COPs and Robbers

Imagine this: you’ve just had your credit card stolen. What do you do? Naturally, you would inform the credit card company so that the thief cannot max out your credit line. Most would agree that a thief running up your credit card bill without your consent would be committing an immoral act.

But this scenario describes exactly what is happening with North Carolina’s state debt.

State lawmakers have maxed out the credit line in our name, running up billions in taxpayer-backed debt without our consent. Indeed, it has been more than a decade since voters last had the opportunity to approve the issue of new state debt.

Article V, section 3 (1) of the North Carolina state Constitution explicitly states the General Assembly must first seek voter approval for “debts secured by a pledge of the faith and credit of the State.” This traditional method of public finance typically results in “general obligation” (GO) bonds.

Not content to first gain voter approval for their spending sprees, however, state legislators exploited the phrase “secured by a pledge of the faith and credit of the State” to develop “special indebtedness” instruments, most notably a funding mechanism known as Certificates of Participation (COPs).  COPs are debt instruments “secured” by the value of the asset being financed – typically a new building. Thus, COPs technically are not required to receive voter approval.

Recent Civitas Institute statewide polling shows that an overwhelming 77 percent of voters believe that the North Carolina General Assembly should not be allowed to borrow money without voter approval. But the ability to circumvent voter approval and skirt any accountability for debt spending proved too tempting for state lawmakers. Even in the face of such massive public opposition, the state has continued to rely exclusively on “special indebtedness” bonding. Since 2000, Raleigh legislators have issued billions in new debt without one penny of it being approved by voters.

Since abandoning the bond referenda process in 2000 in favor of COPs, state debt has predictably exploded. Per capita state debt has more than doubled. Annual debt service payments on the debt have tripled. Moreover, the state has authorized, but not yet issued, another $1.6 billion in debt (as of June 30, 2010).

What has been the impact of the spending binge? In short, North Carolina’s General Assembly maxed out the state’s credit card. Both the 2010 and 2011 Debt Affordability studies produced by the State Treasurer’s office concluded that the state has “substantially exhausted” its capacity to issue new debt without threatening its credit rating.

For years, fiscal conservatives in the state have been warning that the reckless, unchecked debt spending binge embarked upon by elected officials in Raleigh would have negative repercussions. Critics also highlighted the unfairness of running up debt without the consent of those forced to pay it back. But the politicians didn’t listen.

It became quite tragically ironic, really. COPs were robbing us.

New leadership in the General Assembly this year, however, at least offered a glimmer of hope that the unaccountable and immoral practice of evading voter consent on state debt may be ending.  Legislation (HB 491) to repeal the statutory authority for Certificates of Participation was introduced this past session. The bill passed the House, and has been referred to the Senate Finance Committee where it can be picked up for debate next year.

It’s well past time for North Carolina taxpayers to once again have a say over new charges being run up on a bill with their name on it.