John Locke Update / Research Brief

N.C. Budget 2019: Republicans Draw Line in the Sand

posted on in Fiscal Insight, Spending & Taxes
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With each step of the budget process, the lines become clearer in the battle over the future of North Carolina for state employees, taxpayers, and citizens. Will state policymakers have some restraint in what they promise, regardless of what North Carolinians can afford? Or will they overcommit in a way that leaves everyone vulnerable to the next economic downturn?

Legislative leaders only offered a glimpse of the first year of their budget for the biennium, but then Gov. Roy Cooper’s second-year proposal likely understates by hundreds of millions of dollars what he eventually will seek in new spending. Just understanding the first year is a daunting challenge.

The revenue estimate remains $24.8 billion, consistent with what Cooper had to start. The legislative budget for Fiscal Year (FY) 2018-19, which is law, left $500 million unappropriated. Because the final budget for FY 2017-18 ended with a larger surplus than expected, the unappropriated balance is now $650 million. Tax collections for the current FY 2018-19 are $150 million ahead of projections when the budget passed. State agencies are expected to revert $275 million in unspent appropriations back to the General Fund. Together, these three items make an additional $1.1 billion available for the next fiscal year, bringing total availability to $25.9 billion for FY 2019-20. There are many moving pieces that can confuse even those who are familiar with state budgeting, but everyone agrees on these basic figures.

First, Cooper’s budget proposal would move $600 million into reserves for savings, capital, disaster relief, and information technology, appropriate $25.2 billion, and leave $75 million in unspent fund balance.

The budget document confirms what Budget Director Charlie Perusse stated explicitly: Cooper would repeal the State Capital and Infrastructure Fund (SCIF) established in law in 2017. Repeal allows Cooper to take $288 million of availability that would otherwise pay for capital projects and use it for new programs and newly hired state employees.  Coincidentally, his budget would pay for capital projects with $288 million in new debt through Limited Obligation Bonds, whose payment is contingent on appropriations from future sessions of the General Assembly. The most noticeable difference is that Cooper’s budget includes $720 million in debt service payments as appropriations that would otherwise come from the SCIF and availability. If counted under current law in a way comparable to the legislature’s proposal, non-debt funding of capital would total $1.0 billion and appropriations would total $24.5 billion.

By law, 4 percent of anticipated General Fund revenue and 25 percent of unreserved cash balance should be committed to the SCIF. That would make $1.26 billion available for debt service, capital projects, repairs, and renovations. If the General Assembly instead increased the share of revenue to 4.5 percent, the amount would grow to $1.39 billion. Either way, the legislative plan would pay for debt service from the SCIF and have appropriations, including higher teacher pay, of $24.0 billion.

It is unclear how the General Assembly would apportion the rest of the $425 million to $550 million in available funds between savings, unfunded obligations, other reserves, and the unreserved cash balance to be available for other purposes in the future. Cooper kept $75 million unreserved in his budget proposal.

The SCIF can also make year-to-year comparisons difficult. Legislative leaders calculated the change in total spending appropriately, saying it would be a 3.45 percent increase from the FY 2018-19 appropriations of $23.2 billion, excluding debt service. This is close to the combined rate of population growth and inflation. Though higher than the 2.6 percent annual spending growth that had been the rule since 2011, it is significantly less than the 5.6 percent increase of Cooper’s budget using the same basis for comparison.

In addition to the complications in appropriations and reserves this year, there are four very different proposals on how the state could contribute funds for school construction. A Senate proposal (S5) would increase the amount deposited in the SCIF to 4.5 percent of General Fund revenue and leave most appropriations of those funds to be decided later. A House proposal (HB381) would not increase the amount allocated to the SCIF, but it does specify how $6.4 billion from that fund are to be appropriated to university, community college, and public school projects through FY2028-29. A bill that already passed the House (HB241) would borrow $1.9 billion in bonds. Each of these would leave room in state debt capacity to meet the Debt Affordability Commission’s recommendations for paying down more than $30 billion in unfunded obligations for future state retiree health benefits. Cooper’s budget includes a fourth plan, a $3.9 billion bond that would divert money from the existing obligation to cover state employees’ health care after retirement and take on new debt instead.

The legislative agreement does not appear to increase the state’s obligations for an expanded Medicaid program as Cooper’s budget would. Medicaid expansion would entail $200 million in additional state spending to match $1.8 billion in new federal borrowing the first year alone. Although Cooper has proposed a new tax on hospitals to cover the bulk of this burden, ultimately all taxpayers would be responsible for the obligation that would jump to $400 million in the second year ($3.6 billion in federal debt) and continue to grow from there.

Legislative leaders would have been wise to limit spending growth to the recent historical rate of 2.7 percent annually instead of opening the bidding for Democratic support to override the inevitable veto at 3.5 percent. Cooper has repeatedly stated his commitment to expand Medicaid at any cost. State law ensures that government will not cease functioning during a stalemate between the legislature and governor but continue to function at current spending levels. This would mean no pay increases and no money immediately available for capital, but it significantly relieves the pressure on lawmakers to reach a lethal agreement that locks in unsustainably high spending and ensures future tax increases.

The conflict of visions between Gov. Cooper and the General Assembly may look like only $500 million, but actually it includes at least $2 billion in additional state debt, $200 million in new taxes on hospitals, $1.8 billion in new federal debt, plus potentially billions of dollars lost in lower health care benefits for future retired state employees or higher taxes and reduced services for future citizens.  As the N.C. House prepares for a late-April or early-May release of its budget proposal, those who care about North Carolina’s long-term fiscal solvency should urge our elected officials to err on the side of restraint.

Joe Coletti is Director of Oversight Staff for the NC House Majority. Joe is a former Senior Fellow at Locke. Here, he examined fiscal and tax policy. He previously headed the North Carolina Government Efficiency and Reform initiative… ...

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