John Hood: North Carolina Needs More Savings
RALEIGH — With the federal government running massive deficits, inflation still running ahead of the Federal Reserve’s 2% annual target, the administration’s mercurial trade policies generating significant uncertainty, and both business investment and consumer confidence trending in the wrong direction, now would be a good time for states and localities to reexamine their fiscal risk.
Here in North Carolina, we’re in fairly good shape. But we’re not really where we need to be. If national or international actors blunder us into stagflation or even recession, other states are better positioned than we are to manage the consequences.
Consider the latest General Fund report from State Controller Nels Roseland, published September 9. It summarized state reserves, expenditures, and financial reserves over the course of the previous fiscal year. From July 1, 2024 to June 30, 2025, the General Fund ran a $3.3 billion surplus. That is, North Carolina collected $34.6 billion in income tax, sales tax, and other General Fund revenue and spent $31.3 billion on schools, universities, prisons, health care, and other General Fund services.
Now, to be clear, that $31.3 billion doesn’t constitute the entire state budget. We also spend billions of gas taxes, car taxes, and registration fees on our highways, plus tens of billions of non-tax receipts and (borrowed) federal funds. But in a stagflation or recession scenario, it would be in North Carolina’s General Fund where the adverse consequences would be most immediate and severe — be they across-the-board spending cuts, economically ruinous tax hikes, or both.
At the start of the 2024-25 fiscal year, the state had an unreserved credit balance in the General Fund of $2.1 billion. By June 30, it was about $5.4 billion (that’s the credit balance plus the annual surplus). What happened to it? Well, some $891 million remained in the General Fund. The rest was spent on Hurricane Helene relief or transferred, in compliance with state law, to various other programmatic reserves and infrastructure accounts.
Here's the bottom line: North Carolina currently has about $6.5 billion stowed in our rainy day reserve or other accounts from which it would be easy to withdraw funds in an emergency. That represents about a fifth of annual General Fund spending.
Not bad. State savings have certainly been shrimpier. Indeed, I’m old enough to remember when North Carolina didn’t have a rainy-day fund at all! But in this respect, we are far from a national leader.
According to the latest Pew Charitable Trust analysis, released in March, most states have a higher savings ratio than North Carolina does. To compute this ratio, they do roughly the same thing I just did: add each state’s formal cash reserves to the unreserved credit balance in each state’s General Fund. Then they compare that number to annual expenditure.
According to Pew’s analysis, North Carolina could, if necessary, fund about 86 days worth of state spending from savings accounts. The median state could fund 104 days of spending. Georgia (178 days), South Carolina (161), Florida (120), and Virginia (94) are among those with stronger positions than ours.
Since July 1, state government has been operating without a new budget for the 2025-27 biennium. The North Carolina House and Senate failed to reach a comprehensive agreement on taxes and spending. Frustrating, to be sure, but one effect has been to add more cash to state savings reserves.
Lawmakers still need to resolve the impasse, either comprehensively or through a series of mini-budgets to fund high priorities. Businesses and households also need clarity about North Carolina’s future tax rates so they can plan accordingly.
Still, if the General Assembly had fashioned a compromise in May or June — before the Trump administration’s border taxes were fully spelled out, and before Congress passed a reconciliation bill with major changes to joint federal-state programs such as Medicaid — the resulting budget would now look rather out of date.
Here’s hoping that, however the impasse is resolved, lawmakers will include another hefty savings deposit — just in case.
John Hood is a John Locke Foundation board member. His books Mountain Folk, Forest Folk, and Water Folk combine epic fantasy with American history (FolkloreCycle.com).
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