Proposed uses for NC’s flexible funds from American Rescue Plan vary widely

North Carolina’s share of State Fiscal Recovery Funds – flexible dollars allocated to North Carolina from the American Rescue Plan – present the opportunity to address new and long-standing needs across the state by infusing dollars at a once-in-a-generation scale into communities.

Our analysis to date shows that the state House and Senate’s proposed plans lack transparency and public input, rely on arbitrary one-time allocations for specific communities only, and demonstrate an over-reliance on federal funds rather than state funds to address long-term needs.

An additional analysis of the three plans – those released by the Governor, Senate, and House, respectively – shows substantial variation across the proposals. Line items were placed into one of five categories related to the purpose or outcome the investment sought to secure. These were:

  • Aid for individuals, examples include premium pay bonuses and funding for food banks
  • Build capital and infrastructure, including broadband networks and water and sewer utility grants
  • Support the workforce, examples include Longleaf Commitment grants and funding to expand an apprenticeship program for high-demand fields
  • Stabilize private businesses across North Carolina, including through a grant program to aid in their economic recovery from the pandemic
  • Fund public institutions, such as stabilizing community college budgets, funding for communicable disease control and prevention by public health departments, and supports for local governments to administer federal recovery funds.

All three proposals place a high priority on improving the state’s infrastructure, though vary in how they intend to do so. In addition to infrastructure investments, the Governor’s plan prioritizes aid to individuals, while the Senate’s places the next greatest investments to stabilize businesses, and the House proposes similar levels of funding for aid to individuals, mostly in the form of one-time premium pay bonuses and stabilizing businesses. Notably, the legislative plans would invest very few dollars into supporting the workforce, and all three plans invest relatively few dollars into funding for public institutions.


Suzy Khachaturyan is a Policy Analyst at the Budget & Tax Center, a project of the NC Justice Center.

Legislature’s plans for the use of American Rescue Plan funds fall short in three important ways

Click here to view and download a comprehensive list of the ARP items from the NC House and Senate budgets.

The $5.4 billion in flexible funding that North Carolina received from the federal American Rescue Plan presents a tremendous opportunity for the state. With such an unprecedented cash infusion, state leaders have a rare opportunity to both invest in transformational changes that can help all North Carolina communities respond to the ongoing threat of COVID-19, and lay a strong foundation for the future.

Unfortunately, an analysis of the planned uses of these dollars in the competing House and Senate budget proposals reveals a haphazard slew of line items – more than a hundred in each proposal – that altogether fail to provide a vision for change in our state.

Budget conferees are currently attempting to negotiate a compromise budget bill that will be presented to each chamber and, if approved, sent to the Governor. Our analysis to date has focused on the House and Senate proposals for the state’s General Fund dollars; however, the respective state budget proposals also include suggested uses for much of the flexible funding that was received by the state via the federal American Rescue Plan (via the State Fiscal Recovery Fund).

In addition to allocating the American Rescue Plan dollars, the House and Senate plans also allocate issue-specific federal grants to the appropriate state agencies. These dollars will go to support services including child care, mental health, and substance abuse, and will support areas like transportation, capital projects, small business credit initiatives, and more.

Three key takeaways emerge from our analysis (see below for more details):

  1. A lack of transparency and public input from communities is severely limiting the positive impact that’s possible with these funds.
  2. Rather than constructing a coherent vision of the transformational opportunities presented by the influx of flexible federal dollars, the budget proposals instead rely upon mostly arbitrary, one-time allocations for specific needs in specific communities.
  3. Rather than using federal dollars to make up for anticipated near-term losses resulting from a new round of tax cuts, North Carolina should pursue the more sustainable path of investing state dollars to address long-term needs.

A lack of transparency in the process of developing these appropriations does harm to the communities that are left out. State Fiscal Recovery Fund dollars allocated to state and local governments are able to be used to meet a broad range of needs to respond to COVID-19 and begin to build back stronger communities. Lawmakers should therefore seek and provide extensive opportunities for public input and assess needs in communities to ensure funding is targeted to those who need it most. Instead, the proposed plans allocate dollars to narrow uses without any indication of what needs exist.   Read more

Four takeaways from the House budget proposal

On Monday evening, the N.C. House of Representatives finally released its proposed two-year budget for the state, which is expected to pass the chamber by the end of this week. The House budget proposal is only marginally different from the Senate’s, and restricts spending to an arbitrary spending limit like the Senate’s proposal.

