NC debt keeps rising without voter approval

RALEIGH, N.C. — The General Assembly is forever in debt to a 1991 court opinion that allowed North Carolina governments to approve certain types of borrowing without voter approval.

If this year's budget bill is signed into law by Gov. Mike Easley, opponents of that type of debt are worried North Carolina's lawmakers may be tempted to refrain forever from traditional borrowing.

This year, the Legislature went on a borrowing spree in the budget, authorizing $857 million in debt over the next four years. That's the largest amount ever approved in one year without requiring a public vote. Most of the borrowing is so-called "special indebtedness" that will pay for 1,500 prison beds, more than 15 university and state buildings, even an oyster hatchery and the renovation of the polar bear exhibit at the North Carolina Zoo.

"If the Legislature can authorize a billion dollars of debt without a vote, why would they ever offer another bond issue again?" asked John Hood of the conservative John Locke Foundation and a frequent critic of nonvoter approved debt.

Legislative leaders said they aren't giving up on traditional bonds, which under the state constitution must be approved by voters. A blue-ribbon transportation commission recommended a road-building bond this year, and lawmakers said it will be considered in 2009.

But the "special indebtedness" is a way to build essential construction projects faster than possible when public approval is required, an important option as steel and concrete prices soar, according to proponents. The state's construction industry will get a shot in the arm and could generate as many as 20,000 jobs, lawmakers said.

"The contractors are hungry and the interest rates are low and we have a big new group of university students on the way," said House Speaker Joe Hackney, D-Orange. "Together with the stimulus effect, all that argues in favor with going ahead."

North Carolina's annual debt service, projected this year at $681 million before the new borrowing, has doubled as a percentage of tax revenues since 2001, according to the Legislature's Fiscal Research Division. But the overall debt remains within guidelines set by the state treasurer to keep the state's cherished triple-A bond rating, which keeps interest rates low.

Republicans who voted against the budget said they were disturbed by the amount of borrowing, as well as spending cash on planning for an additional $1 billion in future projects.

If lawmakers follow recent patterns, GOP legislators argue, these future projects should be paid for in the next year or two with even more nonvoter approved debt, ultimately leading to higher taxes to pay for it all.

"So we're now going to add (payment) requirements over $100 million to the next three or four years," said House Minority Whip Bill McGee, R-Forsyth. "I think problems are coming for the taxpayer."

For now, State Treasurer Richard Moore's office said borrowing levels remain fiscally sound, even with the debt in this year's budget. Moore's annual debt affordability study advised lawmakers could borrow on average $479.7 million annually for the next five years. The borrowing in the budget is spread out over time to keep below the cap.

"We aren't going to go over any limits," Hackney said.

"Special indebtedness" was first used by local governments to purchase vehicles and other equipment on an installment plan. Interest rates on the debt are slightly higher than those for general obligation bonds. The state Supreme Court ruled in 1991 that a referendum wasn't necessary for this kind of borrowing because lenders couldn't force a local government to raise taxes to pay off any unpaid debt.

That opened the door for the General Assembly to try it in 2000. Special indebtedness greatly expanded in 2004, when lawmakers agreed to borrow $468 million on projects.

Easley, who must decide by Friday whether to sign the budget bill into law, has wrestled in recent years with whether to support nonvoter approved borrowing. He asked legislative leaders in 2005 to require voters statewide to approve any borrowing more than $25 million, with exceptions for projects involving public health and safety. But his fellow Democrats in the Legislature ignored the idea.

Hood said lawmakers may be averse to issuing debt without requiring a referendum because they may be worried voters would reject the borrowing. Dozens of sales tax and land transfer tax referenda have failed since last November.

Hood likened the nonvoter-approved borrowing in recent years to the frog that will jump out of a pot filled with boiling water, but fails to notice a slowly rising temperature until it's too late.

"I think the taxpayers are at the risk of being cooked," Hood said.

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