Home

Previous Page | Next Page

Background

North Carolina municipalities and counties issue debt or bonds to pay for specific projects such as school and municipal buildings, jails, libraries, water treatment plants, streets, and sidewalks. Historically, debt issued by local governments was voted on in referenda and issued as General Obligation (GO) bonds.

However, over time, local governments found ways to incur more debt through faster, easier methods. Many started by moving away from voting on bonds during normal elections and toward less popular election times. In the early 2000s, state legislation was passed that allowed local governments to use methods of borrowing money without asking for the approval of voters and taxpayers.

Today, many cities rely more on non-voter approved debt than voter approved. At end of fiscal year 2012, Rocky Mount, Jacksonville, and Concord had only non-voter approved debt. Asheville had over one-hundred times more debt funded through non-voter approved methods than through voter approved. Fayetteville had eleven times more non-voter approved than GO debt.

Analysis

Bond referenda for schools, libraries, and other projects often pass, but elected officials and government managers may claim other methods will reduce risk and taxpayer exposure, or take advantage of short-term dips in construction or finance costs. This is rarely the case.

There are major cost differences when local governments choose non-voter approved debt financing. GO debt is paid through the taxing power of local governments, so investors face very little chance of default. Non-voter approved debt, is sometimes issued on an unsecured basis, for example by using a specific revenue stream, lease payment, or financing agreement. Because of fluctuations in local revenue, governments have more chance of default on these types of loans, making this form of debt more risky and giving it a higher interest rate.

Certificates of participation and other installment purchase plans also come with promises to protect taxpayers, yet local governments pledge their own assets, such as town halls and fire stations, as collateral to finance these projects. Banks are unlikely to repossess these properties for resale, so taxpayers would still be responsible for the town's leasing back of these facilities.

The disproportionate amount of high-priced debt has forced local governments to divert more funds each year to pay for debt service. As a result, these funds are not available for other needed services. Watauga County's debt service, for example, amounts to $1,321 per person. Needed upgrades to roads, water, or sewer systems must take a backseat to current debt and the interest it incurs. Whatever new tax revenue is dedicated to debt service is not available for other projects. Ultimately taxpayers are liable for the costs and should have a say through referenda in how much exposure they incur.

All debt (certificates of participation, revenue bonds, Build America Bonds, tax-increment financing) pledges the taxing authority of the issuing government.

Between 2005 and 2012, per capita debt service payments rose in counties from $113 to $147 and in municipalities from $180 to $226. A family of four spent an average of $320 more per year on debt payments for local government in 2012 than in 2005. In some areas, this may not include diverted revenue used to pay debt.

The entire 2014 City & County Issue Guide, is available for download as a 3.6MB Adobe Acrobat file.
The free Adobe Acrobat Reader is required to view or print this document.