It also unnecessarily and severely underfunds public schools in violation of the state’s constitutional obligation to provide a sound, basic education to every child as prescribed by the longstanding Leandro court case, and either fails to meet the needs across a raft of other issue areas altogether, or merely provides token investments that fail to bolster core public structures and systems critical to our collective well-being.

After, as is expected, the House budget passes on a simple majority vote, the Senate and House will appoint members from both chambers to develop a conference committee compromise, which will need to pass both chambers before being sent to the Governor for his final review.

Regrettably, the House’s proposed budget would continue North Carolina on a long path of disinvestment, prioritizing tax cuts that disproportionately benefit the wealthy and corporations at the expense of our communities, rather than using this moment as an opportunity to survey the vast needs across the state and invest our collective dollars to ensure every person – Black, brown, indigenous, and white – can have their needs met.

1. Proposal continues to drop state spending to historic lows

The plan proposes spending $25.7 billion in Fiscal Year (FY) 2021-2022 and $26.7 billion in FY 2022-2023. Like the Senate’s proposed budget, the House proposal would bring North Carolina’s investments to a 45-year low of 4.56 percent of the state’s economy in the first year and 4.54 percent in the second year. Spending levels continue to fall over $7 billion short of the 45-year average spending as a share of the economy (as represented by the dotted blue line in the chart).

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Nine ways the Senate budget falls well short of what North Carolina needs

As we wait for the House budget proposal, it is worth digging deeper into the shortcomings of the Senate budget proposal, the passage of which marks the first completed step in the process during which the Senate, House, and Governor must come to agreement about how to fund the needs of a growing state more than a year into the COVID-19 pandemic.

The budget proposed would leave North Carolina more than $7 billion below historical investment levels as a share of the state’s economy during a time of unprecedented and ongoing need. The proposal also includes a suite of tax cuts that would overwhelmingly benefit wealthy North Carolinians and corporations along with their shareholders, and the full impact of the revenue loss when the tax changes are fully implemented — while not completely yet known — would exceed $5 billion annually.

The Senate’s two-year plan once again chooses corporations and the richest over everyday North Carolinians — a vision that has yet to result in tangible improvements in a host of areas where people continue to be blocked from their full potential and greater well-being. Investments in the sound, basic education that the state has a constitutional obligation to provide will go woefully unmet if this plan becomes law, as will the need for our state to finally expand Medicaid to ensure that hundreds of thousands more North Carolinians can receive care when they need it. These and many other opportunities have been missed through this first major step in the budget process, and should the ideas from the Senate be agreed to by the House and the Governor, North Carolina will continue down a harmful path for its people.

  • Failing to make progress toward ensuring a sound, basic education. The Senate budget fails to make meaningful progress toward providing North Carolina students the education they are owed under our constitution in direct violation of a June 7 court order issued as part of the long-running Leandro school funding case. That order requires the General Assembly to fully implement the first two years of a seven-year plan to deliver a constitutional education system by the 2027-28 school year. The Senate budget would fund just 13 percent of the plan, eschewing the evidence-based, court-ordered plan to improve the recruitment and retention of diverse teachers and principals, create a finance system that’s adequate and equitable, support low-performing schools and districts, overhaul a discriminatory school accountability system, and create improved connections to college and careers.
  • Short-term and inadequate funds for equitable early education. The Senate budget fails to meaningfully ramp up investments in NC Pre-K, Smart Start, childcare subsidies, or boosting pay for childcare workers and pre-kindergarten teachers, that is also required by a June 7 Leandro cort order. The Senate budget marginally increases per-slot funding for NC Pre-K but does not increase the number of available slots. While it provides some funding for Smart Start, these funds are one-time only, so the system does not receive continued investment. State dollars would have provided ongoing support to North Carolina’s youngest children and their families and would have helped ensure that federal funds lead to transformative change. Instead, the Senate budget relies on American Rescue Plan funding, which does not meet our state’s long-term needs or Leandro requirements.
  • Choosing to pass on a key fiscal incentive to expand health care access. Senate leaders failed to address the lack of affordable health care access for more than 500,000 North Carolinians. Read more

Five takeaways from the Senate’s budget proposal

This past Monday evening the North Carolina Senate released its much-anticipated budget, providing further details that demonstrate just how limiting the General Fund spending cap is for our communities.

The Senate budget represents a missed opportunity to recognize the importance of public investments in addressing the needs of North Carolinians: educational achievement through a sound, basic education for every child; well-being of our families through a public health infrastructure; social services to support those in need; and the resiliency of communities through homegrown business retention and quality jobs.

