It’s cheap to borrow right now. That doesn’t mean you ought to load up with new debt, however, and this same wisdom applies to the public sector.
North Carolina has traditionally maintained low levels of indebtedness, at least when compared to other states. According to the latest available statistics on total state and local debt, for the 2013 fiscal year, North Carolina ranks 44th in the country at $5,233 per person. That’s significantly lower than the debt loads in South Carolina ($8,874), Virginia ($7,919), Florida ($7,473), and the national average ($9,338), although only somewhat lower than those of Georgia ($5,573) and Tennessee ($5,667).
Naturally, these statistics don’t include local bond issuances since 2013 or the cost of financing the $2 billion Connect NC bond package approved by voters earlier this year. State officials are about to issue the first round of those latter bonds for sale in a few weeks. They’ll fund university and college buildings, water and sewer projects, state parks, and other facilities.
But that doesn’t mean North Carolina’s national ranking on debt will markedly change. It probably won’t. Other jurisdictions have been approving significant bond issuances, as well. They’ve cited the same reason North Carolina officials have: historically low interest rates.
Assuming that the capital needs in question are real, it’s not irrational to borrow instead of pay as you go when rates are so low — particularly when the project being financed will produce significant economic returns when completed. Still, some fiscal conservatives argued that the Connect NC projects didn’t meet that test. Furthermore, although some voters may have thought otherwise, because of the bond package’s name and initial composition, it did not fund the very kinds of projects, highways and bridges, that are often associated with high rates of economic return.
Gov. Pat McCrory’s original plan was larger and included roads. State lawmakers shrank it and removed the transportation piece, properly noting that they had enacted other policies to produce or free up hundreds of millions of dollars in highway-related revenue each year for roads and bridges. There was no need to borrow against general revenues to fund such projects, they argued.
Rep. Chris Millis (R-Pender) has filed a bill this session to move nearly half a billion dollars worth of Connect NC bonds from campus buildings to roads. On several occasions, Gov. McCrory has called for another billion-dollars-plus bond package in 2017, this time for transportation.
I urge caution. The truth is that, due to strict fiscal discipline over the past six years, North Carolina has been paying down debts and building up savings. Even the passage of the Connect NC bond package will only slow the decline in state indebtedness as a share of state spending and the economy, rather than reversing it.
But additional rounds of state and local borrowing may indeed reverse the trend. North Carolina’s traditional stance on debt has served us well. Several academic studies have documented that the effects of state indebtedness, like state taxation, follow a curve. At low levels, it likely produces net economic benefits, as the infrastructure projects financed by bonds facilitate greater investment and commerce. As the debt rises, however, the net turns negative. Paying the principal and interest on the bonds requires either higher taxes or less spending on valuable services, both exacting significant economic costs over time.
Is North Carolina near the tipping point? It’s hard to say. But it’s worth noting that a recent study by two Australian economists concluded that most American states were already past that point. “Beyond quite modest debt ratios,” they wrote, “further debt appears to cause slower growth.”
Let’s keep our status as one of the nation’s least-aggressive government borrowers. While modifying the Connect NC bonds after the fact won’t work, we can keep a lid on government debt while also meeting our future needs by setting firm budget priorities and, when feasible, having private firms assume the risk for new infrastructure. What’s even better than a low debt payment? No debt payment.
John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.