NC Budget and Tax Center

Top 5 pressure points in the state budget

North Carolina legislators are in the months-long process of developing the two-year state budget that covers July 1, 2013 through June 30, 2015. In light of the state’s murky economic outlook, it is important for legislators to consider the major drivers that will impact General Fund availability. There are many pressure points in the state but the biggest 5 include the following:

  1. Schoolchildren. As the single largest appropriations-supported category in the state budget, the needs of K-12 public schools are the most significant driver of the state budget. The K-12 budget has suffered through massive cuts over the last several years, and state investment in public education as a share of North Carolina’s economy is lower than before the Great Recession. This comes at a time of increasing demand: from school year 2008 to 2012, the student population grew by nearly 20,000, or 1.5 percent. The growing number of children enrolled in public schools only places additional budget pressure on an already stressed educational system.
  2. Health care. The cost of providing health care to children, seniors, and people with disabilities through the state’s Medicaid program is continuing to rise, though less rapidly than any other Medicaid program in the nation. The Medicaid program does not exist in a vacuum. Health care costs in general are growing faster than the economy—a factor that rings true for Medicare and privately-provided health care, not just Medicaid. As such, addressing the rise in Medicaid costs will require addressing the rise in health care costs as a whole. And like other safety net programs, the fallout from the economic downturn is exacerbating enrollment in Medicaid—especially among people who are disabled—because need is higher when people cannot find jobs and support themselves. Also, Medicaid is the second largest appropriations-supported category of the budget, and this program also comprises 66 percent of the entire Health and Human Services budget. Not only is there the potential for another Medicaid shortfall—like there was in FY2009-10, FY2010-11, and FY2011-12— but sequestration could have a profoundly damaging impact on the HHS budget. Estimates indicate that these across-the-board cuts ($60 million) would be mostly concentrated in the HHS budget.
  3. Our aging population.  North Carolina’s population is aging quickly: the percentage of residents over the age of 65 will increase by 124 percent from 2000 to 2030. This trend is a function of both the aging of native Baby Boomers in addition to in-migration by individuals choosing to retire in North Carolina. A growing share of older adults adds to state budget pressures, especially as they age to the point where they require advanced care. Funding for core senior services—such as congregate meals and senior centers—is a shared state and federal responsibility, but at present levels demand for senior services far outstrips available funding for those services. As the number of older adults in North Carolina continues to grow, so must funding for proven and cost-effective senior services that make it possible for individuals to live with dignity in their own homes as long as their health allows.
  4. Tremendously diminished baseline and heavy reliance on one-time money. The FY2012-13 is itself a budget pressure because it amounts to an extremely diminished baseline—down 11.4 percent since the Great Recession (FY2007-08). In fact, the current budget constitutes the lowest overall state General Fund spending in four decades, falling far short of investing adequately in education, well-being, and safety of North Carolinians. Not only is there little left to cut, this state budget imprudently relies heavily on one-time money:  it uses $419.4 million in nonrecurring funding to meet recurring obligations. Moreover, the Savings Reserve balance ($418,812,335) is well-below the statutory obligation of 8 percent, meaning that it will not be a strong tool to help stabilize the budget if needed.
  5. Eroding tax revenue.  Revenue collections as a share of state personal income are already far below the 40-year average. Legislators’ decision to enact a business tax exemption is projected to cost the state far more (at least by $120 million) than was originally estimated.  Moreover, legislators’ decisions that have already been made in the current session—such as repealing the estate tax, for example—would further reduce available revenue.  Modernizing North Carolina’s outdated tax code is certainly needed but proposals put forth thus far would only serve to reduce availability in future years by eliminating the income tax, which is best able to grow with the economy.

**Special thanks to Brenna Burch, a former policy analyst at the NC Budget and Tax Center, who drafted the first version of this blog post.

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