North Carolina savings reserve account

Fiscal Research Division _ Budget Development North Carolina Savings Reserve Account Fiscal Brief May 2, 2012 North Carolina Savings Reserve Account Created in 1991 Executive Summary North Carolina is one of 48 states with a savings reserve account that can help balance the state budget during an economic downturn or an unforeseen event. The State’s goal is to maintain a reserve equal to 8% of the prior year’s General Fund operating budget. By statute, the North Carolina Savings Reserve Account receives one-fourth of any unreserved fund balance remaining in the General Fund at the end of a fiscal year. Funds in the Savings Reserve Account remain part of the unappropriated General Fund balance until appropriated by the General Assembly. The General Assembly relied significantly on the Savings Reserve Account to balance the budget during the most recent recession. Since its inception in 1992, the State has also used the Account to help North Carolina recover from major storm damage, stabilize the State Flealth Plan, and settle a major tax lawsuit. Introduction Benjamin Franklin once said that in this world nothing can be said to be certain except death and taxes.” 1 Another certainty over the past two centuries has been the fluctuation of U.S. economic activity known as business cycles. Business cycle expansions and contractions have occurred 33 times in the United States since 1857:. In more recent history, there have been 1 1 business cycles since 19453. The economic contractions known as recessions are defined as “a significant decline in economic activity spread across 1 Letter to Jean-Baptiste Leroy, Nov. 13, 1789, reprinted in The Works of Dr. Benjamin Franklin. Volume VI, page 232, published by Wm Temple Franklin (1817). 2 National Bureau of Economic Research (NBER), “US Business Cycle Expansions and Contractions”, www.nber.org, December 5, 20 1 1 . 3 Ibid. the economy, lasting more than a few months, normally visible in real Gross Domestic Product (GDP), real income, employment, industrial production, and wholesale-retail sales."4 As the economy contracts, so do state revenues. The National Conference of State Legislatures (NCSL) reports that state tax collections are particularly sensitive to economic conditions because 70% of state tax revenues are from the sales tax, individual income tax, and corporate income tax5. (In North Carolina, 90.4% of General Fund tax revenue in FY 2010-1 1 was from these three taxes.6) States also face increased demand for social welfare programs during recessions. One strategy that states use to mitigate these inevitable economic downturns is to maintain a savings reserve account (commonly referred to as a rainy day fund). Savings Reserve Account Whether called savings reserves, budget stabilization funds, or rainy day funds, these state revenues are set aside for use during a period of recession or other economic difficulty. North Carolina established its first such reserve in 1990. The General Assembly appropriated $141 million to a Budget Stabilization Reserve in FY 1990-91 “to provide a mechanism to stabilize the annual funding availability for carrying out State programs and providing financial assistance to local government units.” 7 This legislation was meant to be a short-teim measure until a General 4 Ibid. 5 Corina Eckl, Todd Haggerty, and Julie Lays, “NCSL Fiscal Brief: How State Tax Policy Responds to Economic Recessions”, National Conference of State Legislatures, January 5, 20 1 1 . 6 North Carolina General Assembly Fiscal Research Division, “201 1 Annotated Committee Report on the Continuation, Expansion and Capital Budgets”, Appendix Page A- 14. 7 S.L. 1989-1066, Section 10; in 1987, SB 994 was introduced to create a General Reserve Fund but the bill failed to pass.