N.C. Cupboard is Bare
The General Assembly returns to Raleigh on Tuesday to face a budget crisis of historic proportions.
The last time that North Carolina confronted such large budget cuts was the 1930s, and state leaders fundamentally redesigned the services that government provided and the taxes that were levied.
Gov. Mike Easley and legislative leaders say that nothing short of North Carolina’s future is at stake now. But are they reshaping government? Not in next year’s budget. Are they going to revamp the tax system? Not in next year’s budget.
For two years, the state has struggled with budget shortfalls and faces the prospect of a third year. But in contrast to the 1930s, this session is not expected to deal with any major changes in the way government works.
Legislative leaders appear determined to convene, patch the budget as best they can with cuts in spending and layoffs, take money from reserves and bank on the economy to restore the state to financial health.
Still, the choices legislators make will affect everything from how children start their lives to whether people pay higher taxes and play the lottery to what level of health care that the poor and elderly receive.
The governor has recommended that the legislature cut state spending in human services and prisons, pass a state lottery, withhold local government reimbursements, allow local sales-tax increases and delay tax breaks for middle-income taxpayers — all to pay for a major expansion of education programs while balancing a tight budget in a difficult year.
To do anything less, Easley said, would be to fail the people, and the future, of North Carolina.
“You can’t tax your way out of a recession,” the Democratic governor said. “You can’t cut your way out, you have to grow your way out; and education is the seed corn, and you can’t grind your seed corn.”
At risk is the state’s safety net of services for children, the disabled, the poor and the elderly. Easley has proposed deep cuts to mental health programs, Medicaid and Smart Start, the early child-care program. The General Assembly is considering going even deeper.
Advocates for those programs say that would be a grave mistake and strongly support raising taxes instead of making the proposed cuts to the state budget.
“What’s at stake is children and families and economic security and their safety and the ability of loved ones to stay at home rather than go into a nursing home,” said Paula Wolf, a lobbyist for the Covenant with North Carolina’s Children, a group that promotes children’s needs.
North Carolina isn’t the only state struggling to erase red from its balance sheets. Three-fourths of the 50 states anticipate budget gaps that will have to be closed. Still, North Carolina’s budget problems are among the most severe, with state leaders having to reconcile a 15 percent gap between revenues and expenditures.
“By our estimate, it appears there will be a handful of states to fall into that level of shortfall for the coming fiscal year,” said Arturo Perez, a budget analyst with the National Conference of State Legislatures.
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Cuts run deep
Proposed program cuts run across state government. The General Assembly’s current target of $ 125 million in cuts to justice and public safety spending would eliminate an array of community-based programs that offer judges alternatives to prison
— drug treatment, electronic house arrest or stays in halfway houses — for people convicted of less serious crimes.
Lao Rupert, director of the Carolina Justice Policy Center, said the cuts would undermine years of progress in developing local networks of services to treat offenders.
“It turns the clock back a quarter century, in terms of progress made at local levels in putting programs in place to make links to employment, substance-abuse treatment and mental-health needs,” Rupert said. “We’re not going to have anything left except prison, which is going to cost more. And they [inmates] are going to come out with the same problems as when they went in.”
Legal action is on the line, too.
Advocates for the mentally ill and developmentally disabled say North Carolina has an obligation to provide better community-based services under the 1999 Olmstead decision, in which the U.S. Supreme Court ruled that states must move mentally ill people out of institutions and into community-based treatment when possible.
Yet Easley’s budget proposes deep cuts to exactly those programs — cuts that add up to as much as $ 150 million, according to Beth Melcher, an advocate for people who are mentally ill.
That’s a year after human services officials said the state’s community services needed an immediate $ 100 million infusion just to stay afloat. “You are taking $ 150 million-plus out of your community system. What does that say?” Melcher said. “I think this state has just walked right into a lawsuit.”
Similarly, Easley is quick to point out that one of the two education initiatives he hopes to advance in the coming year could go a long way toward satisfying a court ruling that North Carolina must do more to ensure a quality education for the state’s have-nots.
