John Locke Update / Research Brief

The Rest of the State Budget

posted on in Fiscal Insight, Spending & Taxes
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By now you know the major points of the state budget: it spends $23 billion in the first year and $23.6 billion in the second year, reduces the tax rates on personal and corporate income and raises the standard deduction in 2019, raises pay for teachers and other state employees, provides a cost of living increase for retirees, closes retiree health benefits to employees starting in 2021, raises the age to be tried as an adult for misdemeanors and most felonies, and expands educational choices with more funding for opportunity scholarships and personal education savings accounts.

This is a review of some of the provisions you may have missed and their implications.

Savings and Capital

Before Gov. Roy Cooper even presented his budget proposal for the next two years, the General Assembly passed a law to restrict how and how much of the state’s rainy day fund, the Savings Reserve, can be withdrawn at a time. Existing statutes also required 25 percent of any unreserved balance at the start of the fiscal year be transferred to the Savings Reserve. The new law sets a lower bar of 15 percent of new tax revenue, after tax law changes for the year, if the Savings Reserve is below the threshold agreed by the Office of State Budget and Management and the Fiscal Research Division of the General Assembly.

The budget bill itself includes a provision beginning in 2019 to set aside four percent of total General Fund tax revenue in a single pool to cover capital investments, repairs and renovations, and debt service. This Capital and Infrastructure Reserve replaces the Repairs and Renovations Reserve, which was also supposed to receive 25 percent of unreserved fund balances but rarely did. Debt service is the first priority for this fund.

Transparency

A number of provisions improve the ability of management, legislators, and the public to understand state government finances and operations and hold government accountable for performance.

The budget provides no new funds for the Office of State Budget and Management (OSBM) to create a transparency website but reiterates expectation that such a website be ready by January 2018. It funds a project to remove social security numbers from health and human services databases, one of the limiting factors in making more information on these programs available online.

The community college system keeps its money to plan an enterprise resource planning system that connects all of its schools to manage their finances and other business processes. The University of North Carolina system and Department of Public Instruction each receive appropriations to begin planning similar systems to connect their parts of public education operations. The statewide accounting system in the State Controller’s Office is also slated for an update with appropriations to begin planning and design.

Some non-state entities that receive government funding must now report to OSBM their planned activities and outcomes, though there is no follow-up check to see how they actually perform.

In 2013, the General Assembly changed the benchmark for budgets from the continuation budget, which would fund the same activities with adjustments for inflation and population or enrollment, to a base budget of full-year levels of recurring items from the previous year. (Funding that had been temporarily reduced or increased returns to its normal level, and programs that did not cover the full year are funded for a full year.) A provision this year adds “adjustments for statutory appropriations and other adjustments as directed by the General Assembly” to the base budget. Recurring changes in the budget, by definition change the base budget, but this provision makes it possible to build $10 million additional funding into the base budget each year for opportunity scholarships until fiscal year 2027-28, at which point it will be $144.84 million. A precedent like this could easily lead to a return of the old budget benchmark.

Earmarks

More troubling is the sheer number of earmarks, aka pork-barrel spending, to specific companies and nonprofit organizations in the budget. There are more than 100 individual line items directing more than $30 million in state and federal funds to even more private parties by name. Among the most egregious examples is in directing nominally competitive federal grants to TROSA and Big Brothers Big Sisters. This is a criticism of the process, not the goals or the groups; they are good organizations doing important work. Any time a private vendor is named in the budget, it is a setback for open government and budgeting. There is no reason for a $23 billion budget to direct $20,000 to the Boys and Girls Club of Greene County.

If there is a pony in the pile, however, it is a two-year pilot program by Human Coalition to “provide a continuum of care and support to assist women experiencing crisis pregnancies to continue their pregnancies to full term.” This program is one of the few anywhere in the budget to specifically consider whether it saves the state money as part of an evaluation of the program. It provides the basis for a way to incorporate Pay for Success (PFS) contracting state budgets. If state agencies and legislators agreed on a couple of outcome areas, they could set money in a reserve for a period while the nonprofit launched a pilot program with funds from private foundations, investors, banks, or individual or corporate donors. If the program verifiably met its benchmarks, the state’s funds could be used as payment for expansion with new benchmarks and new funds in reserve, but without private funding.

Conclusion

As we have written before, this budget continues the recent tradition of prudent spending and preparation for future needs. It takes steps to make state government more open and accountable, including new software systems to manage and connect agencies. There are also provisions that could cause trouble by obscuring changes in spending levels. Finally, the sheer volume of pork-barrel earmarks is reminiscent of budgeting in the Basnight era. The state can redirect funds to target better outcomes with Pay for Success contracts instead of earmarked grants with no accountability.

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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