The budget proposal from the North Carolina House of Representatives, released in June, prior to the end of the short session, included appropriations to continue pouring billions of taxpayer dollars into “reserve funds.”
But how exactly do these reserve funds work? Where does the money go, and what are the parameters for how and when it is released? Below is an outline of just that, describing the process and functional factors related to reserve funds to help readers better understand how their tax dollars are being treated.
The General Assembly Enacts…
When the legislature creates and appropriates money to a reserve fund, the Office of the State Controller (OSC) will establish a “reserve fund” account based on what the General Assembly has entitled that particular fund. From there, the Office of State Budget and Management (OSBM), in conjunction with OSC, works out a timeline for the appropriated funds to be released into that reserve. That timeline is based on cash flow and revenue and transfers happening throughout the course of the fiscal year.
The state doesn’t have all the cash up front, especially for larger appropriations. After all, these are tax funds, collected from taxpayers throughout the year, so transfers are scheduled throughout the course of the fiscal year, as well, tracking periods of high revenue influx.
Once the funds are in the “reserve,” they get transferred out based on the needs of the General Assembly or stipulations in the legislation creating the fund.
Most of the budget codes receiving appropriated funds from those reserves vehicles include a receipt capturing the funds being transferred out, as well as the requirement associated with the appropriation.
OSC and OSBM generally prioritize a schedule of transfers that maximizes fiscal security, essentially making sure incoming and outgoing transfers are synchronized.
Newest reserve funds
Approximately $500 million in “reserve funds” have been tapped for fiscal year 2025, set aside in the previous fiscal year. However, because there was no agreement between the House and Senate concerning the “Regional Economic Development Fund” there could be future budget adjustments. Regardless, the funds anticipated to be spent out of the existing reserves total approximately $500 million.
A lot of public debate has centered not on the existence of these reserves, but on their spending. While some are true savings accounts, such as the “Rainy Day Fund,” most are not intended to act as static pools of money. Instead, the reserve funds are designed as financing vehicles where money comes in, and goes out, designed to be spent on the purposes for which each specific reserve was created.
One example of these “reserve funds” is NC Innovation (NCI), a private nonprofit that aims to fund public university research toward commercialization. The 2023 biannual budget appropriated $500 million for this purpose, to be received in two tranches of $250 million. The first tranche was received in January, and the receipt of the second tranche will occur in the second fiscal year.
Transparency
“Diverting money into various economic development and miscellaneous ‘reserves’ harms transparency,” according to the John Locke Foundation’s North Carolina Policy Solutions Manual 2024-25. “Such spending should be itemized in the General Fund rather than sent into a reserve where the expenditures become nearly impossible to track. Also, the diversion of such funds masks the true amount of spending occurring.”
The latest cash watch report from the State Controller’s office, released on Friday, reports the current balances of the various reserve funds. The budget proposal outlines the amount of money that has been “reserved” but not yet appropriated for each reserve fund.
The “Savings Reserve” or “Rainy Day Fund” has a current balance of over $4.75 billion. According to fiscal analysts at OSMB and the General Assembly, that number far exceeds what was determined to be needed to withstand a financial downturn. The House proposed aside another $125 million to the Rainy Day Fund in the budget adjustment for fiscal year 2025.
The Regional Economic Development Reserve has a balance of over $4.65 billion; an additional $550 million was set aside in the House budget proposal.
Economic Development Project Reserve has a balance of well over $735.8 million, and a further $155.1 million was set aside in the budget proposal. The Medicaid Contingency Reserve currently has a balance of well over $726.5 million, and an extra $100 million was set aside in the budget proposal. The State Emergency Response and Disaster Relief Fund has a balance of well over $669.3 million, and an additional $75 million has been set aside in the budget proposal.
The Clean Water and Drinking Reserve, the Housing Reserve, the Transportation Reserve, and the Retiree Supplement Reserve currently have a balance of 0.00 dollars, but $1 billion, $10 million, $100 million, and $79.8 million, respectively, have been set aside in the budget proposal.
The revised General Fund Availability is over $31.8 billion, just over the $31.7 the House proposed in expenditures.
“Both the House and Senate budget proposals included more than $3 billion in discretionary set-asides into these mostly new reserve funds,” Balfour told the Carolina Journal in an email. “Such actions conceal the true amount of spending included in the General Fund budget, making it appear as though budget writers are exercising more fiscal discipline than they really are. These reserves can also take on ‘slush fund’ status or be used as cover for pork spending. For example, the ‘Regional Economic Development Reserve’ smacks of a source for localized spending from state tax dollars that could be doled out to garner the support of certain legislators.”