Budget 2019: N.C. House Unveils its Spending Plan

The North Carolina budget remains a work in progress even as the State House votes this week to approve its version and send it to their colleagues in the State Senate. Spending grows by $700 million or 3.1 percent on a comparable basis but remains $600 million less than Gov. Roy Cooper proposed for Fiscal Year (FY) 2019-20.

Revenues

Tax revenues to pay for the additional spending are projected to increase by $900 million in 2019-20 and another $1 billion in 2020-21 before statutory changes. The insurance companies that manage care for Medicaid patients will pay a premium tax on their Medicaid payments totaling $12 million as they take on enrollees the first year, climbing to $191 million the second year. The premium tax is a result of government privatization and not a tax increase on normal economic activity.

Individual taxpayers will save a little more thanks to a 3.75 percent increase in the standard deduction. Other tax changes will continue state government’s efforts to expand collections from out-of-state companies. Online “marketplace facilitators” such as Etsy would begin collecting sales tax in September, generating $10 million per month. Corporate income tax collections would increase slightly thanks to a shift in income calculation based on where sales occur, which would affect businesses based outside North Carolina more, and businesses with property and investments in the state would benefit from lower franchise tax rates and the simplification of franchise tax calculations. Taken together, the changes result in $7 million in projected new revenue in 2019-20 and $46 million in 2020-21. The actual tax law change is a reduction of $5 million in 2019-20 and $145 million in 2020-21.

Savings and Reserves

After starting with a balance of $1.1 billion, the House sets aside $1.4 billion in reserves, including $721 million for debt service and $482 million that would pay for repairs, renovations, and new capital construction. They transfer $73 million to a reserve for information technology projects. Unfortunately, the House budget would take only a small step toward replenishing the Savings Reserve, adding $105 million to bring the balance to 5.9 percent of General Fund operating appropriations, which is much less than the 10.9 percent target.  But the House does leave $605 million unspent and unreserved in addition to these reserves.

Spending

Salaries and benefits for teachers and school administrators, corrections officers, and other state employees account for $421 million of the $721 million in new appropriations proposed for 2019-20.  Teachers would receive an average raise of 4.6 percent (a slight change from the announced 4.8 percent).  In addition to teacher raises, correctional officers would receive an average 5 percent boost, assistant principals would get an average 6.3 percent raise, and principals would score an average 10 percent increase.  All other state employees would receive a raise of 1 percent or $500 beginning January 2020. Retired teachers and state employees would receive another one-time supplement of 1 percent. The budget already adds another $548 million in salary and benefit increases for the second year of the biennium, bringing the total compensation increases to $969 million.

The largest programmatic spending increases would total $127 million in the first year of the budget and $375 million the second. These would expand summer programs at UNC campuses so underutilized campus facilities are used ($35 million each year), cover the rising costs of Medicaid while enforcing one-time savings in the first year ($32 million in 2019-20 and $212 million in 2020-21), grants for film production in the state ($31 million each year), and meet increased demands on the juvenile justice system as a result of last year’s Raise the Age law ($29 million in 2019-20 and $44 million in 2020-21). The addition of 6,000 students in public schools for the 2020-21 school year would require $53 million in new appropriations in the second year, $50 million more than in the first year when enrollment is projected to stay flat.

While Cooper claimed unrealistically slower spending growth in the second year of his budget proposal, the House would accelerate spending growth in the second year to 4 percent. Cooper has sought annual spending increases of 5 percent or more in each of his budget proposals. The legislature in 2017 passed a 2.7 percent increase, followed by a 4.3 percent spending increase in 2018. The House’s current proposal echoes that pattern, which makes it likely that spending will be even higher in 2020-21. Though budget writers may have taken the high end of forecasts for Medicaid and education spending, both could come in lower than budgeted.

Overall, it is encouraging that the House has developed a bill that would spend less than the previously announced agreement with the Senate. Despite that, spending in the House bill continues to grow faster than seems prudent, even if slower than Gov. Cooper proposed, which leaves room for the Senate to provide more restraint and definition on where the money goes.