Budget Builds Up Savings | Eastern North Carolina Now

    Publisher's note: This article appeared on John Hood's daily column in the Carolina Journal, which, because of Author / Publisher Hood, is linked to the John Locke Foundation.

    RALEIGH - The North Carolina General Assembly seems poised to pass a budget for the 2015-17 biennium that spends some $22 billion a year on General Fund programs, appropriates more than $50 billion a year when all other funds are included, and makes hundreds of millions of dollars in changes to state taxes and fees.

    To my mind, however, the single most important number in this budget is $450 million. It's not an easy number to find - and therein lies a story.

    Since before the (overlong) 2015 legislative session began, I have joined other fiscal conservatives in North Carolina in urging Gov. Pat McCrory and state lawmakers to place a high priority on building up the state's savings account. We currently have about $652 million in the rainy day reserve plus a couple hundred million dollars in various other accounts.

    In the context of a $22 billion General Fund budget, that's woefully inadequate. What if the country enters another recession, even a relatively mild one, within the next year or two? That would probably sock North Carolina with a budget deficit exceeding $1.5 billion. A major hurricane or other natural disaster could wreak comparable fiscal havoc.

    The good news is that legislative leaders heard this warning and took it to heart. The new budget will likely place $450 million into the rainy day fund this year, while also transferring $150 million to the state reserve for repairs and renovations and maintaining a separate, healthy reserve to take care of any unexpected costs as the state reforms Medicaid.

    Unfortunately, these money flows weren't easy for citizens to follow. In fact, those who looked only at the budget's popular "money report" saw something quite different: a $400 million deposit into the repair and renovation account and $200 million into the rainy day account. Some staffers, newshounds, and bloggers initially reported it this way. But those who read the actual budget bill discovered a contingency clause: if a separate bill authorizing a $2 billion bond package passes the General Assembly, which is likely, then $250 million of the $400 million earmarked for repairs and renovations is automatically transferred to the rainy day reserve.

    The provision probably made sense to the lawmakers who crafted it. If the bonds pass, there will be less need to finance building projects with immediate cash. But it contributed to some early public confusion about the budget agreement.

    So did a provision modifying the "fiscal trigger," the revenue target originally set in 2013 to allow North Carolina's corporate tax rate to fall to 3 percent by 2017. By enacting another round of personal income tax cuts and not adjusting the trigger amount accordingly, the new budget makes the scheduled decline in the corporate tax less likely in 2017, although it could still occur if revenue comes in higher than projected. Again, the initial round of reporting suggested something very different, that the corporate tax cut had been made more likely or even guaranteed.

    A full accounting of the pros and cons of the 2015 budget deal is a subject for another day. In brief, while I welcome the prospect of additional tax relief for North Carolina households and businesses, I wish lawmakers had gone about it another way (by placing a higher priority on the corporate tax cut, for example, and leaving the sales tax base alone). On education, roads, and other programs, I generally think they got it right.

    Still, for me, the key fact about the new state budget is that it produces some $1.3 billion in unencumbered reserves (including rainy day and other savings and excluding the Medicaid account). Lawmakers were able to do that by keeping the growth of General Fund spending below the combined rates of inflation and population growth. Ideally, North Carolina ought to maintain reserves of at least 8 percent of General Fund spending, which would currently amount to about $1.7 billion. Next year, I hope lawmakers will continue their disciplined approach to state spending and get us even closer to that goal.

    And next year, I also hope they explain themselves better.
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