Local debt squeezes tax money from useful priorities

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pasquotank-copyPASQUOTANK COUNTY — In last year’s budget discussions, our commissioners raised our taxes, borrowed nearly $1 million and then dipped into our rainy day fund by an amount that was in the range of $500,000.

This paper recently reported that our commissioners were patting each other on the back because they had reduced the overall debt of the County from $78 million to $54 million — an accomplishment worthy of celebration.

Likewise, this improved the credit rating of the County from A- to A. But in the next breath, Commissioner Dixon remarked the change in credit rating would allow the county to borrow more money. Apparently, our Board of Commissioners knows how to spend money very well, but reduced the costs of borrowed money is not a high priority.

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Borrowed money and debt service payments can squeeze out funds that should be available for other worthwhile purposes. But in the case of our county commissioners, for the moment, they seem unable, or unwilling, to accept that rationale.

A recent article provided by the John Locke Foundation is right on point with this discussion:

  • Local governments should put all debt to referendum votes concurrent with general or primary elections.

  • Governments should report the full financing costs and repayment plan for any debt before a vote and put the tax increase associated with the debt on the ballot.

  • Budgets and financial reports should include a full accounting of debt, including the divergent revenue to pay higher – cost, limited – obligation bonds, certificates of participation, installment purchase debt, and all other non-voter approved debt financing vehicles.

North Carolina municipalities and counties have issued debt or bonds to pay for specific projects such as schools 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 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, scheduling votes at other times to ensure lower turnout.

In the early 2000’s, 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-approved debt than voter-approved. At the end of the 2012 school year, Rocky Mount, Jacksonville and Concord had only non-voter approved debt.

Asheville had over 100 times more debt funded through non-voter approved methods than through voter approved.

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 cost. This is rarely the case.

There are major cost differences when local governments choose non-voter approved debt financing. General Obligation 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 higher interest rates.

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 the properties for resale, so taxpayers would still be responsible for the town’s leaseback of these facilities.

The disproportionate amount of high- price debt has forced local governments to divert funds each year to pay debt service. As a result, these funds are not available for other needed services.

There is one county, for example, where annual debt service amounts to a whopping $1321 per person. Needed upgrades to water, roads 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 cost and should have a say through referenda in how much exposure they incur.

Between the years 2005 and 2012, per capita debt service payments rose in the state’s 100 counties to an average of $147 from a seven-year earlier tally of $113. Per capita debt service for municipalities was worse, rising to $226 from an earlier tab of $180.

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 divergent revenue used to pay debt.

Portions of the foregoing were taken from an article by the John Locke Foundation.

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