Previous Page | Next Page

State debt

State spending of current tax dollars is just part of the budget story. Governments also borrow money and take on future obligations they need to fund. This borrowed money can cripple a government, as we have seen in Greece, California, New Jersey, and Illinois. North Carolina has more limits on debt than other states but has still managed to dig a fairly deep hole.

Most outside experts say the state's assumed 7.25 percent return on pension fund investments is overly optimistic. Lower rates of return mean more of the pension obligation is unfunded. State Treasurer Janet Cowell is seeking more flexibility to pursue higher yielding asset classes and has convened the Future of Retirement Commission to address the long-term viability of state pensions.

Debt passed without voter approval makes up one-fourth of the $15.7 billion in outstanding tax-supported state debt, but it comprises 100 percent all newly authorized debt since the higher education bonds passed in 2000. The cost of servicing that debt will approach $800 million in fiscal year 2011.

Unfunded pension and retiree health care obligations add another $43 billion to future obligations for state taxpayers.

Key Facts

• North Carolina has accumulated $6.1 billion in General Fund debt, one-fourth of that without a vote of the taxpayers.
• Since 2003, the General Assembly has authorized $3.3 billion in new borrowing without a vote of the taxpayers.
• The last bond vote was in 2000, for $3.1 billion in building projects for universities and community colleges.
• North Carolina also has $9.6 billion in government borrowing outside the General Fund.
• State employee pensions are officially funded at 99 percent of obligations. At market value, the funding level falls to 79 percent or less, adding at least $14 billion in unfunded liabilities.
• Future retiree health benefits have an unfunded liability of $29 billion.
• Combined debt and unfunded liabilities for the state equal $59 billion.

Recommendations

1. Limit non-voter-approved debt. Lawmakers have abused non-voter-approved debt. Any further borrowing by the state should be subject to voter approval.
2. Reform state employee pensions. Traditional defined benefit pensions put taxpayers at risk for higher costs in the future, particularly when actual returns on investments fall short of the assumed rate of return. Moving to more portable and flexible benefits, such as a 401(k), will improve the sustainability of the system.
3. Reform employee and retiree health benefits. State government should set aside reserves to cover future health care costs for retired state employees. Health Savings Accounts would be one solution and will remain an option at least until 2018, when the state will need to meet federal health insurance regulations.