On Wednesday evening, the North Carolina Senate unveiled its $21.16 billion budget proposal  for the 2015 fiscal year that begins in June 2014 and ends in July 2015. The Senate leadership decided to put the budget on a fast track to approval, bypassing the appropriations subcommittee process and scheduling the final debate to begin today at 4pm  into early Saturday morning.
Even when lawmakers have an adequate amount of time to review the full budget proposal—and to be clear, in this case, an adequate amount of time was not allowed—budget debates tend to spend a majority of the 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 Senate pays for its 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.
For the most part, the Senate pays for its budget in the same way the Governor paid for his budget . Here’s what you need to know regarding how the Senate chose to pay for its budget:
The Senate 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 the Highway Fund and other non-tax sources.
- But, the proposal spends $21.16 billion, leaving the state approximately $197.8 million short. Plus, the Senate must deal with a current year revenue shortfall.
The Senate relies heavily on money they anticipate agencies will return to the state (known as reversions), other one-time dollars, and new fees to close the revenue shortfalls and balance the budget.
- In the current fiscal year that ends in June 2014, base revenues are expected to come in under projections by $445.4 million. The Senate must deal with that shortfall before paying for its budget proposal.
- 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 $121.7million.
- To address the remainder of the shortfall, the Senate then uses another round of reversions ($371.6 million) that agencies are expected to return to the state that was originally authorized to be used in the current fiscal year. This is made possible due to the Governor’s directive in March that ordered state agencies to curb spending  as well as the second directive  issued in May. Interestingly, the Senate anticipates $81.6 million more in agency reversions than the Governor did in his budget. See more on this below.
- The Senate also has an additional $33.9 million at its disposal due to diverting funding from several special fund sources, raising fees for ABC permits that restaurant owners pay, and savings from the Medicaid Hold Harmless Law.
- On net, the Senate has $21.21 billion to spend. But, they put nearly $86 million into savings accounts per statutory guidelines. These savings accounts are more commonly used in good times when revenues are coming in ahead of projections—not when a current and future shortfall in revenues is projected.
The Senate leaves no money unspent in the end.
- Once addressing the revenue shortfalls and putting money into the savings funds, the Senate spends every dollar at its disposal in its $21.16 billion budget proposal.
The Senate frees up money—or General Fund availability—by relying more on federal block grants and raising millions in fees.
- The Senate swaps out $14 million in state support for the Child Care subsidy program with two federal block grants: the Child Care Development Fund and Temporary Assistance for Needy Families Emergency Contingency Fund. This swap is on a one-time basis.
- The Senate also swaps out $7.2 million in state support for the NC pre-kindergarten program with the Temporary Assistance for Needy Families block grant. This swap is on a one-time basis.
- The Senate raises an additional $18.6 million in fees  for hospitals and fishing licenses, among other areas, on top of the alcohol permit fee increase mentioned above (which was sent directly to the General Fund).
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 earlier this month, estimates from the Institute on Taxation and Economic Policy 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 Senate will have to again force agencies to return a huge chunk of change—estimated at over $400 million (see table below). 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.
The General Fund availability statement is summarized in the chart below using both the consensus forecast projections as well as the ITEP projections.
One last note on agency reversions.
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. Agency reversions are the result of varying circumstances. They can result from the Governor’s directive to roll back spending (i.e. forced cuts), as is true in this case. 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.