Deficit Swells: Current Estimate $2 Billion

Gov. Beverly Perdue’s office issued a press release Thursday, Jan. 15 to announce current state financial estimates, which show a projected $2 billion deficit for the FY2008-09 budget. The new estimate increases projected shortfalls by nearly a billion dollars, but it doesn’t include an anticipated $300 million in cash needed to keep the State Health Plan afloat. The Governor also ordered state agencies to withhold an additional 2 percent of funds following the wake of Gov. Easley’s already established 5 percent safeguard. The Perdue administration is struggling to comply with a North Carolina constitutional requirement of having a balanced budget in place by fiscal year end as the recession intensifies across the state and nation.

“The measures that state government is taking are necessary in order to fulfill their legislative requirement of a balanced budget. But make no mistake, the current situation is of their own doing,” said Brian Balfour, budget and tax analyst at the Civitas Institute. “State budget makers refuse to learn from past mistakes, as they spend revenue as fast as it comes in during times of plenty, with no acknowledgement that spending levels will be unsustainable when the next economic downturn hits.”

Perdue in a statement seemed to place blame for the state’s budget crisis on international events noting, “The global recession has forced our state to make tough financial decisions…” and made a bold claim that, “North Carolina has earned a reputation for managing our money wisely.”

“We all know that over the last eight years, Raleigh has not qualified as a wise steward of the people’s money. Spending has increased at an amazing 47 percent and state debt has doubled,” Balfour said.

A few items for Raleigh budget writers to consider as they attempt to understand how the state accumulated this massive deficit:

• Aggressive spending increases during healthy economic years. The four years prior to FY2008-09 saw an average annual spending increase of 8.6 percent- with a total of nearly $6 billion in new spending.
• Failure to save for a rainy day. The history of the U.S. – and North Carolina’s – economy over the last 30 plus years has been of a cyclical nature, with boom and busts occurring at regular intervals. In spite of this predictability, North Carolina budget makers refused to aggressively set aside money into the state’s rainy day fund.
  • Despite more than $3.1 billion in combined revenue surpluses for FY2005-06, FY2006-07 and FY2007-08, the state’s rainy day fund sits at only about $787 million.
• Explosion of debt spending. In the five budget years preceding the current budget, the state authorized roughly $2.4 billion in new debt, none of it approved by voters. As a result, debt service payments are now two-and-a-half times more than they were just seven years ago.

“Hopefully this time around, our state leaders will learn a valuable lesson,” Balfour said. “The good times don’t last forever, and it would be wise to save more when tax revenues are flowing, rather than spending it as soon as it comes in. It is because of the short-sighted spending habits of our lawmakers that we find ourselves in another self-induced budget crisis.”