Remember when our imperial overlords in Raleigh deigned to let us vote on state bond issues? Legislative leaders have apparently decided that the idea of building a consensus around public debt is passé, and that the state constitution is a vestigial reminder of a quaint past, like a long-forgotten hula-hoop in the corner of the garage.
    Just before Independence Day, House Speaker Joe Hackney and Senate leader Marc Basnight emerged from seclusion to inform us peons that they had struck a deal on a 2008-09 budget plan. Responding to warnings about faltering revenues, they agreed to reduce planned tax cuts from $50 million to $20 million. The $21.4 billion General Fund budget represents annual growth of just over 3 percent, which is admirably moderate.
    {mosimage}But then came the sock in the gut.
    In recent years, legislators have grown increasingly comfortable with issuing certificates of participation (COPs) to fund the construction of prisons and other public buildings, rather than using general-obligation bonds. Technically, COPs do not pledge the full faith and credit of the state, and thus are not thought to trigger the state constitution’s requirement that public debts be approved by a vote of the people. Instead, COPs essentially give bondholders a share of revenues to be derived from a particular project. Of course, bondholders know that governments aren’t going to neglect to fund prisons, schools and the like. So in practice, there’s not a lot of difference.
    There is a limited role for COPs in a fiscally conservative government — when speed is truly of the essence, for example, and the borrowed amounts are small. Neither case applies here. The House had included $550 million in COPs projects in its budget plan. That was excessive and unnecessary, because House leaders admitted that many of the projects wouldn’t break ground for years, giving them ample time to submit them to referendum. Then the Senate came along and proposed $672 million in non-voted debt. That was exorbitant and outrageous.
    Here’s how fiscal mathematics in Raleigh works. When given a choice between excessive and exorbitant, you don’t split the difference. You add. So now we are facing an extreme result: more than $1 billion in new debt, including $750 million in COPs, $107 million in reissued bonding authority, and more than $200 million in additional bonds slated for 2009 or 2010. The COPs will cost taxpayers millions more to finance than would bonds. And legislative leaders admit that many projects won’t be built immediately, invalidating any argument based on urgency.
    Realizing that cutting voters out of the fiscal equation isn’t a presentable policy in an election year, Basnight and Hackney resorted to the old politician’s trick of magically transforming a cost into a benefit. The new debts, they asserted, would create 20,000 jobs in construction and related industries, putting $85 million back into the state treasury in the favor of taxes and fees.
    And what of the private spending that the new budget will displace by jacking up annual debt service? The question doesn’t seem to have occurred to Basnight and Hackney, operating under the assumptions that borrowing is income and that opportunity cost doesn’t exist. Public debts for infrastructure are justified only if the benefits from using the infrastructure to carry out legitimate government functions — incapacitating criminals, for example — exceed the full cost of the debt, including principal and interest over the life of the loan. They are never justified by the apparent economic benefits of building the infrastructure, given that the economic benefits are simultaneously lost in the private sector when the state confiscates private incomes.
    Any worthwhile capital projects in the proposed 2008-09 budget compromise should be submitted to the voters. It would reduce borrowing costs and give the public its constitutional due. But would you and other North Carolinians be likely to approve $1 billion worth of new debts in tough economic times? Basnight and Hackney seem to think the answer might be no, which is why they have decided not to ask you.
Constitutional government is such a bother sometimes.

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