Easley’s initiative, an academic program for 4-year-olds at risk of failing school, would expand services to 2,800 of the 40,000 youngsters identified in the court ruling as having been denied a sound basic education.
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How it happened
The roots of the state’s current fiscal problems go back to the roaring economy of the 1990s. A windfall of corporate profits and capital gains caused state tax receipts to nearly double in the 1990s — and lawmakers were ambitious in devising ways to spend all the new cash.
Encouraged by then-Gov. Jim Hunt, the General Assembly added popular new programs such as the Smart Start early childhood development program. The state built more prisons to accommodate a 67 percent increase in prison inmates caused by population growth and tougher sentencing laws. And lawmakers embarked on a schedule of pay raises to push teacher salaries to the national average.
The state’s 20.7 percent growth in population during the 1990s also drove an 18 percent increase in school enrollment, requiring thousands of additional teachers, assistant teachers and support workers.
Starting in 1995, lawmakers also cut income taxes; repealed the state taxes on food, inheritance and intangibles; and lowered the tax on corporations. By 2000-01, the annual effect of the tax cuts was a $ 1.4 billion reduction in revenue.
“We are where we are because we were on a meat-ax tax-cutting binge,” said House Speaker Jim Black, a Mecklenburg County Democrat.
Along the way, the state got hit with $ 2.2 billion in unexpected expenses from Hurricane Floyd and two legal judgments. The state covered the expenses by draining savings, banking on the strong economy to replenish them.
But when the economy slowed two years ago, the budget shortfalls materialized quickly.
“We were just living high on the hog,” said Kim Cartron of the N.C. Budget and Tax Center, a fiscal watchdog for the poor. “All of our projections were based on maintaining that kind of growth. That is not realistic.”
Cartron said that many of the tax cuts benefit corporate interests and the wealthy. She said closing tax loopholes and raising taxes in a progressive manner would make sure everyone pays a fair share to support essential state services.
Now, Easley and the General Assembly are facing their third straight shortfall — the result of the continued stagnation of the economy and the exacerbating effects of Sept. 11. And they face difficult choices to dig themselves out: deep cuts, large layoffs or a lottery or new taxes to lessen the pain.
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Tax debate
There are those who think that Easley and others are too eager to expand the size of government — and go on the hunt for new revenue to pay for it. For them, what’s at issue in the budget debate are reasonable tax rates; protecting state residents from a lottery, which they think will be played disproportionately by people who can’t afford it; and keeping the size of state government in check.
“He’s selling them a pig in a poke,” Jonathan Hill, state director of Citizens for a Sound Economy, an anti-tax group, said of Easley’s inclusion of $ 250 million of hypothetical lottery revenue in his budget proposal. “I think it’s unconstitutional and unconscionable. He’s almost forcing the legislators to look at a lottery by saying either this or a tax increase — and he’s giving them an illegal budget to do it.”
Hill also faults Easley for proposing to renege on promises approved last year for three middle-class tax breaks worth $ 69
million: a larger child-tax credit; elimination of the so-called marriage penalty; and a three-day sales-tax holiday before the start of the school year.
And he criticized the governor for suggesting that the General Assembly give local governments the option of raising their sales tax rates by a half-cent in exchange for the suspended state payments.
Easley’s budget, he continued, is based on the faulty premise that the only option is to continue expanding the size of state government.
“Every time they want to increase the size of government and want to increase revenue, they come to the taxpayer,” Hill said. “How many times do they have to raise income tax or sales tax before it’s too much? Enough is enough.”
Such sentiments raise the political stakes for a Democrat-controlled General Assembly whose leaders say they agree that progress in education is critical — and that the state will need additional money to support the governor’s initiatives.
Easley has appointed a Commission to Modernize State Finances to update the tax structure for 2000-era economy. He said that one of the causes of the state’s troubled finances is its antiquated tax structure, which relies heavily on sales tax. The group is to make its final recommendations before the 2003 legislative session. And it will be up to lawmakers then to decide whether to act.
Meantime, legislative leaders face a closely divided House of Representatives where passage of a lottery is not at all a sure thing and where some will criticize the local-option sales tax as a de facto tax hike.
