The State of Public Finance

Speaker Name: Harlan E. Boyles
Speaker Title: Treasurer
Speaker Company: State of North Carolina

[Note: Treasurer Boyles' speech was preceded by a short video on his life and work produced by the North Carolina Department of Cultural Affairs.]

Harlan E. BoylesChancellor Borkowski, Dean Peacock, Senator Broyhill, fellow visitors and guests, distinguished members of the faculty and honored students of Appalachian State University ... I would be remiss if I didn't honor those who are present here and say that there are many in the audience who have had an impact not only on the quality of government but on those of us who have had an opportunity to serve them. I must say, Senator Broyhill, that I appreciate the fact that our Department of Cultural Resources working with Appalachian State University would undertake to produce such a video. Today is a great day in my life and also I think in the life and the history of Appalachian State University because you have on campus today many people who are friends of the University, many people who serve this State well, and many people who think highly of our State and also of Appalachian State University.

On my own staff, the ones that I give great credit to are the assistant and deputy treasurers who undertake different responsibilities on behalf of our State. I think that in the interest of an understanding on the part of the students of Appalachian, they might find it of interest to see those who represent a very meaningful part of our department and of our state government.

Tom Campbell is assistant treasurer and liaison to the boards and commissions on which the treasurer has the honor of serving. Doug Chappell is our investment officer and director of our investment and banking division. He's the one who heads up the management of over $30 billion in investable assets on behalf of our State and our State employees in the form of pension funds. Bob High heads up our State and local government finance division and works with people like Boone's Mayor Burnley and others across the state in administering over $18 billion of outstanding debt of the State and the localities at this particular time. Dennis Ducker heads up our employee retirement system and has a very important job for the future of our people-the people who serve our State. Jimmy Moore is our administrative officer, budget officer, and procurement officer and serves as the provider for all of our operating divisions.

In addition, our investment advisory committee is on campus today, tomorrow and Wednesday holding a work session and listening to our investment advisors regarding the management of investable assets for our state. They are Alton Howard, who is a practicing CPA in Raleigh with Lynch & Howard; Ben Vernon, who is retired from Dean Witter; and Leigh Wilson, who just retired as the executive director of the North Carolina League of Municipalities. Those gentlemen give much time to our State and provide tremendous insight and advice to me as Treasurer.

Another person who is important to us is Henry Bridges, the former state auditor, and had it not been for people like Henry Bridges offering encouragement and support, I would not be here today. Two representatives from the General Assembly who are here are Dr. John Gamble representing Lincoln County, my home county, and Representative Wade Wilmoth from the Boone area. Both of them are highly regarded members of our General Assembly. United States Congressman Steve Neal was introduced earlier, but he, too, has been very helpful to us and has been a tremendous Congressman for our State over the years.

I will be referring later to the Government Performance Audit Committee. Two people who served on that committee are here today: Helen Powers, our former Secretary of Revenue, and Jim Harrington, our former Secretary of Transportation. Both of these people did a tremendous job reviewing State government.

John Medlin from Wachovia, whom you saw on the video, is here and certainly we're grateful to people like John. Also John Forlines of the Bank of Granite, in Granite Falls, and so many others have given us tremendous counsel over the years. I'd also like to acknowledge Charles Heatherly, the man who collaborated with me in the writing of this publication. He's been a tremendous friend and someone who has made sure that we stuck to our task and that what we offered in the book is of interest. Mayor Burnley, I'm most grateful to you for that proclamation from the Town of Boone and the reason I am is because I'm not out of town yet and I might see some of your police officers before I leave. If so, I'll make sure that I wield that proclamation at the right time, but I'll do it in a very kindly and prudent way.

As the Treasurer of the State of North Carolina, I take great pride in being before you this afternoon. To you the students, you are now enjoying the stewardship and the benevolence of others who have preceded you-those who have invested in your future -- and yes, those who have demonstrated their faith in you; their faith that you would someday carry on for others who might follow you. You are in an enviable and challenging position, and I hope to further elaborate upon some of those challenges this afternoon.

