This article was originally published in the Lincoln Tribune on March 30, 2009
Gov. Perdue’s first biennial budget proposal sets the stage for unbalanced budgets over the next three years. The governor’s plan relies on overly optimistic revenue projections and fails to account for the end of federal stimulus dollars, raising the almost certain specter of future tax increases.
To help fill the current year’s budget hole, the Governor has emptied the state’s rainy day fund. With that in mind, one would think that revenue projections would be rather cautious to avoid another deficit this coming year. Not so.
In spite of an unemployment rate in North Carolina hovering around double digits, the governor’s budget office projects increases in state income, sales and corporate tax revenue for the coming fiscal year. For example, sales tax collections are estimated to rise at a healthy five percent pace.
Hoping for such a rapid rebound in revenue given the likely high unemployment rate throughout the coming fiscal year seems overly optimistic. Consider that as we entered the current fiscal year last summer, North Carolina’s unemployment rate stood at 6.3 percent, and remained under eight percent until December. Conversely, as of January, unemployment had climbed to 9.7 percent. More than likely it will remain in double-digits as we enter the new fiscal year this summer.
Moreover, jobs are typically a lagging indicator of economic recovery, meaning that even if the economy begins a healthy rebound later this year, unemployment will likely remain high through most of the coming fiscal year (ending June of 2010).
Note also that the state budget office doesn’t have a very good track record of late. For instance, this time last year the governor’s budget proposal predicted a 5.5 percent unemployment rate in North Carolina for 2009. Also predicted was a “modest” 3.5 percent growth in General Fund revenue for the current fiscal year – in stark contrast to the actual 6.3 percent decline being realized. Such misjudgments are a large reason why state government is facing such massive deficits.
With no reserves available to balance next year’s budget, what will budget makers do when the projected revenue increases fail to materialize?
Furthermore, the Governor’s budget proposal relies on $2.9 billion in federal funds over the next two years to help balance the state’s budget. Looking further ahead, observers are left to question just how Perdue envisions the state balancing its budget once the federal stimulus dollars dry up.
According to the governor’s proposal, appropriations in fiscal year 2010-11 will exceed state revenue by more than a billion dollars, with the hole to be plugged by federal stimulus money. This one-time provision, however, produces a structural deficit of at least a billion dollars as we enter fiscal year 2011-12.
Some may argue that the budget gap will be made up by an aggressive spike in state revenue, as the economy will be humming along by then. But closer inspection reveals that assessment to be overly optimistic as well. To keep pace with a modest increase in the continuation budget (continuing current expenditures with annual adjustments for inflationary increases, school enrollment growth, etc.) of three percent, state revenue would need to increase at a pace of 8.2 percent – a clip rarely achieved in recent North Carolina history. And bear in mind, the 8.2 percent increase does not even account for teacher and state employee pay raises or increases in other state programs.
Federal stimulus funds may provide a short-term bailout for the state budget. The reality is, however, once the federal aid is gone, North Carolina will not be able to sustain spending levels without significant tax increases.
With that in mind, North Carolina politicians should not be so quick to mock governors from other states seeking to turn down portions of the federal stimulus money.
Don’t be too impressed with the governor’s claim that she has crafted a “balanced” budget proposal. A little smoke and mirrors – in the form of overly optimistic revenue projections – is in part how she made the numbers work. If the final budget bill relies on such rosy revenue estimates, expect the next three years to be plagued by continued budget deficits and panic-induced special sessions to discuss tax increases.