Rainy Day Fund “Fix” Would Reduce North Carolina’s Ability to Budget Responsibly

North Carolina’s House may soon consider a Senate-passed proposal that would amend the state constitution to establish a new rainy day fund.  States should have strong reserves, but this proposal would hamstring decision-makers and hurt the state’s fiscal health.  

In creating the new fund, the proposal would make two ill-advised changes to current policy for filling and using reserves.  It would:

• Make it harder for North Carolina to tap its rainy day fund reserves during natural disasters or economic downturns by requiring a two-thirds vote of the legislature to do so, rather than the current simple majority.  Limits on using rainy day funds, such as a supermajority requirement, have a chilling effect by discouraging legislators from trying to access these funds due to the difficulty in rounding up the votes, as we’ve noted.
• Require the state to contribute to reserves even in bad times, when it should instead use them to pay for services such as education, health care, and transportation.  The state would have to deposit 2 percent of the budget (around $450 million) into the fund every year unless two-thirds of the legislature agree to skip the payment.  That would hamstring the state’s flexibility to manage its money during downturns and to make deposits only during above-average economic or revenue growth, a much more reasonable policy.

These changes are not only fiscally harmful, they’re unnecessary.  North Carolina already has a rainy day fund that’s well-stocked, with over $1 billion.  (Under the new proposal, the laws defining the existing fund would be replaced with a different constitutional provision.)

Adding this new rainy day fund to North Carolina’s constitution would be a fiscally irresponsible step backward.