The subject of public finance touches every person -- in every walk of life -- in a very meaningful and significant way. Public finance impacts our quality of life -- and our social and economic well-being. Public finance is the fuel that feeds our government. Public finance involves money -- and it's your money -- and it's your government that we now propose to address. In reality, you and I together -- individually and collectively -- are getting the kind of government that we are willing to accept. You heard Steve Bell earlier talk about the environment that we're in today, the state of flux in the minds of people. The power to change the leadership of our government and its direction, is forever guaranteed. Thus, it's your money and it's your government about which we will be speaking. It's economics, it's finance, and it's pocketbook issues. Reality and candor are words that are implicit in our presentation. But as proud as we are of our State and as proud as we are of our counties and cities across the State, we simply cannot ask or expect our governments to be all things to all people.

In my tenure in State government, I have seen America become the moral and economic leader of the world. We achieved this greatness with hard work, thrift, discipline and a sense of values based on honesty, integrity, fairness and a respect for the rights and well-being of other people.

North Carolina became a strong and great State during this period as well. We grew a vibrant farm economy and saw it diversify. We sold industry on the potential that existed within our borders and they came, creating new jobs.

America's fortunes have changed, though, as we watch the clock count down the final ticks of the great twentieth century. In the span of just one decade, or maybe two, we have watched with trepidation as our nation went from being the financial leader of the world to the world's largest debtor nation. We seem to have lost our moral compass in the eyes of many people, and, of course, our sense of responsibility.

My own generation deserves many accolades for the advances it has brought in better medicine, communications, transportation and other trappings of high technology. The average American home today is equipped with devices of convenience, comfort and necessity that only the very, very rich enjoyed when I was a child.

My generation also deserves censure for using more of the nation's wealth than we created -- and we are the first generation in American history to do that. We are leaving a national debt to our posterity which exceeds the gross domestic product. That to me is indefensible and will become a source of devastating grief for the next generation as it begins to grapple with the problems of its time and finds that its choices are severely limited. But even worse, there is little left standing to show for what the money was spent.

The borrowed money of the 1980s and 1990s was consumed by the providers of medical care, by government workers, by beneficiaries of numerous entitlement programs, for military spending, by investors of poorly managed savings and loan institutions, and, eventually by investors in the public debt.

Our national leaders now are spending $1 billion a day, which we don't have. Disaster awaits us, if we do not change the direction of our government. Such are the reasons why we should study more seriously and more carefully the subject of public finance, and it was in this spirit that I decided to write a book.

Why a Book on Public Finance?

I began writing Keeper of the Public Purse nearly two years ago for several reasons. First, I realized for several years that there was not a concise account of North Carolina's public finance in existence. There are thousands of pages of budget documents and reports about the State's budget. However, they are complex and quite confusing. This book is the first effort in more than a half-century to explain the story of public finance in North Carolina in a concise and comprehensive manner. My real objective is to peak the interest of the academic researchers and others who would delve further into the subject matter of public finance, hoping that they would engender further interest on the part of the public and those who pay our bills.

The second reason was the rapid growth of our State budget, which is a story that has not been told in many years. The impact of this tremendous increase in public spending upon the future of our State and upon you, our citizens, will be substantial. In our republic the citizen needs to be informed about what his or her government is doing so he or she can make informed decisions about the future.

(Chart Depicting Growth of North Carolina Population and State Budget)

This slide you are seeing demonstrates the rapid growth of State government. The bottom (the dark area) shows our trends in population growth since the 1950s; while the budget growth is in the lighter color. You can see starting at around 1985, that there was a dramatic change in the direction of our budget. There are many concepts and there are many views about why the budget increased so dramatically. I will not go into those changes today because I think there are different views and there are different philosophies as to what happened. Certainly it's a question worthy of your consideration.

And third, such a book is needed at this time because of the direction in which our State and our nation are heading. We're spending too much of your money and the question is, are we spending your money wisely?

Between the years 1800 and 1900 North Carolina's population grew by a factor of 4. During the next century the State's population also expanded by a factor of 3.9. The State's budget, however, increased 20-fold between 1800 and 1900 (in 1994 dollars) and between 1900 and the year 2000, our State budget will have increased 278 times.

