Lost beneath headlines highlighting the rancorous repeal of House Bill 2, N.C. lawmakers took another vote on the same day that could produce major long-term positive benefits for state government finances.
With no fanfare, the N.C. House voted 111-2 on Thursday to accept the Senate’s version of House Bill 7. It establishes new rules regarding North Carolina’s savings reserve. The Senate had approved the measure, 49-0.
This means members of both major parties in both legislative chambers agree that North Carolina should establish significant restraints on spending.
The timing is commendable. Recent legislative history explains why.
Since Republicans took control of the General Assembly after the 2010 elections, they have focused special attention on building the reserve, also known as the “rainy-day fund.”
That focus proved fruitful when lawmakers had resources available to use in December. The savings reserve covered roughly half of the first round of disaster relief related to Hurricane Matthew and western wildfires.
Even with a change in administration from Republican Pat McCrory to Democratic Gov. Roy Cooper in January, an emphasis on building the savings reserve remained. Cooper’s budget plan would add another $300 million to the reserve. He included that provision even as he called on lawmakers to ramp up spending in other areas.
Lawmakers have exercised more frugality in recent years. The new governor sees the benefits of boosting reserves. So one might be forgiven for concluding that there is no compelling need for House Bill 7.
But now is exactly the right time to make the change. Lawmakers face no significant pressure to sacrifice long-term fiscal health for short-term political benefits. Establish the restraints now, and they will help North Carolina weather the next fiscal storm. (Yes, the pun is intended.)
The legislation builds several safeguards into the rainy-day reserve. First, the governor and legislative budget writers must consider the reserve any time state government expects to benefit from year-over-year tax revenue growth. At least 15 percent of that growth must go into the reserve.
Lawmakers would be free to set aside more. They also would face no requirement to build the reserve if an economic downturn leads to a decline in year-over-year revenue growth. But the 15 percent “default setting” would ensure that policymakers avoid the temptation to spend all of the money flowing into the state treasury during good times.
As H.B. 7 sets rules for adding to the reserve, it also limits the uses for which lawmakers can tap the fund. North Carolina had been one of the few states across the nation with no limits on spending from savings reserves. Taxpayers have been forced to rely on legislators’ fiscal discipline.
Now that discipline has an outside enforcement mechanism. Under the new law, a simple majority of lawmakers in both chambers would be able to extract in a single year as much as 7.5 percent of the prior year’s General Fund budget (roughly equivalent to $1.6 billion now) to address one of four pressing needs.
The money could cover a decline in General Fund revenue from one year to the next. It could cover a gap between General Fund spending and revenue in a given year. It could pay costs linked to a court or administrative order. Or it could pay for disaster or emergency relief, such as the literal “rainy day” created by a hurricane.
If lawmakers want to spend more than the 7.5 percent annual limit, or if they want to spend money for issues other than those listed in H.B. 7, they would need to secure votes from two-thirds of the members of both the House and Senate. That’s an even larger supermajority requirement than the one tied to gubernatorial vetoes.
Fiscal hawks are likely to ask: How do we ensure the savings reserve doesn’t grow too large? What about giving some of that money back to the taxpayers?
H.B. 7 covers that issue, albeit in a somewhat complicated way. The governor’s Office of State Budget and Management and the legislature’s Fiscal Research Division will huddle together and produce an annual evaluation “of the adequacy of the Savings Reserve.” It will be based on the volatility of the state’s tax structure.
The goal will be to stockpile a reserve that would “cover two years of need for nine out of 10 scenarios involving decline in General Fund revenue” from one budget year to the next. Advocates want to ensure North Carolina has the funds to cover a worst-case fiscal scenario.
Legislators developed that language based on a model employed in Minnesota. Supporters suggest that the formula would likely lead to a savings reserve totaling roughly 13 percent of the General Fund budget. That percentage could change from year to year.
Once North Carolina reaches its goal, no more money would be added to the savings reserve. Not even the 15 percent of year-over-year revenue growth. Lawmakers would be free to spend the additional money or return it to taxpayers through tax cuts.
It’s not surprising that this complex mix of numbers failed to generate the same buzz as the political fight over H.B. 2. But it’s good to know that lawmakers set aside time on their calendar to address this issue.
Taxpayers should reap the rewards in the years ahead.
Mitch Kokai is senior political analyst for the John Locke Foundation.