State Should Save For Rainy Days

By John Hood

RALEIGH — As I write this, the midterm elections of 2026 aren‘t over. I don’t know whether, among other unsettled questions, the Republicans will retain control of both chambers of the North Carolina General Assembly. But I can predict one thing with certainty: the next legislature, be it controlled by Republicans or split between the two parties, will have critical decisions to make about the state’s finances.

Over the past several budget cycles, Democrats have predicted that GOP tax cuts would produce significant deficits. Republicans have dismissed these predictions as overly pessimistic — and so far, they’ve been correct.

As a fiscal conservative, I support tax reform and reduction as well as the spending restraint required to keep the state budget in balance. Some state functions and agencies do require additional resources, and I was pleased to see last year’s budget respond accordingly. Other functions and agencies merit fewer state dollars, or none at all, including the pork-barrel projects unwisely stuffed into that same budget bill.

These two options, cut taxes or spend money, are not the only ones lawmakers can choose. There is a third option, one that I hope the General Assembly (however constituted) makes a priority in 2027. That is to save money, either in North Carolina’s rainy-day reserve or in other state accounts.

Savings come in handy during times of fiscal distress: economic recessions, natural disasters, unforeseen legal obligations, and the like. I’ve been around long enough to witness legislative sessions without any significant fiscal cushion. They aren’t pretty. Because the state constitution requires North Carolina’s annual operating budget to balance — the state is allowed to issue debt for capital projects, of course — fiscal gaps can produce costly tax hikes or sudden, across-the-board spending cuts. Drawing from reserves can be a welcome alternative.

It would not be correct, however, to claim that stashing state cash in the bank has no downside. There is an opportunity cost. Putting taxpayer money in reserve means those dollars cannot be spent on valuable state services or returned to taxpayers to spend on the critical needs of their own households, businesses, or private associations.

There is a healthy balance to be struck here. Alas, I don’t think North Carolina has done so. Our current state reserves are inadequate to the task and do not compare favorably to those of our peers. According to a study just published by the Pew Charitable Trusts, North Carolina’s total state reserves are the equivalent of about 53 days of state spending. The national median is 80 days. Georgia (85 days), Texas (89), Florida (99), South Carolina (158), and even California (106) are, by this measure, better prepared for fiscal emergencies. Indeed, in the Southern region, only Mississippi (36 days) has a lower proportion of state reserves than we do.

Fortunately, this is not a malady that requires radical surgery. Lawmakers cannot and should not attempt to lift North Carolina to the national median or beyond in a single year. Starting in 2027, however, they can and should make it a policy to add at least 50% more to the state’s rainy-day fund than current law requires. Assuming we don’t endure a major disaster or recession in the short run, such a strategy should raise our savings position to a prudent level by the end of the decade.

Saving money isn’t exciting, I know. One of my favorite presidents, the famously frugal Calvin Coolidge, wasn’t considered particularly exciting, either, but he had it right. “I favor the policy of economy,” he once said, “not because I wish to save money, but because I wish to save people. The men and women of this country who toil are the ones who bear the cost of the government. Every dollar that we carelessly waste means that their life will be so much the more meager. Every dollar that we save means that their life will be so much the more abundant.

“Economy is idealism in its most practical form.”

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).