by John Hood
Chairman John Locke Foundation
Although the general outlines of the House proposal are similar to those of the 2001-03 budget already passed by the Senate, there are some important differences in specific areas. For example, the House plan is significantly more generous to community colleges than the Senate was, allowing a 3.5 percent increase in FY 2001-02, the same percentage hike the House plan gives public schools. The Senate approved only a 1.4 percent increase for community colleges. On the other hand, the House plan makes a number of revisions to the University of North Carolina budget including fewer positions, payroll reductions, less operating support for UNC Hospitals, and fewer special programs that result in essentially no change in the system’s $1.8 billion appropriation. The Senate provided a 1.1 percent increase.
Like the Senate budget, the House proposal borrows money from the state’s Hurricane Floyd relief fund and other reserves, freeing up $167.5 million in one-time money for FY 2001-02 (the Senate budget used $142.2 million from these reserves). Also following in the Senate’s footsteps, the House plan would increase availability by $52 million in each of the next two years by cutting the payroll of all state departments except public schools and community colleges by 1.5 percent. The Senate had employed a 2 percent reduction but exempted UNC, thus yielding $37.3 million. This is not so much a savings as a redirection of funds, however, since reversions from lapsed salaries have traditionally been used for capital projects and other one-time expenses. Unless the House contemplates little capital improvement in 2002 and 2003, it will have to replace these payroll savings with new spending in future years.
Instead of including the Senate’s package of tax increases on businesses and consumers, which totaled $190 million in FY 2001-02 and $233 million in FY 2002-03, the House plan relies on additional one-time revenue boosts. The largest is a bill to require more frequent deposits of taxes by North Carolina businesses, which will generate a one-time windfall of about $117 million from taxes to be collected in May and June of 2002 rather than July as well as a recurring $6 million in interest lost by taxpayers, which is the only General Fund tax increase in the House proposal.
The House plan delays or eliminates several savings recommendations from the Senate in the Department of Health and Human Services. In addition to taking out most of the controversial closings of institutions, such as Dorothea Dix hospital in Raleigh, the House plan also saves far less in the state’s burgeoning Medicaid program ($54.4 million by FY 2002-03) than did the Senate ($79.8 million by FY 2002-03). This does not bode well for the long run, since Medicaid growth is one of the main causes of the recent budget deficit and promises to continue unabated in the future without state and federal action.
Finally, the House budget-drafters were able to save $24.3 million in debt service compared to the budgets presented by Gov. Mike Easley and the Senate. They did so by delaying the issuance of natural gas bonds until 2002, which will save $8.8 million in principal and interest payments, and by delaying the use of proceeds from other state bonds already issued or scheduled to be issued later this year. Instead of being paid out to architects or contractors, these funds will remain in the state treasury and earn $15.5 million in interest to offset their own debt service.
If the House plan passes in its current form, the ensuing negotiation process with the Senate may prove frustrating and time-consuming. Because neither chamber was willing to reexamine the size and scope of state government, each relied primarily on across-the-board savings, revenue enhancements, and one-time gimmicks to present a balanced budget. Of the three areas of state spending offering the most opportunity for significant savings the UNC system, debt service, and Medicaid the House plan outperforms the Senate budget in the first two areas but falls short in the third. The Locke Foundation’s Changing Course IV budget, on the other hand, offered more sizable savings, invested far more in the state’s crumbling highway system, and applied tax cuts rather than tax increases on North Carolina’s rapidly deteriorating economy.
John Hood, President