NCGA allocates billions for opaque “Reserve Funds”

The 2024-25 state budget includes approximately $7 billion in spending beyond the $30 billion headline number is being reported. 

The general fund appropriations total $29.787 billion. However, there is an additional $7.2 billion in planned expenditures that are being kept “off-budget” as they’re allocated to “reserve funds.” 

Reserve funds are not new and, to an extent, allocating money in reserve funds is largely standard procedure when it comes to the budget. However, since 2020 the practice has grown, with an increase in the use and number of reserve funds during the budgeting process. 

“Every year, a certain amount of available funds are set aside into special “reserve” funds.” reads a report from the John Locke Foundation (JLF) released last fall. “Traditionally, the set-asides were limited to contributions into the state’s Savings Reserve Fund and reserved for repairs and renovations.”

So the headline $30 billion repeatedly touted is the General Fund misconstrues total spending. However, the extra reserve funding is rarely reported on.

“The General Assembly actually set aside about $37 billion, but that $7 billion in allocations above the reported $30 billion is in the form of budgetary “reserves” being set aside from state revenue,” states Joe Warta in a recent analysis for JLF. “Essentially, the state is allocating that $7 billion to special accounts set up as reserves for future use, but significant portions of it are allocated right away.”

The argument could be made for putting the surplus dollars in the “Rainy Day Fund” rather than in alternate reserve fund vehicles. However, currently containing around $4.75 billion, the Rainy Day Fund is well above what the Office of the State Budget and Management (OSBM) and the non-partisan Fiscal Research Division of the NC General Assembly determined was sufficient savings for the State to withstand a financial downturn.

Technically, the Rainy Day Fund is a reserve fund, as well. But it is the increase in these reserve funding buckets that raises concern. Since 2020, at least 20 new reserve funds have been created. Prior to 2020, there were only a few.

“Perhaps most troubling of all, is the speed with which this has become a practice for the General Assembly,” wrote Warta. “For FY 2023–24, there are fourteen different budget reservations totaling $7.2 billion. For FY 2021-22, there were eleven reservations totaling $6.3 billion. For FY 2018–19, there were only two reserves totaling just under $300 million: the Savings Reserve and the Medicaid Transformation Reserve. This has been a rapidly changing — and largely unprecedented — budgeting procedure. Indeed, as recently as a handful of years ago it was common practice for contributions to special ‘reserve’ funds to be included in the General Fund appropriations.”

An example of a newly created reserve fund is the NCInnovation Reserve Fund, which was created in the 2024-25 budget legislation, to be filled with $500 million of taxpayer funds over the course of two years for distribution to the private nonprofit NC Innovation to fund research commercialization grants. 

“There was established in the General Fund an NCInnovation Reserve to make funds available for the Corporation for the purposes set out in the Article,” according to a letter to the Department of Commerce. “The State Controller of the State of North Carolina (the ‘State Controller’) shall reserve to the NCInnovation Reserve from funds available in the General Fund the sum of two hundred fifty million dollars ($250,000,000) in nonrecurring funds for the 2023-2024 fiscal year (the ‘First Tranche’) and the sum of two hundred fifty million dollars ($250,000,000) in nonrecurring funds for the 2024-2025 fiscal year (the ‘Second Tranche,).” 

“Formed by select North Carolina business leaders in 2018, NCI was appropriated a total of $500 million in taxpayer funds by lawmakers in the biennial state budget,” reported the Carolina Journal last month. “The money, divided up into two $250 million tranches over two years, will be used to fund an investment endowment, the proceeds from which NCI will use to issue grants to select university applied research projects in support of commercialization in the private market.”

“NCInnovation violates these basic free market principles. The funding comes from the collection of taxes, decidedly not a voluntary transaction,” wrote the John Locke Foundation. “From there, the political appointees award other people’s money to their chosen businesses, shielding the decision-makers from any personal risk or reward from these so-called investments. The people whose money is at stake — the taxpayers — have no say over how their money is allotted.”

One of the primary concerns with the proliferation of reserve funds is the lack of transparency on how these funds are being spent. Reserve funds must be appropriated before they are spent, and the General Assembly must pass legislation to appropriate funds. Details on how the funds are appropriated are found in, either, in the Committee Report or the text of the bill. Some reserves have funds placed in them but not as outgoing appropriations. In these instances, the reserve funds would be seen in either the Availability Statement of the Committee Report, or in a provision within the bill. 

“Perhaps my biggest concern is the recent trend of setting billions aside into newly-created special reserve funds, keeping that spending ‘off-budget,’ meaning it isn’t included in the General Fund spending totals,” said Brian Balfour, VP of research at the John Locke Foundation. “This artificially lowers the General Fund spending total that the public is informed about, misleading them about the growth of state spending.”

While some reserve funds would strike the public as appropriate government functions (the Clean Water Reserve, for instance), others’ relation to core government functions are a bit les clear. One candidate is the World University Games Reserve, aimed at supporting the semi-annual sports competition in North Carolina, according to Balfour. North Carolina has been awarded to host the games in 2029, so the reserve has started to set aside taxpayer funds to subsidize the event when the time comes.

The General Assembly holds its short session this spring, focused on budget modifications that could mean big changes in funding levels for everything from Opportunity Scholarships, to NC Innovation, or even the World University Games Reserve Fund. Yet, much of the tax-paying public will be left in the dark when it comes to reserve fund spending.

The post NCGA allocates billions for opaque “Reserve Funds” first appeared on Carolina Journal.