North Carolina’s Fiscal Chickens are Coming Home to Roost

North Carolina's Fiscal Tsunami

As reported by Civitas

Brian Balfour May 10, 2010

North Carolina's dire fiscal condition will once again take center stage this spring as state lawmakers return to Raleigh to craft a budget for the coming 2010-11 fiscal year. North Carolina's financial woes, however, run much deeper than the daunting shortfall in next year's budget.

While lawmakers will blame the economy, make no mistake: the financial disaster that is North Carolina state government is completely of its own making. Long-term fiscal irresponsibility highlighted by out-of-control spending growth, stunning increases in debt spending and unsustainable financial commitments is to blame.

But just how bleak is the state's financial picture? Outlined below is a summary of North Carolina state government's economic crisis, a "fiscal tsunami" that threatens to overwhelm the state's already-overextended budget in the near and long term.

Dangerous Deficits: $4.3 Billion Structural Shortfall over Next 26 Months (as of May 1, 2010)
State budget writers are facing a real budgetary deficit of roughly $4 billion over the next 26 months. This number represents actual revenue shortfalls (compared to projections), expenses exceeding projections, and revenue streams that will disappear.

• The current state budget is facing a deficit likely to reach almost $650 million.
  
  • General Fund revenue for the current fiscal year (2009-10) is projected to be roughly $391 million below budgeted revenue by the end of the year.¹
    
  • Medicaid expenditures are projected to exceed budgeted appropriations by $250 million or more this year.²
    
• Fiscal year 2010-11 will have $788 million less in revenue than was included in last year's biennium budget.
  
  • Revenue projections made last summer have since been revised down by $703 million.³
    
  • There will also be an estimated $85 million reduction in state revenue due to the one-year estate tax lapse.
    
• State budget finances will drop off a cliff in fiscal year 2011-12: $2.9 billion in lost revenues will need to be addressed.
  
  • $1.62 billion of 2010-11 Federal Stimulus Funds will dry up at the end of the fiscal year.
    
    • This includes $1.04 billion listed as "cuts" and already embedded in the 2010-11 budget courtesy of last year's biennial budget bill, along with another $578 million in additional anticipated federal funds for 2010-11; mostly extra funding for Medicaid.⁴
      
  • The temporary sales, corporate income and personal income tax increases approved in last year's budget will end; leaving a revenue hole of $1.3 billion compared to 2010-11.⁵
    
  • In a nationwide survey, economists project the economy to continue to be very sluggish well into 2011⁶, suggesting slow revenue growth (if any) for fiscal year 2011-2012. More than likely, any revenue growth will fall well short of the lost stimulus and temporary tax revenues.
    
  • The state's rainy day fund is already down to only $150 million, and will not be sufficient to address the state's looming financial problems next year.
    

State Debt: $9.4 Billion and Growing Fast

• North Carolina's true debt burden stands at $9.4 billion. That's an average debt burden of more than $4,000 for every family of four.⁷
  
  • Additionally, the state has authorized –but not yet issued – another $2.2 billion in debt (does not include interest payments).
    
• Per Capita State Debt is up 140% over fiscal year 2000⁸ level.
  
• Debt service in the annual General Fund has more than tripled since fiscal year 2000.⁹
  

North Carolina Owes $3.5 Billion to Federal Government - plus another $153 million in interest payments

• North Carolina has borrowed more than $2 billion¹⁰ from the Federal Government in order to cover statewide unemployment benefit payments. State borrowing is expected to grow to $3.5 billion by the end of this year.¹¹ Funds to repay the state's obligation will likely have to come from increased unemployment payroll taxes.
  
• While there is no re-payment plan yet in place for the principle, the state is expected to begin making interest payments in 2011 on the loan that could total $153 million.¹²
  

Escheats Fund Dwindling: $535 Million Liability by 2012

• The state's Escheats Fund consists of the unclaimed property of citizens, typically abandoned bank accounts, insurance policy proceeds or contents of safe deposit boxes.
  
