North Carolina’s annual financial picture includes many elements — revenues, expenditures and debt, just to name a few. Each fiscal year, those elements change.

That can make it difficult to develop the state’s budgets.

The U.S. Census Bureau’s 2015 Annual Survey of State Government Finances provides information and insight into North Carolina’s fiscal structure in fiscal year 2015 (latest fiscal year surveyed). Those annual surveys, along with other fiscal data, help North Carolina’s Office of State Budget and Management provide information to officials — elected and others — who write the state’s proposed budgets.

“Revenues and expenditures are the two sides to budget development. Revenue forecasting and expenditure forecasting share some similarities but present unique challenges. In North Carolina, the executive branch and the legislative branch have professional, nonpartisan staff who create a ‘consensus forecast’ for baseline revenues,” wrote Charles Perusse, state budget director, in an email. “There is not a consensus forecast on the expenditure side; however, there is a ‘base budget’ that the Office of State Budget and Management prepares, using guidelines from statutes written by the General Assembly. Thus, the starting point for expenditures (aka, the base budget) is generally agreed to by both the legislative and executive branch.”

When it comes to the state’s budget, there are certain requirements that must be met, requirements found in the North Carolina Constitution.

“The Constitution requires that the Governor’s budget include projected revenue collections as well as proposed expenditures. The Constitution also requires that the Governor maintain a balanced budget such that revenues are monitored to ensure that expenditures do not exceed available revenues,” Perusse wrote.

In overall revenue, North Carolina took in $54.8 billion in fiscal year 2015, according to the survey, with $49.7 billion of that overall amount classified as general revenue. Property taxes and similar taxes generated $25 billion, with sales taxes generating $10.7 billion. Personal income taxes brought in $11.1 billion, and corporate income taxes generated $1.3 billion, according to the survey.

The state took in $3.1 billion in miscellaneous general revenue and $5.1 billion in insurance trust revenue.

North Carolina’s overall expenditures for fiscal year 2015 came to $52.75 billion, according to the survey, with $39.7 billion of overall expenditures spent on direct expenses and $28 billion spent of operational costs. The state spent $3.4 billion on capital outlay expenses.

In fiscal year 2015, the state spent $7.7 billion on salaries and wages.

When it comes to revenues, they can fluctuate because of changes in local, state and national economies. As for expenditures, they too can vary because of those same changes and unexpected expenditures such as recovery costs associated with disasters such as hurricanes, tornadoes, earthquakes and the like. Fiscal factors such as the Great Recession of 2008 and its lingering aftermath also affect revenues and expenditures. (See related information box.)

“Although North Carolina’s General Fund is supported by numerous revenue sources, the individual income tax (53%) and the sales and use tax (31%) together provided more than four of every five dollars of the $22.7 billion in anticipated General Fund revenue for fiscal year 2016-17,” reads the OSBM website.

“Forecasting is rendered difficult by unexpected economic downturns and uncertainty in federal and state policy … and unexpected economic downturns can easily cause the revenue forecast to be inaccurate,” Perusse’s email noted.

“For example, this year, unknowns in global and domestic economic policy related to international trade and the domestic health insurance market increased risk in the forecast,” the email continued.

When it comes to revenues and expenditures, challenges exist.

“We don’t have a crystal ball, there are several unknowns, and we must make some assumptions in forecasting,” according to Perusse.

 

Expenditure forecasting challenges

Significant changes to programs: Medicaid and education enrollment are the largest expenditure drivers, and they can be hard to forecast when there are dramatic changes in the programs.

For example, with the implementation of the Affordable Care Act, Medicaid beneficiaries’ income and asset requirements changed, and several groups were switched entirely to other groups, making it difficult to forecast need.

Reliable data: While we have good historical data related to actual expenditures, we do not always have reliable programmatic data for things like enrollment growth, the projected population for a certain program and similar factors.

As examples, we need to know things like number of students and number of children who will enroll in NC Pre-K or Smart Start or other interventions. Those are easier numbers for us to estimate. Harder estimates include things like how many people are affected by the opioid crisis or how many people might be willing to pay a fee (and at what amount) for a service.

Varying agency input: Input is critical for meaningful forecasts, and some agencies are better equipped to plan and forecast expenditures.

Federal decisions: How they affect program spending can be hard to predict, and the federal fiscal year and budgeting timeline are not the same as the state’s.

Onetime or unforeseen events:

Natural disasters — impossible to budget for in advance.

Flu and other disease outbreaks (both human and animal population) — can greatly affect expenditures depending on magnitude.

Lawsuits — As a state, we are sued and we also receive settlements. Depending on the size and outcome of these lawsuits, they can affect expenditures dramatically.

Economic downturns — affect not just revenues but also enrollment in programs, many of which are entitlement programs and have to be funded.

 

Revenue forecasting challenges

Timing of revenue forecast: In preparing for the long session especially, we produce the revenue forecast before we know how revenue collections perform in April, which can produce big swings in revenue. We produce a revenue forecast for the current year and the biennium when we still have about 40 percent of the current year revenues to collect.

Growing revenue volatility: Revenue forecasting has become more challenging due to growing volatility in the revenue collections in the past couple business cycles.

Tax changes: The tax policy changes recently enacted have also contributed to the increase in volatility in the short-run as taxpayers take time to adjust to the changes.

General fund revenue forecasting has small error: Despite volatility, median absolute forecasting error has been 2 percent over the last decade.

Source: Office of State Budget and Management