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Constitution of North Carolina

ARTICLE V Finance

Sec. 3. Limitations upon the increase of State debt.

(1) Authorized purposes; two-thirds limitation. The General Assembly shall have no power to contract debts secured by a pledge of the faith and credit of the State, unless approved by a majority of the qualified voters of the State who vote thereon, except for the following purposes:

(a) to fund or refund a valid existing debt;

(b) to supply an unforeseen deficiency in the revenue;

(c) to borrow in anticipation of the collection of taxes due and payable within the current fiscal year to an amount not exceeding 50 per cent of such taxes;

(d) to suppress riots or insurrections, or to repel invasions;

(e) to meet emergencies immediately threatening the public health or safety, as conclusively determined in writing by the Governor;

(f) for any other lawful purpose, to the extent of two-thirds of the amount by which the State's outstanding indebtedness shall have been reduced during the next preceding biennium.

(2) Gift or loan of credit regulated. The General Assembly shall have no power to give or lend the credit of the State in aid of any person, association, or corporation, except a corporation in which the State has a controlling interest, unless the subject is submitted to a direct vote of the people of the State, and is approved by a majority of the qualified voters who vote thereon.

(3) Definitions. A debt is incurred within the meaning of this Section when the State borrows money. A pledge of the faith and credit within the meaning of this Section is a pledge of the taxing power. A loan of credit within the meaning of this Section occurs when the State exchanges its obligations with or in any way guarantees the debts of an individual, association, or private corporation.

(4) Certain debts barred. The General Assembly shall never assume or pay any debt or obligation, express or implied, incurred in aid of insurrection or rebellion against the United States. Neither shall the General Assembly assume or pay any debt or bond incurred or issued by authority of the Convention of 1868, the special session of the General Assembly of 1868, or the General Assembly of § 1868-69 and § 1869-70, unless the subject is submitted to the people of the State and is approved by a majority of all the qualified voters at a referendum held for that sole purpose.

(5) Outstanding debt. Except as provided in subsection (4), nothing in this Section shall be construed to invalidate or impair the obligation of any bond, note, or other evidence of indebtedness outstanding or authorized for issue as of July 1, 1973.

(1969, c. 1200, s. 1.)

Cross References. - As to limitations upon the increase of local government debt, see N.C. Const., Art. V, § 4.

History Note. - The provisions of subsections (1) and (2) of this section are similar to those of Art. V, § 4, Const. 1868, as amended in 1924 and 1936, and the provisions of subsection (4) are similar to those of Art. I, § 6, Const. 1868, as amended in § 1872-1873 and 1880.

Legal Periodicals. - For note on taxation and revenue bonds to finance low-income housing, see 49 N.C.L. Rev. 830 (1971).

For article on the need to reform North Carolina property tax law, see 59 N.C.L. Rev. 675 (1981).

For comment, "The States, Balanced Budgets, and Fundamental Shifts in Federalism," see 82 N.C.L. Rev. 1195 (2004).

For article, "The People versus Corporate Welfare: North Carolina's Forsaken Opportunity to Reverse Perversion of the Commerce Clause and to Reinvigorate the Public Purpose Doctrine," see 33 Campbell L. Rev. 381 (2011).

CASE NOTES





I. In General.

II. Contracting of Debt.

III. Gifts and Loans of Credit.

IV. Debts Barred by Subsection (4).



I. IN GENERAL.



Editor's Note. - Most of the cases cited below were decided under this section as it stood before the revision of this Article by amendment adopted Nov. 3, 1970, effective July 1, 1973, and under corresponding provisions of the Constitution of 1868.

Application of Statutes to Electric Cooperative Did Not Violate Rights. - Section § 105-116 (now repealed) taxes billings for electrical service rendered by cooperatives in the same manner as billings for service rendered by investor-owned utilities; therefore, application of the section to an electric cooperative did not violate that an entity's right under N.C. Const., Art. I, § 19, this section or N.C. Const., Art. V, § 2. Four County Elec. Membership Corp. v. Powers, 96 N.C. App. 417, 386 S.E.2d 107 (1989), cert. denied and appeal dismissed, 326 N.C. 799, 393 S.E.2d 894 (1990), cert. denied, 498 U.S. 1040, 111 S. Ct. 711, 112 L. Ed. 2d 700 (1991).

II. CONTRACTING OF DEBT.

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Power to Contract Debts Limited. - The language of this section is unambiguous; by its plain terms, the power of the State to contract debts in any biennium without submitting the matter to a vote of the people, except for those purposes specifically enumerated in the section, is definitely prescribed to two-thirds of the amount by which its outstanding indebtedness was decreased during the prior biennium. Hallyburton v. Board of Educ., 213 N.C. 9, 195 S.E. 21 (1938).

The Constitution gives to the people the power to decide whether or not to contract a debt by requiring their duly elected representatives to submit the question to them for their approval before the indebtedness is assumed. Vance County v. Royster, 271 N.C. 53, 155 S.E.2d 790 (1967); Cole v. City of Asheville, 2 N.C. App. 652, 163 S.E.2d 628 (1968).

Public Purpose for Taxation. - Town's breach of contract claim against landowners for proposing to close a hospital built on land the town granted failed because, inter alia, the landowners had held the land for more than the 30 year period during which a challenge to the landowners' title could be brought. Town of Belhaven v. Pantego Creek, LLC, - N.C. App. - , 793 S.E.2d 711 (2016).

Inapplicability to Turnpike Revenue Bonds. - Since the Turnpike Authority's revenue bonds do not create a debt within the meaning of the Constitution, the limitations of this section are inapplicable. North Carolina Tpk. Auth. v. Pine Island, Inc., 265 N.C. 109, 143 S.E.2d 319 (1965).

