Press Release

Analyst: Cap Excuses Don’t Fly

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RALEIGH – The Easley administration’s claims that a proposed state budget won’t violate the governor’s spending cap are convoluted and contradictory, according to a preliminary analysis by the John Locke Foundation.

Fiscal policy analyst Joe Coletti responded to attempts by the governor’s staff to argue that the General Fund spending plan now under consideration in the General Assembly did not increase spending faster than the 5.6 percent cap insisted on by Easley during budget negotiations this year.

The spending-cap issue is significant not only for its own sake but also because the governor has cited the potential violation of the cap as reason for his opposition to higher pay raises for state employees.

Coletti listed three main arguments from the Easley administration and answered them:

• The administration claims that at least a portion of the $257.5 million hurricane-relief package enacted during the 2004-05 fiscal year should be added to the 2004-05 authorized General Fund budget, thus reducing real budget growth in 2005-06 to below the apparent 8 percent.

Only $157.5 million of the amount can reasonably be considered a new authorization, Coletti said, since the remainder consisted of previously budgeted money that reverted for use in hurricane relief. Adding that amount to the 2004-05 budget would reduce the growth rate in 2005-06 to 6.9 percent, still well above Easley’s spending cap.

The bigger problem with this accounting change, he said, is that it would clearly exceed the governor’s spending cap for 2004-05, which was supposedly also 5.6 percent. Adding the hurricane funds boosts that year’s growth rate to 6.7 percent.

“There is no magic disappearing, reappearing ink in the state budget,” Coletti said. “Either the hurricane-relief funds bust Easley’s spending cap this year or last year.”

• The administration further claims that some $160 million in 2005-06 authorizations for North Carolina public schools should not be counted against the spending cap because it is in response to the Leandro court case.

“This is a spurious argument,” Coletti said. “You might make an argument, based on experience in other states, that a one-time, court-ordered tax refund or settlement should not be considered in computing annual spending growth. But these dollars are recurring and are not the result of any specific court order. Leandro requires the state to direct more resources towards needy students – it does not require that these dollars be ‘new’ or raised with new taxes. They can come from redirect existing state funds or even education dollars now spent elsewhere.”

• Several items in this year’s budget that transfer money into special accounts, such as the Health and Wellness Trust Fund and the state employee retirement fund, should not count as General Fund expenditures, according to the governor’s office.

“If this were true, these items should have been reported as adjustments to revenue, not as General Fund spending,” Coletti said. “The $25 million for the retirement system, for example, is clearly a General Fund expenditure and has always been reported as such.”

By seeking to evade the letter and intent of its own spending-cap policy, he added, the Easley administration is ignoring its stated commitment to long-term fiscal discipline.

“If the governor’s spending cap is going to be this flimsy, he should just abandon the pretense and admit he doesn’t favor one,” Coletti said.

For more information, call Coletti ([email protected]) or Summer Hood ([email protected]) at (919) 828-3876.

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About John Locke Foundation

We are North Carolina’s Most Trusted and Influential Source of Common Sense. The John Locke Foundation was created in 1990 as an independent, nonprofit think tank that would work “for truth, for freedom, and for the future of North Carolina.” The Foundation is named for John Locke (1632-1704), an English philosopher whose writings inspired Thomas Jefferson and the other Founders.

The John Locke Foundation is a 501(c)(3) research institute and is funded solely from voluntary contributions from individuals, corporations, and charitable foundations.