Each year North Carolina has a legislative session. Odd-numbered years host a long session, which is when legislators introduce bills and the state’s two-year budget is written. Even-numbered years have a much shorter session, during which legislators typically only address issues that were not completed in the previous year as well as any adjustments to the previous years’ budget. For fiscal year 2013-14 the budget signed into law was $20.6 billion and for 2014-15, the budget was $21 billion.
This year’s short session is expected to have major budgetary impact on certain areas of government, specifically education and Medicaid. In addition, there are reports of a budget shortfall due to the tax reform package passed last year. The Governor’s office is expected to release their suggested budget to the legislature this week. Once the short session formally convenes on Wednesday, there will be more discussion of which parts of the Governor’s budget the legislature will agree with and which they will want to change. Long debate is expected with regard to both teacher pay and Medicaid reform, but there are some other items that will also be discussed during this short session, such as a possible repeal of Common Core, opportunity scholarships, film incentives, in-state tuition for military veterans, the coal ash spill cleanup, and changes to the state’s regulatory policy.
Education tops the list of things to discuss in this year’s budget debate. Governor McCrory announced last week that he is suggesting a $200 million increase to the Education budget to pay for an average 2 percent pay raise for teachers. The majority of this increase will go to newer teachers by raising their base salary to $35,000. Another change the governor is proposing is to offer a salary increase to those teachers who have a master’s degree in the field in which they teach, such as a math teacher with a masters in mathematics. Other education proposals are an expansion of early childhood education spending by $3.6 million and doubling the textbook budget to $46 million.
The second major priority of this short session is Medicaid. The last three years have seen large shortfalls in the state’s Medicaid budget, and this year seems to have followed suit with an estimated shortfall around $130 million. Something must change to make the Medicaid system more affordable to the state while also offering quality health care. As early as a year ago, a policy recommendation to use managed care organizations was at the top of the list for a possible solution to the state’s Medicaid problem. Now a new policy is at the center of attention, accountable care organizations. Either of these policies would represent a change from the current way Medicaid is managed in North Carolina, yet a priority must be placed on budget predictability. Creating a new management system for Medicaid that keeps costs manageable while improving health outcomes is going to prove a difficult task for this legislative session.
Other major budget discussions have been about the impact of last year’s tax reform and a budget shortfall. Third quarter (Jan-Mar) General Fund revenue was $12.1 million above the $14.5 billion target, as shown in a breakdown from a General Assembly report:
- Corporate Income tax revenue is up almost $90 million this year.
- Personal Income collections are $221.4 million below target.
- Sales tax collections are $102 million over target for the year, and gross collections are up 4.2 percent from last year.
So the budget shortfall issue is not across the board, but focused on the personal income tax. The main reason for this is the change in withholding, or the amount withheld from employees’ wages. With less withheld from wages, the state must wait until Spring 2015 to receive the entirety of its tax collections when taxpayers file their tax returns. Essentially, the tax reform plan was front-loaded with the tax cut, and it will take an entire tax year before the state collects its total anticipated tax revenue. So where there seems to be a budget shortfall, it is still too early to tell. The true impact of the tax reform on the state’s tax collections cannot be properly assessed until after 2014 taxes are filed in April 2015.
The short session might not be long enough to properly address all of these issues, so there is anticipation that some of the aforementioned items will also be discussed in the 2015 legislative session. The fiscal year will end on June 30th, and the next will begin July 1st. As we get closer to the end of the fiscal year we will either see a budget pass both chambers or a continuing resolution to extend debate late into the summer. Only time will tell.
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