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State Budget Writers Should Resist Temptation to Spend Surplus Funds

From: John Locke Foundation

With state revenue for the current fiscal year now projected to be $4.2 billion higher than originally predicted, state budget writers are sitting on a sizeable stack of funds. The revenue windfall, combined with another $2.4 billion in unappropriated funds and the $3.1 billion in the state’s Rainy Day fund no doubt creates temptation to aggressively finance new programs or even one-time initiatives. “We have the money, we shouldn’t just let it sit there!” is a common refrain coming from those always eager to increase government spending.

Legislators would be unwise, however, to give in to such temptation.

Signs of an economic slowdown, or full recession, are glaring. Runaway inflation, a stock market dive, a cooling of the overheated housing market, and consumer confidence dipping to levels not seen in a decade all point in this direction. Indeed, GDP decreased by 1.4% in the first quarter, so we may already be in recession territory.

Thankfully, North Carolina state government is far better positioned to withstand a recessionary period than it was leading up to the Great Recession in 2007-08. With little set aside in the Rainy Day Fund, growing debt obligations, and an unsustainable spending spree of 49% spending growth in the 8 years prior, state budget writers and then-Governor Bev Purdue were forced into a desperate situation when recession hit. Massive budget shortfalls had to be filled. That which wasn’t covered by federal ‘stimulus’ money was made up for by multi-billion dollar tax hikes imposed on North Carolina families when they could least afford it. And thousands of state employees were laid off, including teachers, while teachers went three straight years without a pay raise.

Fortunately, North Carolina can avoid such painful policies as long as they avoid the temptation to spend down their sizeable reserves. For context, we can look at the revenue impacts North Carolina experienced in the Great Recession.

For the beinnium of FY 2007-8 and 2008-9, total combined budgeted expenditures were $41.86 billion. Actual revenue, according to State Controller reports, over that two-year period came in at $38.92 billion, good for a $2.9 billion shortfall, with $2.1 billion of that in 08-09 alone.

Furthermore, even with a smaller biennial budget of $38.57 beginning with FY 2009-10, actual revenue still fell $750 million short during those two years

Indeed, state General Fund revenue never recovered to FY 2007-8 levels until five years later. In the intervening four years, revenue collections would have needed to be a combined $2.83 billion more just for each year to keep pace with the 07-08 revenue level. To accommodate even minor annual budget increases would have required billions more.

When a recession hits, revenue can nosedive quickly and dramatically. And, if the Great Recession is any indication, revenue can take several years just to get back up to pre-recession levels. To avoid massive layoffs and tax hikes, state budget writers would be wise avoid the temptation to spend down the surplus funds, and save them to plug in what may shape up to be sizeable budget shortfalls.