N.C.’s 2019 Budget: Previewing Debt and Capital

Everybody wants a piece of North Carolina’s statutory debt limit. For the third consecutive year, the Debt Affordability Study recommends increasing the debt limit to 4.5 percent of General Fund revenue, up from the current 4.0 percent.

A one-half percent hike in the debt limit would be a $120 million increase. Debt service for the year will be $700 million, or 3 percent of General Fund revenue. Last year, lawmakers pledged 4.0 percent to pay down existing debt and fund new capital projects without new borrowing. That money will go through the newly established State Capital and Infrastructure Fund, with another $250 million in the fund available for construction, repairs, and renovation of facilities at colleges, universities, or other state government facilities.

The Debt Affordability Study suggests redirecting some of the construction funds and the extra $120 million to protect the health insurance benefits of retired teachers and state employees in the future. House Speaker Tim Moore, Gov. Roy Cooper, county commissions, and the North Carolina School Board Association want to add a $2 billion bond for school construction, renovations, and repairs. Senators want to set the debt limit to 4.5 percent and use the increase for schools. State Budget Director Charlie Perusse suggested using the full 4.5 percent to provide up to $10 billion in new debt for schools, water and sewer systems, and other state facilities.

While Perusse outlined a list of $31 billion in projected capital needs for schools and municipal and state government facilities, schools have received the most attention. A 2016 study commission projected North Carolina would need $8 billion to meet its school construction, maintenance, and renovation needs by 2021. Voters in Gaston, Mecklenburg, and Wake counties approved bonds in 2017 and 2018 to cover more than $2.1 billion of this amount.  Mecklenburg and Wake school officials plan to ask voters for another $2 billion to $3 billion in coming years.

Enrollment in school districts across North Carolina is declining, even where the population is growing. Fewer babies are being born, and more families are choosing private schools home schools, and public charter schools, which do not receive lottery, state, or local funding for capital expenses.  Enrollment declines are not uniform, so there can still be a need for new schools to meet the demands of enrollment growth in some urban and suburban districts.  Moreover, many aging facilities need additions or renovations to improve safety, climate, and technological capabilities. Perhaps local school districts could take a page from charter schools and repurpose existing facilities instead of building new schools on large campuses with all the amenities.

The capital financing pitches by each legislative chamber overstate the benefits for K-12 schools. Only a fraction of the $2 billion in either the House leadership’s bond proposal or the Senate leadership’s debt-free capital plan would be used for school construction. Community colleges and the UNC System would receive roughly one-third of the capital funds either way, even though they will receive $1.35 billion of the $2 billion Connect NC bonds approved by voters in 2016.

State Treasurer Dale Folwell and the majority of the Debt Affordability Advisory Committee would use additional debt capacity to keep promises that the state has made to provide teachers and employees with health insurance after they retire.  The state historically paid its obligation for retiree health benefits as the obligation came due each year, just as for current employees on the State Health Plan. As health care costs have climbed, however, so has the cost of this benefit for retirees. The annual cost of these benefits is expected to double from $810 million to $1.62 billion over the next 10 years.

The unfunded liability for future retirees’ health care (and just about all of the liability is unfunded) peaked at $45 billion in 2016. Policy changes, such as ending coverage in retirement for state employees who begin work after December 31, 2020, have cut the obligation in half, but that still leaves a $22 billion liability.

In the current fiscal year, $875 million or 3.67 percent of General Fund revenue went to debt service and capital expenditures, which means every option to dedicate 4 percent (or up to 4.5 percent) of General Fund revenue to capital or retired state employees and teachers will mean less available to pay teachers, corrections officers, or other state employees today. Courts have ruled the state must honor its promises to already-retired state employees. Future state employees will not receive the same offer. There is nothing that requires state government to keep all the facilities it owns, let alone build new ones, or that it continues doing everything it does the same way with the same number of people.  Reform is possible, but few in state government seem to acknowledge that it is even needed.