Fiscal report card fails to account for North Carolina’s budget restraint

By Julie Havlak

Raleigh, NC – North Carolina received a “C” for poor fiscal management from the national nonprofit Truth in Accounting. But the Tar Heel State is doing much better than the report suggests. 

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North Carolina’s poor grade ignores a decade of fiscal reforms and efforts to stabilize state employee benefits, says Joe Coletti, John Locke Foundation senior fellow. 

The report says North Carolina was in poor fiscal shape and unready for a crisis. North Carolina entered the coronavirus pandemic with a $4.6-billion shortfall. That leaves each taxpayer responsible for an extra $1,400 in future taxes. 

“North Carolina did not go into the coronavirus pandemic in good fiscal shape, and it will probably come out of the crisis even worse,” the report warns.

But the report overlooks critical resources. Going into the pandemic, North Carolina boasted $1.2 billion in the Rainy Day Fund and $2.2 billion unspent from last year’s budget stalemate. The unspent but available money doesn’t factor into the rankings.

Worse, the system punishes North Carolina for reforming the pension system.

State Treasurer Dale Folwell pushed to use realistic calculations on investment returns to protect the state pension plan. He drove the legislature to increase payments today, rather than sticking tomorrow’s taxpayers with a huge bill for state employees’ retirement. North Carolina boasts one of the most stable, well-funded pension plans in the country. 

The pension reforms actually hurt North Carolina’s ranking. The rankings rely on states’ balance sheets, rewarding the states that obscure the true cost of their pension plans.

“Because [the researchers] only look at the balance sheet, they don’t take a balanced picture,” Coletti said. “North Carolina has practiced fiscal policy better than just about any other state in the last 10 years.”

The nation faces a looming crisis with state governments. The states racked up $1.4 trillion in debt, and the pandemic will add almost $400 billion to that burden, according to the report. 

“Many states were woefully unprepared for any kind of crisis, much less what we have,” Sheila Weinberg, Truth in Accounting chief executive officer, told Carolina Journal. “We call it political math. They use political math to balance their budget while going into debt at the same time. It’s a mathematical game that they play.”

North Carolina’s State Health Plan fits that description. Its instability rivals the stability of the pension plan. The State Health Plan is due to go broke in four years. Folwell’s attempts to reform the plan with transparent pricing collapsed under pressure from the hospital lobby. 

The unfunded health benefits helped drive North Carolina’s ranking down to 15th place. 

But that low ranking deserves some skepticism.

Oil-rich states dependent on natural resources swept the top spots. But those states build strong reserves to combat volatile prices. Today’s reserves and the states’ lack of diverse sources of tax revenue don’t indicate financial stability. 

Topping the rankings: Alaska. It’s in such bad financial shape that it considered axing university funding in 2019. In second and third place, respectively, North Dakota and Wyoming are still grappling with the financial fallout of the shale oil bust and a downturn in fossil fuel prices. 

“That’s not good management. We shouldn’t hold them up as an example,” Coletti said. “They need to have cash set aside. That’s just the nature of how they operate. They can’t rely on a steady stream of income from year to year. It’s helpful, but it’s not the whole story.”