A tale of two recessions: conservative budgeting has NC far better prepared to weather COVID recession
Published October 8, 2020
Thanks to a decade of wise, conservative fiscal policy, North Carolina state government was far better positioned financially to weather the economic fallout of the coronavirus shutdown than the 2009 Great Recession under liberal leadership.
As the Covid lockdown’s economic fallout began, the Office of State Controller’s April 2020 General Fund Monthly Financial Report showed the state’s Rainy Day fund balance at nearly $1.2 billion, with another $1.6 billion in “non-reverting Department Funds.”
Moreover, the state’s unemployment insurance fund was well stocked with roughly $2.9 billion in surplus funds to provide targeted relief for those laid off during the crisis.
This situation stands in stark contrast with the state’s fiscal condition a dozen years ago, at the onset of the Great Recession when the state was largely under Democratic control.
The Great Recession Debacle
The approved FY 2008-09 state budget marked a whopping 49 percent increase in state spending over eight years.[i]
As a result of this reckless and unsustainable build up in spending obligations, state budget writers faced a $2 billion shortfall for the 2008-09 fiscal year, followed by a gaping $4.6 billion budget hole the following year largely due to declining revenue from the onset of the Great Recession.[ii]
Federal “stimulus” funds helped to partially bail out the state budget. Other funds came from arguably the largest tax hike in state history in 2009, which hit many North Carolinians especially hard. Thousands of state employees were laid off, including teachers, while teachers went three straight years without a pay raise (FY 2010-12).
In the beginning of the 2008-09 fiscal year, the state’s Rainy Day fund stood at less than $800 million. By the end of the year, it was quickly drained down to $150 million.[iii]
Also in 2009, the massive 49 percent increase in state budget spending over eight years wasn’t enough to satisfy the spending appetites of the liberals controlling the General Assembly. They were in the process of racking up an alarming $6.5 billion in state debt from 2001 to 2013 – an increase of 230 percent.[iv]
The massive buildup in required debt service payments played no small role in inflating the budget deficits of the time.
Moreover, the Great Recession quickly exhausted what little funds had been set aside in the North Carolina Unemployment Insurance fund. The state’s short-sighted financial mismanagement made it necessary to borrow more than $2.8 billion from the federal government to cover claims during the recession.
The massive debt forced significant tax hikes on North Carolina employers, at a time when businesses could least afford heavier tax burdens as they tried to recover from the recession.
Decade of fiscal responsibility better prepares NC for Covid downturn
Compare how woefully and irresponsibly unprepared the state was under liberal leadership in 2009 to how well conservative leadership over the last decade has prepared the state for the Covid lockdown recession.
Responsible budget policies helped the legislature build up the state’s Rainy Day fund to a record $1.9 billion prior to Hurricane Florence in 2018. As mentioned above, as of April 2020, the fund balance still stood at $1.2 billion, with another $1.6 billion in ‘unspent reserves.’
Spending restraint was key to building up such reserves. In the eight years leading up to and including 2020, state budget writers authored a responsible and sustainable 16 percent total growth in state spending, compared to the 49 percent growth in state spending over eight years under liberal legislatures leading up to the 2009 downturn.
Moreover, budget surpluses – not budget deficits – have become the norm. In 2020, the state was on pace for its sixth consecutive budget surplus prior to Gov. Cooper’s shutdown order. Each of the previous surpluses totaled hundreds of millions of dollars, most exceeding $400 million.
Since 2010, conservative lawmakers have reduced the state debt from $6.5 billion to $4.2 billion, a reduction of 35 percent. Flattening the upward trajectory of annual debt service payments has freed up millions in budget obligations, enabling the state to pay for other expenses.
And thanks to reforms enacted by conservative leaders in 2013, the state’s unemployment insurance fund steadily built up $3.8 billion in reserves. Those funds are vital to meeting the challenges we are experiencing today.
North Carolina is better positioned than most states to accommodate the historic rush of unemployment claims precipitated by Gov. Roy Cooper’s lockdown orders. These policies should allow North Carolina to avoid borrowing money from the federal government and the tax hikes on job creators required to repay it.
Comparing North Carolina’s current state budget and fiscal preparedness with that of a decade ago offers a contrast as stark as night and day.
In 2009, under the leadership of Joe Hackney, Marc Basnight and Gov. Bev Perdue, the state was unprepared to handle the impact of an economic downturn. As a result, legislators panicked and imposed historic tax hikes on struggling North Carolinians while freezing teacher pay for three straight years.
In contrast, today – thanks to a decade of conservative leadership –, the state is better prepared to address the fallout of an economic downturn caused by Gov. Cooper’s mandated shutdown. Taxes aren’t being raised and teachers continue to receive pay raises and bonuses.
The contrast is crystal clear, and the stakes are high. North Carolinians simply cannot afford to return to the reckless spend and tax policies of the past.
[i] Budget figures taken from state budget bills in the referenced budget years. Accessed at the General Assembly website: https://www.ncleg.gov/
[ii] Civitas Institute Public Policy Series, Unlocking the State Budget; 1985 – 2016. Available online at: https://1ttd918ylvt17775r1u6ng1adc-wpengine.netdna-ssl.com/wp-content/uploads/2017/02/Budget-Policy-Guide_2016-timelline-added_FINAL.pdf
[iii] North Carolina Office of State Budget & Management, 2019-21 Governor’s Recommended Budget, Appendix Table 1D. Available online at: https://files.nc.gov/ncosbm/documents/files/REC2019-21_AppendixTables.pdf
[iv] North Carolina State Treasurer’s Office; Annual Debt Affordability Study, years 2020, 2014, 2009 and 2006. Available online at: https://www.nctreasurer.com/slg/Pages/Debt-Affordability.aspx