While the State's population has grown at about the same rate over two centuries, its taxation and spending policies have grown exponentially. I suspect that Representative Wilmoth and Representative Gamble would say to you that when the State budget is presented to them in the General Assembly by the Governor and the executive departments of State government, they read those presentations as they are presented at that particular time. There is no effort and no desire to look back to 1800 because it's irrelevant, they say. And there's no need to go back to 1900, but certainly you would expect that we would be interested in the trends. That's what our undertaking here is all about. It's to show you the trend so that you can develop an interest and a concern about these figures. The figures suggest that by the year 2100, North Carolina's population will total 26 million people and our State budget will exceed $1.5 trillion. No question, our State may be large enough to support a population of that magnitude, but could we do so only without a severe degradation of the quality of life for all of our people. The notion of a $1.5 trillion budget seems quite impractical -- if not impossible.

As we examine North Carolina's fiscal matters, one point worth noting is that most of the State's money goes to pay its 217,000 employees and to provide their medical and retirement benefits. Some 51 percent of the State budget is for payroll and employee benefits. The General Assembly has very little discretion over those costs. Of the education budget, payroll and employee benefits account for approximately 84 percent of the total.

In 1964, there were 108,000 full-time State employees, including teachers, and the total North Carolina budget was $1.2 billion. Since that time, the budget has increased 16-fold and the number of State employees has more than doubled. During the same time period our population increased only 50 percent. It is clear from this rapid growth of public expenditures that the number of tax users in our State is growing faster than the number of taxpayers.

Change Is Needed

I do not believe our people can endure the increased tax burden necessary to sustain the rate of growth of North Carolina's public spending for the past three decades. So, as a consequence, I've identified at least seven changes which I believe we must make to restore reason to our State policies and order to our way of life.

Recommendation #1 is that we reinvent government. Many of you may have read the book, Reinventing Government. You've also heard the term "reengineering" and you've heard of "downsizing." The corporate or private sector at this particular time has done a tremendous job in redefining its mission and assigning reasonable costs to those undertakings. But the question is, have we undertaken to do so in state government and in the public sector at large? The basic problem with government as it functions today is the emphasis upon process and the neglect of the product. Public employees must produce a product or a service that is worth the cost of their time and they must be rewarded accordingly when they do an excellent job.

Recommendation #2 talks about reforming public education. Public education, in my mind, is in need of attention both in its governance and in the delivery of classroom instruction. But we hear it every day, and certainly I hope that you do not take this as being critical of our public schools or the administration, but the attitude of the people is what we hear. Steve Bell talked about the messages that we're hearing from the people, but the message that we're getting about public education is more in the form of a question and that is, are our public schools making better progress or are they failing by all known and measurable indicators? For example, student achievement is low. We're not progressing. Student disruptions and dropouts and incidents of violence in the schools are increasing. Those, among many others, are the reasons I think we must give some attention to the management of our public schools program.

One major reason why our public schools don't work well stands out, and that is because public education is the only profession that I know of where if you do a good job, nothing good happens. But if you do a bad job, nothing bad happens. Nothing important happens regardless of whether school employees do a good job or a bad job, because that's the law. Employees are rewarded for how long they stay on the job rather than for what kind of job they do. So in the absence of some sort of incentive, either to do a good job or to avoid doing bad things, school employees will simply not excel. Our public school law in North Carolina, as in many states in the nation, mandates mediocrity. What we want and need of course is a system whereby mediocrity and incompetence are penalized and excellence is rewarded.

Recommendation #3 deals with the elimination or the modification of federal mandates. I know that Steve Neal shares many of these concerns. The federal mandates have become a heavy burden for state and local governments nationwide, particularly in poor and rural counties. Federal mandate is the term that characterizes mandated expenditures passed on to state and local governments by our federal government. In many cases, mandated programs were not even debated seriously by Congress and yet many of the counties in our State are being forced to abandon their support of education and other worthy programs to pay for federally mandated expenditures. There is no easy solution, so the question is, what do we do?

