Yesterday, the North Carolina house unveiled its $21.11 billion budget proposal for the 2015 fiscal year that begins in June 2014 and ends in July 2015. The proposal is moving through the committee process with the expectation of a final vote on the House floor by Friday. Surprisingly, there is a considerable difference in how the House leadership pays for its budget compared to the Senate’s and Governor’s paths. In particular, the House anticipates a smaller revenue shortfall for the current fiscal year and a far larger amount in agency reversions (which is money sent back to the state at the end of the year).
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 lawmakers pay for the 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 half-billion current year revenue shortfall and a projected revenue shortfall of $191 million for the next 2015 fiscal year—not to mention the fact that the shortfall could be as high as $600 million (see section at the end of this post). It is also on top of the Medicaid shortfall, which lacks agreement among the Governor, House, and Senate on its actual cost. Their estimates are far apart.
All three expect the same unspent balance that will remain at the end of the current year. Yet, they differ on the cost of the current fiscal year shortfall as well as the money agencies will return to the state at the end of the current year. The House sends far more of the net balance to savings accounts.
- All three expect that the state will have an unspent balance at the end of the current year of nearly $323.7 million. This money will help offset the current year shortfall and 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.
- Curiously, the House anticipates a current year revenue shortfall of $429.4 million—this is $16 million lower than the Governor’s and Senate’s estimate of $445.4 million.
- Interestingly, the House anticipates a far larger amount of money that the agencies are expected to return to the state that was originally authorized to be used in the current fiscal year than the Governor and Senate do. The House anticipates $407.2 million—which is higher than the Senate’s anticipated amount of $371.6 million and the Governor’s amount of $290 million. It is unclear what is leading to the variations in their estimates—perhaps it’s due to the latest data available or possibly due to different assumptions.
- We do know that these agency reversions are 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. The directive was issued to address the current year revenue shortfall. But, if the House’s estimates are correct, the directive is bringing in more than what is actually needed to address the revenue shortfall—effectively, making deeper cuts to programs this year to pay for one-time spending for the upcoming fiscal year.
- After addressing the current year shortfall, all three send some of the “left over” money to savings accounts. The House sends $178.2 million—or more than double the amount than the Governor and Senate send—to these savings accounts. Such 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.
- All three have money than can be carried over into the upcoming budget cycle and should only be used for one-time expenses because it is one-time money. The House carries over $123.3 million, the Senate carries over $163.9 million, and the Governor carries over $84.1 million.
On top of the money they carry over at the end of this fiscal year, all three expect to receive $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.
All three rely on one-time dollars to balance their budgets. In particular, the House and Senate divert money from special funds and raise fees to enhance General Fund availability.
- All three anticipate funds that were forfeited from flexible spending accounts but use different estimates. Only the Governor anticipates $40 million from a settlement reached with an online retailer who voluntarily agreed to start charging sales tax to North Carolina customers.
- The House raises millions of dollars by diverting funding from several special fund sources, raising fees for ABC permits that restaurant owners pay, and savings from the Medicaid Hold Harmless Law. The Senate followed a similar route—with some minor differences. Unlike the Senate, the House also phases-in the sales tax on piped natural gas and reduces the sales tax on modular homes. On net, the House boosts General Fund availability by $25.4 million and the Senate by $33.9 million.
- To be clear, the House and Senate raise other fees that aren’t sent back to the General Fund. In total, the House raises $13.6 million and the Senate raises $28.2 million. The complete lists of new fees are here and here, respectively.
- Although it doesn’t show up in the Availability Statement, all three free up money—or General Fund availability—by relying more on federal block grants and raising millions in fees. They all swap out state support for the Child Care subsidy program and the NC pre-kindergarten program. The House takes it one step further by raising additional lottery dollars (generated by more advertising) to pay for classroom teachers, which in turn frees up General Fund dollars. Those “savings” are used to pay for a portion of pay raises for teachers.
In the end, the House and Senate leave no money unspent whereas the Governor leaves money on the table.
- Once addressing the revenue shortfalls and putting money into the savings funds, the House and Senate spend every available dollar. The Governor leaves money unspent that would have to be appropriated at another point-in-time (for a revenue shortfall, for example, if one arises).
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 month, estimates from the Institute on Taxation and Economic Policy (ITEP) 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, House, and Senate would all have to again force agencies to return a huge chunk of change (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 the consensus forecast projection. The last line illustrates what the shortfall would be using the ITEP projections.