Bonds, Interest Rates May Help Deficit

Despite a budget deficit of nearly $800 million, the state will start selling municipal bonds to its citizens in March to finance the $3.1 billion higher education package that passed Nov. 7.

Municipal bonds, tax-free bonds issued by the state to fund public works, will be sold to finance facility improvements at the state's public universities and community colleges, public school construction and clean water programs.

Federal Reserve Chairman Alan Greenspan's decision last month to lower the federal funds rate by 1 percent means the interest rate paid out to bond holders will also decrease, saving the state money.

Though not a direct relationship, financial experts expect that the municipal bond rate also will decrease as a result of the drop in the federal funds rate. "This is good news," said Robert Nelson, UNC-system associate vice president for finance. "It is a great time for the state of North Carolina to be going into the bond market."

Nelson added that there are two more reasons for North Carolina's budgetary planners to celebrate. Planned construction projects will not only create new jobs for state residents but are costing much less than originally expected.

"New construction projects will stimulate the economy," he said. "It means jobs, and it means work."

But UNC economics Professor Richard Froyen said he doubts that North Carolina will save as much as some people are predicting.

Froyen said it is likely that state officials are overestimating the drop in municipal bond rate that will result from federal action.

He said no significant relationship exists between an interest rate drop and a municipal bond rate drop.

"For every one percentage point drop in the federal funds rate, the municipal bond rate is likely to only drop between .1 and .5 of a percentage point," he said.

Froyen also said President Bush's proposed $1.3 trillion tax might actually cancel out some of the effects of the decrease in interest rates.

If tax rates are lowered, the tax-free incentive of municipal bonds will carry less weight and buyers will have more reason to invest in other types of bonds.

And faced with a multimillion-dollar budget deficit, N.C. legislators will likely welcome the extra money that could come as the result of municipal bonds becoming more financially appealing.

Bob High, director of state and local government finance in the state treasurer's office, said the estimated $18 million to $20 million in savings could aide in Gov. Mike Easley's efforts to deal with the budget deficit.

The State & National Editor can be reached at stntdesk@unc.edu.