Recommendation #4 deals with refocusing economic development. Senator Broyhill used to be the Secretary of our Department of Commerce and one of his major responsibilities was the recruiting of new industry and the creation of new jobs. Today the war between the states in enticing industries to relocate their plants and their manufacturing or other operations to a given state is out of control. It's making us all look bad. Take for example the competition for new industry today. We are offering new industry advantages and opportunities that we cannot provide to the industries that are already here making our State what it is. Our cheap labor at one time was a major incentive for luring industry to North Carolina, but that's not available now because cheap labor, or cheaper labor, is available elsewhere. So, what we will have to do is reinvent the process of encouraging economic development in North Carolina if we're to provide and create jobs for our high school and college graduates. I think one of the things that's imperative is that we make sure that we treat our existing industries fairly and equitably.

Recommendation #5 deals with making government more participatory. Citizens have indicated in many ways in recent years and maybe even more today, that they want to participate in the process of government to a greater degree than ever before. The time may have come for North Carolina citizens to be allowed to initiate constitutional amendments through the voter initiative process as voters can now do in almost half the states. To me, voter initiatives have a very definite psychological advantage, with implications far beyond the concept of voter initiatives. It, in effect, says to the members of the legislature that we are looking over their shoulders.

Recommendation #6 deals with equalizing the balance of power. Many of you know that when North Carolina's founding fathers crafted our government, they intentionally created a powerful legislature and a weak executive branch. They did this because they wanted to spare future generations from having to deal with tyrannical governors such as the abusive royal governors appointed by the King of England.

It's time for the General Assembly to put this matter to the vote of the people and that's the message that we're hearing across the State. But with the veto, the Governor would be forced to take positions on issues which he now can avoid. The power of the veto would make good governors better and would expose weak governors for what they are.

Finally, Recommendation #7 is to make our government work. People want their government to work for their interests. Citizens know what it costs to provide public services, and, they are also keenly aware when government programs fail.


The question of taxes always comes up in a discussion on public finance. Before man learned to count, some 5000 years ago, he learned to tax. The need to count arose from the need by an early ruler to assure that his loyal and faithful servants paid their lawful obligations to the kingdom. It was the business of taxes, historians say, that led to the necessity of creating money-and, of course, the creation of the profession of accounting and a bureaucracy to administer those taxes.

There are many Biblical references to taxes. In fact, Jesus was born in Bethlehem because his parents were ordered there to list their taxes.

What Are Good Taxes?

Good taxes, according to Adam Smith in his 1776 book, Wealth of Nations, must meet four criteria. First, they should be based on an individual's ability to pay. Second, good taxes should be certain. Third, they should be convenient to collect and, fourth, they should be efficient and economical. For two centuries, industrialized nations of the western world have generally followed these basic principles of Adam Smith. But in the past two decades, there have been signs that several modern day governments, including our own federal government in Washington and our state government in Raleigh, have strayed from the principles of fairness, certainty, convenience, and economy of scale.

There are two sides of the tax equation which have been eloquently expressed by distinguished former members of the U.S. Supreme Court.

Oliver Wendell Holmes said "Taxes are what we pay for civilized society."

"The power to tax involves the power to destroy," wrote Justice John Marshall.

North Carolina Taxes

Our North Carolina taxes have been quite reasonable and certain, and yet there is a great need for a new look from whence we're getting the revenues. We still, counter to the argument that our tax structure in the state is regressing, rely heavily upon the income tax, which is a very progressive tax, and we're relying, to a considerable extent, upon the sales tax, which is a consumer's tax. But at the same time, the tax growth in our state has been substantial and it has happened since 1980. Between 1960 and 1992, North Carolina's population increased 50% as we alluded to earlier. The cost of living index increased 4.7 times and yet the State budget increased by a factor of 24. The story, my friends, is in the numbers.

The $18 billion annual State budget today is only part of the public finance portrait. Local governments throughout North Carolina spend about $9 billion, and the federal government collects from our citizens some $29 billion. The total tax bill for our citizens is a substantial part of their personal income and was estimated at $125 billion just this last year. So if you take the $56 billion that our people pay to the local, the state, and the federal governments, you can see that it represents some 45% of our people's personal income. That is a significant revelation.


