News: Quick Takes

Key committee endorses plan for new ‘rainy day fund’ standards

The N.C. General Assembly’s Legislative Research Commission officially endorsed this afternoon a plan to set new standards for the state’s “rainy day” spending reserves.

In less than five minutes, and with no opposition, the LRC endorsed the plan. It proposes a new law to establish rules governing additions to and uses of the reserve.

“As someone who’s worked extensively on tax relief for our hard-working families, I know that predictable revenue is important to us all,” said Rep. David Lewis, R-Harnett, LRC co-chairman. Approval of the plan during this year’s legislative session would make North Carolina “a leader in the nation when it comes to identifying an appropriate ‘rainy day fund’ target,” Lewis suggested.

Other states place an average of about 10 percent of their budgets in reserves, Senate Majority Leader Harry Brown, R-Onslow, said. “That tells you really how much North Carolina has lagged as far as taking care of this reserve in the past history, really, of this state, I would say,” said Brown, who co-chairs LRC with Lewis. “I think this is a worthy goal, and it really puts us on par with what a lot of other states have addressed a long time ago.”

First, the law would require the governor’s budget plan to set aside 15 percent of year-over-year revenue growth for savings. For instance, 3 percent growth from a $20 billion base would total $600 million. Of that growth, $90 million (15 percent) would be set aside immediately for savings.

No savings would be required during years when revenue growth falls short of the prior year’s total. Nothing in state law would stop lawmakers from setting aside more money if they place a high priority on building state reserves.

The second addition to state law would boost the optimal size of the rainy day fund. Adapting a fiscal model originally developed in Minnesota, legislative staffers estimate North Carolina’s goal would jump from 8 percent of annual operating revenue to 12 percent — enough to cover a projected worst-case scenario for an economic downturn.

Third, lawmakers would limit rainy day spending. The fund could cover year-over-year declines in state government revenue, budget deficits, natural disasters, and legal settlements. Fourth, lawmakers would need votes from two-thirds of the House and Senate to spend a chunk of the rainy day fund larger than 7.5 percent of the prior year’s operating budget.

Legislators would place these new rules into law but would not seek a constitutional amendment. “We’d like to see it work and see how it does, and at some point in time we would certainly entertain it being in our constitution,” said Sen. Brent Jackson, R-Sampson. “But currently we believe it’s best to try this program out and see how this process works.”