Power to Enter into Long-Term Contracts Not Restricted. - The intent of the provision of this section which prohibits the General Assembly from contracting debt without voter approval is to restrict the State's power to borrow money, not its power to enter into long-term contracts. Boneno v. State, 54 N.C. App. 690, 284 S.E.2d 170 (1981).

The method of financing set forth in G.S. § 122A-6 does not create a debt within the meaning of the Constitution and therefore the limitations of this section are inapplicable. Martin v. North Carolina Hous. Corp., 277 N.C. 29, 175 S.E.2d 665 (1970).

III. GIFTS AND LOANS OF CREDIT.

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Subsection (2) Does Not Apply to State's School System. - Subsection (2) of this section is an inhibition on giving or lending the credit of the State to third persons, individual or corporate, and of the kind contemplated in the provision; it cannot be construed to affect the mandatory provisions of N.C. Const., Art. IX, as to the maintenance of a statewide school system by legislative enactment. Lacy v. Fidelity Bank, 183 N.C. 373, 111 S.E. 612 (1922).

Nor Does It Prohibit the Insuring of School Property. - A county board of education has the authority to insure school property in a mutual fire insurance company authorized to do business in this State, and to assume the contingent liability limited to the amount of the cash premium, and the execution of such policy does not lend the credit of the State to a private corporation under this section. Fuller v. Lockhart, 209 N.C. 61, 182 S.E. 733 (1935).

Authority to Establish Reserve or Contingency Fund Not Pledge of Faith and Credit. - The fact that such appropriations as the General Assembly may see fit to make may be used for the establishment of a reserve or contingency fund to be available for the payment of the principal of and the interest on any bonds or notes of a public corporation does not constitute a pledge of the faith and credit of the State or of any political subdivision thereof for the payment of the principal of and the interest on any bonds or notes of the corporation. Martin v. North Carolina Hous. Corp., 277 N.C. 29, 175 S.E.2d 665 (1970).

When Issuance of Bonds Does not Constitute Lending or Giving of State Credit. - Where an act specifically provides that bonds or notes issued under it shall not be deemed to constitute a debt, liability or obligation of the State or of any political subdivision thereof, or a pledge of the faith and credit of the State or of any such political subdivision, but that they "shall be payable solely from the revenues and other funds provided therefor," the issuance of such bonds does not constitute a giving or lending of the credit of the State, or of its agency, within the meaning of this section. Foster v. North Carolina Medical Care Comm'n, 283 N.C. 110, 195 S.E.2d 517 (1973).

Issuance of Bonds to Finance Hospital. - Former G.S. § 131-138 et seq., authorizing the Medical Care Commission (now Department of Human Resources) to issue revenue bonds to finance the construction of hospital facilities to be leased and ultimately conveyed to a public or private nonprofit agency, did not authorize the contracting of a debt by the State, or its agency, or the lending of the faith and credit of the State, or its agency, in violation of this section. Foster v. North Carolina Medical Care Comm'n, 283 N.C. 110, 195 S.E.2d 517 (1973).

Issuance of Bonds to Aid War Veterans. - A statute for the purpose of issuing bonds, passed by the legislature and approved by the vote of the people at an election duly had for the purpose, providing for an issuance and sale of State bonds for the purpose of lending the proceeds on mortgage to a certain amount of the value of the land to the veterans of the First World War to help them in providing homes for themselves, is the pledging of the credit of the State for a public purpose, and is a valid exercise of statutory authority. Hinton v. Lacy, 193 N.C. 496, 137 S.E. 669 (1927).

Issuance of Bonds to Pay for Stock. - A subscription for stock in a corporation and issuing bonds to pay for such stock is a gift of the credit of the State, within the meaning of this section. Galloway v. Jenkins, 63 N.C. 147 (1869).

Lease of Facility by Ports Authority to Private Corporation. - Lease of a facility by the Ports Authority to a private corporation, under the terms of which lease the corporation would pay during a five year term all costs of operation of the facility and rentals sufficient to retire in full revenue bonds issued by the Port Authority, did not constitute a loan of the credit of the State or the agency. North Carolina State Ports Auth. v. First-Citizens Bank & Trust Co., 242 N.C. 416, 88 S.E.2d 109 (1955).

National Park Act. - The statute establishing the North Carolina National Park Commission (Laws 1927, c. 48), with the certain powers therein enumerated, is for the benefit of the public of the State and not that of some third person, and does not fall within the provisions of this section. Yarborough v. North Carolina Park Comm'n, 196 N.C. 284, 145 S.E. 563 (1928).

Vote of People Necessary to Aid New Railroad. - The General Assembly has no power to contract a debt, without a vote of the people, to aid in the construction of, or build a new railroad. University R.R. v. Holden, 63 N.C. 410 (1869).

IV. DEBTS BARRED BY SUBSECTION (4).

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Proceedings Dismissed. - Proceedings to settle and adjudge the legal validity of claims against the State were dismissed in Baltzer v. State, 104 N.C. 265, 10 S.E. 153 (1889), for the reason that the General Assembly was expressly forbidden by constitutional provisions from which subsection (4) of this section was derived from paying the claim presented therein, the Supreme Court of North Carolina saying that "it would be idle, futile and ridiculous for this court to declare and adjudge the validity of a claim, against the State, and recommend to the General Assembly to provide for its payment, when the Constitution expressly forbids it to pay or provide for the payment of such a claim." Calkins Dredging Co. v. State, 191 N.C. 243, 131 S.E. 665 (1926).

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