The Senate’s budget plan would bring the state’s investments to a new low while committing the state to untold losses in the form of revenue reductions by eliminating income taxes for profitable corporations by 2028 and lowering the already flat personal income tax rate.

As the state continues to respond to the ongoing COVID-19 pandemic and looks to recovery, now is the time to make greater investments to solidify the foundation of a future for every North Carolinian where their health is protected, their families are supported, and their neighbors are connected. Instead, legislative leaders continued to use flawed theories driven by anti-government, trickle-down ideology  at the expense of everyday North Carolinians.

#1 – State spending would reach a historic low

Totaling $25.7 billion in FY 2021-2022 and $26.6 billion in FY 2022-2023, the budget would hold down investments – more than $7 billion short of the historical average as a share of our state’s economy – while locking the state in for years to come with fewer dollars available to make future investments.

#2 – Billions in the bank with millions in need

This proposal comes on the heels of the updated consensus revenue forecast, developed by the state’s leading economists, showing billions more in anticipated revenue growth. This windfall contradicted previous predictions, thanks to robust federal aid that stabilized the economy and the record gains for profitable corporations and high-income people throughout the pandemic that increased state tax revenue collections.

Despite the strong revenue outlook, Senate leaders propose large transfers of General Fund dollars to the flush Rainy Day Fund (i.e. Savings Reserve) and State Capital and Infrastructure Fund (SCIF), well above the statutory requirements they themselves created. These transfers put more funds on the sidelines when today’s hardship threatens to stall future opportunity and stability.

#3 – State leaders have a key role to play

Senate leaders have also begun, through this bill, allocating Fiscal Recovery Funds coming to North Carolina’s state government from the American Rescue Plan. As it stands, the Senate plan fails to provide a comprehensive vision for how the funds will be used. Instead, Senate leaders have identified a handful of areas where their priorities align with permitted uses of these one-time federal funds rather than committing state funds, such as bonuses for state employees and funding for health clinics to respond to the public health emergency.

A better strategy would be to provide a more complete picture of the use of federal funds and deploy state dollars as needed to sustain services and programs and make sure the state has the infrastructure supports to ensure that our schools, our health clinics, and our communities can fully recover from the pandemic and economic downturn over the next several years. Investing public dollars has fueled the COVID-19 response and will be essential to ensuring that a full and equitable recovery is made.

#4 – Forward-thinking investments require profitable corporations and the rich to pay their share

Senate leaders have again prioritized tax cuts that will continue to hamper our state’s ability to meet the needs of a growing population. The bill would eliminate the corporate income tax altogether by 2028 and reduce the already flat personal income tax from 5.25% to 3.99% by 2026, among other changes. The personal income tax change would overwhelmingly benefit the top 20 percent of income earners in North Carolina, with 74% of the tax cut going to the top 20% compared to none of those with the lowest incomes once fully phased in.

The full impact of the corporate income tax elimination is not yet known, largely because its phaseout is too far in the future to be able to account for all of the variables with any level of confidence. Blindly phasing out taxes on corporations without knowing what reductions to public education and other budget areas will be required is the antithesis of responsible budgeting.  It is made worse by the fact that the state dollars on hand today are the result of unique factors like robust federal aid, no final comprehensive state budget for two years, and shifts in tax filing deadlines. By forging ahead with their commitment to reducing income tax rates, Senate leaders are forcing future budgets to their status quo approach of austerity.

#5 – A budget without public input

The lack of adequate investments and fundamental blows to the state tax code’s adequacy is compounded by the the absence of transparency and indifference for the democratic process informing a major policy decision at a critical moment in the state’s rebuilding from the pandemic.

To date, public hearings and input on what is needed to ensure our communities are more resilient after the past year have not been solicited nor provided a forum. Instead, legislative leaders set arbitrary spending limits behind closed doors rather than reflecting and assessing the full scale and scope of hardship and solutions available to them through a collective commitment.

With strict rules for amendments in committee and anticipation that the bill will be forced through the chamber by the end of the week,  the NC General Assembly leaders have blocked not just input from the public but debate with elected leaders who are not in their party.

It’s high time our legislative leaders set aside their zeal for tax cuts and disinvestments, which have pushed everyday North Carolinians further from economic opportunity and well-being with every austerity budget. Let’s instead invest in our communities and forge a path to a more equitable future.

Suzy Khachaturyan is a Policy Analyst at the Budget & Tax Center, a project of the NC Justice Center.