The Pew Center on the States has released a study examining the record of states and how they project revenue availability for the coming budget year. It is these estimates that inform budget writers as to how much they will be allowed to spend when crafting the state budget.
Unsurprisingly, the study shows that revenue projections were woefully low at the onset of the current recession.
The first full fiscal year of the Great Recession—2009—ended with the largest overestimates in revenue forecasting of any year studied. During the 23-year study period, the median estimating error (whether high or low) was 3.5 percent. But in 2009, the median error was a 10.2 percent overestimate, which translated to a $49 billion shortfall that states had to cover.
And the report further notes that North Carolina was among the worst in terms of revenue projections:
Arizona, New Hampshire, Oregon and North Carolina were among the states that had the most difficult time estimating revenues that year, with error rates greater than 25 percent.
The result of such substantial mis-estimates is a massive budget shortfall. As you may recall, for FY 2008-09, North Carolina lawmakers created a state budget totalling $21.35 billion – based on the revenue availability estimates. Actual revenue for the fiscal year came in at $19.65 billion. This forced Gov. Perdue to scramble to hold back monies from state agencies to fill a gap nearing $2 billion.
But state budget writers don’t have to rely on such unreliable revenue projections. A crucial aspect of HB 188 is that it would put an end to the crystal ball method of budgeting, and instead create a limit to the revenue availability that can be used in any budget year. The revenue availability would be limited to actual revenue collections realized in the most recent calendar year. In other words, for the FY 2008-09 budget that was written in June 2008, the revenue available would have been capped at actual tax collections for calender year 2007.
According to the state Office of State Controller monthly financial reports from that year, total revenue collections for 2007 came to $19.8 billion. That means budget writers would have been limited to crafting a budget no greater than $19.8 billion, rather than the $21.35 billion budget they actually passed. So instead of a near $2 billion budget hole, under this scenario the budget gap fo fY 2008-09 would have been only about $150 million.
And that is only if the expenditure limit is that high. Using actual tax revenue from the most recent calendar year is a highly sensible and more practical measure than using unreliable revenue projections.