New state budget builds on good track record, prompts note of caution

July 11, 2017

RALEIGH — The latest N.C. General Fund budget builds on a recent history of sound, fiscally responsible state spending plans. A new John Locke Foundation Spotlight report highlights the budget’s key provisions, while also noting potential challenges in the years ahead.

“Since Republicans gained control of the budget-writing process in 2011, they have focused on tax reductions that benefit all North Carolinians, prudent spending and savings, and a renewed focus on improving government productivity and efficiency,” said report author Joseph Coletti, JLF Senior Fellow. “The 2017-19 biennial budget is no exception.”

At the same time, Coletti warns that tax and spending decisions made this year might require a “future course correction.”

The General Fund budget spends $23 billion in the fiscal year that started July 1 and another $23.6 billion in 2018-19. Appropriations will grow by $1.3 billion, or 5.9 percent, over two years. “The spending increase is larger than the average over the past five years, but it still represents an acceptable level of budgetary restraint,” Coletti said. “State government will take less money, adjusted for inflation, from North Carolina taxpayers.”

Meanwhile, another round of broad-based income tax reductions takes effect in 2019. Lawmakers also set aside another $263 million for the “rainy-day” Savings Reserve, in addition to the $100 million restored to the rainy-day fund after its use last year for Hurricane Matthew and western wildfire relief. Budget writers devoted another $125 million to repairs and renovations of government-owned property.

“Provisions within the budget, along with another law approved earlier this year, should make future funding of the rainy-day reserve and state capital needs more secure,” Coletti said.

The rainy-day fund now contains enough money to cover roughly one month of state government spending at current levels, Coletti said. “That amount is still nowhere near the share of annual state spending necessary to weather a recession, but it’s the largest reserve North Carolina ever has built.”

The budget’s spending and savings provisions should mean good news for taxpayers, Coletti said. “Low spending and an adequate rainy-day fund should mean less temptation to hike taxes when the next recession comes,” he said. “We are unlikely to return to the days of the 2000s, when lawmakers regularly renewed so-called ‘temporary’ tax hikes. Predictable levels of taxes and spending will help people make longer-term plans.”

Coletti highlights other key provisions from the 438-page General Fund budget. He cites “generally broad-based” and “largely positive” tax changes. Those include lower personal and corporate income tax rates and a higher standard deduction starting in 2019.

The budget features 9.6 percent average pay raises for public school teachers over the course of two years, along with new salary schedules for principals. Coletti addresses education-related budget measures that increase funding for the Opportunity Scholarship Program and establish a new joint legislative task force focusing on the future of state education funding. “The budget also places renewed emphasis on early childhood education and career and technical education.”

In the category of health and human services, “the biggest news is what did not make the budget — a proposed expansion of Medicaid that would have been partially funded by a tax on hospitals,” Coletti said. “This unrealistic and unworkable idea from the governor’s original budget plan died early in the budget debate.”

Most state employees will see $1,000 pay raises and an extra three days off, while government retirees will see permanent 1 percent increases in pension payments. A budget provision blocks new state employees hired in 2021 and later from collecting state health benefits when they retire.

Nearly $1 million over the next two years will help state agencies prepare for the “raise the age” initiative. It will shift misdemeanor and nonviolent felony offenses involving 16- and 17-year-olds to the juvenile justice system.

Legislators resisted the governor’s attempt to restore film production tax credits, but they doubled the amount of money available for film grants to more than $30 million per year. Coletti details other changes to the state’s targeted tax incentives.

Budget provisions in education, health and human services, and elsewhere focus on government transparency. “Several provisions improve the ability of management, legislators, and the public to understand state government finances and operations and hold government accountable for performance,” Coletti said.

Looking ahead, Coletti offers budget writers some warnings. One involves the budget’s tax cuts. “The $529 million in advertised tax cuts take effect mostly after January 2019, and those cuts will total about $1 billion over the course of a full budget year,” he said. “This represents no looming crisis with current plans to boost spending by 3.1 percent this budget year and 2.7 percent the following year. But that spending level could grow when the General Assembly makes budget adjustments in 2018.”

Coletti also mentions a technical change in the budget-writing process. “It’s an adjustment to the base budget with the main purpose of incorporating annual $10 million increases in funding for Opportunity Scholarships,” he explained. “This sets a troubling precedent, even though the added funds support a worthwhile program.”

While troubling, these issues do not rise to the level of concern created by budgeting decisions made by Democratic state budget writers from 2001 to 2010. “At that time, lawmakers were raising taxes and repeatedly tapping one-time revenue sources to cover ongoing government costs.”

Current budget writers can maintain North Carolina government’s prudent, sustainable path, Coletti said. “If legislators refrain from adding new appropriations when they return next year, they can keep the budget on a good track.”

Joseph Coletti’s Spotlight report, “A New State Budget Based on Time-Tested Principles: A Review of North Carolina’s FY2017-19 Budget,” is available at the JLF website. 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].