North Carolina still influences
US local government finance
By Mayraj Fahim, Local government adviser*

31 March 2005: North Carolina’s local government finance and oversight system demonstrates how to limit the number of fiscal crises, while delivering municipal bond issuers respected by credit rating agencies, investors and constituents. As a result of its local government default history in the issuance of municipal bonds during the Great Depression, the state of North Carolina developed a system that continues to influence others in following the path it took in the early 20th Century. North Carolina now provides a leading example of state supervision of local government finances.

Through regular checks of local finances it has succeeded in minimizing the type of fiscal distress that has occurred with increasing frequency within local governments of other states lacking a similar framework. This has also facilitated lower tax rates and thereby saved taxpayers money. Furthermore, the state’s role in supporting and guiding its municipal bond issuers has delivered superior credits. And the state’s mechanism of educating local government officials has enabled the state to provide an enduring and sterling example of superior performance that has led to calls for its emulation.

An analysis of the system’s various components reveals that systemic information-sharing is the key driving force of the North Carolina system that builds compliance on the foundation of the administrative and financial laws for local government in North Carolina. This is especially true in relation to The Local Government Budget and Fiscal Control Act, and other statutes related to local government finance that together establish the framework of conduct for government units within the state of North Carolina. The financial discipline of its local governments, state oversight and technical assistance thus play a key role in the national reputation of North Carolina’s local governments for strong financial management.

The state's system of local government has relied on this method to lead the nation in the number of AAA -rated local governments (constituting as much as 25% of the units in this premier category). Local issuers are generally the recipients of better reception than the national average, with local issuers also paying less interest on their debt than equally rated issuers from other states, in a state that is remarkable for the fact that it is one of a few states with a majority of both small units and rural units.

The Institutional Components of the North Carolina System
The Local Government Commission
The Local Government Commission (the “LGC”) was established in 1931 to address the problems in local government finance caused by the Great Depression. At that time more local governments in North Carolina defaulted on their debts than any other state in the nation, except Florida.

While the formal policy-making authority is held by the LGC, its day-to-day operations are carried out by staff, who are divided respectively into sections pertaining to fiscal and debt management.

The role of the LGC has evolved as changes in financial management have taken place. More financing methods, investment securities, and automation methods have all become readily available to local government officials. However, its basic statutory responsibilities remain unchanged.

The Fiscal Management Section
This Section’s most important objectives are to see that debt service and other payments are made in a timely manner, and to ensure adequate financial reporting.

The Competitive Bond Sales and State and Local Government Debt Records Section
This Section handles the sale and delivery of general obligation bonds as well as all state and local government debt records.

The Authorizations and Negotiated Bond Sales Section
The role of this section expanded significantly owing to an increase in the variety of the types of bond issued by North Carolina municipal bond issuers. Although this section handles a variety of types of financing, such as industrial revenue bonds, bond issues for private colleges and universities, and bond issues for private not-for-profit hospitals, its primary responsibility lies in direct financings for local governments.

The Institute of Government at the University of North Carolina
The Institute of Government (the “IOG)” plays a major part in the maintenance of the system. Since 1931, the IOG has conducted schools and short courses for city, county and state officials. The Institute has been a source of inspiration for institutions in other states, including those in Georgia, New Jersey and New York. It continues to attract national and international interest, with the Improvement and Development Agency (IdeA) of the United Kingdom showing similar features in a more limited framework of application.

Public Finance Benefits Offered By Decentralization
The US municipal bond market demonstrates its virtue of maximizing capital-raising capacity within the system. Hence, a primary practical reasoning behind the decentralization of the North Carolina system during the Reconstruction period, was the realization that decentralization maximizes the capital-raising capacity of the system. Because of the state’s extreme need for capital to finance reconstruction, decentralization was the optimal route to take. By this time, the municipal bond market in the US (which New York City opened with the floating of the first bond of that genre in 1812) had already been active for more than 50 years. State leaders were well aware that the depression of 1837-43 was caused by the issuance beyond capacity of bonds by state governments within the United States, after which point limits were constitutionally imposed upon the borrowing levels of state governments - the first systemic safeguarding feature put in place in this market.

Consequently, North Carolina arrived at the logical conclusion that decentralization was the obvious route for maximizing the capital-raising capacity of the system. In fact, the state’s unique local government finance system (put in place during the Great Depression) reflects its continued commitment to maximizing capital-raising capacity within the system. In the process, the system has delivered the added benefit of minimizing local government fiscal distress - maintaining its source of inspiration on that ground as well.

Acknowledgements to State and Local Government Relations in North Carolina, Edited by Charles D. Liner [Publisher: Institute of Government, University of North Carolina at Chapel Hill.]

*Mayraj Fahim, the author of this article, is a local government adviser. Her occupational focus in local government has been in the areas of municipal finance in the United States and in municipal finance monitoring internationally. She also advises on local government reorganization in the United States and internationally. The full version of this article can be obtained free of charge by emailing the editor with 'North Carolina' in the subject line.