John Locke Update / Research Brief

Budget 2019: Borrowing to Balance the Budget

posted on in Fiscal Insight, Spending & Taxes
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In addition to questions of money and Medicaid, the budget stalemate raises a philosophical question: When is a balanced budget not a balanced budget?

North Carolina’s state constitution and state law require the governor to present a balanced budget, the General Assembly to pass a balanced budget, and the governor to reduce spending during the year if necessary to maintain a balanced budget.  Article III, Section 5 (3) of the North Carolina Constitution says,

…The total expenditures of the State for the fiscal period covered by the budget shall not exceed the total of receipts during that fiscal period and the surplus remaining in the State Treasury at the beginning of the period. To insure that the State does not incur a deficit for any fiscal period, the Governor shall continually survey the collection of the revenue and shall effect the necessary economies in State expenditures, after first making adequate provision for the prompt payment of the principal of and interest on bonds and notes of the State according to their terms, whenever he determines that receipts during the fiscal period, when added to any surplus remaining in the State Treasury at the beginning of the period, will not be sufficient to meet budgeted expenditures.…

Practically speaking, these rules prohibit debt for operating expenses.

Like all rules, the balanced budget requirement and prohibition against debt depend on voluntary compliance. Enforcement is contentious, time-consuming, and costly, and its outcome is never assured. Also, once a governor or the General Assembly starts looking for ways around the restrictions on debt, there are few practical impediments to stop them. The rules are only as good as the people who live by them. Illinois provides a vivid example of what can happen to a state once it budgets to what is possible instead of what is prudent with its $6.3 billion in unpaid bills.

Gov. Roy Cooper has sought more debt and more current spending than the legislature in both of his budget proposals this year. Each time, he has argued that the General Assembly spends too little on today’s needs. In particular, Cooper tried to repeal the State Capital and Infrastructure Fund (SCIF) and instead borrow $4.2 billion for construction in his first budget proposal. As if to emphasize the point, Cooper would have dedicated $230 million less to capital projects than the SCIF required and issued $288 million in limited obligation bonds without a vote of the people.

Cooper’s latest proposal would keep the SCIF but would cut it by $330 million over two years to pay current expenses and make up the difference with $3.5 billion in new debt, nearly twice as much as anything proposed by the General Assembly. His reduction in SCIF spending, offset by the new debt, accounts for 60 percent of the proposed new recurring commitments in fiscal year 2019-20.

Moving money from a one-time capital expense to a recurring cost and backfilling it with debt commits two future dollars for the one spent today. Because they are recurring, it is many times more expensive than even this implies.

Consider if you spend $100 today on a new phone and keeping your existing cable package, versus upgrading your cable subscription by $100 a month and borrowing $100 for a new phone. You have now committed yourself to $1,200 over twelve months for cable and $100 plus interest for the phone. If your future needs or income changes, you have less ability to respond and adapt.

Principal and interest on debt receive priority in the state constitution over every other dollar the state would spend. The constitution says the governor “shall effect the necessary economies in State expenditures” only “after first making adequate provision for the prompt payment of the principal of and interest on bonds and notes.” Borrowing money, therefore, means creating costs in the future that will either have to be paid with new taxes or reductions in other services.

Pushing costs from today into the future is exactly what the balanced budget provisions in the constitution and in statute are intended to prevent. Much of Cooper’s budget is based on an assumption of perpetual growth in state revenue, whether through a larger economy or government taking a larger slice of the economy. It just happens that his choice of more debt and more spending is also potentially unconstitutional.

Joe Coletti is Director of Oversight Staff for the NC House Majority. Joe is a former Senior Fellow at Locke. Here, he examined fiscal and tax policy. He previously headed the North Carolina Government Efficiency and Reform initiative… ...

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