State Government

Could North Carolina Weather Another Recession?

By Steve Tuttle

If another recession like the one in 1990 struck, the $522 million in North Carolina's Rainy Day Fund would be quickly wiped out and the state would have to make significant cuts in services and sharply raise taxes to balance its budget, according to a report by the Washington-based Center on Budget and Policy Priorities.

If such a recession lasted three years, as most do, the state –– after emptying its Rainy Day Fund –– would face a $2.36 billion revenue shortfall, or almost 19 percent of the state's total budget, the report says. According to the report, among all states North Carolina is in the 13th worst shape for weathering a recession.

North Carolina is hardly alone in having only thin financial reserves. The report concludes that more than three-quarters of the states couldn't weather another recession like the one that struck in 1990 without cutting spending and raising taxes. To avoid repeating that experience, state governments on average need to maintain reserves of 18 percent of current expenditures, about double the current level, according to the study.

The study found that only eight states — Delaware, Indiana, Iowa, Maine, Massachusetts, Michigan, Minnesota and North Dakota — could bridge the gaps between revenues and expenditures that could accompany a downturn of the same length and severity as the 1990 recession.

The report examines a hypothetical recession that begins in the middle of calendar year 2000 and assumes that states experience fiscal stress for the subsequent three years, parallel to the experience in the relatively mild recession of the early 1990s. It was prepared using data from the National Association of State Budget Officers, the National Conference of State Legislatures (NCSL) and state fiscal offices.

To close a $1.2 billion budget gap in fiscal 1991, the North Carolina General Assembly slashed spending by $600 million and raised taxes by $600 million, including raising the state corporate income tax to 7.75 percent, the highest in the Southeast. NCCBI subsquently persuaded the legislature to roll back the corporate income tax rate over four years.

After the recession, North Carolina and 44 other states states established budget stabilization or “rainy day” funds designed to receive surplus revenues when finances were healthy against a future slump. The target level for those rainy day funds has typically been five percent of annual general fund expenditures, a figure widely held to be based on recommendations from NCSL and Wall Street analysts.

In fact, the five percent recommendation was intended to serve as a guideline for reserves against normal contingencies, such as errors in forecasting revenues or unexpected outlays like settlement of a lawsuit. In a 1993 report, an NCSL committee suggested that a five-percent reserve level was “useful only when the economic weather forecast is `overcast with a mild drizzle' rather than `continued thunderstorms with flooding expected.'”

There has been widespread talk in the General Assembly of using some or all of the state's Rainy Day Fund to pay a court settlement over refunds of intangibles taxes to those who did not file timely protests.

David Sues Goliath: A Statesville lumber company is seeking $1 million in damages from the N.C. Department of Environment and Natural Resources' Division of Water Quality and its former director, Preston Howard, in an unusual lawsuit that pits a small business against one of the biggest bureaucracies in state government.

Godfrey Lumber Co. alleges in the suit filed in Wake Superior Court that in November 1997 Howard, without required prior notice, revoked a stormwater permit the company had obtained to open a wood chip mill in Stokes County. The suit says Howard was reacting to vocal local opposition to the plant.

Godfrey Lumber appealed the action, and in June 1998 an administrative law judge ruled that the state acted improperly. The Environmental Management Commission later affirmed the judge's ruling and reinstated the permit.

Chester Godfrey, the owner of the company founded in 1955 which employs 40 people, said he filed the suit to “send a message that government agencies can't arrogantly disregard the civil rights of small businesses. This happens all too often to small business. It's an abuse of power that costs people their jobs and family income.”

He said the delay cost the company more than $1 million in expenses and lost income.

DENR spokesman Don Reuter pointed out that while the EMC upheld the administrative law judge's ruling that Howard violated proper procedure in revoking the permit, it also concluded that he did have the authority to require the chip mill to obtain an individual stormwater permit for the facility.

Reuter said the lawsuit “is a premature action since the company is in the middle of appeals on these matters and they should have exhausted all administrative remedies, including a challenge to the EMC's decision, before taking this step.”

Social Promotions End: Voting unanimously, the State Board of Education said students in the third, fifth and eighth grades must pass year-end exams to be promoted to the next grade.

The April 1 vote by the board officially ends the longstanding practice of promoting students who are struggling academically just so they can keep up with their age group.

Officials estimate somewhere between 8,000 and 30,000 students in those grades will be held back next year when they fail end-of-year tests.

Gov. Jim Hunt praised the board for its action. “This is not about holding students back. It is about helping make sure that all of our students succeed.”

— Steve Tuttle