We have alluded to the fact that our State and our counties and cities today have some $18 billion worth of debt outstanding. This is a general obligation debt which is revenue bonds and other types of IOUs. If you look at the purposes for which we have borrowed money, most of that money has been for grants-in-aid to our counties and cities for clean water, our schools and for educational and other worthy programs and projects. The State has been very careful in the utilization of borrowed money. We have not used it, and could not use it under our constitution, for operating expenses.

The State's Money

Where Does It Go?

The authorized budget for the State of North Carolina in fiscal year 1993-1994 was $16.7 billion. This averages out to an annual expenditure of nearly $2,500 for each man, woman and child who resides in our State. For working taxpayers, the burden is much higher and is between two and three times the $2,500 figure.

Let's look at where the $16.7 billion goes. The largest portion of it goes to education -- public schools, the university system of which Appalachian State University is a part and our community colleges. Add to what the counties and the federal government put into the $4.2 billion, or the 41% appropriation of the State budget that goes to our public schools, the total today being spent is almost $5,500 per child. In our university system, from which we're getting tremendous dividends, the supplement from the State appropriation, on average, is about $7,600. For every full-time equivalent student in our community colleges, the supplement from state appropriations is roughly $4,500. You can see that we're very interested in and attribute many of our dollars to public education.

The Budget

In North Carolina, the only state in America in which the governor does not have veto power, the General Assembly has final say in all legislative matters. That's appropriate and that's the way it should be, because that is what the government process is all about. Its power to levy taxes and choose where those taxes will be spent has the greatest impact upon the individual taxpayer of any of the numerous powers exercised by the General Assembly. Its power of the public purse is also its most awesome tool in setting policy for the destiny of our State.

Preparation of the State budget begins with the Governor, whose role is to "propose." The General Assembly's role is defined as "disposing." In other words, the Governor proposes -- and the General Assembly disposes.

I alluded earlier to the Government Performance Audit Commission (GPAC), and I would simply say to you today that the bills introduced to accommodate the recommendations made by the Commission totaled some 275 separate legislative bills. They were introduced in the 1993 General Assembly, and had as their estimate, annual savings of some $300 million a year, with the reduction to State employment of some 7,500 jobs. What came from it all, was that very little was done. For example, of the 275 bills introduced, only five were adopted, at a projected savings of only $30 million, some 10% of what had been identified by the Commission members.

The disappointing experience of the North Carolina General Assembly, in dealing with a variety of rather modest recommendations to eliminate waste and inefficiency in State government, illustrates the problem that all governments face today. Special interest groups form a strong and articulate constituency which resists all threats to the status quo, no matter how well deserved or intentioned the proposals are.

By the year 1994, the economy having improved and the tax revenues of the State being more favorable to the interest of the General Assembly members and others, the General Assembly returned for its "short" session in 1994 and the GPAC recommendations and proposals were all but forgotten. They will, I'm sure, resurface one of these days along with an interest to curb the growth of state government.

The world around us, my friends, has changed much during these past two decades. Yet the government has failed to follow the changes and adapt accordingly.

In spite of the deep sense of concern which we all have for the rapid growth of public expenditures in this State, I am hopeful about the future as I'm sure you are. I'm especially encouraged by what I hear about the business students here at Appalachian State University. The Walker College of Business has achieved, under Dean Peacock and his faculty and associates, a national reputation for excellence. I'm confident that you, the students and the faculty, will assume a major role in the leadership of your community and the leadership of your State and, of course, the affairs that pertain to all of us.

Let me close now by saying to you in the words of Mark Twain, "Do what is right," he said, "You will please a few and astonish the rest."

Finally, as the writers of Reinventing Government, David Osborne and Ted Gaebler, said, "Our governments are in deep trouble today." That's cynical and to me very disturbing, but they said, "We last reinvented our governments during the early decades of the twentieth century, roughly from 1900 through 1940 ... Today the world of government is once again in great flux. The emergence of a post-industrial knowledge-based, global economy has undermined old realities throughout the world, creating wonderful opportunities and frightening problems." [David Osborne and Ted Gaebler. Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector, Reading, Massachusetts: Addison-Wesley Publishing Company, 1992.]

Ladies and gentlemen, it has been my pleasure to share with you today and I will leave with you this one final statement: We are in a very complex and changing society but unless we, the people, manage change, change will manage us.