A lower revenue forecast and worries about federal cuts to states are pressuring North Carolina's budget process.
A new revenue forecast from the Office of State Budget and Management "makes the budget negotiation even more difficult," state House Democratic Leader Robert Reives II told The Bond Buyer.
In March the Office of State Budget and Management projected an 8% revenue shortfall compared to needs in fiscal 2029 unless changes were made. OSBM projected smaller shortfalls in fiscal 2027 and 2028 and larger ones after fiscal 2029. The office projects needs based on current expenditures adjusted for anticipated population growth and inflation.
North Carolina government prepares budgets for two years and is currently working on its budgets for the period from July 1 to June 30, 2027.
Last week the OSBM
There is "heightened uncertainty about the economy," the office said last week. "Although the economic outlook underlying the forecast anticipates weakening — but positive — economic growth, there is also elevated risk of a national and global recession that could push revenues much lower."
"Federal cuts are liable to have a massive impact on our ability to fund state government," Reives said.
"North Carolina is headed to a structural budget deficit — and fast," wrote retired North Carolina General Assembly Fiscal Analyst Richard Bostic
"The
Republicans hold roughly 60% of the seats in both the House and Senate but Gov. Josh Stein is a Democrat.
North Carolina's general obligation debt is rated triple-A by Moody's Ratings, S&P Global Ratings and Fitch Ratings.
North Carolina's House and Senate have developed their own budgets and the chambers' leaders are talking with each other to reconcile them. The Senate version would lower the income tax rate from 4.25% to 3.99% in 2026 and to 3.49% in 2027. The House version would reduce the rate to 3.99% in 2026 but raise revenue thresholds necessary for any further tax cuts thereafter.
The OSBM's recent projections are likely to put even more limits on the ability to meet priorities that the chambers have for increased funding and create even more discussion of the scheduled income tax cuts that economists have identified as the major cause of the revenue losses, Sirota said.
"It may make the House plan to reform the revenue thresholds that would trigger future personal income tax rate reductions more appealing or it could lead to even lower spending levels than the already historic lows contemplated in both the House and the Senate plans," she said.
The new projection "validates the position of the House over the Senate," Reives said. "Our chamber acknowledges that further tax cuts in tandem with the impacts of federal policy around tariffs will lead to a shortfall sooner rather than later."
Any significant federal cuts would worsen the state's position compared to the projections as the projections don't include them, said Marcia Evans, communications director for the OSBM.
"My chief concern is that [federal] cuts to Medicaid will trigger Medicaid expansion to end," Reives said. "More than half a million North Carolinians have benefited from that coverage which was passed on a bipartisan basis just a few years ago. The state cannot afford to foot the bill itself, particularly with dwindling revenues and the massive cost of Western North Carolina recovery."
Hurricane Helene
Any state that thinks it knows what its budgets will look like after the budget process in Congress is not dealing with reality, said Muni Credit News Publisher Joseph Krist. "If you are in a biennial budget state, it's worse."
In North Carolina, "you have the impact of Hurricane Helene serving as a real reminder of what can go wrong so it would be prudent to bolster reserves," he said. On the other hand, there is tax cut zealotry that relies on the results of the prior year, he said.
"My opinion is that tax cuts are economically unwarranted," Krist said. "It would be smart to increase any buffers against proposed federal cuts to see what results. Especially in light of the reduced state revenue estimates."
North Carolina Senate Democratic Whip Jay Chaudhuri agreed, saying the state faces three sources of pressure. Hurricane Helene will cost the state $60 billion. "Federal budget cuts in food assistance, health and veteran benefits will force the state to try to address the shortfall," he said. Last, economists say there is a one in three chance for a recession.
"These pressures require a state budget that's truly conservative and fiscally responsible," Chaudhuri said. "The Senate budget simply doesn't do that and it's fiscally reckless."
The nature of federal cuts is uncertain and will continue for a few months, Sirota said. Once the federal budget is set, state budget writers will likely have to return to the state capital of Raleigh to adjust their budget.
"State budget writers should pause the scheduled income tax cuts and make a plan for how to ensure that families and communities can weather the damaging cuts to services coming from Congress and provide greater certainty around the costs of things like childcare, health care and food," Sirota said.
House Democrats and Gov. Stein should be included in creating the budget, Reives said. The government should also freeze the tax cuts, he said.
"Depending on the timing and certainty of potential federal funding cuts it could further delay budget enactment or result in budget adjustments after being enacted," said S&P Director Joe Pezzimenti. "The state has a history of prudent fiscal management, which includes making difficult budget decisions to restore fiscal balance, when necessary, as well as managing surpluses when they occur, to retain structural budget balance."
Reives said, "The General Assembly has in recent years found it more difficult to agree on a final budget, routinely missing the fiscal year start date." When this happens, the state operates under the prior year's budget.
"House and Senate Republicans have differed significantly on their priorities in the budget and this year is a stark example of that," Reives said. "Their differences are seemingly intractable now, with the House wanting to pump the brakes on further tax cuts while the Senate wants to double down. Our fiscal situation is precarious and further cuts to state revenue could leave us unable to fund basic functions of state government by the end of the decade."
Chaudhuri said the Senate and House were "playing a game of chicken." He suspected both sides would remain in a standoff beyond the June 30 deadline.
Both the current House and Senate versions of the budget allocate $32.6 billion for general fund spending in fiscal year 2026 and $33.3 billion in fiscal year 2027.
