by John Hood
Chairman John Locke Foundation
Many observers have attributed the 2000-01 budget shortfall, variously estimated at between $450 million and $700 million, to factors such as court losses, hurricane relief efforts, and tax cuts. Underlying all of these issues, however, is the annual growth rate of the state budget. Modest growth during the 1990s would have left enough revenue in state savings to handle unforeseen emergencies while offsetting some of the massive tax increases of the early 1990s. But at an annual growth rate of nearly 7 percent a year during the decade, the state budget reflected little willingness on the part of state officials to make tough decisions.
Gov. Jim Hunt’s proposed adjustments to the FY 2000-01 would contain this distressing trend. Despite talk of a fiscal crisis and the need to find significant savings in the base budget, the administration is proposing total General Fund growth of 6.2 percent faster than last year’s rate and close to the average for the 1990s. Although some ideas for one-time savings are included, such as tapping unspent Smart Start and Y2K funds and whittling at projected growth in Medicaid and debt service, no major state programs or agencies will face significant reductions. The base budget lies largely intact, even as hundreds of millions of dollars in new spending is added.
Perhaps the most objectionable element of the proposal is the idea of borrowing $240 million in a “judgment bond” to repay illegal intangibles taxes. North Carolina has largely avoided the temptation to borrow its way out of short-run fiscal emergencies, the way some other states with fewer scruples have done. Now, the governor says, there was no way to repay the intangibles taxes “while keeping our commitments for children and for schools.”1
Obviously, given the rapid growth in state spending being proposed, there was little emphasis placed on avoiding the extra interest costs and the bad precedent associated with the judgment bond plan. Among expansion items alone not counting possible base budget savings there are millions of dollars in the proposed FY 2000-01 budget that have nothing to do with children or schools.2 For example:
State policymakers have a responsibility, particularly in a year in which voters will select a new governor and General Assembly, to consider carefully the long-term ramifications of their decisions. According to the administration’s own projections, additional spending obligations in the FY 2000-01 budget, when coupled with recent increases in the base budget, will put significant stress on state finances for years to come. The projected fund balance, from which important commitments to the Rainy Day Fund and Repair and Renovation Fund must come, won’t return to acceptable levels until FY 2003-04 well into the next governor’s term of office.3 And these projections do not include the cost of financing $3.1 billion in university and community college bonds that the governor and legislature endorsed today.
The next governor, whoever he or she may be, will have to grapple with the conflicting fiscal pressures left over from the past decade of reckless spending and burgeoning debt. Just as the 1990s were a decade that gave taxpayers a net tax increase of nearly half a billion dollars, the coming decade will likely feature at least one unforeseen economic downtown leading to tax increases. Unless lawmakers reverse the budgetary trends reflected in the governor’s FY 2000-01 proposal, a hefty tax increase under those circumstances with hundreds of millions of dollars in debt service and other future obligations that cannot realistically be avoided is all but certain.
John Hood, President