RALEIGH – Today’s news headlines in North Carolina are full of attempts by spending lobbies to scare voters and taxpayers away from budget reductions and towards tax increases as a means of closing the state’s projected fiscal deficit. This kind of gamesmanship is familiar and predictable, and Gov. Beverly Perdue has been around the legislature long enough not to be fooled by it.
But among the many important rhetorical responses to this tactic should be to change the subject.
I don’t mean that fiscal conservatives should stop talking about budgetary restraint. What I mean is that fiscal conservatives should expose the myopia of those public officials, lobbyists, policy wonks, and political activists who seem to think North Carolina is simply facing a short-term problem.
The General Assembly doesn’t just have to treat a $2 billion-plus acute fiscal condition, caused by an international recession. North Carolina government is also facing a chronic fiscal disease, a structural imbalance between spending promises and projected revenues that far exceeds $30 billion. It’s manifesting itself now. It’ll only get worse in the coming years, and will not be substantially reduced by economic recovery.
The main component of this long-term fiscal imbalance is health insurance for teachers and government employees. As Gary Robertson of the Associated Press recently reported, the hole in the state employee health plan is larger than anyone predicted just a few weeks ago.
Back then, the news was bad enough – the General Assembly needed to pump $300 million into the health plan, starting in the next couple of months, to close an immediate gap between state contributions and expected utilization of medical services. Now, however, it appears that some combination of increased taxpayer and employee contributions totaling $1.2 billion will be needed over the next two fiscal years to finance the current level of benefit.
Not scary enough? Try this on for size.
In the ensuing years, as tens of thousands of current teachers and other government employees start to retire, they’ll be filing claims against the state’s promise of supplemental health insurance for retirees. Unfortunately, past governors and state legislatures haven’t deemed it necessary to accumulate financial assets with which to finance this obligation, referred to in the accounting literature as an Other Post Employment Benefit (OPEB).
North Carolina is hardly alone in underfunding its OPEB liability. But according to a June 2008 study by the Center for State & Local Government Excellence, our state had one of the biggest unfunded liabilities in the United States: $24 billion, or nearly twice our annual payroll.
The author of the report, N.C. State University economist Robert Clark, used several different measures to compare the states’ liabilities. I found two of them particularly revealing. The average annual contribution (AAC) into the state reserves needed to fund North Carolina’s retiree-health obligation was nearly one-fifth of the current annual payroll. More to the point, the AAC worked out to about 6.1 percent of the annual state budget.
Of the 30 states Clark studied, only four had higher AACs as a share of state budgets: New Jersey (11.9 percent), Louisiana (9.7), Hawaii (8.4), and Connecticut (7.8). Thirteen states had rates below 2 percent, including Florida (0.3 percent) and Virginia (0.37).
In other words, using Clark’s estimate, if the General Assembly began taking the state’s unfunded liability seriously this year, that would widen the expected FY 2009-10 deficit from 14 percent to 20 percent.
Yes, it gets even worse.
The estimate of North Carolina’s liability used in the Clark report was from the end of 2005. The most-recent hard estimate, from December 2007, puts the state liability at $29 billion. By now, it’s almost certainly above $30 billion – so you can bump that “20 percent true budget deficit” up another point or two.
These are the kinds of numbers that focus the mind. Nor do they convey the entirety of the problem. We have tens of billions of dollars of long-term needs in basic state infrastructure such as roads, bridges, and prisons. Recent market performance may have implications for the future funding of the state pension system. And localities seem to be counting on increased state funding of local projects such as water systems and school buildings.
North Carolina political leaders have created more programs, hired more employees, and assumed more fiscal obligations than can be financed at current tax rates. Even economically ruinous tax increases wouldn’t come close to paying the bill.
The size and scope of our government must be brought into line with reality. Now. I can only hope that our elected officials are beginning to get the picture.
Hood is president of the John Locke Foundation