expected growth in student enrollment of some 48,000 students in the next decade.6 The assumption that a major expansion of the university system must be undertaken on the basis of this enrollment projection is unwarranted, despite its uncritical acceptance by many university officials and state policymakers. First, while population demographics indicate that an enrollment increase is possible, trends in society may well lead to a steady or somewhat declining percentage of students pursuing four-year college studies. According to Professors David Schaffer and Eric Pryor in their recent book Who’s Not Working and Why, the once formidable gap between earnings for college graduates and those without has been narrowing if one excludes the earnings of graduates who acquire the skills needed for very-high-paying professions such as engineering, law, or medicine. More and more college graduates who lack specialized training or professional (as opposed to academic) credentials are finding that they can obtain employment only in what have been traditionally “high school” jobs.7 As this realization spreads, the number of students who conclude that the time and expense of four years of college is worthwhile compared to other options — such as two-year colleges, private training programs, or on-the-job training — will decrease.
Second, the strongest job growth in the coming decade is expected to be in jobs that do not require a college education. According to the US Department of Labor, the job category expected to grow the most in the coming decade is cashiers. Among the top 10 categories, only two — systems analysts and business managers — are jobs that are generally available only to those with four-year college degrees.8 The growth of job opportunities in fields that don’t require college will probably reduce the percentage of young people who choose to attend.
A third factor that will reduce the need for facilities is the growth of distance learning. The communications revolution is just beginning to alter the educational opportunities available to Americans, but it seems likely that more and more people will take advantage of the convenience and low cost of studies done via computer. Even if university enrollment rises, many new students will not need or demand physical campus space.9
Fourth, more efficient use can be made of existing facilities. A report done in 1998 found that only at UNC-Charlotte were classrooms used up to a standard of 35 hours per week. The rest of the campuses were below and in some cases far below that benchmark.10 Holding classes at earlier or later hours may not be popular with students and faculty members, but it would alleviate the need to construct so many new buildings.
Finally, the private colleges and universities in the state currently have some 9,000 empty classroom places.11 The private institutions provide excellent educational opportunities, but have difficulty in attracting in-state students because of the extremely low tuition in the UNC system. A previous Pope Center analysis found that few states subsidize undergraduate tuition more heavily than North Carolina.12 An increase in the Legislative Tuition Grant (currently set at $1,600 per student) that assists North Carolina students who choose to attend one of the private institutions in the state would help to take the pressure off the state university system — and the taxpayers — by making attendance at one of the state’s private schools affordable to more people.
Indeed, the question must be asked: do North Carolina lawmakers and taxpayers really want to attract almost 50,000 additional students into the UNC system over the next few years? Not just the facility costs but the taxpayer subsidy for operating costs must be considered. The average UNC student pays only a small fraction of the cost of an undergraduate education, with state taxpayers picking up the bulk of the cost, or $6,340 per student.13 As long as the UNC system is educating well-qualified students whose future economic prospects are truly tied to a four-year degree, this arrangement — with some modifications — might be justified. But a nearly 31 percent increase in UNC enrollment in such a short time reflects the likely entrance of thousands of young people into four-year colleges for which they are unprepared and from which they will receive far less economic return than they have been led to believe. In operating costs alone, this means spending an additional $304 million annually on UNC operations. It may also mean weakening the UNC system’s already low admissions standards. Before building this costly enrollment increase into the UNC capital plan, policymakers should more carefully evaluate the public policy issues that surround subsidies for post-secondary education and training.
Is the State Taking on Too Much Debt?
In recent years, North Carolina has approved several large bond issues — over $3.75 billion in new bonds since 1996 for public schools, highways, water, sewer and natural gas extensions. This has already resulted in a 220 percent increase in annual state expenditures for debt service, which will total $428.8 million in FY 2000-01.14 The $3 billion in “limited obligation” bonds to be issued for UNC and community college capital needs would increase the annual debt service amount by another $240 million.15
It is true that the state-issued bonds would be “limited obligation” bonds where the state’s taxing power is not legally pledged, thereby avoiding the need to submit the proposal to a vote of the people. The funds for paying principal and interest on these bonds, however, will come from state appropriations. Tax dollars that go for the service of these bonds are tax dollars not available for servicing other bonds, or for other state needs such as public education, transportation, or tax relief.
There is no precise point at which a state has “too much” debt, just as there is no precise point at which an individual has too much debt. Nevertheless, it bears consideration that State Treasurer Harlan Boyles warned last year that he thought the state was taking on too much debt when voters approved $1 billion in water and sewer bonds. If approved, the proposed university bonding would more than double the state’s bonded indebtedness (not including the fee-supported “special obligation” bonds). Even if the state budget could afford the debt service from the new bonds, North Carolinians should ask whether devoting this much of the state’s revenues to bonds for the university system is a wise use of funds given other priorities affecting a broader cross-section of citizens.
