New Revenue Projections: Budget Outlook Continues to Worsen

The release of updated revenue estimates provided by the General Assembly’s Fiscal Research Division brought more bad news to state budget makers: projected revenue estimates for the coming fiscal year are being revised down by another $1.3 billion.

Compared to the recommended continuation budget, the state is now facing a projected $4.6 billion deficit for FY 2009-10. The new projection estimates revenue for the coming fiscal year to be $17.5 billion, down from the $18.8 billion revenue estimate used by the Governor and Senate when crafting their budget proposals.

Making matters worse, new projections peg the current year budget gap at $3.2 billion – putting actual revenue collections approximately 15 percent below the original forecasts.

State Employee Cuts May Be Unavoidable
State employee payroll obligations are the largest single state expenditure.
Such a massive budget deficit may make personnel cuts unavoidable. Consider the following:

• According to the annual Fiscal Research salary survey, budgeted base salary and benefits of state employees totaled more than $13 billion (as of Dec. 2008) – not including any state appropriations for the State Health Plan.
  • A revenue projection of $17.5 billion leaves a difference of only $4.5 billion with which to finance non-payroll items (not counting federal stimulus funds and the use of various state trust funds).
• By comparison, the salary survey indicated budgeted base salary and benefits in Dec. 2007 as $12.5 billion. The FY 2007-08 state budget totaled $20.7 billion, leaving a difference of $8.2 billion with which to fund non-payroll items.

How Did We Get Here?
Too many short-sighted, irresponsible spending sprees by state lawmakers have created another self-imposed, and entirely avoidable, “budget crisis.”

• In the last five years, state budget increases have outpaced inflation plus population growth by $9 billion.
• From 2004 to 2008, spending increased at an annual average rate of 8.6 percent- with a total of nearly $6 billion in new spending.
• Even after adjusting for inflation, per person budgeted spending in North Carolina is:
  • Up 25.7 percent over 15 years
  • Up 94 percent over 25 years

Explosion in State Debt Making Matters Worse

• North Carolina has authorized more than $7 billion in new debt since 2000.
• Per capita state debt has more than doubled in the last seven years.
• Debt service payments are now two-and-a-half times more than they were just seven years ago.

The Well is Almost Dry
In spite of state coffers being flush with tax revenue during the economic boom period, lawmakers have set aside very little for a rainy day. Moreover, Governor Perdue has already tapped into the state’s savings as well as federal stimulus funds designated for next year.

• Despite more than $3.1 billion in combined revenue surpluses for FY2006 through FY08, the state’s rainy day fund currently sits at only $787 million.
  • Gov. Perdue has already pledged millions from the rainy day fund to help fill the current year budget gap.
• The OSBM plans to divert $200 million of the federal stimulus funds previously designated for FY 2009-10 to help balance the current year budget.

The Public Demands Spending Restraint, Lower Taxes
Voters and taxpayers throughout North Carolina recognize that rapid growth in state spending is to blame for the current budget deficit. They strongly believe they are taxed enough already. Likewise, voters correctly understand that tax cuts are key to economic recovery while more government spending spells stagnation.

• 68 percent of voters believe the General Assembly should “cut existing programs” in order to balance the current budget, compared to only 16 percent that replied “raise taxes.”
• 73 percent of voters believe it is more important to cut taxes to help stimulate the economy, compared to just 14 percent who believe it is more important to increase state spending.

Time for a More Responsible Approach to Budgeting
The growing budget hole underscores the need for state government to develop a more responsible approach to budgeting in North Carolina. Several bills have already been introduced:

• Constitutional restraints on spending growth (SB 87, HB 159, HB 183) would help state government avoid the roller-coaster spending fluctuations that have dominated North Carolina’s state budget for the last 30 years.
• Restricting annual budgeted appropriations to the actual revenue collections of the most recent calendar year (SB 1052) is a better alternative to the current projection methods that are so frequently widely inaccurate.