• The state has traditionally used the interest earned on these funds to finance grants, loans and scholarships to needy college students.
  
• The legislative mandate of using only the interest earned was first violated in the 2008-09 budget when Gov. Easley approved $60 million from the Escheat Fund be directed to financing his new EARN college scholarship program.
  
• This past year, the state continued dipping into the actual fund, dropping the value of the fund from $535 million to $332 million, and is on pace to exhaust the rest of the funds by 2012.¹³
  
  • This would leave the state a liability of $535 million, as the money in that fund is the property of citizens who may claim it at any time.
    

$28 Billion Unfunded Liability for State Retiree Health Benefits

• North Carolina state employees – mostly teachers – are entitled to fully-paid health insurance coverage under the State Health Plan after they retire.
  
• The state pays for these benefits on a pay-as-you-go basis. There is virtually no money set aside to help pay for future obligations, making these future obligations "unfunded."
  
• The cost of providing these benefits for state retirees is projected to explode over the next several years.
  
• Unfunded retiree benefits calculated as of Dec. 31, 2008 were $28.3 billion – up from $23.9 billion in Dec. 31, 2005.¹⁴
  
  • To fully pre-fund liabilities, the state should be contributing $2.7 billion annually (calculated for FY 2009) – with most of that amount set aside into a trust fund to save for future liabilities.
    
  • If state lawmakers continue to ignore this liability, state retiree benefits may be in jeopardy as the costs to insure the growing number of eligible retirees will skyrocket and consume a larger share of the state budget.
    

Pension Fund to Require $650 Million in Additional Funds Over the Next Two Years

• North Carolina's Teachers and State Employees Retirement System (TSERS) is no longer fully funded.
  
• The current state budget is scheduled to appropriate $503 million to TSERS in fiscal year 2010-11
  
• To fully-fund the pension system, the state must appropriate $684 million in 2010-11, and $972 million the following year.
  
  • Doing so would require increasing appropriations by $650 million over the next two years. (The Governor did recommend a $20 million increase to the pension fund in her budget recommendations for 2010-11.)
    
• Current projections also show that budgetary outlays will need to exceed $1.1 billion by fiscal year 2013 to fully fund the pension system – a level more than three times the current fiscal year (2010) appropriation of $364 million.¹⁵
  

State Health Plan: Costs to Rise by $2 Billion in Next Four Years
North Carolina's State Health Plan – which covers state employees and retirees - faces many financial challenges in the next several years.

• Rising premiums are estimated to cost taxpayers an additional $1.8 to $1.9 billion from FY 2011 to FY 2015¹⁶ above current costs.
  
  • For fiscal year 2009, total expenses for the Plan came to $2.6 billion.
    

Federal Healthcare "Reform" to Cost Millions
Federal healthcare reform legislation recently signed by President Obama will burden North Carolina's state budget with hundreds of millions in additional expenses.

• The legislation expanded the eligibility threshold for Medicaid enrollment, a program partially funded by state governments.
  
  • Early estimates from the North Carolina Medical Society suggest that, beginning in 2017, North Carolina's cost to finance the newly-eligible Medicaid population will come to "at least" $245 million, and grow to $490 million by 2020.¹⁷
    
• The federal legislation will also impact the State Health Plan.
  
  • Many details of the federal healthcare reform bill are still uncertain, but State Health Plan Executive Director Jack Walker presented some of the federal bill's projected impact on North Carolina's State Health Plan.
    
    • Programming and administrative costs are projected to rise, by a currently "uncertain" amount.
      
    • The mandate requiring coverage be offered to dependents up to age 26 would add $11 million to $27 million per year in potential claims to the plan.
      
    • A tax on plan enrollment is slated to begin being assessed on July 1, 2012. The tax is scheduled to be $1 per member for fiscal year 2012-13 and rise to $2 per member annually for the following six years until the tax sunsets in 2019. The State Health Plan currently has 661,000 members, meaning this tax will cost the state several million dollars over a seven year span.