Is North Carolina facing a financial cliff?

Reactions to the Office of State Budget and Management’s Consensus General Fund Forecast have ranged from Governor Stein saying our state is approaching a fiscal financial cliff next year to Senate President Pro Tem Phil Berger saying he thinks the alarm is unwarranted and that the state is in good shape. Who is right?

This is called a “consensus” forecast because it is just that: a consensus reached by both the Executive and Legislative branches in our state. It is based on past history, the current economy and projected growth. It has been a pretty accurate projection over the years, however it cannot anticipate unexpected events.

The forecast is that our state will experience a healthy 3 percent growth in revenues this year totaling $34.71 billion. Based on budgeted expenditures the state will enjoy a $544 million surplus for the fiscal year 2024-25.

But the projection for the two years afterward is causing concern. The forecast for 2025-26 calls for revenues to be almost flat, with only a half percent increase, and the year following, the 2026-27 year, the forecast is for a decline in revenues of 2.4 percent. After so many years of healthy budget surpluses why have the forecasts been more pessimistic?

There are several factors at play. First, the impact of tax cuts the legislature has passed will kick in. Personal income tax rates have declined from 4.5% in 2024 to 4.25% this year and will decline to 3.99% in 2027. Corporate taxes have also been reduced. The 2024 corporate rate was 2.5% and it is dropping to 2.25% this year, falling to 2% in 2026. And many lawmakers want to see the personal rate dropped another half percent in this current session. Lower tax rates obviously will yield lower revenues to the state.

On the plus side, revenues from the lottery and, especially online gambling (which amounted to $118 million from March through December) will aid the revenue picture some. And if new casinos are authorized additional revenues could improve the picture.

But there are real pressures on the expenditure side of the state budget. First among them is obviously disaster relief based on Hurricane Helene in our state. Governor Stein urged lawmakers to appropriate another $1 billion in relief. Lawmakers will initially pass only half that amount.

Don’t read too much into that action. Legislative leadership will certainly provide additional funding in the future but they want to make sure that appropriations are being prudently used, remembering the delays and management problems that still linger from hurricanes Matthew (2016) and Florence (2018). We join them in wanting to see the money go to the right people in the right ways in a timely manner.

Inflation is also potentially a factor in future budget deliberations. After many months of decline in the inflation rate, there was a small uptick in the consumer price index in January, to 3.0 percent. Tom Barkin, president of the Federal Reserve Bank in Richmond believes it will fall in February and decline in future months. Let’s hope he is right.

We also know there will be pressures to increase current state budget expenditures. Already the House is talking of increasing teacher pay and overall education budgets. Plus, there will be requests to increase pay for state employees along with their retirement and health plans. And there will always be requests for additional funding from state agencies.

But perhaps the biggest budget question regards federal funding. The actions and noise coming out of Washington is disturbing. North Carolina state and local governments, along with our universities, received $35.4 billion in 2024, almost as much as our total general fund budget. Until things settle down over the next few months it will be extremely difficult for legislative budget writers to finalize a new biennial budget in time for our fiscal year starting July 1.

Both Stein and Berger make valid points about the state budget. Stein is correct in saying our long-enjoyed budget surpluses appear to have ended and that, if projections become reality there will be a precipitous decline in revenues, forcing lawmakers to make choices of either cutting budgets or raising taxes - highly unlikely from this legislature. But Senator Berger is also correct in saying we are not in a “pants on fire” emergency at this moment.

Berger isn’t refusing to face reality, but he is also aware of the giant safety net our state has amassed for dealing with future needs. As of January, we had $3.73 billion in surplus funds in the bank.

Forewarned is forearmed. There are obviously decisions to be made, however there is time to consider the variables and act responsibly. Let us trust that our government leadership will be forthcoming and transparent in making decisions for our future.

Tom Campbell is a Hall of Fame North Carolina broadcaster and columnist who has covered North Carolina public policy issues since 1965.  Contact him at tomcamp@carolinabroadcasting.com