by Joseph Coletti
Senior Fellow, Fiscal Studies, John Locke Foundation
Note: Part 1 of this series gives an overview of Gov. Roy Cooper’s 2021-23 biennium budget proposal. Part 2 will examine Cooper’s proposed appropriations more closely. Finally, Part 3 will highlight some good ideas — and a terrible one — from the governor.
Gov. Roy Cooper and the General Assembly have an opportunity to put North Carolina state government on such a solid fiscal footing that it won’t take a budget stalemate to keep the state out of fiscal trouble when the next recession strikes. As it is, state government and the economy are coming out of the Covid crisis in better shape here than they are in many other states. Businesses did not have to repay $2.5 billion in debt for the unemployment system. Government employees did not lose their jobs, even temporarily, to get through the worst of the Covid recession. Families and businesses did not face higher sales taxes when they were struggling to make ends meet.
To judge from Cooper’s latest budget proposal, however, fiscal prudence and realism will need to come from the General Assembly. His budget would increase spending more than 11 percent, spend nearly all of the $5 billion in surplus, and borrow another $4.7 billon for capital projects. The 11.6 percent increase would be 9.3 percent ($2.2 billion) more than the rate of inflation and population growth for the year. Instead of leaving the state on solid ground, Cooper’s budget would leave state finances more fragile, with a greater likelihood of layoffs and tax increases in a future recession.
The proposal also underscores the need for North Carolina to enact a Tax and Expenditure Limit (TEL) constitutional amendment, because without conservative leadership in the General Assembly, there would be no stopping this irresponsible spending plan.
State government had an opening balance in July 2020 of $1.5 billion. With tax collections now expected to reach $27.6 billion by the end of June and appropriations less than $24 billion, budget writers will start the biennium with at least a $5 billion fund balance.
Cooper would direct $575 million to the Savings Reserve as 15 percent of the revenue increase for the year, though the source of his implied base budget of $23.5 billion is not clear from actual revenue or past forecasts. He would add another $525 million to that, doubling the Savings Reserve balance to $2.2 billion, less than the $2.67 billion – or 10.9 percent of the prior year’s budget – set by the Office of State Budget and Management and the General Assembly’s Fiscal Research Division. Given the magnitude of the unreserved fund balance, John Locke Foundation Chairman John Hood and I have argued separately to add $2 billion to the Savings Reserve, bringing it to $3.1 billion, or 11.4 percent of Cooper’s spending proposal for Fiscal Year (FY) 2021-22.
With $447 million from the surplus, educators would receive bonuses in May to offset a portion of their lost pay raises because of Cooper’s budget vetoes in 2019 and 2020.
Cooper continues to ignore the statutory requirement to transfer 4 percent of forecast tax revenue and one-fourth of the year-end unreserved fund balance to the State Capital and Infrastructure Fund (SCIF) to pay for debt service and new capital projects. Without the educators’ bonuses, that would mean $2.34 billion for capital projects, nearly half of the $4.7 billion he proposes to borrow over the next ten years. There will surely be a provision to eliminate the SCIF.
Instead, Cooper’s budget for FY 2021-22 would deposit $549 million in a “Capital Improvements Project Reserve,” $225 million in an “Energy and Environment Reserve,” $169 million in an Information Technology Reserve, and $100 million in the State Emergency Response and Disaster Relief Fund, which would bring the total in reserve for past hurricanes, earthquakes, and other disasters to $280 million.
Reserves for Medicaid contingency and transformation would receive a combined $214 million from the surplus. The balance for the two funds was $344 million as of February 29.
The budget would make a token, $150 million contribution towards the $28 billion unfunded liability for state retirees’ health benefits. Perhaps Cooper will reform retiree benefits and use federal funds from the American Rescue Plan Act to reduce the liability.
After transfers, the unreserved fund balance would add $2.0 billion in one-time money to $27.4 billion in recurring General Fund revenue, making $29.4 billion available for appropriations. Cooper’s final availability would be $29.1 billion after deducting $366 million for two poorly targeted tax credits that function more like spending programs. Revenue for FY 2022-23, after accounting for the tax credits, is expected to reach $28.3 billion.
Proposed recurring expenditures total $27.0 billion in FY 2021-22 and $28.3 billion in FY 2022-23, taking nearly every dollar of recurring revenue and leaving a balance of $6 million in FY 2021-22 and $12 million in FY 2022-23. From the $5 billion fund balance, in addition to $3 billion dedicated to reserves, the budget would include $300 million in nonrecurring appropriations for FY 2021-22, leaving $1.74 billion for FY 2022-23. Reserves and nonrecurring appropriations total $1.47 billion, which would leave $284 million in fund balance, including the $12 million balance on the recurring side.
Adding $31.2 billion in transportation, federal funds, and other receipts to $27.3 billion in appropriations brings Cooper’s proposed total spending in the first full year after Covid to $58.6 billion, an increase of at least $11 billion from the pre-Covid budget for FY 2019-20, not counting spending through reserves or $5 billion in federal funds to the state through the American Rescue Plan Act. The biggest contributors to the increase are a $1.3 billion increase in K-12 appropriations for salaries and a $5 billion increase in Medicaid receipts for Medicaid expansion.
The American Rescue Plan Act (ARPA) provides $350 billion to state and local governments. North Carolina cities and counties will receive $3.8 billion. The state will receive $5.2 billion. States can use the money to cover revenue shortfalls, provide Covid-related premium pay to state employees, provide Covid-related assistance to people and businesses, or pay for water, sewer, and broadband infrastructure. They cannot deposit the money in a pension fund or use it to offset “directly or indirectly” any permanent or temporary tax cuts of any kind until the funds are spent some time before December 2024.
North Carolina revenue for the current fiscal year, ending June 30, is projected to reach $27.5 billion, much higher than the $23.3 billion expected in May 2020 or even the $26.2 billion forecast in 2019 before the pandemic began. As a result, state government does not need ARPA money to offset revenue losses.
Cooper’s budget mentions a need for more education spending from the Leandro lawsuit but offers no price tag for it while recommending two new tax credits. The restrictions on indirectly paying for tax reductions mean the governor would likely not be able to go back and pay for Leandro-related spending with ARPA money, reinforcing the impression that the purpose of this budget proposal is to score political points, not provide a realistic guide to spending policy.
Medicaid, hospitals, schools, colleges, and universities have received multiple rounds of federal funding for Covid, much of which remains unspent, according to the Committee for a Responsible Federal Budget. Not counting the $9 billion for state and local governments’ discretionary spending mentioned above, Medicaid has spent$1.1 billion of $2.7 billion in available federal funds designated for that program while schools have spent $4.6 billion of the $5.8 billion they had available.
The next part of this series will examine Cooper’s proposed appropriations more closely.