Is It Necessary to Depart from the Traditional Pay-As-You-Go Approach?
Completing the backlog of repairs, maintenance, and renovation needed for the academic infrastructure will cost a large amount of money. The General Assembly could appropriate enough money over a period of years to take care of the problem if legislators and university administrators were willing to make this problem the top priority until it had been addressed.
Based on the consultant’s report to the Board of Governors, it appears that approximately $1.1 billion is needed over the next five years in order to remedy the problem of crumbling academic infrastructure. The university has already been receiving large amounts for capital outlay in recent years — $113 million for 1998-99 alone. In addition to that, the university system receives 46% of the state’s Repairs and Renovation Reserve — which came to $67 million in 1998-99. If the UNC system redirected existing state support and directed more of their non-tax receipts toward the goal of facility repair and restoration, it would be possible to increase spending on academic infrastructure to about $275 million per year (see Graph: Paying for Renovation). At that rate, in four years the state would have remedied the bulk of the “campus deterioration” problem.
Allocating more of the university’s budget to the necessary repair and renovation work will mean allocating less to other things on which the Board of Governors would like to spend money. The Board of Governors’ budget request for 1999-2001 calls for large expenditures on items and projects that could easily be abandoned in favor of repair and maintenance work. For example, the Board has requested $54 million for faculty salary increases in 1999-2000 and $113 million in 2000-01. A recent Pope Center report finds that UNC professors are already well compensated compared to the national average, and quite well so when cost of living is taken into account.16 If instead of spending millions on augmenting faculty salaries and other unnecessary initiatives such as the “Strategic Reserves” program, state matching funds for the endowment of professorial chairs, and the PATHWAYS program, spending priorities were oriented toward fixing the campuses, the funds for needed campus repairs would be available within the limits of the university system’s current budget.
The state has the resources needed to fix the deteriorated academic infrastructure. Borrowing the money up front to begin a several-year program is not necessary. The money can also come through the legislature and the university’s own significant revenues. Increased spending on restoring academic infrastructure will mean less spending on other, more attention-getting things, but it is simply a matter of priorities. Now that the report on the condition of the campuses has alerted state leaders to the problem, they must summon up the will to solve it.
Will the Use of Bonding Weaken Fiscal Discipline Upon the University System?
Our traditional system has had the considerable virtue of putting university spending under the magnifying glass of legislative and public scrutiny. The university system had to submit a detailed outline of its proposed expenditures and the General Assembly could and sometimes did winnow out the least justifiable items.
To the extent that university funds come from the two types of bonds, university administrators will be able to set their own spending plans without the need to subject them to that scrutiny. Projects that would produce the kinds of revenue streams to make them eligible for bond financing are not necessarily the kinds of projects that are consistent with the underlying academic mission of the university system. Athletic facilities and conference centers, to cite two examples, may pay for themselves, but divert resources and attention from teaching.
The fact that so many facilities have been allowed to fall into a deplorable condition does not inspire confidence in the ability of the administrators to set priorities. Giving them “new financial tools” to raise money and spend money without the approval of either the General Assembly or the voters of the state might be regarded as a move in the wrong direction. Indeed, any additional capital funding beyond the $1.1 billion identified here as pressing priorities should be predicated on the design and implementation of more effective procedures for UNC administration to repair and maintain its facilities. Anything less would be an abdication of responsibility and an insult to state taxpayers whose previous investments in UNC facilities has been so poorly maintained.
Myth and Reality
During the early stages of the legislative debate over the bond proposal, several points have been made that deserve attention and rebuttal:
Myth 1 — Issuing bonds won’t cost taxpayers any additional money.
The reality is that the annual debt service on the $3 billion in “limited obligation” bonds will exceed the average amount of state appropriation for UNC capital, necessitating lawmakers to redirect tax collections that would otherwise be available for other needs such as public schools, transportation, or tax relief. Unlike the alternative plan proposed here, the bond package effectively increases the share of state dollars going to UNC capital projects and excludes them from the annual give-and-take of state budgeting — because the state is not likely to default on bonds in the event of an economic downturn or other fiscal crisis.17 Finally, it is never cheaper to borrow than to pay as you go. Under the UNC proposal, taxpayers will shoulder hundreds of millions of dollars in interest charges in order to speed the construction of projects which, as shown earlier, are not high priority academic renovations but constitute program expansions. Again, this is money that many North Carolinians might prefer to see spent on other programs of importance.
