How the State Uses Borrowed Money
● State issues bond debt through a murky, complicated process
● Process shields lawmakers from accountability for debt spending
● Real power belongs to two boards few citizens have even heard of
● Two lawmakers (probably not yours) have seats on both boards
● State’s general obligation bond debt now at $326 million and climbing
● State now saddled with more than $70 billion in total liability/debt
South Carolina’s general obligation bonding process is a mystery to the vast majority of citizens. The process is murky by design: It allows lawmakers to spend borrowed money with virtually no public awareness or input.
With the state now saddled with $326.6 million in general obligation debt – along with a total debt of around $71 billion when outstanding unemployment trust fund loans, debt, and pension liabilities are included – citizens ought to know how this debt is accrued, and who’s responsible for accruing it.
How bonds happen
South Carolina requires only one form of general obligation bonds – bonds secured by the taxing power of the entire state – to be voted on by the entire legislature: state capital improvement bonds.* All but two other types of general obligation bonds can be issued by two unaccountable boards: the Joint Bond review Committee (JBRC) and the State Fiscal Accountability Authority (SFAA).
- The JBRC is a ten-member entity comprised entirely of legislators. All of its members are appointed by two legislators, the Senate Finance chairman and the House Ways and Means chairman. The only place the names of current JBRC members are publicly available is here, on the official minutes printed on the committee’s letterhead.
- The SFAA – essentially the renamed Budget and Control Board – is a hybrid executive/legislative body comprised of the governor, state treasurer, comptroller general, Senate Finance chairman, and House Ways and Means chairman. Seven of the nine classes of state general obligation bonds are approved and authorized to be issued by these two bodies.
The two classes of state general obligation bonds that aren’t authorized by either of these boards are, first, the
aforementioned state capital improvement bonds – voted on by the legislature in the form of a bill – and, second, state school bonds, which are requested by the State Board of Education and authorized by the governor and treasurer.
The JBRC and SFAA still have a role to play in these two bond categories, however. The state code gives the JBRC the
blanket authority to review “the establishment of any permanent improvement project and the source of funds for any such project not previously authorized specifically by the General Assembly.” And although capital improvement bonds are not authorized by the two boards, the SFAA and JBRC are empowered to prioritize projects funded by capital improvement bonds.
The seven categories of state general obligation bonds that are approved and authorized by the JBRC and SFAA are:
- State school facilities bonds
- State Transportation Infrastructure Bank general obligation bonds
- State economic development bonds
- Research university infrastructure bonds
- State highway bonds
- State institution bonds
- State air carrier hub terminal facilities bonds
The process for issuing these seven categories of bonds goes like this:
(1) The appropriate agency (the Department of Transportation for highway bonds, the State Board of Education for school facilities bonds, etc.) submits its request for bond issuance to the JBRC and SFAA.
(2) The JBRC and SFAA review the application.
(3) Once the request is approved, the SFAA authorizes the issuance and sets the terms (interest rates, time and place of payment, etc.).
(4) In the case of state agencies, the requests and proposed terms must also be approved by the governor and treasurer.
(5) After advertising the bonds’ sale in a New York City financial newspaper, the governor’s office and treasurer’s office sell the bonds.
(6) The proceeds of the bonds are typically held and distributed by the treasurer.
All state general obligation bonds are ultimately payable from the state’s general revenues. That’s why, in each year’s state budget, the General Assembly sets aside funds to make debt service payments on general obligation debt – money taken from taxpayers for no other purpose than to pay interest on debt.
Some categories of bonds, though, have to be repaid with more specific sources of revenue. The following categories of bonds are repaid in whole or part by specific revenue sources.
- State school bonds have to be repaid with revenue from the retail sales tax.
- State Transportation Infrastructure Bank general obligation bonds have to be paid back with the STIB’s revenues.
- State highway bonds have to be repaid with revenues from the gasoline tax, fuel oil tax, road tax, and the motor vehicle license tax.
- State higher education bonds must be repaid with revenues from the tuition and fees received by the institution for which such bonds are issued.
Example: State economic development bonds
Consider a specific example. State economic development bonds are one of the most used and debated types of bonds.
They’ve been used in the recent past to finance the construction of an aircraft assembly plant for Boeing, and were used during the 2015 session to finance infrastructure as part of an incentive package for the Volvo Corporation.
Before they’re issued, economic development bonds are first requested by the Department of Commerce or the agency that will own the project funded by the bonds. The SFAA and JBRC review the request and either approve or deny it. If approved, the SFAA adopts a resolution authorizing the bond issuance and setting the terms – interest rate, maturation date, place and time of payment, etc.
The bonds are then sold by the governor and state treasurer. The treasurer then receives the proceeds and applies them to the purpose for which the bonds were sold. Finally, the legislature appropriates revenue to keep up with the sale’s principal and interest.
Although bonding is a function properly executed by the entire legislature, in South Carolina two boards are responsible for approving and authorizing the issuance of most state bonds. One of these boards is controlled by only two legislators, and the majority of the others board’s members aren’t even from the legislative branch. In other words: Although legislative leaders dominate the process, lawmakers themselves never face any real accountability for the decision to finance state needs with debt.
Together these unaccountable boards are responsible for hundreds of millions in debt that must be paid back by state taxpayers. To put this into perspective, in 2015 taxpayers paid $125 million simply on the debt service for bonds approved by the JBRC and SFAA.
All decisions involving the spending of taxpayer dollars – and especially the spending of taxpayer dollars financed by debt – should be conducted in full public view. In South Carolina, these decisions are made not by the body supposedly charged with appropriating public money – the General Assembly – but by two murky and practically anonymous boards that have de facto freedom from any accountability to taxpayers.
* The “bond bill” passed by the legislature (it was incorporated into the roads legislation passed on June 1, 2016, then signed by the governor) really wasn’t a bond bill; it was revenue bill. The appropriation will go to the State Infrastructure Bank, which would then bond the money. This is one of the few cases in which a state bond has attracted even a little public scrutiny.