Are bonds ties that bind economy?

• Author: Mooneyham, Scott
• Position: CAPITAL GOODS - Editorial

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...