“I’d like to think that most of us are willing to move forward in education,” Black, the speaker, said. “We’re going to do everything possible not to move backward. That creates a dilemma.”
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Budget choices
Legislators have to close a projected $ 2 billion gap in next year’s budget between the money needed to cover government operations and the money expected to come in from state revenues. Here is a sampling of the budget pressures that lawmakers face and some of the ideas for closing the gap.
Needs and Initiatives
Smaller classes. The governor wants to reduce class size in every first-grade classroom to 18 pupils by hiring 582 more teachers. Cost: $ 26.2 million
Expanded preschool programs. The governor wants to phase in his More at Four prekindergarten program for an additional 2,800 at-risk 4-year-olds. Cost: $ 28 million
Enrollment increases. Public schools need more money for textbooks, instructional equipment, and supplies because of higher enrollment. Cost: $ 30.2 million
Teachers’ bonuses. The state’s ABC program needs additional money to provide bonuses ranging from $ 500 to $ 1,500 to teachers’ assistants in schools that make more improvement than expected.
Cost: $ 79.8 million
Pay raises for teachers and principals. The governor proposed pay raises averaging 1.84 percent for teachers and 1.89 percent for principals. Cost: $ 51 million
Private Aid. The governor proposes to increase tuition aid to students attending private colleges in North Carolina. Cost: $ 2.2 million
Medicaid. The state’s Medicaid program, which provides health insurance for the poor, needs additional money to cover increased health-care costs. Costs: $ 35 million
New prisons. The state Department of Correction needs to cover the operating costs of three new 1,000-bed prisons in Scotland, Anson and Alexander counties. Costs: $ 8.3 million
Possible spending cutbacks
K-12. The governor proposed a 10 percent cut in the Department of Public Instruction — for the second year in a row. Savings: $ 3.2 million
Smart Start program. The governor proposed reducing Smart Start funding by 7.5 percent. Savings: $ 16.5 million
No pay raises. No pay raises for state employees were recommended by the governor. Each 1 percent raise costs $ 80 million.
UNC system. The governor proposed a 5 percent cut in educational programs. Savings: $ 5.6 million
UNC positions. The governor proposed to eliminate 1,052 positions in the university system, but not permanent faculty.
Savings: $ 51.3 million
Criminal Justice Partnership. Legislators are considering elimination of state funding for the network of county-operated programs for probationers and parolees. Savings: $ 8.8 million
Boot Camps. The governor proposed to close IMPACT boot camps for male probationers in Hoffman and Morganton. Savings: $ 4.1 million
Libraries: The governor proposed to reduce funding by 11 percent for public libraries in all 100 counties. Savings: $ 1.8 million
Retirement fund. Lawmakers are considering a proposal, also endorsed by the governor, to make no state contribution to the state employees’ pension fund and to reduce contribution to the judicial retirement system from 14 percent to 11 percent.
Savings: $ 142 million
Possible revenue sources
State lottery. The governor wants a state lottery that he says could be up and running in time to generate money for next year’s budget. Projected revenue: $ 250 million
Local government reimbursements. The governor proposed and legislators are considering the elimination of state reimbursements to local governments for previously repealed taxes. Revenue: $ 330 million
Tobacco fund. The governor recommended diverting revenues from the national tobacco settlement funds. Revenue: $ 40 million
Highway funds. The governor has recommended transferring money from the highway trust fund to the general fund. Revenue: $ 180 million
Various fee Increases. Legislators are considering raises in various state fees. The governor’s list includes higher fees for notary public commissions, for certified documents from the Secretary of State, for seat-belt infractions, and for county inmates held in state prisons. Revenue, if all enacted: $ 28 million
Higher tuition. University officials and the governor propose raising tuition by 8 percent for in-state students and 12 percent for out-of-state students at 16 UNC campuses. Revenue: $ 39.9 million
Cigarette tax. Some legislators want to raise the tax on cigarettes, which at 5 cents a pack is among the nation’s lowest. The national average is 44.6 cents per pack. State budget experts estimate that each additional penny of cigarette tax would raise $ 7 million. Raising the tax to the national average theoretically would generate $ 277 million.
