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Cooper budget relies on excessive debt

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John Hood

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Monday, March 18, 2019

American states and localities are, on the whole, administered more responsibly than the federal government is. Their superiority has nothing to do with the qualities of individuals involved. Indeed, many federal politicians were once state or local politicians.

The difference is institutional. It’s about rules. Most states and localities are required to balance their operating budgets. The federal government isn’t. Balanced-budget rules discipline behavior and choices of political actors.

Compare the current conditions of the federal government and North Carolina’s state government. Washington is full of politicians who profess to care about fiscal responsibility but do nothing of consequence about it. According to the latest estimates, we will see well over $10 trillion in federal deficits over the next decade. If President Trump’s recent budget proposal somehow became law, we’d still run $8 trillion in deficit during the period. And these scenarios assume no significant recessions.

I think the recent federal tax bill was a good one. It reduced the double-taxation of savings and investment, boosting both short-term and long-term economic growth. It also expanded the freedom of Americans by letting them keep and spend more of what they earn.

But its fiscal impact should have been offset by large reductions in federal spending, both short-term and long-term. Although growth will be faster, broader, and deeper because of tax reform, the resulting increase in federal revenue will fall far short of closing the deficit. Tough decisions are inevitable.

In North Carolina, by contrast, state government has run small to moderate surpluses every year since the end of the Great Recession. Its operating budget cannot, legally, run a deficit. Moreover, state lawmakers and governors have wisely chosen not to spend all the surpluses, but instead to build up the largest cash reserves in modern North Carolina history.

These reserves came in handy when the hurricanes hit. They’ll come in handy when the next economic recession hits. They will protect taxpayers (by reducing the political pressure to raise taxes during future crises) as well as the state’s long-term spending priorities (fiscal panic is often inconsistent with sound budgeting).

Balanced-budget rules bind today’s politicians in the interest of tomorrow’s residents. These constraints can be uncomfortable. Leaders are compelled to make tough decisions. That produces better decisions — and, actually, better leaders.

The exceptions prove the rule. Consider two hot-button issues in North Carolina politics right now: Medicaid expansion and public debt. Gov. Roy Cooper and legislative Democrats recognize that the state doesn’t have nearly enough revenue coming in to finance the operating expenditures they believe are needed. But most also (correctly) believe that North Carolinians don’t consider themselves undertaxed. Despite the forlorn hopes of progressive activists, Cooper was never going to propose large-scale tax increases on personal or corporate income.

Instead, the governor’s budget proposes to expand Medicaid and to issue $3.9 billion in bonds to fund capital projects for schools, colleges, universities, and local utilities. Both use borrowed money to skirt North Carolina’s balanced-budget rule — federal debt in the first case and state debt in the second.

The Medicaid gambit is more egregious, since Medicaid is inherently an operating expense. But even when it comes to capital spending, North Carolina has traditionally employed debt conservatively, not expansively. While borrowing does make financial sense in some cases, pay-as-you-go has its own benefits and ought to remain a significant part of the mix.

More importantly, North Carolina has already been evading its balanced-budget rule for decades by promising pension and retiree-health benefits to public employees without setting aside enough money to cover the cost. We should have tightened the rule to stop that, by requiring accrual rather than cash accounting. But we didn’t — and now we have tens of billions of dollars in unfunded liabilities. That’s a real debt that effectively reduces the state’s capacity to issue bonds.

Washington’s unfunded liabilities are enormously larger, of course. States are better run, no question. But they aren’t perfectly run. Time to clean up the mess — and to avoid making bigger ones.

John Hood is chairman of the John Locke Foundation of Raleigh.

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