John Locke Update / Research Brief

Now is not the time for new programs or debt

posted on in COVID-19 Series, Fiscal Insight, Spending & Taxes
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  • North Carolina’s fund balance may not finish the year at $4.2 billion, but it should remain healthy
  • Economic conditions after COVID-19 remain uncertain
  • Budget writers should save a portion of the reserve and not take on new debt

Budgeting for North Carolina’s “new normal” means an economy and government transformed. As in every other aspect of life, from school and work to groceries and gatherings, COVID-19 has changed assumptions about what state government should do and how it should do it.

How long will legal government restrictions continue? How long until people are comfortable in crowds? How much economic activity will return? How many zombie companies already exist? How many jobs are gone for good?

As reported in the December General Fund Monthly Financial Report, North Carolina’s unreserved fund balance was a healthy $4.2 billion, fully $2 billion higher than in February 2020, even after Gov. Roy Cooper used $500 million to conclude Fiscal Year (FY) 2019-20. In addition to the $1.5 billion fund balance that remained June 30, revenues since July have run $2.8 billion more than expenditures. A significant portion of the fund balance is a result of income tax deadlines being delayed from April to July. July 2020 revenue was $1.2 billion higher than in July 2019.

Money from the federal Coronavirus Relief Fund created in the CARES Act has kept General Fund appropriations 4 percent below FY 2019-20. State Health and Human Services appropriations are $476 million (17%) lower. Public Safety had negative appropriations in October, and total appropriation are $389 million (38%) lower than in FY 2019-20.

April to December 2020 state revenue was $242 million behind revenue from April to December 2019, but it was $2.9 billion ahead of April to December 2018 revenue. July to December 2020 revenue is $320 million ahead of the same period in 2019. State appropriations could accelerate as federal coronavirus money dries up, but it could still leave $3 billion in the unreserved fund balance.

North Carolina made it through hurricane season 2020 without a need to draw on the Savings Reserve. The state could save a portion of the unreserved balance. To reach the target level for Savings Reserve would require close to $1.75 billion, leaving $1.25 billion available for capital projects, debt reduction, unfunded retiree liabilities, other one-time expenses, or a one-time tax rebate. John Hood made a case for providing county health departments with more money “to expand their workforce, physical capacity, and online networks to handle the load [of COVID-19 vaccination].” Gov. Cooper and state legislators should not commit the fund balance, which is one-time revenue, to pay for new, recurring expenses, whether they be programs or debt service.

An uncertain economic time is not good for borrowing. If the state takes out debt and the post-COVID economy turns out to be smaller, then debt capacity will shrink and the debt will end up taking more from other priorities. If the economy recovers quickly, then the state would have more money available for capital anyway. In other words, a short-term revenue challenge is no reason to mortgage the future if the state has cash available now.

Borrowing also takes time. With cash on hand, the state needs only to approve the projects and start construction. Bonds, however, have to go before voters on the ballot in November, after which there would be a delay before bonds could go on the market and money could be available for work to begin. Bonds get sold over time. The $2 billion Connect NC bonds voters approved in May 2016 still have $400 million to be issued. There is no guarantee interest rates will be as favorable next year, let alone in five or ten years.

Debt increases uncertainty. Committing future resources to solve yesterday’s problems is no way to budget today. For now, state government can use a portion of today’s cash for urgent repairs and renovations. New construction should be delayed until every student who wants to be is back in a classroom, restaurants and bars are at full capacity with normal hours, and venues can welcome audiences again. Only then will it be clear what capital investments the state needs to make.

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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