Myth 2 — UNC capital needs are too complex to be submitted to voters in a referendum.
This insidious conclusion isn’t based on any empirical data but instead on the assumption that voters are incapable of evaluating university priorities and making investments when the facts justify them. School bonds in Wake, Mecklenburg, and other counties that have failed in recent years have done so because of flaws in their design and excesses in their cost. Voters have exercised their judgment and used school bond referenda to express their dissatisfaction with broader management and policy problems, calling attention to needed reforms.
A representative government need not and should not submit every issue of importance to a public voter. But even the states most restrictive of initiative and referendum power (like North Carolina) see bond issues and constitutional amendments as exceptions that prove the rule that representative government is preferable. In both instances, public officials are faced with making decisions that have large, long-term legal or fiscal implications that bind future elected bodies. In those cases, most advocates of self-government view a public vote as critical. It acts as a democratic check on politicians who might otherwise make decisions based on short-term gain at the expense of long-term costs. Thomas Jefferson wrote that to bind future generations through excessive public debts was immoral because the world “belongs to the living, not the dead.” In an 1816 letter, he wrote about the importance of democratic approval of public debts: “I am not among those who fear the people. They, and not the rich, are our dependence for continued freedom. And to preserve their independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude.”18
Myth 3 –North Carolina’s economic will realize significant benefits from the UNC capital package.
There is no evidence of a correlation between university building per se and the state’s economy. Dollars spent on construction are dollars that cannot be spent on other items with an economic impact. The existence of the university is not at issue here, only whether an additional $5 billion in debt will finance productivity gains sufficient to generate the revenue needed to repay the bonds. Certainly for the significant non-academic portion of the $5 billion package, no such gains can be expected. And for much of the academic renovation and expansion, no measurable impact is likely on the breadth and depth of skills learned by future North Carolina workers.
Graphs: Comparisons between UNC Plan and Pope Center Plan
The report on the capital “needs” of the UNC system has generated something of a crisis atmosphere with calls for immediate legislative action to allow new kinds of bonding to supply the funds that the system is calling for. Although there are many buildings that need repairs and renovation, that work can be done over a period of years within the traditional budget process by establishing the renovation of deteriorated academic infrastructure as the top priority in the system. Neither the even-larger capital outlay for new construction and non-academic campus enhancements nor the proposal for new bonding to support the university’s spending program appears justified, and indeed would pose new risks to the state’s fiscal health.
The Author is Director of the Pope Center for Higher Education Policy, a nonprofit, nonpartisan think tank that studies issues facing North Carolina colleges and universities. A former professor of law and economics and state legislative analyst in Michigan, Leef is the author of numerous articles and studies on public policy issues for national research institutes and periodicals. He currently serves as publisher of Clarion, a bimonthly journal on higher education issues, and as book review editor for The Freeman magazine, based in New York.
1. Eva Klein & Associates, Building for the New Millenium: A Report to the University of North Carolina Board of Governors, April 9, 1999.
2. David Rice, “Officials detail plan for colleges,” Winston-Salem Journal, June 25, 1999.
3. Dennis Patterson, “Legislative Leaders Say UNC Bonds Don’t Need Public Vote,” WRAL OnLine (Associated Press), June 25, 1999.
4. Klein, p. 6.
5. Data obtained from Klein & Associates report for each campus. Worse-than-average condition is based on Facilities Condition Index.
6. Klein, p. 13.
7. Frederick L. Pryor and David L. Schaffer, Who’s Not Working and Why, Cambridge: Cambridge University Press, 1999.
8. U.S. Department of Labor, Monthly Labor Review, November 1997.
9. Katy Weatherly, “Distance Learning,” Clarion, February 1998, pp. 7-9.
10. “Inefficiency on UNC campuses,” Footnotes, The News & Observer, September 15, 1999.
11. Letter from Hope Williams, N.C. Association of Independent Colleges and Universities, June 22, 1999.
12. Jon Sanders, “A Helping Handout,” Clarion, July 1997, pp. 7-9.
13. Data obtained from N.C. State Budget, FY 1999-2001, various pages of Volume 1.
14. Ibid., Summary of Recommendations, p. 138.
16. Melissa Suarez, “UNC-Chapel Hill one of the highest-paying public universities, study finds,” Clarion Call, Vol. 1, No. 20, June 17, 1999.
17. Jane Stancill and Pat Stith, “UNC bond plan to cost extra $40 million,” The News & Observer, June 29, 1999.
18. Saul K. Padover, editor, Thomas Jefferson on Democracy, New York: Penguin Books, 1946, p.73.