June 21, 2007

RALEIGH – Legislators can adopt a final budget that’s more fiscally responsible than existing House and Senate plans, according to a new John Locke Foundation Spotlight report.

Click here to view and here to listen to Joseph Coletti discussing this Spotlight report.

“If the members of the budget conference committee take the ‘less bad’ ideas from each budget, they can deliver a budget that is still not perfect, but better than existing plans,” said report author Joseph Coletti, JLF Fiscal Policy Analyst. “Those conferees can focus on slowing spending growth, providing more money for roads, and leaving the state better prepared for the next economic slowdown.”

N.C. Senate Democrats and Republicans united May 31 to support that chamber’s $20 billion budget for 2007-2008. House Republicans also supported the Senate budget plan, but House Democrats voted to reject the Senate’s proposals. Now House and Senate negotiators are working on a compromise plan for the budget year that starts July 1.

Despite an unusual level of bipartisan support, the Senate budget contains flaws, Coletti said. “Even though it’s smaller than the House budget, the Senate plan would increase operations spending by 7.1 percent from the previous budget year,” he said. “The total budget increase would be smaller – 6.2 percent – because the Senate budget proposes using less General Fund money for capital projects.”

Instead of General Fund money, the Senate proposes that North Carolina take on $1.2 billion in new debt, Coletti said. “The Senate budget would rely heavily on ‘certificates of participation’ or COPs, a scheme that allows the state to take on new debt without giving taxpayers a vote in the process,” he said. “If you include debt linked to COPs, the Senate budget increase would be 8.3 percent. Even some of those legislators who voted for the budget criticized new borrowing for university and correction facility construction projects with no vote by the public. Gov. Mike Easley and Treasurer Richard Moore also questioned this decision.”

The Senate plan has some good points, Coletti said. “First, the temporary sales and income tax increases first enacted in 2001 would disappear – or sunset – as scheduled,” he said. “Second, this proposal was $200 million smaller than the budget that passed the House. Third, the budget also provided for the review of some nonprofit organizations that receive funding from the state and ways to address Medicaid fraud.”

But spending growth would likely push lawmakers toward raising taxes again in the not-too-distant future, Coletti said. “Unless tax revenues do significantly better than forecast or legislators develop a new will to exercise fiscal restraint, taxes would have to rise as early as July 2008 to meet higher spending demands,” he said. “Recent history suggests this is unlikely.”

Budget conferees can salvage some good ideas from the House and Senate plans and approve a $19.9 billion budget, Coletti said. “Conference committee members can make a general practice of taking the lower spending proposal from the competing House and Senate budgets, with the exception of three critical areas: county Medicaid expenses, mental health, and the Highway Trust Fund,” he said. “Such an effort would leave a number of questionable spending items in place, but the legislature would have a chance to demonstrate at least a small degree of fiscal responsibility.”

Joseph Coletti’s Spotlight report, “The ‘Less Bad Budget’ Principle: With luck, the conference committee will discover fiscal responsibility,” is available at the JLF web site. For more information, please contact Coletti at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].