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Consensus revenue forecast

General Fund revenue from state taxes should reach $27.6 billion by the end of June, which would be 16% higher than in FY2019-20, according to the consensus revenue forecast from the governor’s Office of State Budget and Management (OSBM) and the General Assembly’s Fiscal Research Division. That could give budget writers an unreserved fund balance of $5 billion on top of revenue projections of $27.3 billion in FY2021-22 and $28.5 billion in FY2022-23.

I have urged a cautious approach on both spending and taxes given economic uncertainty. Forecasters state, “A major assumption of the forecast is that the coronavirus will no longer be disrupting the economy” by July 2022. That still leaves plenty of room for disruption until then in retail, restaurants, education, and other sectors of the economy. Taking the news for what it is, here are key points for budget writers to consider.

One-Time Money: The massive fund balance is in some measure a result of the budget stalemate between Gov. Cooper and the General Assembly in 2019 and up to March 2020 when we first began “two weeks to control the spread.” State budgeted appropriations have grown less than 3% since FY2018-19, and the federal largesse has further reduced the need to spend money. This is the textbook definition of one-time money.

  1. Commit $2 billion to the Savings Reserve, the state’s rainy day fund, bringing the total to $3.2 billion for future storms and economic troubles.
  2. Commit $1.25 billion to the State Capital and Infrastructure Fund (SCIF) in keeping with statutory requirement to transfer 25% of unreserved fund balance to this purpose.
  3. Commit $1 billion to the unfunded liability for retiree pensions and health benefits.
  4. Return the remaining funds in a one-time tax refund of up to $120 per tax filer.

Recurring Revenue: Budget writers can appropriate up to $26.1 billion in FY2021-22 and $26.8 billion in FY2022-23 and not exceed the inflation-adjusted per capita amount from FY2018-19.  (This recommendation is based on the average rate of population growth and inflation, measured by the implicit GDP deflator, over the three years prior to the start of the fiscal year. For FY2021-22, this is 2018-2020. For FY2022-23, this is 2019-2021.) Prudence could lead legislators to apply a more stringent test of allowable appropriations based simply on the working budget for this year. Using the current year as a baseline, would cap appropriations at $25.3 billion for FY2021-22.

Legislators could increase appropriations $800 million to $1.5 billion the first year to help students overcome learning deficits from the past year of online education, strengthen public health infrastructure, and meet other demands. If legislators appropriate the full $26.1 billion in FY2021-22 and $26.8 billion in FY2022-23 and dedicate 4% of revenue ($1.1 billion) to the State Capital and Infrastructure Fund (SCIF) each fiscal year as required by statute, the unreserved fund balance would be $140 million in FY2021-22 and $540 million in FY2022-23 based on the forecast revenues.

With remaining uncertainty on economic conditions, federal legislation still working its way through Congress and no clear picture of how federal funds have been used by state agencies so far, it is too early to provide any more specific guidance. OSBM warns, “Due to heightened uncertainty regarding the impact of federal stimulus measures on the state’s tax bases, anticipated revenues could be significantly lower or higher, even using the above economic assumptions.”

 

Joseph Coletti / Senior Fellow, Fiscal Studies

Joe Coletti is a senior fellow at the John Locke Foundation focused on fiscal policy issues. He previously headed the North Carolina Government Efficiency and Reform initiativ...