For the first time since 2013, the North Carolina General Assembly has altered the form of ballot question local governments must use to secure voter approval of general obligation (GO) bonds. These revisions — contained in Section 36.3.(a) of the state’s biennial budget (S.L. 2023-134) — impose new obligations on local governments that plan to seek voter approval of GO bonds in 2024 and beyond.
New Ballot Disclosure Requirements for N.C. Bond Referenda. With few exceptions, North Carolina’s local governments must obtain approval from a simple majority of their voters in a referendum prior to issuing GO bonds. North Carolina law prescribes the form of ballot question that must be used in a referendum — and for any referenda held after Jan. 1, 2024, the new law will require local governments to disclose on a voter’s ballot:
- “[t]he estimated cumulative cost over the life of the bond, using the highest interest rate charged for similar debt over the last (maximum bond issuance term);” and
- “[t]he amount of property tax liability increase for each one hundred thousand ($100,000) of property tax value to service the cumulative cost over the life of the bond provided above.”
A Continuing Trend in Disclosure. These changes represent the General Assembly’s latest imposition of additional disclosure requirements in the GO bond issuance process. In 2022, in S.L. 2022-53, § 2, the General Assembly amended Chapter 159 of the General Statutes to require that a finance officer of a local government proposing to issue GO bonds file a “statement of disclosure” with the clerk of that local government and with the North Carolina Local Government Commission (LGC).
Like the new ballot disclosures imposed by S.L. 2023-134, that statement must include an estimate of the total amount of interest to be paid on the bonds over the expected term of the bonds, if issued; a summary of the assumptions on which the estimate is based; and an estimate of the increase in property tax rate necessary to pay debt service on the bonds, if any, or, if no increase is estimated to be needed, a brief statement that projected revenues are expected to be sufficient to pay debt service on the bonds.
State law requires that the LGC — in approving a local government’s application to issue GO bonds — make a finding that a finance officer used reasonable assumptions in determining the total amount of estimated interest. The LGC has released guidance providing a “safe harbor” for its approval of certain assumptions.
Questions in Interpretation. Although the ballot disclosures under the new law are similar to those already required in the “statement of disclosure,” local government officials face challenges in interpreting the exact meaning of the new requirements. The LGC is not required to make any specific findings or approvals related to the ballot disclosures.
- New Disclosure #1: “estimated cumulative cost over the life of the bond, using the highest interest rate charged for similar debt over the last (maximum bond issuance term)”
S.L. 2023-134 does not define what “similar debt” means. Although it likely means GO debt, it is not clear whether a local government should use its own previous GO issuances (if any), or instead issuances of units of a similar size or financial profile, when determining the “highest interest rate for similar debt.” It does not explain whether a local government should assume the statutory maximum term of a GO bond issuance (40 years) or the maximum bond issuance term actually contemplated when calculating the “cumulative cost” of a bond, nor does it take into account that GO bonds may be issued up to seven (and, with LGC approval, 10) years after a ballot question is approved.
- New Disclosure #2: “amount of property tax liability increase for each one hundred thousand ($100,000) of property tax value to service the cumulative cost over the life of the bond”
S.L. 2023-134 does not explain how a local government should project its future property tax rates or tax valuations over the life of a proposed GO bond. Property tax rates in North Carolina are set annually after considering all sources of local government revenue, and property tax revaluations must occur in each county at least once every eight years. The statute does not concretely explain how a local government should project its future revenues or determine the future taxable value of property in its jurisdiction when determining future property tax increases.
Consequences for Failing to Make Accurate Disclosures on the Ballot. When the legislature adopted the new “statement of disclosure” requirements in 2022, it stated expressly in G.S. 159-55.1(b) that the validity of bonds issued could not be challenged if the actual amounts of interest and property tax increases differ from the estimates set forth in the statement. It did not include a similar caveat when revising the form of ballot question in S.L. 2023-134.
This omission raises questions about the effect of estimated costs and tax increases disclosed in an initial referendum that, with the passage of time, do not reflect actual costs or tax increases. Historically, North Carolina courts have rejected attempts to invalidate GO bonds based upon claims that a local government’s use of bond proceeds differed from the purposes described in a ballot question — as long as the use did not “substantially deviate” from those described purposes. See, e.g., Coggins v. City of Asheville, 278 N.C. 428, 180 S.E.2d 149 (1971); Sykes v. Belk, 278 N.C. 106, 178 S.E.2d 439 (1971). However, North Carolina courts have never addressed a challenge to the validity of a bond issuance based upon the inaccuracy of ballot disclosures like those the new law requires.
Local governments should address the questions the new law raises in consultation with bond counsel. For more information about the changes discussed in this alert, please contact one of the authors listed above.