Budget disaster of gigantic proportions looms over NC

by Sabre Faires, former Asst. Sec. Dep't. of Revenue, published in News and Observer, May 7, 2014.

The Office of State Budget and Management describes the reported year-end state budget hole of $445 million as “disappointing.” It’s not a mere disappointment, however. It’s a symptom of a larger problem that is downright alarming. That larger problem is the structural deficit the General Assembly has created.

Even more alarming than the existence of this deficit is its cause. The structural deficit is not the result of a sudden downturn in the economy or another unexpected event. On the contrary – it is the result of the 2013 tax law changes that reduce expected revenues below expected expenses. Public information on the General Assembly website explains that the 2013 tax plan reduces tax revenue by over half a billion dollars in the year of full implementation and that revenues continue to decline in subsequent years. These calculations do not even take into account the additional revenue losses of up to $260 million that will occur if overall tax revenue hits the thresholds specified for further automatic reductions in the corporate tax rate.

Revenue is, of course, only half of a balanced budget equation. Expenditures are the other half. But the 2013 General Assembly did not make budget cuts sufficient to close the projected gap. Any realistic five-year forecast predicts a budget hole well in excess of $500 million in 2015-16 and 2016-17. A realistic forecast is one that takes the predicted growth in education enrollment and Medicaid into account, gives teachers and state employees a raise of at least 1 percent for each of the next two years and complies with the statutory mandate to set aside funds for the Rainy Day Fund and the Reserve for Repairs and Renovations.

It is not realistic to assume that teachers and state employees will never receive another pay increase, that the number of students in our schools and colleges will not increase as the state’s population increases or that our state buildings and technology infrastructure will never need repair or update.

Because of the mismatch in projected revenues and expenses, the tax system resulting from the 2013 law changes fails the first measure of a sound tax policy, which is sufficiency. Regardless of the merits of the components of a tax system, the system must produce enough revenue for the taxing entity to pay its predicted bills. Right now, the state’s system does not do that.

As a result, the state is faced with both a short-term and a long-term budget problem. The short-term problem is balancing the unbalanced budget enacted for the current 2013-2014 fiscal year. The reported $445 million hole appears likely to be closed by an appropriation from either the Rainy Day Fund or from unspent money originally appropriated to the agencies for other purposes. This violates a basic budget principle of not using nonrecurring funds for recurring expenses, but it gets the job done.

The long-term problem is eliminating the structural deficit by either increasing revenue or decreasing expenses. The General Assembly could eliminate entirely the Departments of Environment and Natural Resources ($157 million), Agriculture and Consumer Services ($115 million), Commerce ($73 million) and Job Development and Investment Grants ($63 million), Administration ($67 million), Cultural Resources ($63 million) and the Secretary of State ($11.6 million) and save only $550 million. If revenues are not increased, dollars to cover the sizable projected deficit can realistically come only from education’s $11.7 billion budget or Health and Human Services’ $5.1 billion budget. For two years in a row now, the Health and Human Services’ budget has had a year-end hole requiring infusions of over $500 million additional dollars. Not a likely source for savings.

That leaves education to bear the brunt of solving the structural deficit. Teacher pay raises will come at the cost of reducing other education spending and North Carolina will continue its downward spiral in education funding.

Sabra Faires is a former assistant secretary for Tax Administration at the N.C. Department of Revenue.