February 17, 2021
Dr. Barry Boardman and Jennifer Hoffman with the North Carolina General Assembly’s Fiscal Research Division updated the House and Senate Appropriations Committees today on the revised Consensus Revenue Forecast, and to discuss the history and outlook of the state budget.
Dr. Barry Boardman, the state’s chief economist, first updated the committees on the Consensus Revenue Forecast that was released last week. Dr. Boardman explained that the world and economy look significantly different than nine months ago, at the time of the last consensus forecast. While the pandemic produced a rapid, substantial decline in economic activity in 2020 the second quarter, two waves of federal stimulus provided significant support to the economy. This support mitigated the severe and enduring negative impact economic forecasters expected earlier in the pandemic. Consumers and businesses also adapted to the pandemic and resumed economic activity as parts of the economy reopened. Consequently, revenues through the first seven months of FY 2020-21 were significantly above targets based on the May 2020 consensus.
This year’s forecast projects $4.13 billion in over-collections. The consensus forecast anticipates a total of $55.8B for the next biennium, with $27.4B in FY 2021-22 and $28.5B in FY 2022-23. For this fiscal year, collections are well-ahead of expectations. Through January, collections are $2.5 billion over what the May 2020 forecast expected. As stated above, there are several reasons for this, including that there were better tax collections from April 2020 that were delayed until July 2020. Additionally, the federal government’s CARES Act bolstered household and business income. North Carolina households received an estimated $18 million in support, and businesses received an estimated $12.5 billion. Also, the impact of the recession has not been as widespread as originally predicted. Most middle-class and upper-class households experienced little financial distress, while service workers and part-time workers were hit the hardest.
The consensus forecast is based off of several assumptions, including that there will be no shift, either up or down, in economic growth for the second-half of the fiscal year. Also, it is expected that the effects from the pandemic will begin to lessen this spring. Another important assumption is that expectations for tax refunds and final payments are met in April. State economists are also assuming there will be additional federal relief and stimulus, which could impact both household and business income.
For 2021-2023, the improved current fiscal year forecast means that there is a larger revenue base to start the next biennium. In FY2021-22, the state expects to collect $252 million less due to the billion-dollar shift of revenue. Personal income is projected to drop 2.5% below the previous fiscal year due to a tax shift, sales tax is projected to increase by 3.1%, and corporate income and franchise taxes are projected to fall 13.2%. In FY2022-23, the state is expected to collect $1,110.9 million more than previous fiscal year with 4% growth. Personal income is projected to increase 3.4% above the previous fiscal year, sales tax is projected to increase by 3.7%, and corporate income and franchise taxes are projected to grow by 3.6%. Economists are also expecting for the insurance gross premiums tax to increase by 20.5% with the addition of Medicaid Managed Care provider fees. Economic decisions will continue to be impacted by the pandemic with added uncertainty from the size and timing of a federal stimulus. A full return to a pre-COVID economy is not expected until mid-2022 or 2023, with the forecast approach remaining cautious given these uncertainties.
Jennifer Hoffman with the General Assembly’s Fiscal Research Division also gave an update on the state’s General Fund budget. The state’s current budget is over $24 billion. 58.8% of the state budget is allocated for Education, and 23.4% is allocated for Health & Human Services, meaning that for every dollar spent in the state, 82% is spent on Education and HHS. Key budget drivers include public schools, higher education, and Medicaid. Over 51% of the budget is dedicated to state employee salaries, and 20.3% is dedicated to benefits.
In 2019, Governor Roy Cooper vetoed the budget passed by the General Assembly (HB 966). Legislators were not able to override the veto, and no new budget was enacted for the 2019-20 biennium. The statutory Continuing Budget Authority outlines that the state will continue to operate on the existing budget if no new budget is enacted, and 2019 was the first time this occurred. However, the General Assembly did enact 21 supplemental appropriations bills, including a base budget bill for all State agencies, as well as budgets for the Department of Transportation, NC Community Colleges, and the State Board of Elections.
In January 2020, pre-pandemic, the state was in good financial standing and the General Fund showed an unappropriated balance of $2.3 billion. Mid-pandemic in May 2020 when the General Assembly reconvened for short session, the revised consensus forecast estimated a $4.2 billion reduction to revenue, and predicted a $600 million shortfall for the budget. The budget was adjusted to meet the balanced budget requirement, and the legislature enacted 32 supplemental appropriations bills between April 28 and September 3, 2020. The General Assembly was also able to allocate federal funds that were appropriated for COVID-19 relief and recovery. Despite the decrease in state revenue in 2020, there were no significant cuts to state agencies.
The recommended base budget is the state’s operating budget before any new expansion or reductions are taken, and is the amount of funding that is necessary to continue to support state agencies at the previous year’s budget levels. The recommended base budget for this fiscal year is $24,106.1 million, and $24,116.5 million in FY2022-23. Factoring in projections from the consensus revenue forecast, the state should have $2,502.6 million in FY 2021-22 and $3,603.1 million in FY 2022-23 remaining that can be appropriated. The key takeaway is that there is a significant amount of funding to begin this fiscal year that can be used to offset any budget pressures or uncertainties.