Savin’ in the Rain

Why North Carolina Must Not Cave to Spending Demands

Every family knows that their savings account is crucial. But for some reason, too many people don’t understand the concept when it comes to government.

There’s been a target on North Carolina’s “rainy day fund” ever since the new Republican majority in the General Assembly made it a priority nearly a decade ago.

Gov. Roy Cooper attacked it during the 2016 campaign, and his Democratic colleagues and the media have consistently criticized it over the years. The thinking goes, if there’s money available, go ahead and spend it. You’re always going to tax people again next year.

Thankfully, our legislators have resisted the temptation and have prudently managed the state budget, putting aside billions of tax money for future use. That rainy day fund came in handy in 2018 as two major hurricanes battered eastern North Carolina.

Our state is currently facing a new kind of storm in the form of COVID-19.

Now the same people who’ve decried the rainy day fund in years past are demanding that the state use that money to ease the economic pain brought on by coronavirus restrictions. These calls have intensified in recent weeks as the General Assembly prepares to return to Raleigh for the long session.

As NC Spin host Tom Campbell puts it in an op-ed:

"Here’s a question for North Carolina’s leaders: If what our state is experiencing right now isn’t a “Rainy Day,” pray tell what is? … The need is clear. The money is available. Spend it now!”

With hundreds of thousands unemployed, there is a logic to it. But there’s a big problem with this approach, and I hope the General Assembly can resist the temptation once again. 

If you demand that the state spend all that money right away, you fundamentally misunderstand North Carolina’s budget situation — and what our state’s rainy day fund is best used for. 

While it’s true that the state budget is not in as grim a shape as once feared, that doesn’t mean the outlook is rosy. The worst of the COVID-related cash crunch is likely still to come.

And even though the state’s fund balances seem big, they won’t go nearly as far as you think they will.

We must not spend down these savings — at least not yet, not all of it and not in the way they’re calling for.

The state of our savings

North Carolina’s rainy day fund, also known as the Savings Reserve Account, stands at roughly $1.1 billion. This is down from $2 billion a few years ago, spent down by relief appropriations after Hurricanes Florence and Michael. 

Then our state also has $4 billion in cash unspoken for, known as unreserved fund balance (the number fluctuates a bit week-to-week, but that’s essentially what it is). This is money that’s accumulated from past surpluses and the fact North Carolina hasn’t had an approved budget in two years. Some of this money would have been spent and some would have gone into the rainy day fund if Gov. Cooper hadn’t vetoed budget bills.

That’s a total of $5.1 billion, give or take, that’s theoretically available to spend whenever the General Assembly would like. 

This is the money you’re hearing people talk about spending on COVID relief. 

For the record, this does not include the $3.6 billion in federal Coronavirus Relief Funds the state received over the summer. About 90% of this has been distributed to school districts, local governments nonprofits and hospitals, and the rest should be by the end of the year. 

What they want

Put simply, Democrats and the media want this money spent now. They say it’s unconscionable for state government to have such a big pile of cash when people are hurting. 

The N&O Editorial Board says that:

“When the General Assembly returns in January, the emphasis should be on how to use this good fortune for those less fortunate. That means not only direct payments, but investment in schools, rural health care, vocational training and infrastructure.” 

The editorial also claims that our budget situation is in solid shape for the coming year, citing the fact that tax collections were $513 million (2.2%) higher than predicted for the 2019-20 fiscal year, and that tax revenue is up over the first few months of this fiscal year.

I understand where they’re coming from, and I empathize with the hundreds of thousands of North Carolinians who are struggling. But this simply won’t work. 

Real life is more complicated than that. The N&O is selectively reading the numbers and failing to understand how budgets work. Here’s why.

First, things aren’t that rosy

Back in May, the General Assembly’s Fiscal Research Division sounded the warning bells — predicting that the state’s tax revenue could come up $4.1 billion short over the next year due to a COVID-induced recession. 

Thankfully, it might not be as bad as that — but it still ain’t good. Yes, tax revenue in the last fiscal year was higher than predicted, but that prediction was the state’s disaster scenario. The number was still down nearly $900 million from the year before, after years of increases.

It is true, too, that tax revenue in this fiscal year is ahead of where it was last year, but a good bit of that is due to the tax filing deadline coming in July this year, delayed from April. 

The truth is, we don’t really know where the budget situation will go from here. 

The Fiscal Research Division was supposed to give us another update in August, but that didn’t happen. 

The economy is still in flux. Tax bills for this crazy year haven’t gone out yet. Foreclosures and evictions have largely been put on hold. Federal stimulus has added support for a limited time. Schools are closed with no end in sight. Plus, with rapidly rising COVID case counts, there’s the chance that new restrictions will shut down businesses once again. 

The rainy day fund is primarily intended to preserve essential government services during lean times. That way, you don’t have to lay off thousands of teachers or other public employees every time there’s a downturn in the economy. 

There’s still a very good chance we’ll need this money for its intended purpose.

