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In doing some research for JLF’s alternative budget, I found some startling information.  Every month an economist with the Fiscal Research Division (FRD) for the General Assembly reviews North Carolina’s revenues and gives legislators an outlook/forecast of future revenues.  In late 2007 and early 2008 the FRD forecasted revenues for legislative use in creating the budget.  Looking back, some of the findings seem ridiculous, given what we now know about the situation we were really in at the beginning of 2008.  The only way to avoid reliving such a budget crisis is to change the way budgets are drafted, by using HISTORICAL revenue figures in calculations.  Take a look at the information below and see if that strategy might have helped in the 2008 crisis.

"We are not concerned about a recession because the job market in North Carolina is relatively healthy." – FRD, November 2007

"Conclusions, a U.S. recession is not likely and N.C. will continue to fare better than the nation." – FRD, January 2008

Other data they relayed to legislators was to expect +4.6% growth of baseline General Fund Revenues for the 2008-2009 fiscal year.  Actual growth that year was –11.2%. That’s a 15.8% difference between forecasted and actual growth rates. Their reasoning for this? "Fiscal Research handles revenue forecast risk differently than many states.  Our assessment of the possibility of recession, 30%, is lower than most."

One year later they reported a different picture stating that, "through November (2008), General Fund revenues are running $520 million below a $7.2 billion forecast target for the period."  They also included information from the National Bureau of Economic Research stating the recession began in December 2007 – the same month FRD predicted a U.S. Recession would not hit North Carolina.

In January 2009, the new biennium began with freshman legislators and a new budget to be drafted.  Typically revenue numbers are released in late February or early March to set the tone for budget negotiations.  In May of 2009, the FRD had to revise revenue and budget outlooks as they found a $3.2 billion shortfall in revenue relative to their original predictions.  They reported that data had shown an unprecedented 10.8% decline from 2008 revenue collections, which meant revenues were 15.2% under budget.  The April 15th, 2008 tax payments were down 40%; in comparison, the previous two recessions only saw payments down by 20-21%.

To sum up these differences in whole numbers, in July 2008 the General Fund budget was $20.8 billion.  The January 2009 forecast of revenues was $18.6 billion and in May was revised to only $17.7 billion (a change of -$3.1 billion or -15%).

What does this mean?  It means that as talented and educated as the Fiscal Research Division is, their economists don’t have a crystal ball.  Our state has seen this before, during the 2001-2002 mini-recession.  North Carolina cannot keep operating under the current system of forecasted numbers.  Private citizens do not budget their car payments on the assumption they will get a raise in the second quarter — neither should the government.  The solution is to use past years’ values.

A majority of our state’s revenue collections come from three sources: personal income tax, sales and use tax, and corporate income tax — three sources directly affected by changes in the economy.   For the 2012-2013 fiscal year, these three sources accounted for 89% of total tax revenue in the General Fund.  When so much of the budget is tied to sources affected directly by the condition of the economy, it makes sense to use past years’ budgets.  Would that have helped alleviate the 2008 crisis?  Probably.

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