The Build NC Bond Act was recently introduced in both chambers of the legislature to speed up local and regional road projects (HB 1010 and SB 758) . The legislation – sponsored in the House by Representatives John Torbett (R-Gaston), Frank Iler (R-Brunswick), Michelle Presnell (R-Yancey) and Phil Shepard (R- Onslow), and in the Senate by Bill Rabon (R-New Hanover), Kathy Harrington (R-Gaston) and Jim Davis (R-Macon) – calls on the state to borrow up to $3 billion in transportation funding over ten years using highway fund revenues to repay the bond.
Advocates say the bill will buy the state some time as it shifts to a new transportation funding model that will help to make up for declining revenue from the gas tax, vehicle sales taxes and DMV fees.
Interestingly, some thought the legislation might find it’s way into the budget bill. When lawmakers failed to agree on whether the debt should be included in the state budget, the Build NC Bond Act was put forward as separate legislation.
And therein lies the problem. Let’s be clear; North Carolina certainly has a growing mountain of transportation needs. The Build NC Bond Act is not the best way to address those needs.
The biggest problem is that the Act authorizes debt without the public having an opportunity to vote on whether or not to borrow the funding.
That’s one of the reasons State Treasurer Dale Folwell has been critical of HB 1010 and SB 758. In a May 21st statement, Folwell said, “I’m not against more money for transportation, nor am I opposed to the goals of those who support the proposed bonds. I’m opposed to the issuance of any debt that does not meet my guiding principles, I think we need more transparency so that people can decide whether they want to take on more debt in this environment.”
Folwell continued, “it’s important for the people to understand that this additional debt is being issued at a time when we have almost $50 billion in pension and health care liabilities.”
I couldn’t agree more with Folwell’s call for caution, greater transparency and for letting people decide on whether they want to take on more debt. Folwell’s comments certainly helped to unhinge the provisions from the state budget and prompted additional safeguards to try to ensure state borrowing is within acceptable limits
According to provisions in the Act, the bond will be repaid through money from the state Highway Trust Fund. Since the bonds in question will be similar to a program called GARVEE bonds (Grant Anticipation Revenue Vehicles), the state will borrow money by pledging the use of future federal transportation funding for the loan payment. Unlike general obligation borrowing where the state pledges its full faith and credit of the state, as payment, GARVEEs and special indebtedness are based on the state’s annual debt service appropriations. As such, interest rates for special indebtedness are usually higher than general obligations bonds and will add to the already existing $6.96 billion in outstanding state debt – without the public ever having a say.
Special indebtedness bonds were at the heart of a decades-long state and municipality spending spree. Civitas helped to sound the alarm about North Carolina’s binge spending largely financed with special indebtedness bonding — especially Certificates of Participation (COPs). Read about it here and here.
When policymakers finally came to their senses, they passed Session Law 2013-78. The law limited the amount of special indebtedness the state could incur to 25 percent of all total bonded indebtedness.
Advocates for the Build NC Bond Act say the Treasurer must approve the issuance of additional debt and only after certain financial health benchmarks are met. Don’t be fooled. HB 1010 is still bad policy.
Remember voters in 2016 approved $2 billion in Connect NC Bonds, most of which have yet to be issued.
Moreover, there is the estimated $8 billion in school capital facility needs. To help address those needs last year the legislature added $100 million in lottery proceeds to the PublicSchool Building Capital Fund (PSBCF) and set up matching funding for districts with the greatest needs. PSBCF is likely only a temporary fix on what may be an inevitable larger school bond question.
North Carolina has spent the past decade getting its financial house in order. North Carolina legislators’ fiscal prudence has been rewarded with Triple A ratings for General Obligation Bonds from all three credit agencies – one of only 12 states to receive such a designation. The high ratings mean the state has followed sound financial management policies and strong debt management.
The decision to incur up to $3 billion in special indebtedness bonding can mar that record. A fiscal note accompanying the legislation projects annual debt service on the Build NC bonds to max out at more than $300 million per year. But that is the point: Context is important. There are many competing demands for operating costs and capital needs; especially with the rising costs associated with healthcare and pensions.
All the more reason why voters deserve the right to vote on questions of public debt. The Build NC Bond Act takes away that right and does nothing to address North Carolina’s long-term transportation problems. Lawmakers would do well to get serious about transportation policy and forget about the NC Bond Act.
