JLF: North Carolina Has More Covid Cash Than It Can Use

RALEIGH – What many worried would lead to revenue deficits turned out to be a boon for state government coffers, after portions of trillions of dollars in multiple COVID ‘rescue’ plans were doled out to states, many of which weren’t actually facing much of, if any, deficit at all. North Carolina is among the latter, and Joseph Coletti of the John Locke Foundation makes the case that the Old North State is so awash in COVID money, that it should consider giving it back.

It’d be a decided turn against the current; a torrent of helicopter money driven by the presupposition that Uncle Sam and his printing presses should always save (and rule) the day. It doesn’t come without costs, of course, and Coletti, who previously headed the North Carolina Government Efficiency and Reform initiative within the Office of State Budget and Management, spells out why those costs are nowhere near the price of admission:

“Even before Gov. Roy Cooper reversed course on masks, it was clear that the national health emergency  of Covid had been overtaken by the emerging specter of unconstrained dollars chasing very constrained economic output. This stagflation was last seen a half-century ago. Republican governors across the country are opting out of the federal government’s bonus unemployment benefits to help get people back to work. North Carolina’s General Assembly could compel Cooper to do the same here, as a small step toward addressing the output problem by getting people back to work.

A closer look at Covid relief to schools and state and local governments reveals the dollars problem: for all the money already chasing goods and services, much of the what the federal government sent out is still unspent. This fact calls into question two of the governor’s five reasons for continuing the state of emergency: “The State of Emergency maintains the state’s ability to receive federal funding to meet challenges presented by COVID-19.” (They are his first and third reasons, which he repeated verbatim perhaps for emphasis.)

North Carolina governments and school districts have more than $18 billion in funds in their coffers or on the way. The state Department of Public Instruction (DPI) reports K-12 schools have $4.8 billion  in unspent federal money. State and local governments will start receiving a combined $8.8 billion this month from the American Rescue Plan Act (ARPA). In addition to the $13.6 billion in federal funds, the latest public report  from the Office of the State Controller showed a $5 billion surplus in the state’s General Fund. Whatever potential emergency could arise, it certainly would not be met with a shortage of available money.

Legislators have not settled on a budget for next fiscal year or what they will do with ARPA money. Schools get $3.2 billion on top of $1.6 billion unspent “emergency relief funds” and $111 million unspent from other sources. The rest of state government receives $5.2 billion, and local governments receive $3.8 billion. The spending of federal Coronavirus funds so far does not inspire confidence for clear goals and objectives in the next round, but a longer time horizon should allow for better monitoring and better controls. American Recovery and Reinvestment Act (ARRA) money disbursed in 2009 was still funding programs into 2015, well after the fiscal crisis was over. The current influx of money will be appropriated into 2024 and spent through 2026, six years after vaccines became available. That’s not the timeline of an emergency.

Audits of federal Covid funds have found that neither DPI nor the Pandemic Recovery Office (NCPRO) took steps to ensure it was spent properly. A preliminary audit in March assured policymakers that every dollar through NCPRO was “accounted for, allocated, and disbursed” in accordance with state appropriations.

As the May audit explained, however, lax controls led to “an increased risk that recipients could have misused the funds without the misuse being detected and corrected timely. Additionally, NCPRO was limited in its ability to know whether funds were achieving legislatively intended results and take timely corrective action if necessary.”

DPI and NCPRO were under tight deadlines to get their money spent. DPI had to get a summer program up and running after a shortened school year while still trying to figure out rules for the 2020-21 school year. It also had more money for free lunches than low-income families could use, so school districts opened lunches to everyone regardless of income. NCPRO had to ensure money would be spent by December 30 and even held back some funds over concerns that it could not meet that goal. Those are reasons for the lax controls, but not excuses. It is reminiscent of how the Department of Transportation overspent by $742 million in its recent attempt to spend a great deal of money in a short period of time.

In a separate report on the Extra Credit Grant program, the auditor concluded that more could have been done to make payments automatic to low-income families. The report suggested identifying eligible families from enrollment in benefit programs if they did not file tax returns. This finding also underscored that a reason for linking programs and filing paperwork is to make it possible for government to “read” society, borrowing James C. Scott’s term. When people in the “zero tax bracket” do not file a tax return, they are invisible to a part of government.

Gov. Roy Cooper and state legislators have time to set priorities for ARPA funds. The first tranche arrived in May, but the final expenditure won’t need to happen until December 31, 2026, five and a half years from now. With the extended deadline for earlier rounds of federal assistance, there should be much better measurement of funds and outcomes for any remaining money the state uses. U.S. Treasury Department guidance largely allayed concerns that the state would not be allowed to cut taxes if it used ARPA funds.

With each passing day, however, the need for federal funds diminishes, and the case for sending the funds back grows stronger. While I have offered some relatively harmless ways to use the money, I remain convinced that the best approach is to send it back to Washington. [Read more from Coletti and JLF here.]