spotlight

No. 364 – January 7, 2009

Spending Beyond Government Means

Even politicians must face fiscal truths

k e y f a c t s : • Tax revenue in North Carolina is volatile because of

the dependence on income and sales taxes.

• Proper budgeting would account for the rise and fall in tax revenues over
time.

• Instead of proper budgeting, legislators have been on a spend-and-tax

roller coaster for the past twenty years, spending when tax revenues are
high and raising taxes when revenues are low.

• $2,311: The amount of budgeted appropriations per person for the current fiscal year
ending June 30, 2009.

• 41.3 percent: The amount by which inflation-adjusted spending per person climbed
between FY 1989 and FY 2009.

• $3.0 billion: The amount state government could save if spending per person were

for Truth
brought back to 1990s levels, adjusted for inflation.

200 W. Morgan, #200
Raleigh, NC 27601
phone: 919-828-3876
fax: 919-821-5117
www.johnlocke.org
The John Locke Foundation is a
501(c)(3) nonprofit, nonpartisan research
institute dedicated to improving public
policy debate in North Carolina. Viewpoints
expressed by authors do not necessarily
reflect those of the staff or board of
the Locke Foundation.
s tate government in North Carolina obtains most of its money from two
volatile taxes. First is the progressive income tax, which provided 56
percent of state government revenue in 2007. It grows faster than the
economy in expansions as people earn more and move into higher tax brackets,
but shrinks faster in contractions as people earn less and move into lower tax
brackets. Second is the sales tax, which provides another 27 percent of revenue.
People make more and larger taxable purchases as the economy grows and
their outlook brightens, but they cut back when the economy slows and their
prospects dim. These two taxes, together with the corporate income tax, make
up roughly 90 percent of state General Fund revenue each year.1
Wise budget writers would adjust to these cycles by spending less than
is available in fat years and setting aside a portion to maintain core services
in lean years. Once an adequate amount was set aside, the government could
even return the rest to taxpayers.
Instead, spending in the state follows the same cycle. Spending climbs as

more >>
fast as tax revenues in years of Figure 1. General Fund Appropriations Per Person,
plenty, then slows in lean years Fig. 1: General Fund
Adjusted forAppropriations
Inflation,Per Person,
FY 1979Adjusted for Inflation
– FY 2009
FY 1979 – FY 2009
while tax rates jump. Then as
2000 – 2008
the economy grows, tax reve- +1.5%
1995 – 2000
nues and spending again climb +11.6% $2,336
together.2 $2,248

1991 – 1995 $2,311

State government appropri- +3.5%

ations per person in fiscal year 1979 – 1991

+35.6% $1,942
(FY) 2009 were $2,311; more $1,818
$2,037
1996 – 2003
+7.2%
than the $2,248 per person in
$1,822
FY 2000 after adjusting for in- 1992 – 1996
$1,675 +5.6%
flation, even though the earlier 1983 – 1992
+36.7%
year was the peak of the previ-
ous spending cycle.3 Spending in $1,198
the state has ebbed and flowed
$1,173
over time, ratcheting upward
with each cycle (Figure 1). More
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worrisome, spending this cycle
has been on continuing pro-
grams instead of capital.
Average state appropria-
Figure 2. General Fund Operating Appropriations Per Person,
tions through the 1990s were Fig. 2: General Fund Operating Appropriations Per Person, Adjusted for Inflation
Adjusted for FY Inflation,
1979 – FY FY20091979 – FY 2009
$1,848 per person adjusted for
2000 – 2008
inflation. Returning spending to +6.3%

that level would save the state 1995 – 2000

$2,310
+8.7%
$3.0 billion from the $21.4 bud- $2,297
$2,122
geted for FY 2009 – more than 1991 – 1995
+4.8%
the potential shortfall in the 1979 – 1991
+36.4% $1,883 $2,032
next budget. 1996 – 2003
+9.5%
$1,740
The current fiscal year’s
$1,778
spending relied heavily on 1992 – 1996
+3.1%
$1,675
1983 – 1992
transfers from a number of re- +39.1%
serve accounts even before ac-
tual revenues started coming in
$1,140
below projections, another indi-
cation that tax revenues were $1,152

not keeping up with legislators’

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desire to spend more. Per-per-

son appropriations adjusted for
inflation in FY 2008 were 3.9 percent higher than in FY 2000. Operating appropriations per person, adjusted for in-
flation, climbed 8.8 percent between FY 2000 and FY 2008. From the time the budget bottomed out in FY 2003 to FY
2008, per-capita spending adjusted for inflation climbed 14.7 percent. The increase from FY 1989 to FY 2009 has been
41.3 percent.
Starving Savings
The Savings Reserve Account, the rainy-day fund, is supposed to get “one-fourth of any unreserved fund balance,”
according to the State Budget Act.4 Legislators disregarded that provision in the FY 2009 budget, which set aside no
money for saving, despite lower revenue expectations.5 Past experience and best practices from other states show the
savings reserve should be at least
Fig. 3: Average Inflation-Adjusted
Figure 3. Average Inflation-Adjusted General Fund Appropriations
10 percent of the previous fiscal General Fund Appropriations
year’s General Fund spending. Per PersonPerPer
PersonDecade,
– 1980s,1980s
1990s,Through
2000s 2000s
North Carolina’s reserve is less
than four percent, and Gov. Per- $2,172
due could take out half or more of
$1,848
that just to get through June.

Hiding Debt $1,348

In addition, the General As-
sembly violates the spirit of the
constitutional provision requiring
a balanced budget by borrowing
money without voter approval.
Legislators have passed $3.1 bil-
lion in debt without voter approv-
1980-1989 1990-1999 2000-2009
al since 2003. That is equal to the
amount of the last bond package
that did receive voter approval in 2001. Such hidden debt has been legislators’ preferred way to pay for capital projects
this decade. As a result, inflation-adjusted General Fund appropriations for capital projects have fallen from $51 per
person in the 1990s (2.4 percent of total General Fund appropriations) to $20 per person in the 2000s (0.9 percent).

Conclusion
As with previous budget crises facing the state of North Carolina, the shortfall in FY 2009 and the projected short-
fall for FY 2010 are as much the result of rampant spending as of lower than expected revenue. Revenue volatility is a
long-standing problem in North Carolina given the state’s tax structure. The General Assembly has consistently failed
to budget accordingly, instead creating a spend-and-tax roller coaster. Rather than set aside money in good times,
legislators have created new programs and taken on additional debt to finance capital projects, both of which reduce
flexibility for future budget writers.
Joseph Coletti is fiscal policy analyst for the John Locke Foundation.

End Notes
1. Figure 2.1, Statistical Abstract of North Carolina Taxes, 2008, North Carolina Department of Revenue, www.dornc.com/publications/ab-
stract/2008/index.html.
2. For more on this cycle, see “Spend and Tax: A History of General Fund Crises in N.C. and How to Prevent Them,” John Locke Foundation
Policy Report, Sept. 14, 2006, www.johnlocke.org/policy_reports/display_story.html?id=75.
3. Per-capita appropriations in this report are based on General Fund appropriations for fiscal years 1991 through 2009 from Table 9 of the
2007 Post-Legislative Summary for fiscal years 1991-2008 and budget bills for fiscal year 2009, population estimates in July of the previous
year from the Office of State Budget and Management (1978-2008), and GDP deflator levels on July of the previous year from the Federal
Reserve Bank in St. Louis.
4. G.S. 143C-4-2, as created by the 2006 Budget Act S.L. 2006-203.
5. S.L. 2008-107, Section 2.2 (c1).