N.C. state government spending reached record high this year

May 7, 2012

Click here to view and here to listen to Fergus Hodgson discussing this Spotlight report.

RALEIGH — North Carolina state government is spending more money per person this budget year than ever before. A new John Locke Foundation Spotlight report documents that fact, which gets lost in ongoing debates about state budget “cuts.”

“Total state spending per capita is at its highest level ever in the 2012 fiscal year and has more than tripled since 1970,” said report author Fergus Hodgson, JLF Director of Fiscal Policy Studies. “Adjusting for inflation, state spending has increased in that period from $1,701 per person to $5,247.”

That spending expansion has far exceeded personal income growth, Hodgson said. “State spending stood at 10.9 percent of personal income in 1970, dipped as low as 9.3 percent in 1984, and never exceeded 12 percent prior to 2008,” he said. “Yet for 2012 it is on course to be 14.4 percent of North Carolinians’ income.”

Hodgson documents state spending facts and explains how those facts are obscured in public debate. He also recommends new constitutional spending limits, an increased focus on state government’s true spending and liability numbers, and action on a federal balanced budget amendment.

Spending on all reported state budget categories has more than doubled since the mid-1970s, Hodgson said. “This is true for education, corrections, health and human services, transportation, and debt payments.”

Other evidence refutes arguments about declining education spending. “Gauged as a percentage of income, state spending on education has fluctuated around 4 percent of total income for the past 40 years,” Hodgson explained. “This year, 2012, sits right on the 40-year average of 4.2 percent.”

Meanwhile, transportation spending is set to reach its highest level on an income-percentage basis since 1979, and Hodgson notes a “disproportionately high rise” in spending on debt service payments. “Since 2000, debt servicing has increased in per capita terms by 128 percent and more than doubled as a percentage of income.”

A spending cap would have made a major difference over the past decade, Hodgson said. “If adopted in 2000, a simple cap limiting state spending increases to inflation plus population growth would have restrained current spending to $38.5 billion, which is 75 percent of the actual spending of $51.5 billion.”

Much confusion about state spending stems from an undue focus on the general fund, Hodgson said. Media reports about the North Carolina budget generally refer only to general fund numbers.

“General fund spending per capita has declined by 16 percent since 2009, but per capita spending outside of the general fund increased by 26 percent at the same time,” Hodgson said. “This more than compensated for the general fund’s decline. It’s also important to note that the general fund makes up just 38 percent of total state spending this year, down from 53 percent in 1970 and 59 percent in 2000.”

Most budget debates also ignore the growing role of federal dollars, Hodgson said. “Federal aid makes up 36 percent of state revenue now, up from 21 percent in 1975 and 24 percent in 2000,” he said. “While this funding source has no immediate impact on state taxes, it still merits concern. North Carolinians will feel it through federal taxes or through debt and inflation.”

North Carolina’s approach to accounting conceals another important fact. “State officials across the U.S. — including North Carolina — use something called cash-basis accounting, which does not account for bills that will be due in future years,” he said. “The largest future bill, or unfunded liability, is retirement health benefits. Those benefits totaled $34.2 billion at the end of the 2010 calendar year. That figure had increased by $4.4 billion in just two years.”

These budget facts have clear implications for Hodgson. “First, since budget growth has been so consistent, against the wishes of constituents, a constitutional protection seems necessary,” he said. “That could come in the form of a simple cap on spending growth equal to inflation plus population growth or a super-majority requirement for any spending or tax increases.”

Hodgson also reminds those who study and report on the budget to consider the limitations of relying on general fund numbers. “The general fund does not provide an accurate gauge of overall spending,” he said. “The official budget also does not account for huge unfunded liabilities.”

A growing reliance on debt-financed federal aid also should raise red flags, Hodgson said. “Given the precarious and severe indebtedness of the federal government, such transfers merit opposition from North Carolina’s federal representatives,” he said. “They also should support a federal balanced budget amendment similar to what 49 of the 50 states have.”

Fergus Hodgson’s Spotlight report, “2012 State Spending at a Record High: Albeit Concealed, State Spending Has Grown For Decades,” is available at the JLF website. For more information, please contact Hodgson at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].