Wednesday, Feb. 24, 2010

Don't forgive their debts

There are plenty of reasons for North Carolinians to be worried and angry about the recent fiscal management of their government. After spending too much money when the economy was growing, the General Assembly has raised income and sales taxes during recessions. State and local officials have failed to set firm budget priorities. And skyrocketing levels of state indebtedness is consuming tax money that might otherwise have been used to balance the budget, cut taxes or fund core services.

I think all of these objections to the fiscal policies of current and former North Carolina leaders are valid. But there's an argument I find even more persuasive: these public officials have repeatedly violated the fiscal-policy provisions of the state constitution and should be held to account.

Many instances come to mind, but let me focus today on perhaps the most egregious one, government borrowing without securing the permission of voters in a referendum.

In general, Article V, Sections 3 and 4 of the North Carolina Constitution require that any state or local borrowing that would pledge taxes to pay off the debt must be subjected to voter approval. There are some exceptions, however. For example, officials can borrow without holding a referendum to fund or refund a valid existing debt, to supply an unforeseen revenue deficiency or to meet public health or safety emergencies. They can also reissue a portion of bonded debt that was previously approved by voters and has been paid off, and use this debt for any lawful purpose.

But in recent years, both state and local governments haven't bothered to use these exceptions. They have issued certificates of participation (COPs) to fund the construction of prisons, schools and other facilities. COPs are not subject to voter approval, which is why politicians like them. Holding a referendum takes some time and expense. More important, holding a referendum means that you have to accept the possibility that voters will say no.

It's best just not to ask the peons in the first place.

The use of COPs and other non-voter-approved debt is no minor occurrence. According to the 2010 Debt Affordability Study just released by the office of State Treasurer Janet Cowell, nearly one-third of the state's total debt will be in the non-voter-approved category by 2011. That's higher than the 30 percent mark that bond-rating agencies prefer for states to maintain a triple-A credit rating. For the 2008-09 fiscal year, the relevant figures for the state were these: $4.75 billion in general-obligation debt and $1.37 billion in COPs.

In defending this practice, North Carolina politicians argue that COPs aren't subject to the state constitution's referendum requirement because they don't pledge the taxing power of the government. Technically, investors who buy COPs are buying the right to share in the revenues to be derived from the buildings being financed. Technically, the investors can repossess their share of the buildings in question if the revenues don't materialize.

Technically, this is what a layman would call male-bovine excrement.

Public schools and prisons derive virtually all of their "revenue" from government tax collections. Public universities derive a large share of theirs from taxes, too. In reality, investors who buy COPs are loaning money to the state in return for receiving future tax revenue. They have no interest in claiming an ownership stake in the few bricks their money paid to lay. There isn't even a practical means of exercising such a claim.

Obviously, if COPs are used in a true emergency - say, to cover an unforeseen drop in revenue or to remedy a sudden public-health crisis - that would be constitutional, regardless of the wisdom of the act. But to issue COPs in lieu of general-obligation debt, simply because the politicians don't want to risk voter disapproval, is to evade the clear intent, and arguably the clear letter, of the state constitution.

As long as North Carolina politicians are never held to account for their misuse of the power to borrow, they'll keep doing it. I wonder if we'll ever see a major statewide bond referendum again.

Hood is president of the John Locke Foundation and publisher of CarolinaJournal.com.