These savings can’t fix our economic problems

Second, even a $5 billion fund isn’t a cure-all. Government cannot replace a robust economy. Not for the long-term, and not even really in the short-term, either. 

North Carolina has 10 million people. Direct payments of just $510 would exhaust all $5 billion. That’s not even going to pay a month’s rent. 

Sending out a check per household only gets you to $1,275. Restricting to households making under $100,000 gets you to around $1,500.

Trying to target direct payments much further than that opens up a Pandora’s box of perverse incentives and unpredictable outcomes.

The other things on the N&O’s wish list don’t lend themselves well to rainy day fund spending either, save for infrastructure. Investments in public schools, rural health care and vocational training presumably include hiring people and creating projects you want to last more than one year. 

What does work? Discrete, closed-ended projects.

Back in 2018, the General Assembly allocated about $850 million from the rainy day fund for Hurricane Florence recovery, including public school repairs, housing assistance and beach renourishment. These are primarily one-time projects where the costs are relatively easy to estimate. Once these repairs are made, they’re made. 

You pay for a new roof with your savings. You pay for a gym membership out of your weekly paycheck. 

What NC should do

All that said, the General Assembly still faces a tall task when it reconvenes after the holidays. The current landscape is incredibly different from that of 2018, though we’re operating on the same budget. 

Here are some prudent things North Carolina can do with the $5.1 billion in reserves.

Beef up the reserve fund. That $1.1 billion fund isn’t nearly enough. Economists forecast that North Carolina would likely need $2.6 billion in reserve to weather the next recession, whenever that occurs — and it absolutely will. A good chunk of unreserved fund balance must go over to the Savings Reserve Account. It’s not sexy, but it’s vital.

Give whatever it takes to reopen schools. Much of the state remains in remote learning, which is failing our students. The General Assembly must appropriate money that will allow our kids to go back to school. Perhaps this is new HVAC systems in classroom buildings. Perhaps we need to beef up the pool of substitutes or raise bus driver pay. This doesn’t mean caving to all the demands of the NCAE, who will never be satisfied as long as Republicans are in office, but there are bound to be some steps we can take. I don’t have all the answers on this, but it sounds like a good first task for incoming Superintendent Catherine Truitt. 

Fund one-time retrofits for small businesses. It’s time to end emergency mode and move into long-term planning. If businesses aren’t safe enough to reopen, the state can offer grants to help businesses set up the infrastructure to reopen safely. 

Expand vaccine distribution infrastructure. We likely won’t get back to any semblance of normal before the vaccine is widely distributed. Does every clinic and rural hospital in the state have the cold storage capacity they need? 

Set up COVID-positive nursing homes. This should have been done in April, but North Carolina likely still needs a better way to treat seniors in long-term care facilities who test positive. The Cooper administration’s guidance keeps them in their nursing homes where other residents can easily become infected. Other states, like Florida and Connecticut, have created dedicated COVID-positive nursing homes. We can, too. 

Staying the course on sound financial management is the right thing to do, but count on there being resistance every step of the way.

The N&O says: 

“What shouldn’t happen is a retreat in which lawmakers pad the state’s reserves and hold back on spending based on a misguided notion that the times call for caution.”

Wrong. That’s exactly what should happen. 

Now’s not the time for sweeping new spending. We need to protect the vulnerable, help transition back to normal life and prepare for a possible recession. We’ll be thankful later. 

Quick Takes

Sen. Steinburg takes things way too far. Perhaps the Senator is just poor at using Facebook, but it appeared like he called on President Trump to invoke the Insurrection Act to deploy the military across the U.S. and use it to stay in power. I’m all for healthy skepticism and am fine with losing political candidates using the legal process to challenge results. But there’s a line where political rhetoric moves from venting frustration to damaging the country. Sen. Steinburg crossed it. 

Can Mandy Cohen call herself “Doctor”? The country has spent entirely too much time elating whether Dr. Jill Biden deserves her honorific. A more interesting debate is whether North Carolina law allows DHHS Secretary Mandy Cohen to go by “Dr. Cohen,” as she does on her official website and in the COVID briefings. 

Secretary Cohen has an MD and formerly practiced as a physician, but does not appear to have an active medical license in our state. Under state law, using the title "Doctor" while working in the healthcare field is considered a practice of medicine (NCGS 90-1.1(5)e). Practicing medicine without a license is against the law (NCGS 90-18). She’s earned the title and ethically, there’s no problem using it. But DHHS did not respond to my questions about whether there’s any legal justification Secretary Cohen can cite to use the title “Doctor” or if she is concerned that she is violating this law. 

Worth noting

• COVID vaccines hit the ground in North Carolina on Monday, and healthcare workers are the priority at this point. An Atrium Health doctor was the first in the state to get the shot.

• Apparently Amazon’s Alexa will tell you that Gov. Cooper is in the Stanly County jail, which is bizarre and hilarious. 

• Congrats to Thomas Stith on the new role as president of the state’s community college system.