While the federal government continues to rack up massive debt, North Carolina state government has seen a trend of declining state debt

After decades of rapidly building up debt, conservative leadership has reversed course

Debt service payments divert tax dollars from other budget priorities

Recent headlines revealed that the federal government’s deficit has topped $1 trillion in the first eleven months of the current fiscal year. The massive spending imbalance has driven the national debt up to $22.5 trillion.

While the federal debt crisis continues to spiral out of control, a different trend has occurred in the last several years here in the Tar Heel State.

After two decades of significant ramping up of state debt, new conservative leadership in 2011 ushered in a policy of fiscal restraint that has resulted in a notable reduction in the state’s debt burden.

The last three years has seen the approval of new state debt, however. In 2016, voters approved a $2 billion bond referendum known as “Connect NC,” with the funds largely dedicated to college campus infrastructure, public parks and water and sewer projects. The bond represented the first time in a decade and a half that voters were actually afforded the opportunity to approve state debt – a drastic improvement.

The Connect NC bonds will be repaid with state General Fund monies.

More recently, the legislature approved $3 billion in infrastructure bonds known as the “Build NC” bonds. That debt will be financed through the Highway Trust Fund, not the General Fund.

Falling State Debt

Debt issuances were the exception rather than the rule for the last eight years, as state debt finances have seen an overall dramatic reversal from the previous two decades of reckless and short-sighted debt spending.

The below chart illustrates this point.[i]

Highlights of this data include:

From 2001 to the peak in 2013, North Carolina General Fund, net tax-supported debt grew from $2.8 billion to $6.5 billion, an alarming growth rate of 230 percent.

In contrast, from 2013 to 2018, this debt has steadily dropped from $6.5 billion to $4.2 billion, a 35 percent reduction. Stated differently, this debt fell from roughly $660 per person to $405 per person.

State debt continued to fall after the approval of the Connect NC bonds because the pre-existing debt continued to be paid down at a more rapid pace than the new bonds were being issued.

Dwindling Debt Service Payments Frees Up Funds for Other Priorities

Increasing state government debt manifests itself in annual debt service payments. As shown in the chart below, North Carolina’s debt service payments ballooned from $269 million in 2001 to a peak of $785 million in 2011, a dramatic near tripling of annual debt payments representing an increase of more than half a billion dollars. Since 2011, annual debt service payments have leveled off, and fallen to $729 million by 2018.[ii]

Debt service payments come from the General Fund, meaning that every dollar devoted to paying down the debt means one less dollar for other state government priorities like education or public safety.

Conclusion

It is important to note that much of the debt issued and accumulated in 1990s and 2000s was during flush economic times in which economic growth was strong and state revenues were growing at a healthy clip.

Irresponsible borrowing during boom times imposed a growing debt service burden on future legislatures, a burden that was especially difficult to bear when the Great Recession hit.

Fortunately for North Carolina taxpayers, a culture of fiscal responsibility has won the day in the last eight years. If only politicians in DC would follow suit.

[i] North Carolina State Treasurer’s Office; Annual Debt Affordability Study, years 2019, 2014, 2009 and 2006. Available online at: https://www.nctreasurer.com/slg/Pages/Debt-Affordability.aspx

[ii] North Carolina Office of State Budget and Management; 2019-20 Governor’s Recommended Budget, Appendix Table 4B. Available online at: https://files.nc.gov/ncosbm/documents/files/REC2019-21_AppendixTables.pdf