2003 decision causes debt service to grow over 150% | Eastern North Carolina Now

    Publisher's note: This post, Sarah Curry, was originally published in John Locke Foundation.

    Remember voting for a bond on the ballot? You know, those things city, county and the state government use to pay for things like prisons, schools, roads, and any number of things. Normally it generates good debate, do we need the item the bond will pay for or don't we? There are debates, yard signs and even television commercials whether or not voters should support a bond, but that all changed in 2003.

    The 2003 budget created a new form of debt called special indebtedness. There are three forms of special indebtedness created, and they are:

    certificates of participation, lease purchase revenue bonds, and limited obligation bonds. The creation of these appropriation-funded debt vehicles gave legislators a method to issue non-voter approved debt, and over time have become the sole method for North Carolina's debt issuance. Their creation was prompted by the necessity for alternative financing methods to allow more flexibility and the ability to take advantage of changing financial and economic environments. In the budget document, it was confirmed the state would continue to issue debt through general obligation bonds, which has not happened, and there was no rule introduced for accountability or transparency.

    The big difference between these new debt vehicles and general obligation bonds is their price. Because they are funded through the state budget and not through the general taxing power of the people, the interest rate is higher. Meaning more money in the state budget must be directed towards debt service. To add to this, they are passed through a vote in the General Assembly, not a vote of the people. So the debate that used to occur, does not happen with the everyday voter. This has caused law makers to quickly move debt measures through without proper public debate, yet the public are those that are paying the higher interest rate.

    Take a look at the chart below that shows the state's debt service since 1990. Growth was relatively small prior to the creation of the new debt. Remember, we had a small recession in 2001-2002, so debt is always higher during a recession. So we left that recession and added to it higher interest forms of debt – and off we go....



    If you want to read more about these special forms of debt, check out my Spotlight: COPs Evade Voter Scrutiny.