Governor Bev Perdue (D) has signed into law North Carolina’s 2010-11 state budget. The new budget was authorized before the start of the fiscal year for the first time since 2003. The spending plan increases actual spending over the current fiscal year, adds 864 full-time positions to the state payroll, raids lottery funds to preserve teacher jobs, freezes teacher and state employee pay and offers a misguided package of targeted tax breaks intended to help small business job growth.
Worse still, the budget fails to address the roughly $3 billion structural gap looming for next year’s budget.
(Click on the links in the box to the right for a summary of each agency budget.)
Total Spending Up Again, Contingency Plan in Place for Federal Funds Not Yet Approved
North Carolina’s fiscal year 2010-11 state budget includes appropriations totaling $18.96 billion, but that doesn’t tell the whole story. The $18.96 billion does not count $1.04 billion in American Recovery and Reinvestment Act (ARRA) – the federal stimulus act – funds already embedded as cuts via last year’s two-year spending plan. That is money counted as a "cut" in the state budget, but backfilled by federal dollars. The budget also includes another $561 million in Medicaid "cuts" that are also merely funding shifted to the feds. The $561 million, however, is money that would come from “enhanced funds” from the federal government that have not yet been approved by the U.S. Congress. In case these extra funds are not approved, North Carolina budget writers included a contingency plan to make up the difference. The contingency plan includes raiding trust funds such as the Disaster Relief Fund and the state’s Rainy Day Fund, raiding Lottery money supposed to be dedicated to education, a reduction in Medicaid provider rates, a reduction to the state teacher and employee pension system and a one percent across-the-board “management flexibility reduction” for all state agencies.
Especially troubling about the contingency plan is the reduction to the state’s pension system. Recent reports from the State Treasurer’s Office reveal that the pension system is under funded, and already requires an additional $650 million in state appropriations over the next two years to make it once again fully funded. All told, total spending on state programs including the federal funding comes to about $20.6 billion in the 2010-11 state budget.
Due to a revenue shortfall, the 2009-10 budget year will likely see actual appropriations (including federal funds) of about $20 billion. Thus, this year’s budget marks an increase of about $600 million in year-over-year spending, or about 3 percent.
Finally, compared to 2008-09 actual appropriations of $19.65 billion, this year’s state budget will hike state spending over a two year period by nearly a billion dollars – roughly 4.8 percent – during the “greatest recession since the Great Depression.”
Public Education and Public Safety Cut the Deepest, Nearly Everything Else Increased
In a curious display of priorities, the 2010-11 state budget reduces funding for K-12 education and public safety, while expanding spending on all other state agencies but one.
The budget bill makes adjustments to the second year of the two-year spending plan approved last year. The adjustments include a reduction in funding for public education by more than $275 million – or roughly 3.7 percent – compared to the spending plan approved last year. A large share of this reduction, however, is not a spending reduction at all. The budget shifts an extra $121 million in state lottery funds to the pubic education budget to help finance teacher positions. Because the lottery money backfills funds the education budget would have otherwise needed to spend, it is counted as a budget cut.
Similarly, the state’s Justice and Public Safety budget is reduced by 3 percent in the finalized spending plan. Conversely, every other state agency’s budget – save one – is expanded for 2010-11. The agency with the largest such increase is Natural and Economic Resources, which expands by 11 percent, followed by a 4.4 percent increase for Health and Human Services (once federal funds are included). General Government is the only other agency decreased, and their reduction is a mere two-tenths of one percent.
New Budget Adds 864 Full-Time State Employees
In what would continue a long-term trend of growing state employment as private sector jobs contract, the 2010-11 state budget adds 864 full-time state positions even as North Carolina suffers from double-digit unemployment. Most of those positions would come in the form of staffing needs for a new women’s prison and a central prison hospital and mental health facility. The UNC system would also add more than 280 new positions for maintenance and security staff for additional buildings being put to use.
Raids Lottery Funds to Preserve 1,600 Teacher Jobs; Teachers and State Employees Pay Frozen
The 2010-11 state budget raids $121 million of lottery proceeds to preserve a reported 1,600 teacher positions. The $121 million amount tracks closely to the State House’s proposal, but is nearly $90 million more than what the state Senate proposed. Meanwhile, Governor Perdue didn’t include any lottery funds being transferred for teacher salaries in her proposal.
Teacher and state employee salaries will be frozen for the second straight year in the 2010-11 state budget. If the state needs to fall back on its contingency plan, however, furloughs or layoffs may be included as part of the management flexibility reduction.
Ineffective Attempt at Small Business Relief
Included in the budget is $34 million designated for a targeted tax credit intended to encourage job growth among North Carolina small businesses. The temporary refundable credit will amount to 25 percent of a business’s unemployment insurance liability. The credit would be limited to businesses with annual revenue of less than $1 million, and expire at the end of 2011. Such a small, targeted and temporary tax break is not likely to sway the hiring decisions of business owners.
Lawmakers Pile on More Unauthorized Debt
The State Treasurer’s most recent Debt Affordability study specifically warned that North Carolina state government has “substantially exhausted its General Fund debt capacity until FY 2012.” Moreover, the study strongly recommends that the state no longer rely on “special indebtedness” instruments such as Certificates of Participation, which do not require voter approval.
In spite of these warnings, state budget writers authorized another $175 million of Certificates of Participation to be issued to finance repair and renovations of state buildings and purchase equipment for the UNC and Community College systems. In other words, the state is going against the advice of its Treasurer, and will again deny voters a voice over an increase in the state debt. North Carolina voters haven’t been allowed to vote on new state debt in a decade, in spite of the state’s Constitution directing new state debt be authorized by a vote.
Setting the Stage for an Even Worse Crisis in 2011-12
The implications of the 2010-11 state budget will be felt heavily next year. By relying on more than $1.5 billion of non-recurring federal stimulus funds and $1.3 billion in temporary tax revenue to help balance the 2010-11 budget, North Carolina lawmakers and Gov. Perdue are setting up North Carolina for a major state budgetary crisis in 2011-12. Absent those two significant sources of funding, state budget writers will be facing a revenue hole of $2.8 billion when they reconvene next year to craft the 2011-12 state budget.
Combine this massive revenue hole with several mounting spending pressures and the 2011 session will present the most daunting budget crisis to date. Rising spending obligations include state pension contributions, a massive and growing unfunded liability for state retiree health benefits, rapidly climbing state debt, and billions of dollars owed to the federal government in exchange for their loan to cover unemployment insurance benefits.
Instead of implementing meaningful spending reform, short-sighted state lawmakers decided to pull together a patch-work budget that creates an even greater financial mess next year.