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John Hood: Both parties should prioritize state spending

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John Hood (@JohnHoodNC) is chairman of the John Locke Foundation and appears on “NC SPIN,” broadcast Fridays at 7:30 p.m. and Sundays at 12:30 p on UNC-TV.

RALEIGH — As the North Carolina General Assembly gathered for its October 2 special session on Hurricane Florence relief, the state’s rainy-day fund stood at $2.01 billion. There was another $737 million in reserves earmarked for other purposes (including $104 million specifically for disaster relief) along with an unreserved credit balance in the General Fund of $1.2 billion.

That North Carolina had billions of dollars socked away to address emergencies such as Florence was no accident. Prudently and methodically, the General Assembly has spent years building up financial reserves. Foolishly and repeatedly, critics faulted lawmakers for saving these dollars rather than spending them.

There has been a partisan dimension, no question. After winning majorities in both legislative chambers in 2010, the Republicans made it a high priority to accumulate a substantial rainy-day reserve equal to at least 8 percent of annual state spending, and preferably upwards of 10 percent. Former Gov. Pat McCrory, who served from 2013 to 2016, was if anything even more hawkish about the rainy-day fund.

Democrats favor keeping some money in reserve, of course, but have often argued that GOP policymakers were overdoing it. Larry Hall, then the Democratic leader in the North Carolina House, complained during the 2016 legislative session that the Republican majority was saving too much and spending too little. “We artificially starved ourselves,” he said just before that year’s budget bill passed the House. “We have funds available, and we’ve decided not to invest.”

And while campaigning against McCrory in 2016, Roy Cooper blasted the governor for “building up the rainy day fund in excess of what’s necessary for the state,” and for letting the money “just be sitting there” rather than spending it.

A few weeks later, Hurricane Matthew hit North Carolina. As you might expect, Cooper immediately stopped complaining about an overly large rainy-day fund.

At this point, maintaining significant fiscal reserves ought to be a goal shared by North Carolina politicos of all persuasions. It’s not as if they can’t imagine what it would be like to experience a massive storm with inadequate savings. Most can remember 1999, when Hurricane Floyd ravaged large swaths of the state.

Then-Gov. Jim Hunt and a Democratic-controlled legislature settled on a $840 million disaster-relief package. But there wasn’t enough dedicated savings to pay for it. They had to cobble together the funding from several sources, including reverted funds from the operating budget. As a result, the North Carolina had inadequate reserves in 2000-01 when a recession bit into state tax revenues, creating massive budget deficits.

Democratic policymakers responded to those deficits by raising taxes, primarily sales taxes. Their decision was economically counterproductive and politically damaging, contributing to legislative losses in 2002 that would have turned control of the North Carolina House over to the Republicans — except that then-House Speaker Jim Black bribed a Republican lawmaker to switch parties and then convinced a rump group of credulous Republicans to keep him in power. This skullduggery sowed the seeds of Black’s ultimate political downfall, felony conviction, and stay in federal prison. But it can also be thought of as a delayed consequence of unwise fiscal policy during the high-growth years of the 1990s.

I don’t expect the two sides to agree on the fundamental trade-off that lies beneath all state budgets. Republicans think that lowering taxes has broad economic benefits. Democrats think higher spending on state programs would be a better choice. This disagreement reflects contrasting philosophical premises and differing interpretations of the empirical evidence.

Nevertheless, both sides should want to keep a sizable savings reserve — and should be willing to prioritize replenishing it even if that means some other fiscal goal has to be deferred. Remember that natural disasters aren’t the only potential shocks to the system. If a recession comes, a healthy reserve will reduce the pressure on lawmakers either to raise taxes or enact precipitous budget cuts.

While no one can forecast precisely when disasters will strike, strike us they will. Thank goodness we were ready this time.

John Hood (@JohnHoodNC) is chairman of the John Locke Foundation and appears on “NC SPIN.” broadcast statewide Fridays at 7:30p and Sundays at 12:30p on UNC-TV.

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