Since nonpartisan staff at the General Assembly presented a five-year projection of spending and taxes, editorials and comments from state legislators make it clear that long-term estimates of spending and taxes can be misused for partisan purposes. It is a good practice to examine how the state raises and uses money; one that the John Locke Foundation has often advocated in the past.
Katherine Barrett and Richard Greene, a highly respected and prolific pair of government consultants, listed long-term forecasts among ten best practices for state budget transparency in a 2015 paper for the Volcker Alliance, whose current head is former UNC System president Tom Ross.
North Carolina does better than most states in its budget development, and reporting practices as a review of the recommendations make clear.
- Present one-time revenues and their impact on future budgets clearly. Both the governor’s budget request and the General Assembly budget bills clearly show one-time sources of funds and one-time expenditures. These are labeled “non-recurring” in budget documents.
- Provide multiyear projections for growth of recurring revenues and expenditures. This is what started the discussion. Going beyond the Volcker Alliance recommendations, these fiscal impact statements should accompany each of the four budget plans, including the governor’s recommended plans, the final Senate bill, the final House bill, and the final bill that becomes law. If the governor’s spending proposal had been evaluated in this way, much of the news in the Fiscal Research Divisions projection would have been known from the start, such as that slow economic growth means slow tax revenue growth and budget gaps. The Office of State Budget and Management provides a range for revenues, but not for spending.
- Disclose and explain the impact of delayed spending. The first budget of each legislative session provides a two-year snapshot of spending, including programs that do not start until later. Fortunately, North Carolina has not resorted to the kinds of gimmicks New York and Illinois have done, so this is less of an issue. Going beyond the Volcker Alliance recommendations, delayed tax changes also need to be accounted. Most of the tax changes passed this year do not take effect until January 2019, so only half of the $1 billion annual impact is seen in the budget, though the whole amount is accounted in the five-year projection.
- Determine and disclose deferred infrastructure maintenance. North Carolina does not have the necessary data on state-owned assets to measure and report deferred maintenance. Estimates that do exist suggest the state put the amount of deferred maintenance on facilities alone at $4.4 billion in 2016. Adding roads, bridges, and other assets would cause that number to swell.
- Provide tax-expenditure information. The Department of Revenue compiles a report of tax expenditures every two years. It defines a tax expenditure as “an exemption, exclusion, deduction, allowance, credit, refund, preferential tax rate or other device that reduces the amount of tax revenue which otherwise would be collected.” Since 2013, the report has been accompanied by an Excel database to aid analysis. The John Locke Foundation has questioned the assumptions behind the narrow definition of tax expenditures and suggested accounting for all tax biases that favor one economic decision over another, but the information is worth having in some form.
- Include current, historical, and trend information for debt. In addition to historical information on debt and debt service in the governor’s budget proposal, the State Treasurer publishes an annual Debt Affordability Study that shows historical and projected debt. It also shows debt service by year compared to the statutory limit of four percent of General Fund revenue.
- Disclose the impact of state fiscal actions on local governments. This is trickier for North Carolina because the state controls more functions on its own than other states do. There is room to improve. For example, “Minnesota [publishes] an annual Price of Government report that examines the cost of services statewide, including those delivered by the state, cities, counties, and school districts. Provided with supplementary budget documents, the report shows annual changes in revenues localities collect and the aid they get from the state, and helps explain how changes in state spending affect them.” Going beyond the Volker Alliance recommendations, budget documents should more consistently and visibly account for federal dollars flowing to and through state government coffers, particularly in education, human services, environmental regulations, and transportation. The Statewide Single Audit provides a good starting point to account for federal funds.
- Compare actual education funding to goals set by legislatures, voters, or court decisions. Other states often have set targets for education funding levels or growth, but then ignored or been unable to meet those targets. North Carolina’s education funding commitments are written into the state constitution but too vague to be quantified. Going beyond the Volker Alliance recommendations, state budget documents should compare actual funding to any goals written into statute or a court decision. For example, there are new commitments to the Savings Reserve and a State Capital and Infrastructure Fund, but similar statutory commitments were regularly ignored in the past.
- Improve disclosure of the degree of volatility in tax revenues. Some taxes magnify economic cycles, growing faster than the economy in good times and shrinking faster than the economy in recessions. Corporate income tax collections have dropped by half in some years only to double in following years. Capital gains taxes also fluctuate wildly. Sales taxes are less volatile unless there is a policy change to increase or decrease rates. North Carolina relies on the personal income tax for 52 percent of total revenues on average and the sales and use tax adds another 27 percent on average. Progressive income tax rates created revenue roller coasters as people entered higher tax brackets for large windfall earnings in economic expansions, particularly from pass-through businesses, then returned to lower tax brackets when the economy shrank and businesses lost paying customers. The sales and use tax has been much less volatile, except in the wake of policy changes. In addition to the year-to-year variations, some taxes are difficult to forecast. The governor’s recommended budget in odd-numbered years provides a discussion of the differences in tax revenues and, since 2013, has included a table showing actual versus forecast revenue over time. Additional discussion of the volatility of types of taxes would further inform policymakers.
- Include targets for achieving financial goals. In addition to annual funding targets, the state has long-term commitments to cover health benefits and pension costs for retirees, to save adequately for the next downturn, and to meet infrastructure needs. Legislatures have historically fallen short of these commitments, though current leadership has so far proven more willing to stay focused on meeting them. A regular check on progress toward the Savings Reserve target, full funding of retiree pension and health care obligations, and other long-term goals would be another addition to official budget documents.
North Carolina’s budget planners in the governor’s office and the General Assembly have used the tools they have available to provide policymakers a great deal of insight on the fiscal conditions facing state government. Improvements would include
- building five-year forecasts, with ranges based on different assumptions, into the budget development process and making those projections available;
- gaining and sharing better information on the condition of the physical and information infrastructure of state government, including roads, buildings, and information technology;
- comparing actual results to forecasts and targets on taxes, spending, and saving; and
- accounting for intergovernmental impacts across local, state, and federal governments.
We’ll be doing our part to make some of this information available in the meantime.