RALEIGH — The annual Debt Affordability Study, which assesses the state’s capacity to issue debt for capital needs and that influences credit quality evaluations by rating agencies, was released earlier this month.
The Debt Affordability Advisory Committee (DAAC) oversees the Study each year and its members include State Treasurer and Chair Dale Folwell, as well as Ronald Penny, Secretary of Revenue; Nels Roseland, State Controller; Kristin Walker, State Budget Director; Jessica Holmes, CPA, State Auditor; as well as Senate appointees Frank Aikmus and Bradford Briner, and House appointees Donald Pomeroy and Eugene Chianelli.
The DAAC’s Study emphasizes the importance of acknowledging the substantial unfunded pension and other post-employment benefit (OPEB) obligations, including retiree healthcare costs, and recommends a consistent yearly allocation of $100 million to the Unfunded Liability Solvency Reserve (Solvency Fund) established 2018 session laws to address these liabilities.
Additionally, the Committee has also suggested “continuing the single target calculation utilizing the limitation that debt service and the continuing annual appropriation to the Solvency Fund not exceed 4% of revenues.”
In the 2024 Study, Folwell highlighted the repurchasing $20 million Connect NC bonds following the Silicon Valley Bank crisis when that institution was forced to sell off assets. Folwell said that by buying these bonds at a discount, the state’s taxpayers will save nearly $11 million.
“This was a great opportunity for the taxpayers of North Carolina to get some relief during a tough inflationary period,” Folwell in a statement. “We are in the sixth year of retiring over 60% of the state’s debt over an eight-year period. I don’t know of another state or country that can say that. And that’s why ‘NC’ stands for ‘nothing compares.’ It’s a tribute to taxpayers, employers and the General Assembly that we have budget surpluses and reserves. But we still have approximately $43 billion in unfunded pension and health care liabilities. That bill will come due much sooner than people realize.”
The Study notes that North Carolina’s AAA ratings from Moody’s, S&P, and Fitch were affirmed in 2023, with manageable debt levels compared to peer states.
Over the 10-year planning horizon, the state’s general fund revenue projections exhibit positive growth, relatively unaffected by prior economic declines or recent interest rate increases, per the Study.
The debt service projections factor in the issuance of $1.5 billion in Build NC Bonds, aimed at accelerating highway projects.
The combined debt service for the General Fund and Transportation Fund is projected to peak at about 2.03% of combined revenues in fiscal year 2024.
The General Fund model indicates a debt capacity of about $1.63 billion annually for the next decade or up to approximately $8.5 billion in the first year following DAAC’s recommended policy. This policy also allocates annual appropriations of $100 million to the Unfunded Liability Solvency Reserve for addressing pension and OPEB liabilities.
For fiscal year 2022, the North Carolina General Assembly has assigned $40 million to the Solvency Fund, with an additional $10 million allocated for fiscal year 2023. The anticipated peak in the ratio of debt service to revenues is 1.82% in the current fiscal year.
The transportation model shows a debt capacity of around $104.7 million per year for the next decade, reaching approximately $745 million in the initial year. Without additional authorizations, the projected peak for transportation debt service as a percentage of transportation revenues is about 5.0% in fiscal year 2029.
On the topic of Environmental, Social & Governance (ESG), the Study says that the state’s bond ratings “so far have not been impacted by the incorporation of the ESG methodologies.”
Investopedia.com defines ESG as “a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.”
During the 2023 General Assembly legislative session, an ESG bill was passed and later became law after a successful override of Governor Cooper’s veto.
The law prohibits state entities from creating or using ESG criteria or economically targeted investments (ETI) requirements when making employment decisions. Additionally, law also requires gives the state treasurer certain control over such investments and bars the use of ESG criteria when hiring, firing or evaluating state employees.
