2018 Fiscal Year State Budget, NC Budget and Tax Center

New budget a roadmap full of potholes and an unclear destination

A new BTC report highlights how the new two-year budget passed by state lawmakers continues to choose austerity and failed trickle-down economics over broadly shared prosperity. House and Senate leadership garnered the needed votes to override Gov. Cooper’s veto of the budget, resulting in approval of the budget. Under the budget, total state spending for the 2018 fiscal year (FY18) will remain below 2008 pre-recession spending. This marks nine consecutive years that state spending as a share of the state’s economy has declined.

Under the budget, overall spending for FY18 – which will run from July 2017 through June 2018 – is a 3.1 percent increase over the prior fiscal year. Beyond additional state funding provided for state employee pay increases, year-over-year net new spending for FY18 is a modest 1.4 percent above spending for the prior fiscal year. Consequently, nearly all core areas of the state budget remain below or near pre-recession spending levels when adjusted for inflation.

 

 

Tax cuts included in the budget will reduce available annual revenue by a total by $900 million; however, the budget only shows an annual cost of $521 million in the budget. This is because the tax cuts kick in starting January 2019 and thus will only apply to the second half of fiscal year 2019 (which runs from July 2018 through June of 2019). These tax cuts build onto those passed since 2013, which have greatly reduced the level of revenue available for public investments. This self-inflicted revenue challenge has allowed lawmakers to lower their expectations in regards to what is possible for the state and has created a budgetary landscape based on false choices where some public investments are funded at the expense of others. Furthermore, according to a News & Observer article yesterday, North Carolina is looking at serious future revenue shortfalls:

“State expenses are expected to grow faster than revenue starting in 2019, according to a five-year budget forecast.

“The report by nonpartisan legislative staff offers a half-dozen suggestions for dealing with future shortfalls, including not paying for inflationary increases in spending items such as state salaries; using money unspent from previous years; calling off planned income tax cuts; or increasing the sales tax rate from 4.75 percent to 5 percent.

“The budget projections prepared by the legislature’s Fiscal Research Division show shortfalls of $1.2 billion to $1.4 billion in years 2019-2020 to 2021-2022.”

From ensuring a high quality education for all students, to promoting healthy and safe communities, to pursuing economic development initiatives that target rural and distressed communities, the budget falls short of ensuring broadly shared opportunity and prosperity. The new BTC report highlights missed opportunities to make adequate public investments so that all communities across the state can thrive.

Cedric Johnson is a Policy Analyst with the Budget & Tax Center, a project of the NC Justice Center.

2018 Fiscal Year State Budget, NC Budget and Tax Center

Final budget a mixed bag of give, take, and disregard for courts and public safety

The final budget released by state leaders this week includes a mixed bag of give, take, and neglect in regards to public investments that promote safe and healthy communities. At the same time that public investments are made for particular initiatives of interest, lawmakers cut state funding and totally neglect boosting public investments in other areas of the Justice & Public Safety (JPS) budget.  For fiscal year 2018, the JPS section of the final budget is a modest 1.6 percent year-over-year increase in state spending when excluding additional state funding to provide pay raises to state employees.

Here are notable takeaways from the JPS section of the proposed final budget.

  1. Provides around $58 million in additional state funding for pay raises to state employees. The majority of the pay increase funding consists of a $1,000 salary increase for eligible state employees.
  2. Provides $250,000 for a limited pilot project with the City of Wilmington to address the needs of opioid and heroin overdose victims. This is the same level of funding included in the House and Senate respective proposed budgets. Whereas lawmakers acknowledge the seriousness of the opioid abuse issue in the state, a modest amount of state funding is included in the budget to prevent and combat this issue.
  3. Provides no additional state funding to enhance access to mental illness services for offenders. This missing investment in the final budget aligns with the House and Senate proposed budgets, which also excluded such funding. The Governor’s recommended budget provided $5.8 million for fiscal year 2018 to enhance services for mentally ill offenders.
  4. Includes $519,600 in one-time state funding for planning in regards to implementation of Juvenile Justice Reinvestment Act (JRA). The JRA was passed in 2011 and made major changes to sentencing and corrections in North Carolina in an effort to reduce state spending on corrections and to reinvest the savings in community programs that decrease crime and strengthen neighborhoods. The Governor’s budget included a total of $4 million in state funding for various support initiatives that continue the implementation of JRA.
  5. Provides $13.2 million in one-time state funding to support the “Raise the Age” initiative. The funding would be used to construct a new youth development center in Rockingham County in response to “Raise the Age” and is included in the Capital section of final budget. The respective House and Senate proposed budgets provided no state funding to support the “Raise the Age” initiative. Thus, the inclusion this funding is one positive outcome in the final budget.
  6. No additional state funding provided for indigent individuals to have access to private counsel representation. This missing investment in the final budget aligns with the House and Senate proposed budgets, which also excluded such funding. The Governor’s recommended budget included $2.9 million in state funding for fiscal year 2018 to increase compensation paid to private counsel representing indigent people who are unable to afford access to legal counsel.
  7. Includes a $10 million state funding cut to the Department of Justice budget and generates another $4.1 million in savings from eliminating 79 positions within the Department of Public Safety.

For more news and analysis during the budget debate, follow the Budget & Tax Center on Twitter @ncbudgetandtax.

