John Locke Update / Research Brief

Federal largesse and state priorities during and after the COVID-19 outbreak

posted on in COVID-19 Series, Fiscal Insight, Local Government, Spending & Taxes
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Other states have begun to worry about the coronavirus shutdown’s impact on their economies and state government finances. Energy producing states like Colorado and Texas must deal with plummeting oil prices in addition to other shutdowns that cut revenue and compel spending.

Congress is on its way to pledging $1.6 trillion in a bipartisan way for public health spending, loans to small businesses, payments up to $1,200 to individuals (with more for families with children), and bailouts of entire industries that, unlike the banking sector in 2008, did not bring this disaster upon themselves. This spending is in addition to the $1.1 trillion bipartisan deficit and $22 trillion bipartisan debt they had already accumulated.

Regardless of what one thinks of the federal response, no amount of state money will have anywhere near the impact. Instead, Gov. Cooper and the General Assembly should shore up state and local government finances while responding to the public health and economic challenges arising from the coronavirus outbreak.

Where the money is

The first best use of North Carolina’s unreserved fund balance remains saving to prepare for a significant reduction in tax revenue. North Carolina already has $1.2 billion in the Savings Reserve rainy day fund, but would need $2.6 billion to carry the state budget through most recessions. The recession looming as a result of the coronavirus could test even that assessment. Saving must be the first priority.

Last week, I wrote that the state should direct at least $1.1 billion of the $2.2 billion unreserved cash balance to the Savings Reserve. Sales tax and personal and corporate income tax revenues will fall as a result of the coronavirus quarantine while demands for state spending rise. North Carolina has a Savings Reserve to protect taxpayers from a tax increase at the very time, such as during a recession or after a natural disaster, they need every dollar they have to take care of their families.

Half of the remaining $1.1 billion of the unreserved General Fund has been built up since July. Income tax withholding and sales tax collections will be down for the second half of March and at least into April. With state and federal income tax payments not due until July 15, revenue in April will also fall, so any bump in revenue expected from the strong economy in 2019 will not reach the state treasury this fiscal year. Legislators and the governor thus need to be cautious about new spending.

There is $186.4 million in a Medicaid Contingency Reserve, created in 2014, for cost overruns. Legislators tried to clarify how the Contingency Reserve could be used in a Medicaid Transformation bill (HB 555: Medicaid Transformation Implementation) that Gov. Roy Cooper vetoed. They can have another try with additional allocations to the reserve and the first disbursements from it in response to the coronavirus. Medicaid is all but certain to spend more than budgeted, even with higher federal reimbursement rates. Legislators also have $425 million ready to fund Medicaid’s transition to managed care. Legislators should confer with health care leaders before deciding to go ahead with the shift to managed care, hold the money for a later transition, or redirect the money to more urgent needs.

At least $30 million of the $74 million reserved in the Emergency Response & Disaster Relief Fund at the end of February was already pledged for matching federal funds, which leaves just $44 million. The Hurricane Florence Disaster Recovery Reserve had $179.7 million at the end of February, but $80 million had been spent in the previous three months alone. Legislators could add $100 million to the Emergency Response & Disaster Relief Fund from the General Fund’s unreserved cash balance.

Agencies have $1.5 billion in non-reverting funds, a 10% increase since the start of the fiscal year. But because they have already been obligated, these dollars should be the last source of money policymakers consider.

After estimating how many people may be without work as a result of public health measures and for how long, policymakers could consider making benefits more generous, as long as doing so does not put the state unemployment system in debt again. The system is healthy now and can meet the needs of workers in this crisis despite having fallen into a $2.5 billion debt to the federal government during the last recession. Workers and Gov. Cooper himself can be thankful for those measures and that neither of Cooper’s last two budget proposals became law.

North Carolina has more than $3.5 billion in the Unemployment Trust Fund.  According to Gov. Cooper’s budget recommendations for 2019-2021,

Benefit payments from the Unemployment Trust Fund for FY 2017-18 were approximately $200 million; if there are no major changes to the state’s economic condition, that level of benefit payout is likely to continue.…The trust fund balance as of December 31, 2018, is $3.5 billion, over $1 billion more than the U.S. Department of Labor recommends to ensure that necessary funds are available.

The governor’s budget recommended diverting some tax payments to a new state program based on the assumption that “no significant economic changes” would occur. With an explosion in coronavirus-related unemployment claims (5,000 in the hours after Gov. Cooper announced his executive order making it easier to claim benefits, compared to 10,000 for the entire month of February) and potential economic effects growing with the caseload, diverting funds would have been harmful.

All of this indicates the state has money available to meet the demands of the current crisis but not the exorbitant dreams to remake society that some desire. Besides saving money to stave off a billion-dollar sales tax increase, where could the state spend its money?

Where the money could go

After the first week of social distancing, the costs are becoming more apparent to families, the economy, and state and local governments. North Carolina’s state government is in better shape than most to weather the storm, but even it has less available than we thought at the start of the week. At the same time, federal deficit spending knows no limit, so Congress can provide more money to North Carolinians than state government ever could. (The country missed another decade of growth that could have helped right the federal budget, but that’s a fight for another time.) State government still has some ways to help without breaking the bank besides building the Savings Reserve.

An inexpensive and highly effective way the government is already providing help is with this page with a partial list of places for people to donate their time or money to help their neighbors. As mentioned above, legislators could deposit $100 million in the Emergency Response & Disaster Relief Fund to be available for urgent public health spending.

As Jon Sanders recommended, state government can “give extensions for expiring driver’s licenses, expiring vehicle registrations, and other nonessential services that require in-person visits and standing in lines at government offices.” Extending renewals for vehicle registrations would mean a delay in local property tax collections. North Carolina created the Local Government Commission back in 1931 when towns across the state ran into financial problems. The LGC could backstop property tax assistance. For local governments trying to keep people housed, this assistance could be provided in exchange for enforceable pledges to remove zoning and to permit barriers that make housing expensive.

Many local governments have already opted not to disconnect water or even reconnect service to homes that are having trouble paying their bills. Here, too, assistance to local governments can be tied to structural reforms that will improve the financial viability of local water systems.

Thanks to a decade of fiscal restraint, often overriding vetoes by governors who wanted to ignore that restraint and increase spending, North Carolina is better positioned to get through the immediate crisis and recover than most states. A crisis provides great incentive to ignore caution in attacking the problem, but that would undo much of the good done in budgets until now. As Margaret Thatcher told President George H. W. Bush, “This is no time to go wobbly.”

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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