Legislators agreed this week to use millions of dollars from North Carolina’s “rainy day” reserves. Some of them are also pursuing clearer rules for using those reserves in the future.
New rules aren’t likely to generate many headlines, but they could lead to major long-term benefits for state finances.
Gov. Pat McCrory asked lawmakers to spend $200 million — roughly half of it from the state’s rainy day fund — to deal with costs associated with natural disasters on opposite ends of the state: Hurricane Matthew in the east and wildfires in the west.
It would be hard to find someone who disagrees that these disasters represent the type of “rainy day” the fund was established to address. The House and Senate unanimously approved the disaster relief.
But it might surprise you to learn that North Carolina is one of only five states across the country with no clear definition of “rainy day.”
Yes, lawmakers can use the money to deal with disasters. They can dip into the fund to cover unanticipated declines in tax money.
At the same time, nothing blocks them from using reserves to start new government programs or to expand existing projects. In other words, the rainy day fund’s viability depends on lawmakers’ willingness to keep their hands out of the cookie jar.
In recent years, the Republican-led General Assembly has exercised enough self-control to rebuild reserves. Heading into this week’s special legislative session, the fund contained roughly $1.6 billion.
While lawmakers deserve credit for building the savings account — and ignoring shortsighted pleas to use the money for other purposes — they might merit even more applause in the months ahead. They are considering rules that would guide future use of the rainy day fund.
That’s precisely the goal of the Legislative Research Commission’s Committee on Savings Reserve.
The group has been focusing on several related questions: When should lawmakers add money to the reserves? When should they consider spending reserve funds? What’s the optimal size for a reserve fund?
Two “key characteristics” separate good state government savings reserve policies from bad ones. That’s the assessment from Steve Bailey, senior associate for state fiscal health and economic growth at The Pew Charitable Trusts.
“First of all, the good ones have policies in law that set aside a portion of higher-than-normal tax revenue growth,” Bailey told the savings reserve committee on Nov. 30. “When revenues come in above a normal level, the state has a way of identifying and then saving some of that revenue.”
Second, good laws clearly define when lawmakers can use that revenue. “In other words, they have properly defined what ‘rain’ means for the rainy day fund.”
Once lawmakers have addressed saving and spending questions, then they can determine the savings reserve’s appropriate size. The General Assembly already operates with a goal of setting aside 8 percent of the annual operating budget for savings. The study committee’s leaders believe that percentage should be higher.
Moving forward, those leading the push for new savings rules want to build several safeguards into state law. 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. And nothing in state law would stop lawmakers from setting aside more money if they place a high priority on building state reserves. “You want it to act as a floor as opposed to a ceiling,” said Rep. Nelson Dollar, R-Wake, co-chairman of the study committee, during a Dec. 8 meeting.
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 13 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.
Some fiscal hawks would like to build these safeguards into the state constitution. Others believe that idea can wait. “I’m not as much right this moment pushing for a constitutional amendment until we can get something in place and see that it works,” said Sen. Brent Jackson, R-Sampson, who serves as Dollar’s co-chairman. “Once it works, and we can understand it, we can explain it to the population to let them vote on it.”
Lawmakers will have more time to debate these ideas when they return in 2017 for their regularly scheduled session. These safeguards could help North Carolina prepare for the next Hurricane Matthew, the next large-scale wildfire, or the next recession without worrying about placing state budget finances in long-term jeopardy.
Mitch Kokai is an associate editor of Carolina Journal.