NC Budget and Tax Center

A formula for failure

Some legislators want to severely limit the resources the state can invest in schools and other needs and are considering arbitrary formulas to guide those decisions, even though we are already doing less with less. State investments as a share of the economy would be $3.2 billion higher if North Carolina caught up to 2008 levels. That means the Governor and legislative state budget writers have a lot of catching up to do to replace what was lost while also keeping up with the growing needs of a growing state. Tying our hands with artificial limits on how much we can invest is a road to ruin.

The goal of these arbitrary formulas is to radically restrict state spending and shrink the reach and effectiveness of critical public services, regardless of need or cost. One example is a formula that would limit year-to-year growth in total state spending to the rate of inflation plus population growth. Automatic spending limits—as well as caps on year-to-year revenue growth—are sold as common-sense measures, but in reality they are not a responsible way to measure the cost of providing basic government services. Instead, such limits merely ensure perpetually insufficient funding and never allow policymakers to replace the cuts enacted in the aftermath of downturns.

Case in point: inflation, as measured by the Consumer Price Index, doesn’t accurately reflect the cost of providing public services overtime. That’s because the CPI measures changes in the cost of goods and services that urban households purchase—not changes in the cost of public goods that benefit all of us.   The cost of health care services, for instance, makes up a sizeable chunk of state spending and is growing faster than inflation. Over the last twenty years, the medical cost index—a national measure of medical costs—has grown nearly twice as fast as inflation (see chart below).

Costs of Government Services such as Health Care Grow Faster than Inflation

Also, the formula doesn’t account for our changing population and economy, and how that affects services.  North Carolina’s population is aging rapidly, with the older adult population expected to grow 6.5 times faster than the rest of the population by 2030. That means the need for Medicaid, community care, and other vital services for seniors will grow disproportionately.  At the same time, the number of students in the University of North Carolina system has grown by 36 percent since 2000, compared to a 23 percent increase in the general population. As the economy changes, the number of jobs that will require a college degree will only increase, meaning campuses will need more resources –especially if we want to keep college affordable.

Taken together, both components of the population-plus-inflation formula would keep state spending at starvation levels, making it impossible to adequately invest in schools, health care, public safety and other building blocks of a strong economy. As lawmakers iron out a two-year budget agreement over the next few months, they should think twice before using this flawed formula or any other arbitrary spending limits or revenue caps.

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