Cedric Johnson is a Policy Analyst with the Budget & Tax Center, a project of the NC Justice Center.

2018 Fiscal Year State Budget, NC Budget and Tax Center

Final budget fails to strengthen the foundation of North Carolina’s public schools

The final budget that lawmakers have proposed fails to strengthen the foundation of North Carolina’s public schools. While the public schools area of the budget seems to have a lot going on – one could argue that a lot of special pet projects made it into the final budget – the reality is that little is achieved in ensuring that every student receives a high quality education, regardless of where they live in the state. Consequently, educators will embark upon the upcoming school year with the familiar challenge of doing more with fewer and inadequate resources.

Here are some highlights of the public schools budget that reflects the austerity budget approach state leaders continue to pursue despite an improving economy. Read more

2018 Fiscal Year State Budget, NC Budget and Tax Center

Lawmakers’ approach to paying for final budget means long-term fiscal challenges for North Carolina

The negotiated conference budget expects the state’s tax system to raise $22.3 billion in base General Fund revenue. This available base revenue is greatly constrained by previously approved tax cuts in recent years, and additional tax cuts in this final budget further reduce available revenue. In addition to base revenue, lawmakers rely on revenue collections coming in above what officials anticipated ($580.6 million); money they anticipate agencies will return to the state (known as reversions, estimated at $271 million); non-tax revenues ($849 million); and unappropriated dollars from the most recent fiscal year ($208.6 million). In total, $23.6 billion in revenue is available to lawmakers for public investments for fiscal year 2018 (FY18).

The second year of the budget uses $499.2 million of available revenue for FY18 to fund public investments for fiscal year 2019 (FY19). This reliance on prior year’s revenue raises concern, as the state’s tax system already falls short of raising adequate revenue to meet the growing needs in the state. This reality of an inadequately structured tax system and the use of prior fiscal year revenue, reflects the long-term challenges the state will face in ensuring that adequate revenue is available to meet the basic responsibilities of a growing state.

Year-over-year annual General Fund appropriations increase by $621 million in the final budget. However, around $1.1 billion in additional revenue will be needed in going from the first to the second year of the two-year budget to account for enrollment growth in public education, to pay for rising costs in the delivery of Medicaid services, to meet retirement and health plan obligations for public employees, and to fund the teacher pay plan. This suggests that existing obligations will either not be fully funded or cuts to public services are on the horizon, or a combination of both, in order to fund these ongoing obligations.

How do lawmakers pay for the final budget?

The final budget includes a required transfer of $100.9 million of General Fund dollars to the state’s Savings Reserve fund, per the special session disaster relief bill passed by state lawmakers in December 2016 to aid communities harmed by Hurricane Matthew. Furthermore, lawmakers stash an additional $263 million in available revenue into the Savings Reserve fund and another $125 million is set aside in the state’s Repair and Renovations fund.

More tax cuts in the final budget builds onto tax cuts in recent years that have reduced available General Fund revenue. Tax cuts in the final budget largely begin in the second year of the budget and will reduce annual revenue by $521 million for FY19. The full cost of the tax cuts – reflected by the loss of annual available revenue – is not reflected in the final budget because the tax cuts will only be in place for the second half of FY19. Accordingly, the cost of the tax cuts will be higher than the $521 million price tag included in the budget, meaning a further reduction in available revenue for public investments in the years beyond the two-year budget.

Cedric D. Johnson is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.

NC Budget and Tax Center

At the legislature: One step forward after three steps back in funding local government

Wednesday, members of the House Finance committee voted in favor of House Bill 900 (HB900), which allows North Carolina cities and towns to increase their local sales tax by a quarter cent. This local sales tax increase would have to be approved by a majority of local residents via a local referendum.

The proposal is being considered on the heels of state lawmakers steadily limiting and restricting revenue options for local government in recent years. The repeal of the local privilege tax in 2014, for example, resulted in nearly $63 million in less annual revenue for cities and counties across the state. Corporate income tax dollars were no longer dedicated to school building and infrastructure after the 2013 tax changes. And overall, tax cuts passed since 2013 that largely benefit the highest income earners in the state and profitable corporations have resulted in around $3 billion less in available revenue for public investments and that impacts local governments as well as state public programs and services.

The argument by proponents of the bill is that it provides a needed revenue option to cities and towns so that they can invest in infrastructure and bring jobs to their communities. It does, but is unlikely to fully address the unmet needs in communities and alleviate the fiscal pressures that local governments face. So, one step forward after three steps back – that’s not progress.

The diminished revenue resulting from tax cuts has served as an excuse for state lawmakers pushing the cost of public investments, like public education, down to counties, cities, and towns. For the 2018-19 school year, approximately $293 million in additional funding would be needed to fully fund state-mandated class-size requirements for K-12 classrooms in public schools. If state lawmakers fail to provide the needed additional funding, the cost and burden will fall onto local communities across the state.

Local municipalities need all the support they can garner to help ensure they have adequate resources to meet the needs of their residents and communities. Accordingly, HB900, even in its limiting form, is probably welcomed news for local officials.

However, it is important that we acknowledge the big picture and consider how we get back to being able to invest in the schools and businesses and workers who together drive our economic future forward. For that, we need a reconsideration of North Carolina’s failed tax-cut experiment.

Cedric D. Johnson is a Public Policy Analyst for the Budget & Tax Center, a project of the North Carolina Justice Center.