Sarah Curry, director of fiscal policy studies for JLF, writes today about how North Carolina’s balanced budget requirement works.

In the North Carolina Constitution of 1971, the state is required to pass a “balanced budget” (Article III, Section 5). More specifically, the state’s total expenditures cannot exceed the total income and surplus from previous years during a fiscal period. Each biennium the governor recommends his version of the budget; this too must be balanced.

North Carolina’s balanced budget legislation worked in the 1970s, but needs updating to deal with modern fiscal problems. One of those problems is the shift of a majority of the state’s spending in recent years outside the General Fund. Current laws require only the General Fund, or state revenues, to be balanced — this excludes federal funding. Excessive debt accrued through unemployment insurance and Medicaid occurred due to this loophole and will need to be addressed in future budget negotiations. 

North Carolina’s other looming problem is that budgets are based on state revenue forecasts, not actual receipts; if revenues are not at expected levels, there is not a balanced budget. This proved extremely difficult during the Great Recession as revenues were not as high as projected. This caused state government to spend more than a true balanced budget would have allowed.