by Paige Terryberry
Senior Analyst for Fiscal Policy, John Locke Foundation
After a history of vetoes, Gov. Roy Cooper signed his first state budget for the biennium into law last November.
This solid budget delivered benefits to hard-working families in the form of tax cuts, aggressive savings, and expanded school choice, all while avoiding Medicaid expansion.
That budget is law for the new fiscal year, which begins July 1. But during the current legislative “short” session, legislators are able evaluate the second year of that budget plan in order to make adjustments to account for any new needs or changing circumstances.
Unfortunately, this budget process was settled in a conference report with limited transparency, veering from the traditional budget process, which seems itself to be a new tradition. Traditionally, each chamber is responsible for passing their own budget adjustments, subject to the regular appropriations committee process, allowing for robust debate that results in a compromise conference budget.
John Locke Foundation President Donald Bryson has written on this issue at length. This step of transparency was skipped, setting precedent for bad government in North Carolina. As Bryson wrote, “sound policy makes good politics, and sound policy comes from good debate.”
On Tuesday evening, June 28, state house and senate leaders released their budget adjustments for fiscal year (FY) 2023, which begins on Friday.
Below are six things this budget would do:
Year-over-year spending would increase nearly $2 billion, good for a 7.6% annual increase. This would be the largest such annual increase in over a decade, but it would occur amid the highest inflationary environment in 40 years.
The spending total of $27.9 billion is 3.4% higher than the $26.98 billion approved in last year’s two-year budget plan. This spending number would surpass the population growth and inflation spending cap set in the N.C. Senate’s proposed Taxpayer Bill of Rights (TABOR) legislation, but it would fall just under the cap as calculated in the N.C. House’s TABOR bill.
This budget would build on the incredible recent additions to the Rainy Day Fund (the Savings Reserve). It would set aside a generous $1.6 billion into the reserve for FY 2023, up $500 million from the November budget additions, bringing the total Rainy Day Fund balance to $4.75 billion by the end of the biennium.
Moreover, the adjustments would set aside $1 billion to a newly created Stabilization and Inflation Reserve for the coming fiscal year. According to the General Assembly leaders at the press conference, this fund would allow the state to be better prepared for a coming downturn. It would also provide a cushion to avoid tax hikes. Inflation, however, will likely outlast the coming fiscal year, and legislators should be mindful of any long-term commitments for this fund.
The budget would create a similar, additional fund to combat inflation in state capital projects specifically. The Capital Project Inflationary Reserve would be available for state agencies to request funding. Among other things, the agency would need to provide “documentation supporting increased costs associated with supply chain or inflationary pressures.”
Another $945 million would be earmarked for the State Emergency and Disaster Response Fund in the budget adjustments.
All told, just over $9.1 billion would be set aside in various reserve funds, most of which in preparation of a looming recession and the drop in revenue that would accompany it.
This budget would build on expanded pay for teachers and other state employees.
Starting teacher pay would increase from $35,000 to $37,000 under this budget. Budget writers said Tuesday that teachers would receive an average 4.2% increase in compensation this coming fiscal year, which would bring total pay raises to 6.7% over the biennium. Including bonuses, the average teacher will have received a 14.2% increase in compensation over the biennium.
Most other state employees would receive a 3.5% pay raise this coming year, marking a 6% increase in the biennium.
Noncertified public-school employees — custodians, for example — would receive a 4% raise or an increase in pay up to $15 per hour, whichever is greater.
Retired state employees, disproportionately harmed by inflation as they must stretch their fixed incomes, also see an increase from this budget. They would receive an additional one-time 1% cost-of-living bonus, bringing the total this year to 4%.
Furthermore, to address the teacher retention struggles in rural areas, the budget would expand supplemental funds for teacher compensation – expanding eligibility for counties and increasing the supplement cap to $5,000 per state-funded teacher.
Moreover, the budget would create a fund to provide salary increases that would allow state agencies to make targeted decisions on raises, according to budget writers at the press conference. This Labor Market Adjustment Salary Reserve of $79.4 million would allow for salary increases to attract workers.
Despite the fact that both the House and Senate have introduced versions of Medicaid expansion, this budget bill would not expand Medicaid in North Carolina.
At their press conference, Senate Pro Tem Phil Berger and House Speaker Tim Moore exchanged barbs declaring that their chambers’ version of expansion was superior to the other. With the legislature likely wrapping up this session in early July, expansion is likely dead this year — barring a special session later this year.
This budget includes an about-face for the state’s philosophy on transportation funding.
Transportation funding is separate from the state’s General Fund. In North Carolina, transportation funding largely follows the user-pays principle, relying on state and federal gasoline taxes, license fees, vehicle sales taxes, and some local taxes.
This proposed budget would divert sales tax revenue to the state’s transportation account. The writers attempt to keep the transferred revenue equal to the sales of transportation-related goods and services, an amiable goal to maintain the user-pays principle. Even so, transferring General Fund dollars to the Highway Funds muddles the user-pays principle, and should be corrected in future budgets.
This action diverts taxpayer money to an institution that has been found to lack financial oversight.
In FY 2023, 2% of state sales tax revenue — or an estimated $193 million of taxpayer funds — would go to the Highway Fund. By FY 2025, 6% of taxpayer’s sales tax revenue would go to the state’s Highway Fund and Highway Trust Fund.
The proposed budget would give government employees, from the governor himself to new state workers, a pay raise with taxpayer dollars. Notably absent from this budget, however, were further tax cuts. Tax cuts would benefit state and private workers alike.
The November budget rewarded hard work through cuts to the personal tax rate, scheduled to drop from 5.25% to 4.99% this year and then to 3.99% in 2026. Accelerating the cuts to take effect sooner than 2027 would have been another great way to better prepare North Carolina to weather the coming economic storm.
In the same way, accelerating the corporate income tax phaseout to take effect before 2030 would have allowed workers to reap those benefits sooner. That action would confirm the intention of the conservative leadership to make North Carolina a more competitive business climate.
These economic growth policies stand in stark contrast to the expansion of economic development programs in the proposed budget. A total of $876 million would be added to the Economic Development Reserve fund, with $450 million of that specifically earmarked for a “transformative” project in Chatham County that would involve the production of electric vehicles, most likely to fulfill the promised benefits to Vietnamese company VinFast whose deal was announced in late May.
The budget has many additional positive elements: increasing the Opportunity Scholarship school choice program and expanding school safety and mental health programs, to name a few.
Budget writers creatively and aggressively addressed inflation and better prepared the state for a coming recession, noting that this budget “responds to our current needs and plans for an uncertain economic future.”