North Carolina was profiled in a recent Pewtrusts.org article as one of five states that uses a “budget stress test” to determine how much money should be set aside in its rainy-day fund. The stress tests are used to avert a future crisis after events like a recession or hurricane. It also allows lawmakers to see how the state budget would fare under various economic scenarios. California, Maine, New Mexico, and Utah round out the rest of the list.
North Carolina Republicans focused their attention on building the reserve, also known as the “rainy-day fund,” when they took control of the General Assembly after the 2010 elections.
As a result of lawmakers’ foresight, the savings reserve covered about half of the first round of disaster relief related to Hurricane Matthew and western wildfires for use in December 2016.
The state passed H.B. 7 in 2017, establishing new rules regarding North Carolina’s savings reserve. Democrats and Republicans in both the Senate and the House agreed that the state should create significant restraints on spending.
H.B. 7 created a rule that sets aside at least 15% of revenue growth into the reserve. More can be set aside, but there is no requirement to build the reserve if an economic downturn leads to a decline in year-over-year revenue growth.
The law also passed limits on which lawmakers can take money out of the fund. Under the new law, a simple majority of lawmakers in both chambers would be able to extract in a single year as much as 7.5 percent of the prior year’s General Fund budget (roughly equivalent to $1.6 billion now) to address one of four pressing needs.
A decline in General Fund revenue from one year to the next, a gap between General Fund spending and revenue in a given year, court or administrative order costs, and costs associated with disaster or emergency relief could all be covered with funds from the reserve.
Lawmakers could spend more than the 7.5% annual limit or spend money for issues other than those listed in H.B. 7, but they would need to secure votes from two-thirds of the members of both the House and Senate.
The governor’s Office of State Budget and Management and the legislature’s Fiscal Research Division work together to create an annual evaluation “of the adequacy of the Savings Reserve” based on the analysis of several economic scenarios.
Both offices provide a joint recommendation to the chairs of the General Assembly’s appropriations and finance committees each January. The goal is to have enough funds in the rainy-day fund that could cover nine out of 10 scenarios for two years.
North Carolina met the recommended target of the rainy-day fund when it significantly increased its savings reserve with the passage of the fiscal year 2022 budget.
“The good news, North Carolina is well prepared to weather a recession,” said Senate Leader Phil Berger, R-Rockingham, about the $27.9 billion Fiscal Year 2022-23 budget that Democratic Gov. Roy Cooper signed into law on July 11, avoiding a last-minute deadline.
Berger added that the state has a current surplus of $6 billion, of which $2 billion is expected to be recurring. The Rainy-Day Fund balance is projected to be $4.75 billion at the end of the biennium. That is an increase from the $4.25 billion projected in the last budget. A $1 billion State Inflationary Reserve was also created in anticipation of a recession.
Legislative leaders said they would not make the same mistakes state Democrats did in the run-up to the last recession with a $3.5 billion shortfall. In 2009, then-Gov. Bev Purdue, a Democrat with a Democrat-run legislature, temporarily cut teacher pay, instituted state employee furloughs, and tapped heavily into state reserves for emergency spending.
“This is a reminder of where we were in 2010,” said House Speaker Tim Moore. “Some of our predecessors really did not prepare for economic downturns.”