Using bonds for public projects

North Carolina voters will soon make decisions on giving the state authority to issue bonds for educational facilities and other projects. NC State University economist Mike Walden explains what bonds are and how they work.

“Well, they are a form of financing. Let me give a comparison to personal financing: Let’s say you want to buy a house, and … the house costs $200,000. And you don’t have $200,000, but, boy, living in that house would really benefit you and your family. What you can do is borrow the $200,000 and then pay it off in small amounts over time while you are living in the house — that’s called a mortgage.

“That’s essentially what a bond is, except a bond is for big public projects like building new public buildings, improving roads, building new roads, etc. And the same logic is being used there: You have a need for, let’s say, new educational buildings because North Carolina is growing; more young people are coming to campus; we need some facilities for them to go into and use and learn to be productive citizens and workers. Those buildings cost usually in the tens of millions of dollars. When you add them all up for many projects in the state, you can easily get into the billion-dollar range. That’s a lot of money for taxpayers right now to fork over. But if you borrow the money and then pay off that loan in small periods over many years, it can be much more affordable.

“And in addition you get the benefit of not only taxpayers now helping to pay for it who benefit but taxpayers in the future who also benefit from those investments paying for it.

“Bonds are used for government. Bonds are used for private companies. If General Motors wants to build a new factory, they will borrow money with a bond to build that factory. So a very, very common way to build large projects.

“And right now another benefit of going into the bond market is interest rates are very, very low and expected to go up, so it makes sense to go in now and lock in those low rates.”