Apples, Oranges, and Capital Spending | Eastern North Carolina Now

Publisher's note: The author of this post is Joseph Coletti, who is Senior Fellow for the John Locke Foundation.

    The University of Chicago is known for its imaginative admission application essay questions, questions such as "So where is Waldo, really?" or "Find x" or one year "How are apples and oranges supposed to be compared?" This last question is actually a practical one. We make "apples and oranges" comparisons when we debate whether Michael Jordan or Lebron James is the greatest of all time, whether New York or New Bern is a better place to live, and even the undisputed merits of dogs over cats.

    Nearly every area of life has developed a way to compare the seemingly incomparable. In a number of team sports, players are compared based on how much better the team performs with them in the game than with them injured or on the bench. These statistics include some variations of point differential comparisons in basketball and hockey or Wins Above Replacement in baseball. Academic researchers use a technique called Difference-in-Differences Estimation to measure the effect of policy changes.

    Local governments calculate what the tax rate would be if the government were to collect the same amount in property tax revenues before and after they reassess property values. Retailers and restaurants compare the performance from one year to the next of existing stores to adjust for any changes in the number of locations they have. Other companies often develop pro forma financial statements to make clear how much of any difference in results was the result of how the core business performed and how much of was the result of any structural or accounting changes they made.

    A little-noticed change in the state budget made comparing the increase in spending this year a bit like comparing apples and oranges and has implications for how well the General Assembly kept spending under control this year. With all the demands for bigger government and more spending from the teachers union and others, the final budget was not nearly as large as it could have been, nor as large as Gov. Roy Cooper's spending proposal was. But the budget that passed was not quite as restrained as advertised.

    The budget for fiscal year (FY) 2018-19, which began July 1, appropriates $23.9 billion, up from $23.0 billion in FY 2017-18, which ended June 30. The budget for each year includes operational funding for state agencies, statewide reserves to be distributed later by the Office of State Budget and Management, payments on debt the state owes, and capital construction projects. Nearly all of the money covers current operations, reserves (which become operating funds once apportioned), and debt service (the current cost of past borrowing). Budgeted capital projects take $2 million this year, down from $55 million last year. But that is not the whole story.

    Like employer-provided health insurance, pre-tax deductions for a retirement account, or tax withholding payments that most people ignore because the money is gone before they receive it, the General Assembly usually sets aside a portion of the previous year's fund balance and makes other transfers that count as reductions in available funds instead of spending. One of these transfers has long been to a Repairs and Renovations Fund that pays for fixes and upgrades to existing government buildings based on a needs assessment done by the State Property Office. In FY 2017-18, the General Assembly set aside $125 million for this purpose but short-circuited the standard process by specifying where $22 million of that money should go, essentially treating that money as capital appropriations and leaving $103 million for repairs and renovations. For FY 2018-19, the General Assembly set aside $65 million for repairs and renovations but added a $155 million reserve for capital projects in addition to the $2 million appropriated.

    Because most of the money for capital projects is treated differently, comparing spending across the two budgets is like comparing apples and oranges. Future budgets will combine spending for capital projects, repairs, and renovations in a new Capital and Infrastructure Fund that will be considered a transfer instead of an appropriation, which means the best way to compare budgets will be to exclude capital projects from total appropriations and to compare capital and repairs and renovations separately. (Until 1996, capital and operating budgets were usually considered as two separate bills.)

    Taking this approach, operational spending increases 4.07 percent instead of the stated 3.85 percent. Spending on capital, repairs, and renovations increases 24 percent. For comparison, the reported increase from FY 2016-17 to FY 2017-18 was 2.6 percent after including emergency spending for hurricane and flood relief and would have actually dipped to 2.5 percent excluding capital projects. The General Assembly should return to its previous path of slow spending growth, as should Gov. Cooper who promoted his first budget as one that would not exceed the rate of population growth and inflation over the two years from July 2017 through June 2019.