Last week we discussed Unemployment Insurance and the debt burden it is giving North Carolina. This week I want to discuss our state’s overall debt. Every year the Treasurer’s office releases a report that gives an evaluation of North Carolina’s ability to issue debt and the current status of debt already issued. This newsletter will highlight some of the attention-grabbing portions highlighted by the media and soon to be discussed in legislative budget negotiations.
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State of North Carolina Outstanding Net Tax-Supported Debt |
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The State’s total outstanding debt at June 30, 2012 totaled approximately $9.2 billion of which $7.7 billion was tax-supported. |
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Tax-Supported |
Amounts in Millions |
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$4,470.5 |
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$2,383.9 |
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$811.1 |
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$46.9 |
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Total General Fund Tax-Supported Debt |
$6,493.2 |
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Total Highway Tax-Supported Debt |
$1,219.2 |
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Total Tax-Supported Debt |
$7,712.4 |
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Non-Tax Supported Debt |
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$657.6 |
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$621.6 |
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$160.6 |
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Total Debt |
$9,152.2 |
General Obligation (GO) Bonds and Special Indebtedness
Historically North Carolina has held bond referendums and let the voters decide if certain projects should be funded with tax dollars. These were popular methods of issuing debt during the 1990s because they carried high rating levels and low interest rates. Unfortunately, the last bond referendum was in 2000, and since then the state has relied on Special Indebtedness (certificates of participation, lease revenue bonds, etc.). The state’s percentage of non-voter approved special indebtedness has been increasing and has become the main method of financing since 2000. This is not good for taxpayers because special indebtedness debt vehicles have a lower rating than GO bonds and also carry a higher interest rate, making them more expensive.
Untraditional Methods of Debt
During the last recession, the state’s debt capacity was rationed due to declines in revenue, which caused legislators to look for alternatives to traditional debt instruments. Multiple state agencies have proposed "off balance sheet" methods for funding projects. These methods are a bad idea since they would be against North Carolina’s historically conservative debt management practices and also have more expensive financing costs when compared to more traditional financing methods. If legislators allow agencies to finance with these schemes, it could severely damage North Carolina’s current "triple A" ratings and the state’s financial position. Legislation has been discussed to prevent this from occurring, but none has been introduced to date.
Debt that Doesn’t Count
Well, not really. The state has many liabilities that are not included in the calculation of the overall debt capacity for the State’s General and Highway Funds. Scarily, these happen to be the largest portions of North Carolina’s debt picture.
Retiree Health Care Benefits
This is the unfunded portion of the State Health Plan. As of December 31, 2011 the unfunded portion was $29.610 Billion. This is not considered debt because it is based on estimates the state will incur in the future and the payment schedule is uncertain. Changes have been made to the State Health Plan, but future action is needed to lessen the amount.
Unemployment Insurance
North Carolina owes $2.546 Billion to the U.S. Treasury for funds borrowed to make our unemployment benefit payments from 2009-present. Legislation is going to put the burden of the repayment on employers. If the burden were put on taxpayers through refinancing, debt capacity limitations would be surpassed and would increase the state’s debt burden by 35%.
Teachers’ and State Employees’ Retirement System
North Carolina is one of the most fully funded systems for teachers and state employees in the country. Over the last 70 years it has been fully funded with the exception of one year. Currently, the system is 94% funded.
Reflection
Overall, our state is not in as good a situation as some statisticians and the news media make it out to be. When we owe billions in debt that isn’t counted towards our total, we obviously aren’t given the whole picture. The NC House voted on the unemployment issue last week, and it will be debated by the NC Senate this week. The other forms of unfunded liabilities have yet to be discussed in this legislative session.
Our state is holding on to its ‘triple A’ rating, but the continued reliance on special indebtedness is going to hurt taxpayers and eventually harm the ratings. Taxpayers need to be given the choice whether to issue debt for special projects or not — the last 12 years have been decided by politicians in Raleigh. Hopefully we will see a decline in outstanding debt in years to come; legislators need to see the warning signs and address debt issues now instead of later.
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