The good news: North Carolina state government is better financially prepared for the coming economic fallout from the coronavirus pandemic than previous economic crises. The most recent General Fund monthly report shows the state’s rainy day fund balance at nearly $1.2 billion, with another $1.5 billion in “non-reverting Department Funds.” The state’s unemployment insurance fund is well stocked with roughly $3.9 billion in surplus funds to provide targeted relief for those laid off during this crisis. The state has already relaxed rules for unemployment benefits.
The bad news: Reviewing the last economic crisis reveals that state government needs to take more measures now to avoid a fiscal panic in the coming months and next fiscal year. As the 2008 financial crisis devastated the economy, North Carolina’s FY 2008-09 state budget faced a $3.2 billion shortfall. Governors Mike Easley and Bev Perdue utilized a combination of budget cuts, hiring freezes and dipped into state reserves (including the lottery fund) to close the gap. North Carolina state government is constitutionally required to balance its budget every year, so unlike the federal government, it can’t borrow money to make ends meet.
The following year’s budget was staring at a $4.6 billion shortfall between projected revenues and expenditures. A combination of further budget cuts, “temporary” tax hikes and federal stimulus funds enabled the state to close that gap.
In short, the $2.7 billion the state has set aside thus far strengthens the state’s position, but more will likely need to be done.
There is no guarantee that the federal government will bailout state governments this time around, and imposing tax increases during a period of recession was a huge mistake that must not be repeated. That leaves aggressive budget cutting and savings measures as the best alternatives to meet the challenges of the coming economic fallout.
State responses also need to balance the financial needs of those impacted who are most in need of a lifeline.
Following are several recommendations for budget and tax policy responses the state should follow in order to address the coronavirus crisis:
No new or temporary taxes. Whatever legislators do, they should NOT enact any so-called temporary taxes. Doing so will punish people already struggling and prolong the downturn and recovery. History has shown that “temporary” taxes prove to be very difficult to eliminate.
Hold off on taxpayer rebate checks. Some legislators are urging the state to supplement the state’s easing of unemployment benefit requirements with a cash payment to all citizens. Approving a measure like the Taxpayer Refund Act would provide a payment of $125 to $250 to most North Carolinians, at a cost of $668 million to the General Fund. The state should instead opt to maintain these funds in reserves to help balance the budget and avoid costly new taxes. Federal legislation is already poised to send checks of up to $3,400 to a family of four. Once the economic fallout subsides, legislators can re-assess the feasibility of state rebate checks.
Eliminate unfilled positions. Eliminate unfilled positions vacant since July 1. The state has approximately 1,700 unfilled positions that have been vacant since the beginning of this fiscal year, with a combined salary of roughly $103 million in total lapsed salary for the entire year, which does not include the cost of benefits.[i] These positions should be permanently eliminated and the unspent salary and benefit funds set aside into the rainy day fund.
Save surplus funds. Set aside 100 percent of any surplus funds for the current fiscal year into reserves. According to the most recent Office of State Controller General Fund monthly report, “The Fiscal Research Division estimates that General Fund revenue is $289.6 million above the revenue target for the fiscal year.” To the extent that any surplus revenue remains by the end of the fiscal year, these funds should be set aside to help fill any budget gaps in the coming fiscal year.
Freeze hiring. State government should not include any additional positions in the coming fiscal year budget, nor hire any additional workers for the remainder of this fiscal year.
Implement budget cuts. Reduce non-health state agency spending by 5 percent for the remainder of the current fiscal year. This measure would largely replicate Executive Order 21 issued by Gov. Bev Perdue in August 2009.
Reduce capital spending. Halt expenditures for capital projects for which state funds have been appropriated but not placed under state contract. Transfer any unused capital project funds to the General Fund. These provisions were included in Purdue’s Executive Order 6 issued in January 2009.
At this point, the size and length of the economic downturn is highly unpredictable. One thing, however, is certain: a significant decline in state revenue is coming. At minimum, it will have a major impact on the remainder of the current fiscal year (which ends June 30) as well as the next fiscal year. As the economic fallout from the coronavirus pandemic and response continues into unchartered territory, it will be nearly impossible to project state revenues for FY 2020-2021.
The best way to confront this uncertainty is to take a very conservative fiscal approach and be prepared for the worst by aggressively reducing spending now and setting aside additional savings reserves to help meet both expected and unexpected needs.
[i] Data obtained in a personal email with Fiscal Research staff on March 19, 2020