(RALEIGH, N.C.) – State Treasurer Dale R. Folwell, CPA, announced today the results of the 2021 Debt Affordability Study, advising the Governor and General Assembly on the estimated debt capacity of the General and Transportation Funds for the upcoming 10 fiscal years.
The annual study, approved by the Debt Affordability Advisory Committee (DAAC), provides a comprehensive assessment of a government’s ability to issue debt for capital needs. Control of a state’s debt burden is one of the key factors used by rating agencies’ analysis in assessing credit quality.
The DAAC is required to annually advise the Governor and General Assembly of the estimated debt capacity of the General, Highway and Highway Trust Funds for the upcoming 10 fiscal years. The DAAC is also directed to recommend debt management policies it considers desirable and consistent with the sound management of the state’s debt.
The guidelines attempt to strike a balance between providing sufficient debt capacity for funding essential capital projects, while imposing sufficient fiscal discipline to maintain future budgetary flexibility and protect the state’s “AAA” bond rating. North Carolina is one of only 13 states that have an “AAA” bond rating with all three major rating agencies.
“This is not political or emotional, but mathematical,” said Treasurer Folwell. “We have almost $40 billion in unfunded pension and health care liabilities. That bill will come due much sooner than people realize. We’re doing what’s necessary at this point in the state’s history because others didn’t. As Gov. Martin said, ‘…doing right is rarely wrong.’”
The DAAC has adopted the ratio of debt service as a percentage of revenue as its controlling metric determining the state’s debt capacity. Despite the impact of the COVID-19 pandemic, general revenue projections show a positive growth trend for the next 10 years. Debt service projections incorporate the future issuance of the remaining $400 million of Connect NC Bonds and $2 billion in Build NC Bonds.
However, the DAAC recommends that the state consider General Obligation (GO) Bonds that are generally approved by voters as the preferred, but not exclusive, vehicle to provide funding for the state’s capital projects. It was noted in the report that, contrary to the DAAC’s standing recommendation, the $3 billion Build NC Bonds were not authorized as GO bonds and will subsequently prove costlier for taxpayers as a result.
The DAAC further noted that transportation debt service will substantially increase over the next 10 years. Projections show that the 6% of transportation debt service to transportation revenues debt capacity limitation may be exceeded as early as FY 2026, which could reduce the total amount of Build NC Bonds issued to less than the $3 billion authorized.
The study also showed that the state’s General Fund has debt capacity of approximately $1.458 billion per year over the next 10 years after incorporating the DACC’s recommended policy of annually directing $100 million to the Unfunded Liability Solvency Reserve to begin addressing the state’s $39.8 billion in pension and Other Post-Employment Benefits liabilities.
DAAC members are Dale R. Folwell, State Treasurer, Chair; Ronald Penny, Secretary of Revenue; Linda Combs, State Controller; Charles Perusse, State Budget Director; Beth Wood, State Auditor; Frank Aikmus, Senate appointee; Bradford Briner, Senate appointee; Donald Pomeroy, House appointee; and Eugene Chianelli, House appointee.
The N.C. Department of State Treasurer’s State and Local Government Finance Division handles the sale and delivery of all state and local debt and monitors the repayment of State and local government debt. More information can be found at https://www.nctreasurer.com/links/state-and-local-government-finance-division.