This morning, Governor McCrory released his two-year plan to invest in education, health care, public safety and other priorities that are essential for economic opportunity and quality of life. He spoke of a “new paradigm” for state budgeting. A new paradigm indeed, one that abandons many of the practices that served North Carolina well in the past—like ensuring funding to maintain current service levels year-over-year or reinvesting in the recovery rather than locking in low levels of revenues by keeping the 2013 tax plan on the books.
A preliminary review of his budget plan shows that too many vital public services are at diminished levels, threatening their effectiveness, reach, and efficiency. No amount of “budget spin” will cover up how the budget baseline has been eroded from years of cuts or how the current tax system cannot sufficiently keep up with growing needs.
Below is a quick summary of how the Governor’s budget compares to pre-recession levels and also how the Governor chose to pay for his budget.
Investments Would Still Not Catch Up to Pre-Recession Levels
The Governor proposes a $21.5 billion and $22.2 billion spending plan for the 2016 fiscal year and 2017 fiscal year, respectively. His plan would invest more overall compared to the budget that is currently in place but would still fall short of what’s needed to keep up and replace the worst cuts enacted in the aftermath of the recession. In fact, his 2016 fiscal year budget would be $1.4 billion lower than the budget that was in place when the recession began, adjusted for inflation (see chart below). The gap drops to less than $1 million in his 2017 budget. Even then, funding would be insufficient to address long waiting lines—for programs such as pre-kindergarten and in-home and community care services for older adults—or put an end to tuition hikes compared to the 2015 school year.
How Does the Governor Pay for His Budget?
Examining how the Governor pays for his budget is more important than ever in light of the 2013 tax plan that will drain more than $1 billion each year of the biennium. Here’s what you need to know regarding how the Governor chose to pay for his budget:
Before tackling the 2016 fiscal year budget, he had to deal with a projected $271 million revenue shortfall for the current fiscal year, which will end in June. To address the shortfall, he relied heavily on money that various agencies are expected to return to the state by the end of the fiscal year. It is not clear if the Governor ordered the agency reversions—like he did to address the 2014 budget shortfall.
After addressing the FY2015 revenue shortfall and putting money into the state’s two core savings accounts, the Governor was able to carry over nearly $93.7 million in left-over funds to help balance the budget for FY2016. The plan is built on the expectation of tax and non-tax revenues of $21.4 billion. This total takes into account the official estimates that show the growing cost of the 2013 tax plan—the benefits of which primarily flow to wealthy individuals and profitable corporations. Because the base revenues are not enough to cover his budget proposal, Governor had to come up with additional dollars.
Governor McCrory came up with $24.6 million by attaining tobacco settlement funds, using unspent NC Flex FICA funds, and acquiring disproportionate share fees for health and human services. After making other tax changes—such as extending the job preservation tax credit and the historic preservation tax credit—in the end, the Governor left nearly one-half million unspent. The Governor carried that unspent money into the FY2017 budget where the process restarts (see chart below). Noticeably different in FY2017 the Governor’s decision to leave nearly $4.4 million is left unspent—at a time when long waiting lists for vital public programs remain and many services continue to operate at diminished levels.
The tax plan is costing far more than originally estimated—both for the 2014 fiscal year and the current fiscal year. That begs the question: what if history repeats itself and another revenue shortfall arises in the upcoming biennium? If that ends up being the case, agencies may again be forced to return money 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.
Stay tuned for more analysis on the details of the Governor’s two-year spending plan from the NC Budget and Tax Center.