Yesterday, Governor McCrory unveiled his $20.99 billion budget proposal for the 2015 fiscal year that begins in July 2014 and ends in June 2015. Budget debates tend to spend a considerable amount of time on the spending side. Yet, how the state raises the billions of dollars that fuel the state budget gets relatively little scrutiny compared to the rest of the budget during the budget process.
Examining how the Governor pays for his budget is more important than ever in light of last year’s tax plan that drains $438 million from the state’s coffers in the upcoming fiscal year. This is on top of the fact that lawmakers are facing a current year revenue shortfall, a projected revenue shortfall for the next 2015 fiscal year, and a Medicaid shortfall.
Here’s what you need to know regarding how the Governor chose to pay for his budget:
The Governor expects to receive nearly $20.96 billion in base revenues—$191 million short of what the state initially anticipated.
- The total includes the huge cost ($438 million on net) of the tax plan that lawmakers enacted last year—the benefits of which primarily flow to the wealthy and profitable corporations. It also includes the hundreds of millions of dollars lawmakers already scrounged up from a variety of resources to pay for the FY2013-15 certified budget.
- Most of the revenues will come from taxes, primarily from the state income tax, sales tax, and corporate income tax. The remaining comes from other non-tax sources.
- But, the proposal spends $20.99 billion, leaving the state approximately $27.5 million short. Plus, he must deal with a current year revenue shortfall.
The Governor relies heavily on money he anticipates agencies will return to the state (known as reversions) plus other one-time dollars to close the current year and next year revenue shortfalls.
- In the current fiscal year that ends in June 2014, base revenues are expected to come in under projections by $445.4 million.
- However, the shortfall will be offset in-part by money expected to be left “on the table” at the end of the current fiscal year. This money mainly comes from revenue over-collections that accrued under the old tax structure as well as agency money sent back to the state at the end of the previous fiscal year that ended in June 2013. Combined, the shortfall drops to $121.7 million.
- The Governor also has an additional $44 million at his disposal due to a FICA transfer and a settlement reached with a retailer who agreed to collect out-of-state sales taxes.
- The Governor then uses another round of reversions that agencies are expected to return to the state that was originally authorized to be used in the current fiscal year. Typically, reversions are carried over as a “positive” balance in the subsequent fiscal year—boosting the next fiscal year’s bottom line rather than the current year’s bottom line because of timing. This move, which could arguably be called a budget gimmick, is the only way the Governor is able to close the current year shortfall and make his budget work. See more below on this point.
- On, net, the Governor has $212.3 million to spend. He puts some of that funding into savings accounts per statutory guidelines. These savings accounts are more commonly built in good times when revenues are coming in ahead of projections—not when a current and future shortfall in revenues is projected.
The Governor leaves money unspent.
- Once addressing the revenue shortfalls, there is an unspent General Fund balance of $100.6 million remaining after the recommended appropriations are made.
It is worth lifting up the question that few people are asking: what if the tax plan ends up costing more than originally estimated?
As we reported last week, estimates suggest that the revenue projections for next fiscal year could be off target by $600 million—a far greater number than the $191 million estimate. If that ends up being the case, the Governor will have to force agencies to return a huge chunk of change to the state. Of course, this would come at the expense of vital programs and services that build a strong foundation for the economy and help North Carolinians.
One last note on agency reversions.
Closing the shortfall is built on the curious assumption that agencies will be able to revert their money before the close of the fiscal year to pay for June’s expenses rather than after the close of the fiscal year. If that fails to happen, this spending plan kicks the can down the road by paying for this year’s shortfall in the next fiscal year. Also, agency reversions are the result of varying circumstances. They can result from the Governor’s directive to roll back spending. Or in the case of education, there are anticipated savings resulting from the lower cost of teacher salaries. This can happen when veteran teachers leave the classroom and are then replaced by newer, lower cost teachers. Savings can also accrue during vacancies as well.
The General Fund availability statement is summarized in the chart below.