Capital Goods - December 2008

Are bonds ties that bind economy?
By Scott Mooneyham

In tough times, it’s probably a good idea to stash the plastic. It can be difficult enough making ends meet without rising credit-card payments. Of course, living a pay-as-you-go life isn’t easy when the economy is in the toilet and you’re struggling to keep up with the bills. That card can be awfully tempting.

For state government, the tough times aren’t so different. Sure, it has a few advantages over individuals when it comes to finances, the most obvious being that legislators and the governor can pretty much dictate the state’s income, raising taxes when budget requirements, perceived or real, outstrip revenue. But North Carolina’s constitution requires that the state, unlike you or I, balance its budget. Borrowing to run state government — to pay salaries and operate programs — isn’t an option.

The state does borrow money to build things, be they highways, prisons or university dormitories. Better than $6 billion is being repaid with general tax revenue. Legislators have approved an additional $1.5 billion yet to be sold on the bond market. You, the taxpayer, are repaying all that debt at roughly $600 million a year. State government faces a budget shortfall likely to exceed $1 billion this fiscal year. The next one might be even tougher. So, wouldn’t it make sense for North Carolina to put away its credit card and cut down on those debt payments? It depends on whom you ask.

Dan Clodfelter, a Charlotte Democrat and co-chair of the powerful Senate Finance Committee, says delaying bond sales is worth exploring. “It’s something we ought to look at: What could we postpone for a year or two?” If top state officials decided to delay issuing $400 million in debt, the savings in debt-service payments would come to roughly 10% — $40 million. That’s not chump change in a $21 billion budget, especially when legislators will be scrimping, scraping and cutting to try to make expenses match revenue.

There’s another reason that delaying the sale of bonds makes sense: It has been a buyer’s market. Interest rates have spiked. The bond market has been all but frozen. Maine recently was unable to sell $50 million in bonds for road construction, and local governments across the country with building needs have suffered a similar fate. Some analysts also worry that what happens in Jefferson County, Ala., which is struggling to avoid the largest municipal bond default in U.S. history, could damage the broader bond market.

Still, as the larger credit crunch eases, bond markets have begun to thaw. That should continue, and even if interest rates remain high, state elected officials can’t ignore the effects that major building projects have on the larger economy. “Now is not a good time to talk about slashing construction work,” says Dave Simpson, a lobbyist for Carolinas AGC Inc., a contractors trade group. “We need to get those [projects] going to jump-start the economy.” He notes that borrowing money when the economy is down, and repaying it later as the economy improves, makes financial sense. In fact, Simpson’s organization and other business interests probably won’t let a struggling economy stop them from pushing next year for a major bond issue for highway construction.

For the broader economy, the argument makes sense. A $100 million building project will produce 400 to 500 construction jobs. The value of building projects that the state begins each year usually runs four to five times that amount: You’re talking about significant job creation. Plus, a slowing economy usually means cheaper costs, as hungry construction companies try to underbid competitors and the prices of building materials, especially petroleum-based products such as asphalt, drop, too.

But how do legislators, the governor and the state treasurer weigh the responsibilities of trying to spark economic growth and job creation against protecting the interests of taxpayers? Economists might argue that there’s no real difference, that creating jobs will generate tax revenue and ease pressure to hike taxes. Elected officials, though, don’t live in theoretical worlds. They’re creatures of fear, always worried about the next election and trying to keep from invoking voters’ wrath. If money is scarce and a balance sheet shows that they can trim $40 million by holding off on issuing debt and delaying building projects, they’re going to think about it. If opposition to the delay isn’t fierce, they’re going to consider it some more. If the alternative is an unpopular tax increase … well, you get the picture.

Scott Mooneyham is the editor of The Insider,