North Carolina has a fiscal Gordian knot to
tackle. Now, that we have a republican
governor and republican dominated legislature, whom we consider adults, unlike the teenagers who ran
up these huge debts, maybe we can confront this budget monster head on. Here is an op-ed by John Hood, the president
of the John Locke Foundation, outlining the steps that need to be taken. By the way, this was published by the Democratic
Party’s mouthpiece the Charlotte Observer.
Newly elected Republican Gov. Pat
McCrory and the newly reelected Republican legislature may have an ambitious
agenda for dramatically cutting taxes or adding new programs. But there is a
fiscal constraint on any such agenda: Past governors and legislatures didn’t
pay for what they spent.
Like almost all states, North
Carolina has a constitutional requirement that its budget be balanced. But the
rule applies only to current expenses in the General Fund operating budget. It
doesn’t constrain the issuance of debt for capital expense. It doesn’t account
for depreciation. And it doesn’t apply to promises made during a fiscal year to
pay employees in later years.
Essentially, the state’s fiscal
rules operate on a cash basis. They don’t preclude the state from accruing
liabilities to be paid from future revenues not yet collected or even projected
at current tax rates.So how large is the pile of unpaid bills McCrory and the legislature have inherited? My lowball estimate is $72 billion. Let’s break it down.
The unfunded liability gaining the
most political attention right now is the $2.5 billion the state owes
Washington for unemployment-insurance payments in excess of UI payroll-tax
collections. But that’s one of our smaller debts. If you add up bonds and other
obligations, the state’s formal debt stood at about $8.5 billion last year,
most of it in the form of special obligations (not authorized by referendum).
So far, we’re at $11 billion. Next,
add $30 billion. That’s the current estimate of how much the health plan for
teachers and state employees is in the hole for promised future spending on
retiree health benefits.
Next, add another $30 billion.
That’s one estimate of the unfunded liability in North Carolina’s pension fund
for teachers and state employees that would be revealed if the system used
more-realistic projections of future investment gains. Next, we need to account
for the future cost of deferred maintenance in government infrastructure. In
transportation alone, the figure starts at $1 billion (remember, this is to
repair existing roads and bridges, not add new capacity).
It would be bad enough if the
preceding $72 billion in unpaid bills was the end of the story. But it isn’t.
Remember that all North Carolina taxpayers are also federal and county
taxpayers, and many reside in municipalities. These other governments have
built IOU piles of their own.
These federal and local debts at
least constrain how much more indebtedness or taxation can be imposed on North
Carolinians by the state. In some cases, they may also impinge directly on
future state budgets – as the cash-strapped federal government pushes
additional unfunded liabilities down and some cash-strapped localities get
their liabilities pulled up into the state budget.
The truth is that some public
liabilities will never be financed. Federal entitlements will be cut. So will
North Carolina’s retiree health benefits. But the state can’t repudiate all
past promises to pay. So the new leaders of the state have two fiscal
responsibilities. The first is to begin to accumulate cash to satisfy existing
debts and unfunded liabilities. The second is to offset any new state programs
or tax cuts with budget cuts (remember, any apparent General Fund surplus
doesn’t account for the unfunded liabilities).
Past politicians didn’t even try to
do these jobs. It’s time for grownups to step up.
Mr. Hood, you can expect any attempt at
fiscal reform by republicans will be greeted with a Charlotte Observer temper tantrum.
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