John Hood: Good news on state budget

Published 12:00 am Tuesday, November 24, 2020

By John Hood

RALEIGH — Since the beginning of the COVID-19 recession in March, North Carolina policymakers have been watching government revenues and expenditures carefully. How big a hole would the economic downturn poke in the state budget? Would cash-strapped localities come begging for aid? Would lawmakers feel compelled to raise taxes or cut spending drastically to balance the books?

While we have no conclusive answers, the latest report from the Office of the State Controller strengthens the case of the optimists, not the pessimists. North Carolina’s finances are strong. There is no gaping budget hole.

In fact, during the first four months of the 2020-21 fiscal year, the state collected about $9.5 billion in General Fund revenue while incurring $6.6 billion in general fund expenditures. In other words, it ran a substantial cash surplus.

The picture looks even better than that when you consider that North Carolina entered the fiscal year in July with a $1.5 billion unreserved balance in the general fund, plus well over $1 billion more in rainy day reserves and other savings.

To be sure, some of the revenue collected in 2020-21 was actually due the previous year. In the thick of the initial coronavirus wave, the General Assembly postponed the tax filing deadline to July. The fact that General Fund revenue from July to October was 18% higher than last year’s trend is largely attributable to timing, not a fully recovered economy.

Still, a dollar in the treasury is a dollar in the treasury. And even sales tax revenues, which were collected on a regular schedule, still show a solid $220 million increase during the period.

Alas, most of our local governments are not in as great a financial shape as state government is. Households and businesses have been badly battered by the last six months. And the state still has some deferred needs and long-term challenges. So, when the legislature begins its next regular session in January, there will be many demands on state coffers — far more, as usual, than even North Carolina’s substantial cash balances can finance.

I think Gov. Roy Cooper and the newly elected Republican leaders of the General Assembly should articulate firm priorities for 2021 and have the fortitude to stick to them, come what may. Here’s what my list would look like:

• Public health. With the announcement of at least two effective COVID-19 vaccines on the way, we can all breathe a collective sigh of relief. Unfortunately, it will still be many months until we reach a critical mass of vaccinations. In the meantime, we’ll all have to do our part. That means washing our hands, keeping our distance and wearing our masks. For state policymakers, it means ensuring that our public health infrastructure has adequate capacity to get us through the coming year.

• Public safety. Are we all agreed that North Carolina state and local governments are not going to “defund the police”? Good. Now, let’s get serious. We need better recruiting, training, and retention of law enforcement officers to combat the rising crime and disorder in our cities while also applying force judiciously. And we still need better pay and working conditions in the state’s prisons.

• Public employees. Gov. Cooper repeatedly vetoed pay raises for teachers, betting that Democrats could transform the resulting public frustration into legislative gains. It was a bad bet. It’s time for the executive and legislative branches to work out a reasonable way forward, including additional adjustments for public employees in other agencies and departments.

• Economic recovery. For much of the past year, North Carolina has lagged behind most other southern states in job creation and income growth. The state’s sizable revenue collections, combined with reelected GOP majorities in the legislature, have eliminated the risk of a tax increase that would have further retarded our economic recovery. Now lawmakers can focus on more-constructive approaches to the problem.

That North Carolina isn’t facing a fiscal crisis is no accident. It reflects years of prudent budgeting by the General Assembly. Let’s extend that streak into 2021.

John Hood is chairman of the John Locke Foundation.