Once again, state government is forecasting a budget surplus flowing into its general fund for fiscal year 2016-2017 — that’s the period from July 2016 to June 2017 that the state uses for taxing and accounting purposes.
This is just the latest in a string of positive budget news for state lawmakers and marks the third year in a row that we’ve seen budget surpluses. This time the state is anticipating a budget surplus of $552.5 million.
The legislature’s Fiscal Research Division and the Office of State Budget and Management issued a joint report on February 9, 2017, announcing the surplus. The report also finds that the cause of the anticipated revenue surplus is predominantly the result of stronger-than-expected wage growth, increasing both Personal Income tax and Sales tax collections.
Senate leader Phil Berger issued a statement following the report, saying “Even as the majority of other states face revenue shortfalls and budget crunches, Republican state leaders’ tax cuts and disciplined spending have generated a $552 million revenue surplus for North Carolina – making us one of just four states in the country expecting surpluses.”
Encouraged by this positive economic news, Republicans say their policies are working and they plan to introduce further tax reforms in the coming year.
House senior budget-writer Representative Nelson Dollar said in a release, “The report is further evidence that tax relief, regulatory reform and responsible budgeting by the state General Assembly have turned our economy around by encouraging innovation, attracting entrepreneurship and creating a competitive business climate for our rapidly growing population.”
As left-leaning editorials mock conservative legislators for their frugality, there seems to be a consensus in the Republican caucus that the state’s “Rainy Day Fund” needs to be strengthened. The John Locke Foundation’s Dr. Roy Cordato discussed conservative policymakers’ decision to build up the state’s Rainy Day Fund on Carolina Journal Radio in the aftermath of Hurricane Matthew.
In fact, a bill has just been introduced that would make changes in how the state puts money into the Rainy Day Fund and how it decides on spending those funds. Lawmakers say the bill is necessary as a check for a time when less responsible legislators may be in charge of the state’s purse strings.
House Bill 7, sponsored by Representative McGrady, would make these changes:
- The state’s budget would have to include the transfer of 15% of each year’s estimated growth in tax revenues to Savings Reserve, up to the target balance mentioned below. (Current law requires the State Controller to reserve 25% of leftover money at the end of the budget year.)
- Money could be spent out of the Savings Reserve up to a total amount equal to 7.5% of the prior year’s General Fund operating budget if approved by majority votes in the House and Senate and if that money is to be used 1) to cover a shortfall or reduction in revenues, 2) to pay costs imposed by a court or administrative order, or 3) to pay for recovery from a natural or man-made emergency.
- Expenditures for other purposes or for those three purposes in an amount greater than the 7.5% limit would have to be approved by 2/3 votes in the House and Senate.
- The Office of State Budget and Management (part of the Governor’s Office) and the Fiscal Research Division of the General Assembly would estimate the “target balance” needed for the Savings Reserve, based on fiscal analysis of the state’s tax system and possible shortfalls in revenue.1
Brian Balfour of the Civitas Institute points out that implementing spending restraints can be a prudent measure given the history of out-of-control spending by the legislature. As the chart below shows, in the 30-years prior to the Great Recession, Democrats increased the state budget at a rate three times population growth, even when adjusting for inflation.
1. “Raleigh Report — January 31, 2017” North Carolina Council of Churches.