Where Did the Money Go?

An Examination of North Carolina’s New, Non-Essential Spending During the Boom Years

A total of $1.64 billion of non-essential new spending was introduced by North Carolina budget writers during the economic boom years of FY 2004-05 to FY 2007-08. Like the irresponsible guy who blows his unexpected bonus buying drinks for everyone at the bar, state lawmakers decided to be overly generous with the avalanche of tax revenue being raked in during those prosperous four years.

Rather than aggressively set aside money flowing in to bloated state coffers for a rainy day, Raleigh politicians opted instead to aggressively expand new, unproven programs and to sprinkle tens of millions more on one-time, earmarked local “niceties.”

If You Send It, They Will Spend It
The 2009 legislative session imposed one of the largest tax hikes in state history. The difficulties of the session underscores a crucial lesson from past behavior: the need for budget writers to examine these past non-essential expenditures and determine the wisdom of such spending given how desperately lawmakers could have used that money to help fill this year’s budget deficit in lieu of imposing job-killing tax increases.

Indeed, for fiscal years 2004-05 through 2007-08, North Carolina state government raked in a total of $3.4 billion in surplus revenue. In spite of the substantial revenue windfall, however, North Carolina’s “rainy day” fund stood at only $787 million by 2008, and was nearly drained by the time budget negotiators sat down to find the necessary funds to balance the current year’s spending plan.

Our Findings
In order to track the cumulative total of new spending on non-essential items, the Civitas Institute  conducted a review of the expansion spending contained in the FY 2004-05 through FY 2007-08 state budgets. Many of the spending items may go to causes deemed worthy by most, but certainly belong in the “niceties” category; i.e. items that are nice to direct money to, but not in concert with the core functions of state government.

To reiterate, the totals included in the study reflect only new spending relative to the FY 2004-05 baseline – not total spending on the items. For instance, if spending on, say, More at Four increased from $10 million to $11 million, the new spending would be $1million. If the following year total spending grew to $12 million, that would be another $2 million in new spending (the $12 million compared to the baseline of $10 million). In total for those two years in this example, new spending would be $3 million.

Additionally, new spending tallied in the study is not all-inclusive, but focused on non-essential appropriations. Focus is on creation and expansion of new programs and one-time, earmark spending.

An overview of the findings include:

• A total of $1.64 billion in non-essential new expansionary spending from FY 2004-05 to FY 2007-08.
• Almost a billion of that total ($967 million) went to expanding and maintaining higher levels of appropriations for recurring program expenditures (above and beyond the normal base budget expansion for inflationary and program enrollment increases), or creating and growing new programs.
• Another $677 million went toward one-time, nonrecurring expenditures.
• Some of the items received both recurring spending expansion and one-time nonrecurring additional funds.
• More than 240 line items were earmarked for specific, mostly local, projects and organizations.
• The largest recipient of the new spending documented was public education. Roughly $650 million went to ABC bonuses and additional non-teacher personnel alone.

Table 1 (below) further summarizes some of the major expansionary spending included in the totals.

See the spreadsheets attached at the bottom of this article to view the complete itemized listing of new spending found in this study.  One spreadsheet totals the new spending on expanding and maintaining higher appropriations for recurring items and the other file itemizes nonrecurring (one-time) appropriations.

Opportunity Costs Should Not Be Overlooked
The important point that North Carolina voters and lawmakers should consider going forward is this: every dollar the state government spends has an opportunity cost. Each dollar could alternatively be spent on a different program, returned to taxpayers, or saved for a rainy day.

For instance, from FY 2004-05 to FY 2007-08, the state spent $368 million on ABC teacher bonuses and another $278 million in new expenditures for additional non-teacher personnel in the public education system. If this money had instead been saved, how many teachers’ jobs could have been preserved this year with that $646 million?

Similarly, should state lawmakers have spent $67 million rapidly expanding the new, untested Learn & Earn and More at Four programs – or should they have taken a more measured approach by setting aside some of those funds to protect teacher jobs during the recession?

Furthermore, more than $71 million of new expenditures during this time went to a lengthy list of more than 240 one-time, earmarked local programs. Some of these earmarks went to worthy charities, but in reality these expenditures equate to one-time “bonus” money diverted by state lawmakers to projects and organizations in their home districts. In other words, because state coffers were flush with money, Raleigh politicians couldn’t resist bringing state tax dollars to their hometowns to bolster their own public image.

But in retrospect, the ribbon-cutting ceremonies for these local projects are but a bittersweet memory as that $71 million could have been useful now to, among other things, help avoid cuts to state services for the disabled and elderly.

Choosing Niceties Over Necessities
The new expenditures state lawmakers decided upon during the boom years and documented in this study raise grave concerns about our elected officials’ worthiness as stewards of our tax dollars. Sadly, instead of saving for a rainy day, lawmakers opted for short-sighted appropriations to rapidly expand unproven programs and on non-essential items. In other words, they chose to fund “niceties” during the flush times at the expense of preserving necessities in the current downturn.

The end result was yet another self-induced budget “crisis” and passage of one of the largest tax increases in state history.

We should always keep an eye on the long term and understand the cyclical nature of our economy. Booms are inevitably followed by busts. How we allocate tax dollars during the boom is just as important and should be scrutinized just as closely as how tax dollars are spent during a recession. There is always an opportunity cost to every tax dollar spent. An extra dollar spent during the boom years on nonessentials like museums or welcome centers is one less dollar the state will have to preserve teachers, judges, prisons or social services when the next recession comes.

Perhaps during the next boom period budget makers will have the foresight to seriously consider setting aside more revenue to preserve essential operations during the recession that will surely follow.