Introduction
Updated as of January 2020.
State facilities became a surprisingly contentious part of budget discussions in 2019. In 2017, state government owned nearly 118 million square feet of space across 12,000 buildings worth $25.6 billion. The state budget includes $700 million per year to pay the principal and interest on money it borrowed to build and maintain these facilities.
The 2017 budget bill, passed over Gov. Roy Cooper’s veto, created the State Capital and Infrastructure Fund (SCIF), a pay-as-you-go fund that dedicates 4 percent of state tax revenue and one-fourth of any year-end unreserved cash balance to construction, repairs, and debt payments. As the state pays off existing debt, more money would be available to build new facilities, maintain what already exists, and address other pressing liabilities such as benefit costs related to retired state employees.
Legislative budget proposals in 2019 pledged $1.9 billion through the SCIF, over 10 years, to local school construction. Gov. Cooper sought to repeal the SCIF, objecting that it would take money from other spending. Instead, he proposed diverting $100 million or more each year to recurring expenses and borrowing $3.9 billion for schools and other capital projects.
If the debate were simply about the best way to finance construction, we could compare the opportunity cost of borrowing a dollar at low interest rates against paying cash. Instead, under Gov. Cooper’s proposal, the comparison is between spending a dollar every year on recurring government expenses plus repaying the dollar borrowed for construction, against the dollar in cash paid on construction. Over 10 years, that equates to roughly $11 in cost under Gov. Cooper’s plan versus $1 in cost under the legislative plan. The legislative plan leaves $10 unobligated over the next 10 years, cash that would be available to fund other capital needs, for operations, or to be returned to taxpayers.
Key Facts
- State government has $25.6 billion in facilities with a backlog of roughly $4 billion in repairs because of past neglect. A general rule of thumb suggests setting aside 2.5 percent of a property’s value for maintenance and renovation, which would total $640 million per year.
- Principal and interest payments on state debt supported by the General Fund is $700 million per year.
- Voters last approved debt via the $2 billion Connect NC bond program in 2016. Two-thirds of Connect NC money will fund projects at public universities and community colleges, while the remainder will be used for water and sewer projects, state parks, and public safety and National Guard facilities. Although 15 percent of the bond package is intended to go to water and sewer projects, they received just 2 percent of the $622 million spent as of October 11, 2019. The state has borrowed $1.2 billion, with another $600 million to be issued in 2020 and the final $200 million in 2021.
- The statutory debt limit for state government is 4.5 percent of General Fund revenues, which is $1.07 billion. The State Capital and Infrastructure Fund (SCIF) passed in 2017 dedicates 4 percent of tax revenue ($953 million) plus one-fourth of unreserved cash balances to debt service, repairs, renovations, and new construction.
Recommendations
- Use the State Capital and Infrastructure Fund to pay for construction, repairs, and renovations of state property. Paying for capital from current revenue ensures construction, repairs, and renovation happen on schedule and provides more flexibility in the future instead of tying up hundreds of millions of dollars in debt payments.
- Consolidate state-owned facilities. Sell what is not needed, improve what is left, and consider ways to better use space in prime locations for retail.
- As debt is paid down, use more money for unfunded liabilities tied to retired state employees. The unfunded liability for the Teachers and State Employees Retirement System is $10 billion of $80 billion in total liabilities. The unfunded liability for retiree health benefits, the largest portion of other post-employment benefits, is $28.5 billion of $29.8 billion in total liabilities. (See State Employee Benefits for more information).
