A Government that North Carolina can Afford | Eastern NC Now

    Publisher's note: The author of this post is Joseph Coletti, who examines fiscal and tax policy for the John Locke Foundation.

    Each February, the State Treasurer's Debt Affordability Advisory Committee preempts the hopefulness of Groundhog Day with the publication of the annual Debt Affordability Study, the committee's reminder that state government resources are limited. The committee details how much debt state government has, whether it was approved by taxpayers, how it will be paid, how much it costs to pay the principal and interest, and how much more debt state government can afford for general purposes and transportation. This year's report adds details on the competing challenges even among prudent uses of state revenue.

    General Fund debt service is targeted at 4 percent or less; transportation debt can take up to 6 percent of combined Highway Fund and Highway Trust Fund revenue.committee has advocated raising the target for payments on state debt from 4 percent of General Fund revenue to 4.5 percent, still below the statutory cap of 4.75 percent. The committee would put roughly $200 million per year toward unfunded obligations for retiree pensions and health care benefits, which total at least $40.7 billion and use the additional debt capacity to fund a $1.5 billion general obligation bond.

    Net tax-supported General Fund debt totaled $4.7 billion in 2017, well below the previous peak of $6.2 billion in 2013. Tax-supported transportation debt adds another $870 million. State government has $608 million in highway debt based on federal funds and $237 million in guaranteed energy savings contracts. The N.C. Turnpike Authority also has $834 million in debt that is ultimately state government's responsibility. In all, that is $7.3 billion worth of state debt.

    Two legislative changes in the 2017 budget bill (Session Law 2017-57) affect the committee's recommendations. Beginning in 2021, new state employees will no longer qualify for state-provided health insurance after retirement. This change will not be seen in the unfunded liability for retiree health insurance until 2026 when those new workers would have vested in the system. The unfunded liability will continue to grow until then, but it puts a definite cap on the liability that can be accrued.

    On the other hand, the committee's goal of setting aside unused debt capacity was "circumvented" by the creation of a Pay-As-You-Go Capital and Infrastructure Fund. As the Debt Availability Study explains, the fund lays claim to "4% of the State's General Fund net tax revenues...to pay debt service (first priority) and then new State and UNC capital projects and repair and renovation projects." The new fund is designed to reduce or eliminate the need for new debt, but it takes money that the committee hoped to use for pensions and retiree health care. A 0.5 percent allocation of General Fund revenue would yield $115 million in the coming fiscal year, half of the $214 million expansion and a fraction of the full $1.9 billion (8 percent of General Fund revenue) already dedicated to this purpose for Fiscal Year 2018-19.

    These changes pile on existing fiscal challenges. If state government were to continue doing all the things it does the same way it does them, spending would grow faster than revenue is expected to increase. If state and federal tax and regulatory reforms do not spur faster economic growth, spending growth would need to remain near the post-2011 trend of 2.5 percent per year to keep the budget balanced.

    State government needs to set aside money for the next downturn, for future retiree health and pension benefits, and for the capital needs of state facilities. These needs compete with each other, as well as with program costs for education, health, public safety, and other government services in the General Fund. Just as transportation funding demands hard choices, so does the rest of government. Needs may be unlimited, but resources are. North Carolinians are still paying for past promises and outsized expectations.

    Unlike the Sir Walter Wally or Punxsutawney Phil, who are entertaining but bad meteorologists, the Debt Affordability Study does not make pleasant reading, but it is essential for charting a responsible fiscal course.