Spotlight Report

Framing the Budget Debate: House Plan Reduces State Savings, Increases Risk

posted on in Education (PreK-12), Spending & Taxes

As noted in an earlier Spotlight, the budget adjustment bill passed by the N.C. House is a marked improvement over the FY 2000-01 budget proposed by Gov. Jim Hunt. House appropriations chiefs nixed the idea of issuing $240 million in so-called “judgment bonds” to finance a refund of illegal intangibles taxes. Also gone is $172.5 million of an unneeded $540 million contribution to the state employee retirement system, which is already generously funded. Present is a welcome deposit into the state’s Rainy Day Fund, which needs replenishment.

Still, state representatives shied away from the tough decisions that previous legislatures had put before them. No significant savings in existing programs were realized. None of the state’s duplicative array of major agencies and departments was eliminated. No opportunities were sought for introducing competition into state services or selling unneeded state assets to free up capital for higher-priority investments.

The past decade has left many issues unresolved. During the 1990s, the General Assembly first raised ($1.8 billion) then lowered ($1.4 billion) state taxes, leaving the tax burden heavier in 2000 than it was a decade earlier and the tax code more rather than less complicated. Lawmakers wisely created a half-billion-dollar Rainy Day Fund to deal with unforeseen fiscal crises and then drew it down almost to zero due to a string of losses in court and a (somewhat inflated) relief bill for Hurricane Floyd.

Through it all, state spending grew rapidly. How rapidly is somewhat debatable. One of the unfortunate legacies of the past decade is the confusing clutter in the state’s budget reports. In the early 1990s, lawmakers grappling with a recessionary budget deficit pulled hundreds of millions of dollars in local tax sharing and reimbursements, previously considered “off-budget,” into the General Fund in order to balance the budget on a cash basis. A few years later, they took the items back off budget.

Similarly, lawmakers partially shifted payroll in 1991 from June 30 to July 1, again to balance the budget on a cash basis, then restored the payday in 1994. In the House’s FY 2000-01 proposal, a similar gimmick changes the accounting of teacher bonuses and payrolls from an accrual to a cash basis, thus shifting the cost of paying some employees to the next fiscal year. The device allows some $400 million previously devoted to compensation to be redirected to the intangibles tax repayment ($240 million), a $120 million deposit in the state’s Rainy Day Fund, and $40 million for other spending. In effect, the budget proposal would draw state savings down by a net of $280 million (the Rainy Day Fund deposit merely swaps one form of savings for another) to help fund a state budget that is bloated with waste and growing at a healthy clip.

The idea is similar to the bad old notion of “negative reserves,” in which money is authorized for one purpose, and then assumed to be unneeded and appropriated again in the same year. Like a negative reserve, the House’s payroll shift doesn’t actually create new money for lawmakers to spend. It merely reduces revenue availability in the future, leaving a new governor and General Assembly with less room to maneuver. In sum, depending on how the payroll shift and other items are scored, the 2000-01 budget can be said to grow as much as 7.5 percent or not to grow at all. It’s confusing, to say the least.

Dark Clouds on the Horizon

For taxpayers, what should be most worrisome about the House’s budget plan is its impact on future decisions about taxes. If $3.1 billion in university and community college bonds receive approval in a referendum this fall, debt service expenditures in North Carolina’s budget will nearly double. On top of that, the House budget will add another year of significant budget growth while further shrinking the state’s savings “cushion.” There will be virtually no slack left in the rope.

The last economic recession was a brief one that ended in late 1991. It is unreasonable to expect the nation’s good fortunes to continue indefinitely, particularly if federal taxes remain excessive and strongly biased against investment and labor force expansion. Even a moderate slowdown in economic growth and revenue collections would leave North Carolina with a yawning gap between its spending promises and the money taxpayers are currently obligated to pay. If past experience is any guide, such a budget deficit will intensify the pressure that lawmakers already feel from their leaders, spending lobbies, and editorialists to raise taxes. The House budget makes the unhappy prospect of a state tax hike increasingly likely.

John Hood, President

Graph of tracking general fund spending

John Hood is president of the John William Pope Foundation, a Raleigh-based grantmaker that supports public policy organizations, educational institutions, arts and cultural programs, and humanitarian relief in North Carolina and beyond. Hood is also chairman of the board at… ...

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