Governor McCrory’s budget proposal misses the mark, keeps state on unsustainable path

This afternoon, Governor McCrory released his $20.99 billion 2015 fiscal year budget for the period that runs from July 2014 to June 2015. His proposal creates more problems than it solves, failing to take prudent steps that would put North Carolina’s budget on a more sustainable path. Similar to his budget proposal last year, his new spending proposal follows suit and fails to catch up—let alone keep up—with the needs of kids, working families and communities in many areas of the budget.

The Governor’s budget was constrained in major ways—which were self-imposed by state lawmakers last year when they decided to cut taxes. The state is facing a revenue shortfall of $191 million in the 2015 fiscal year (not to be confused with the nearly half-a-billion shortfall for the current 2014 fiscal year that ends in June). The driver of these revenue shortfalls—despite an economic recovery—is the series of tax cuts that Governor McCrory signed into law last year that was already estimated to drain available revenues to the tune of $437.8 million in the 2015 fiscal year.

As we reported last week, estimates suggest that the revenue losses from the tax plan, particularly stemming from the personal income tax changes, could reach $600 million next fiscal year.

Yet, rather than prudently recommending the halting of future tax cuts that are scheduled to go into effect in January 2015, the Governor chose to keep this next round of tax cuts in place despite the diminished revenue picture. As we warned last year, North Carolina cannot afford to pay for tax cuts that primarily benefit the wealthy and profitable corporations at the expense of teacher layoffs, growing waiting lists for critical public services, and higher tuition rates.

State spending under the Governor’s proposal would continue to remain well below pre-recession levels, as illustrated in the chart below, even though spending over the base budget would slightly increase. All areas of education funding fall short of what was called for in the continuation budget. Tax cuts are making it harder to regain lost ground.

Art Pope, State Budget Director, will present the Governor’s spending proposal to the Joint Appropriations Committee tomorrow morning. My colleagues and I at the Budget and Tax Center reviewed the proposal and put together a short list of noteworthy items in the major budget areas (dollar changes below are compared to the certified budget lawmakers enacted last year):

K-12 Education:

• Boosts starting pay for teachers with up to 7 years of experience to $33,000. More experienced teachers will receive an average pay increase ranging from 2 percent to 4.3 percent.
• Provides a 2 percent pay increase to experienced assistant principals and principals. All other assistant principals and principal not receiving the 2 percent pay raise will receive a one-time salary and benefit bonus of $1,000. Provides a $1,000 salary and benefit increase to all other school-based personnel.
• Provides $9.7 million in one-time funding for a pilot initiative within 8 local school systems to promote retention of the highest quality teachers within the teaching profession and at the classroom and school level.
• Restores the master’s salary supplement only for teachers who hold advanced degrees in the subjects that they are teaching. Under the system in place in 2012 (before the boost was repealed in last year’s budget), this condition was not in place.
• Provides a one-time appropriation of $23 million for textbooks—a total that, in the end, is still well-below pre-recession levels.
• Cuts $38 million in funding to account for decrease in student enrollment for 2014-15 school year compared to previous school year.
• Cuts $19.8 million funding cut for Teacher Assistants, which keeps funding level for 2014-15 school year at the same funding level as current school year.

Community Colleges and UNC System

• Recommends $16.8 million in funding for training programs that support students seeking jobs with documented skill gaps that pay higher wages
• Increases tuition and fees for NC Community colleges from $71.50 to $72 per credit hour.
• Continues to underfund need-based scholarship for the UNC system.
• Implements a 2 percent management flexibility reduction of $44 million.
• Makes cuts to all UNC Centers and Institutes not involved in degree production or not central to the educational mission of the constituent institution, this is a 20 percent reduction to the 2013-2014 appropriation.
• Revises enrollment growth projections, which reduces dollars because fewer students are projected to enroll
• Provides $3 million appropriation to help translate research & development on campuses into the marketplace

Health and Human Services: 

