Opinion: Daily Journal

A Gap in Budget Reporting

RALEIGH – Does North Carolina have one of the biggest state budget deficits in the country? It depends on whom you ask, when you ask, and how you word the question.

According to a state budget update published December 7 by the National Conference of State Legislatures, North Carolina had the third-highest projected deficit in the country for the 2011-12 fiscal year, at 20 percent of the General Fund. Projected deficits in Nevada (32 percent) and New Jersey (26 percent) ranked higher. (The budget gap in Illinois would surely have ranked higher had it been reported to NCSL in time to make the December report.)

But if you look at a different source – a December 16 survey by the left-wing Center on Budget and Policy Priorities – North Carolina’s fiscal challenge for 2011-12 doesn’t look quite as extreme by national standards. The Center’s study provided estimates for 40 states expecting budget deficits next year (the NCSL count was 35 states). The Center also pegged North Carolina’s deficit as 20 percent of the General Fund, but reported higher gaps in 10 other states. More importantly, the total gap for all states came in at 19 percent, so North Carolina was close to the average by that measure.

Does it really matter how North Carolina ranks in fiscal distress? A $3.7 billion budget gap is a $3.7 billion budget gap, regardless of what’s going on in New Jersey or California. But putting the problem in perspective is a valuable exercise.

The truth is that with very few exceptions (primarily states that derive a significant percentage of their government revenues from taxes and fees on commodity exports) state governments are under tremendous fiscal pressure from coast to coast. State politicians respond in similar ways to similar circumstances and incentives. North Carolina lawmakers let state spending increase too much during our boom years – but so did lawmakers in most other states. North Carolina took on too many new spending obligations and unfunded liabilities – but so did their counterparts, and to an even greater extent in places such as Trenton, Springfield, and Sacramento.

My own reading of the data is that North Carolina is likely somewhat worse off than the average state but not yet as far gone as the likes of Illinois and New Jersey. We haven’t made the colossal blunder of giving formal collective-bargaining authority to public-employee unions, for example.

Beyond that, I approach all the various national studies of state fiscal problems with a generous amount of skepticism. Such reports tend to get the particulars of individual state budgets wrong. Different state governments use different estimates, timetables, and definitions. External researchers either don’t know about the differences or don’t properly account for them when completing their tables.

North Carolina is a good case in point. Both the NCSL and Center for Budget and Policy Priorities exaggerated North Carolina’s past and future budget deficits. Our FY 2011-12 gap is actually around 17 percent of the budget, not the 20 percent the external researchers reported. I know how they goofed up. They got the denominator of the fraction wrong.

They used a General Fund estimate of $19 billion – technically the GF budget for 2010-11 – but that was a misleading figure. It didn’t include the General Fund spending that, for that year only, was financed with $1.6 billion in federal stimulus funds and $400 million in off-budget gimmicks. Thus the comparable figure for 2010-11 was about $21 billion. For 2011-12, state fiscal officials have an initial General Fund budget projection of $21.9 billion. That’s the $21 billion plus half a billion dollars to shore up the state pension and health care systems and $400 million more to cover projected caseload increases in education, Medicaid, and other programs.

Because state officials currently project only $18.2 billion in General Fund revenue, that yields the gap of $3.7 billion everyone is talking about, or about 17 percent of projected spending.

How does that truly compare to other states? Unless every other state’s figures are checked for similar errors, we can’t know for sure.

Perhaps we shouldn’t want to.

Hood is president of the John Locke Foundation.