#ncga: smoke, mirrors, Jones Street and the treasurer’s office

There is an eye-opening report out from the highly-respected, free market-oriented Mercatus Center at George Mason University.  Apparently, something may be rotten in Princess Janet’s kingdom: 

[…] Real state spending per capita has increased fourfold in North Carolina since 1970. Three sources of revenue allowed for this increase: (1) tax increases, (2) increased debt, and (3) increased federal transfers. The latter two revenue sources have served to mask the true cost of increased spending—that is, they have created a fiscal illusion by transferring costs to future generations of workers and by dispersing costs across all federal taxpayers and debt holders. We argue that despite recent reforms, North Carolina’s long-run spending trend is unsustainable. To return the state to long-term fiscal solvency, reforms must likewise be focused on long-term institutional incentives. To be competitive with other states, North Carolina’s taxes, regulations, and property rights protections must all be competitive. […]

Treasurer Janet Cowell is retiring from the state treasurer’s office with all kinds of bipartisan fanfare.  She got praised by then-speaker now-senator Thom Thillis.  The Mercatus report raises some important questions about what has been going on in the state treasurer’s office and on Jones Street. The authors seem to echo our point from a previous post:

[…] The state government has steadily increased its spending since the 1970s (figure 3). The spending increase over the period is significant, rising from $5.2 billion (inflation adjusted) in 1970 to $37.7 billion in 2013, an increase of more than 600 percent. All else being equal, some growth in spending is to be expected in a state that has experienced both population and economic growth over the same period. However, as figures 3–5 show, the increase in spending far exceeds the rate of population growth or even the overall economic growth.

[…]  The reported figures already include a great deal of local spending in the form of state spending on K–12 education, higher education, state road spending, and so forth. While such spending is local, it is distributed politically at the state government level. Adjusting for population, spending has still risen steadily over the past 40-plus years, nearly quadrupling from $1,024 (inflation adjusted) per person in 1970 to $3,831 in 2013 (figure 4). Further, state spending as a percentage of GDP has more than doubled from 1970, when state spending was approximately 4.4 percent of GDP, to 8.6 percent in 2013, the most recent year of fully available spending data (figure 5). Like the United States generally, North Carolina has experienced strong long-run growth, but its state government spending has consistently outpaced its economic growth.

[…] As real state spending in North Carolina has grown since 1970, so has real spending in every one of those categories. Health care and education expenditures together amount to more than half of all state spending, with health care taking up 31 percent of spending and education taking up 21 percent (figure 6). Spending in these areas has grown steadily in real terms—education spending in North Carolina has grown by more than 500 percent in real terms since 1970, while healthcare and pension spending have each grown by more than 2,000 percent (figure 7). Over the same period, real transportation spending has grown by a seemingly modest 200 percent. Welfare spending has grown in real terms since 1970, but the growth is overstated in figure 7 because unemployment insurance claims had driven state welfare spending to an all-time high of $6.1 billion (adjusted for inflation) in 2010.

For 2013, the last full year of available data, the figure had fallen below $4 billion, and tentative data for 2014 indicate that the number has fallen significantly since then, in part due to the McCrory administration’s decision to limit unemployment benefits to 20 weeks in order to pay back unemployment insurance debt to the federal government.

And who do we have to thank for driving that effort?  Dale Folwell, who is a candidate to replace Cowell as state treasurer in 2016.   

The report’s authors say we’re in for a shortfall in the state pension fund TEN TIMES the size originally estimated.  

One bright spot in the report? Despite the liberal whining about “education cuts,” North Carolina students are in the Top 15 nationally in terms of test scores.

The authors also have some interesting insights on state debt that are pretty relevant ahead of a March vote on a statewide bond issue:

Between 1970 and 2005, North Carolina’s state debt per person quadrupled, from just over $500 per person to over $2,000 in 2009 dollars (figure 14). However, the sharpest increase in debt growth was over the 10-year period from 1995 to 2005, and it is noteworthy that the debt burden on individuals has decreased somewhat from its peak in 2006.

However, debt per person is overall much higher than it was a generation ago, and the trend toward increased debt requires further explanation. Beginning in the 1990s, the main change in state debt per capita, as observed in figure 14, is the result of an increased reliance on debt-financed capital projects, such as transportation repairs and renovations and a massive investment in university development. Debt-financed projects affect the budget in an important way: in the short run, less of the state’s General Fund is taken up with servicing such debt. However, the long-run tendency for the state has clearly been to accumulate debt at a rapid pace. While debt is not harmful in itself, fiscal responsibility means that a plan must exist to balance income and expenditure in the long run; furthermore, a reliable system must be in place to evaluate the supposed returns on spending.

In most cases, it is impossible to evaluate any returns versus the opportunity cost because the evaluator lacks knowledge of what the private sector would have done had those tax dollars been left in their hands. North Carolina’s true picture of public debt is more complex, primarily because of two factors. First, the official debt understates the burden of the state employee pension plan. Second, the federal government gives considerable aid to the states, including North Carolina, and much of the federal budget is itself debt financed.

North Carolina has seven different state employee pension plans, as well as a disability plan and a death benefit plan. However, the majority of state employees fall under the Teachers’ and State Employees’ Retirement System. As of the end of 2013, TSERS had just over 310,000 active participants and over 187,000 retirees and survivors receiving benefits.

There are another 125,000 eligible individuals who are not yet receiving benefits. One notable trend, consistent with current US demographic trends, is that the number of those paying into the system is decreasing while the number of retirees is increasing. This is not a concern for a fully funded system, but if the system ever becomes a pay-as-you-go system, that is, where current workers’ payments are used to pay retiree benefits, then the demographic trend can create a major strain on the state budget.[…] 

Definitely some food for thought here as we head toward Election Day.  I encourage you to read the linked report in its entirety, and to ask your elected officials (and those seeking to be your elected officials) about its findings.  Our nation and our state are at a critical junction. It’s important that our votes in 2016 are well-informed votes.