• Provides $123 million to fully fund the projected enrollment growth in the number of people eligible for the Medicaid Program, known as the “rebase.” And, provides $1 million for Medicaid Reform. Also, provides $6.2 million to offset savings in provider rates that weren’t realized last year. Also, requires prior drug authorization for mental health drugs, saving the state $6 million. Saves another $59.6 million by retaining a portion of the LME/MCO assessment and another $15 million by retaining a portion of the hospital provider assessment. Provider assessments help finance the state’s share of Medicaid costs. Instead of returning those assessments to Medicaid providers, the state is keeping a greater share of the fee.
• Allocates $3.6 million in lottery funding to add approximately 700 slots to the NC Pre-K program. Also reduces General Fund support (i.e. state support) for the program by $14.8 million by relying more on federal funding and lottery funding.
• Provides one-time spending increases of $5.2 and $4.1 for the NC TRACKS and NC FAST systems, respectively.
• Reduces state support for Subsidized Child Cares Services by $13.8 million by relying on more federal funding (TANF block grant).
• Reduces state appropriation for the AIDS Drug Assistance Program by $3.8 million due to additional non-state receipts.
• Eliminates funding for the Child and Family Support Team program, which identifies and coordinates appropriate community services and supports for children at risk of school failure.
• Enhances oversight funding of county operations in Child Protective Services by 2.7 million. And, provides $5 million to boost foster care assistance payments.
• Uses a portion of federal block grants, not state funding, for new appropriations for crisis services.

Natural and Economic Resources:

• Fails to restore funding to community-based economic development that targets lower income and more disadvantaged communities—such as the Community Development Initiative, the Minority Economic Development Institute, and the NC Association of Community Development Corporations.
• Provides $596,000 in non-recurring funds to DENR for research and monitoring the state’s existing coal ash ponds. Also provides $1.2 million in recurring funds to support additional positions and operating expenses associated with regulation and clean-up of coal ash ponds, and $176,000 in recurring funds to support the state’s new fracking regulatory regime. Lastly, provides $3.46 million in recurring funds to continue the clean-up of residential Leaking Underground Storage Tanks throughout the state. Makes reductions to appropriations for existing Divisions in order to pay for the expansions. Divisions receiving cuts include: Water Infrastructure, State Parks, Marine Fisheries, Waste Management, Environmental Assistance, Water Resources, and the state Zoo.
• Cuts operating expenses by $289,500 on a recurring basis (2.3%) to Wildlife Resources. And, Provides a 2% flex cut to the Department of Agriculture, which allows the Department to determine where efficiencies can be achieved.

Specifically, in the Department of Commerce

• Supports privatization of the Department of Commerce by shifting 67 positions into the new nonprofit Public Private Partnership for economic development. And, provides a 2% flex cut, which allows the Department to determine where efficiencies can be achieved to reduce overall spending.
• Provides recurring increases of $1.2 million to the Community Development Block Grant program to support new purchase and installation of new grants management software and provide the state match for federal funds. If the match is not provided, the state will lose additional federal funds. This program provides financial support for building water/sewer infrastructure and shell buildings to promote economic development in designated distressed census tracts.
• Restores $500,000 in recurring funding to the Common Follow-up System, which tracks former participants in the state’s education and job training programs. And, provides $500,000 in new, non-recurring funds to recapitalize the Main Street Solutions Program, which focuses on downtown economic development to support small businesses and job creation.
• Provides $2.5 million in non-recurring funding to the One North Carolina Small Business Fund, which supports early-stage funding for small, high-growth, and high-tech businesses across the state. The funding will be made available from One North Carolina Program, rather than through appropriation from the General Fund.
• Provides $300,000 in recurring funds associated with the transfer of the Apprenticeship program from the Community College System. This program is a federally-administered program that places workers in apprenticeship positions businesses in certain high-demand occupations.

Justice and Public Safety:

• Provides $724,454 in one-time funding to restore funds and 13 positions for Alcohol Law Enforcement that were reduced during the 2013 legislative session.
• Provides $1.86 million to expand DNA testing capability to the Western (NC) lab by adding 10 positions and equipment.
• Makes a $2.7 million funding cut for agency efficiency cuts for the Department of Justice
• Closes a correctional center and makes adjustments and modification to other correctional institutions.

Miscellaneous

• Provides a flat $1,000 pay raise for most state employees. Some others receive a step increase. This is the first pay raise since 2010 when a raise of 1.2 percent was awarded.
• Makes no cuts to the Housing Finance Agency.
• Sends $50 million to the Rainy Day Fund and another $50 million to the Repair and Renovations savings account.

The North Carolina Budget and Tax Center is closely examining the Governor’s spending proposal. Stay tuned for further details as they develop. And tomorrow, we will break down the general fund availability statement to give you an idea of how the Governor pays for his budget.