New deficit in N.C. may top $2 billion

News & Observer ^ | Nov. 24, 2002 | AMY GARDNER,

[jern]

New deficit in N.C. may top $2 billion

By AMY GARDNER, Staff Writer

Gov. Mike Easley and the General Assembly are facing yet another budget shortfall that could exceed $2 billion, and they have begun to confront the certainty that they must either cut existing programs or raise taxes when lawmakers return to Raleigh in January.

Government number-crunchers already are poring over the likely big-dollar new expenses for the spending year beginning July 1. Looming largest is the need for Easley and lawmakers to replace $850 million in one-time revenue and reserves used to pay for ongoing expenses in the current year's $14.3 billion spending plan.

	new expenses
	Budget analysts for Gov. Mike Easley and the General Assembly already are taking stock of new expenses for the budget year beginning next July 1. Already, they've identified the following likely increases: $850 million to replace one-time revenue and reserves used to balance the current year's budget. Includes $350 million to replace revenue from a half-cent of sales tax due to expire July 1. $260 million to $350 million in new state Medicaid costs $145 million increase for state health plan $40 million in new debt payments, primarily for university construction bonds $94 million per 1 percent in pay raises given to state workers $60 million to $245 million in enrollment growth at universities, community colleges and public schools

Budget writers are also expecting spending increases of as much as $350 million in the state's share of Medicaid, the health insurance program for the poor; $245 million for enrollment increases at public schools, community colleges and universities; and $145 million for the state health plan.

That's not counting pay raises for state workers, bonuses for teachers or expansion of Easley's two prized education initiatives, the prekindergarten program More at Four and an effort to lower class size in elementary school.

"Our budget flexibility is shot, it's very weak," said State Budget Officer David McCoy. "The fact that the General Assembly adopted a budget that used so much nonrecurring revenue on recurring programs, they have put us in a situation where we start off with a much greater challenge than we otherwise would."

If there is one bright spot as the new budget season begins, it is that Easley and the General Assembly wrote an exceptionally conservative spending plan this year, and it appears to be paying off. For the first time in three years, actual revenues in the current fiscal calendar remain in line with forecasts; as a result, Easley is likely to be spared the task of managing a midyear emergency.

"The good news is that the governor's got some breathing room this year to think about next year," said Jim Johnson, director of the General Assembly's Division of Fiscal Research.

The bad news, Johnson and others say, is that there are only two ways to close that projected $2 billion gap: cut services or raise taxes. And with the GOP narrowly in control of the House but Democrats still in charge of the state Senate and the Governor's Office, finding a winning mix is likely to be an exercise in compromise.

The largest chunk of the one-time money that lawmakers used to plug this year's budget is revenue from an extra half-penny on the state sales tax, added temporarily last year and due to phase out in July. Each half-cent of the state's 4.5 percent share of the sales tax generates more than $350 million, and Easley is likely to propose extending the temporary half-cent permanently to help plug the budget hole.

But the governor faces a daunting anti-tax force in the new, though narrow, Republican House majority.

"We're going to be saying no to tax hikes, and we're going to agree that spending cuts have to occur," said state Rep. Richard Morgan, a Republican from Moore County and one of several contenders for House speaker. "And so we're going to have to work together to identify those areas. No one has the answers to those questions right now."

The Republican majority will also make it more difficult for Easley to get a state lottery passed to finance his education initiatives -- an attempt that narrowly failed this year. In fact, the GOP will resist the governor's effort to continue phasing in More at Four at all.

"Now's not the time to be expanding new programs," Morgan said.

One possibility being discussed is an expansion of the types of items that are subject to the sales tax. Easley's Commission to Modernize State Finances has talked about taxing such items as personal services: for example the labor portion of a car-repair bill.

Commission members have suggested lowering the tax rate at the same time, so the state would collect roughly the same number of dollars each year and avoid the appearance of a tax increase. The advantage would be greater potential for revenue growth as the economy improves.

Another possibility is an increase in the cigarette tax, which, at 5 cents a pack, is the third-lowest in the nation. Supporters say voters wouldn't object to an increase in this so-called sin tax, and they also point to the money -- $350 million for a 50-cent hike -- as reason to pursue the idea.

"The candidates who made a no-tax pledge, none have been able to come up with a billion-eight in cuts," said Jim Goodmon, CEO of Capitol Broadcasting Co. and a supporter of a cigarette-tax hike both for the revenue and to discourage smoking.

"We're going to need to both cut and raise revenue," he said, "and I think there's a compelling reason to do the cigarette tax."

Goodmon's figure, $1.8 billion, is one estimate for the shortfall when the General Assembly convenes Jan. 29. But Dave Crotts, the legislature's chief economist, said the shortfall could go as high as $2 billion before budget deliberations are through.

Crotts and the governor's economists say it's too early to predict how the economy will perform during the next fiscal year, making it impossible to know precisely what state revenues will be. But if the current budget cycle is any indication, both the governor and the General Assembly will be cautious with their predictions.

This year's budget assumes revenue growth of just 1.9 percent and, so far, is on track. That's a stark contrast with the previous two budget cycles, when revenues came in far below forecasts -- $700 million below in 2000-01 and $1.6 billion below in 2001-02. Easley had to declare a budget emergency and slash spending in the middle of both budget cycles.

To keep the state in the black again next year, the governor is already taking an exceedingly conservative approach to predicting revenue growth.

"There are some signs that the economy is recovering," said McCoy, Easley's budget officer, "but it is going to be a very slow recovery."

Staff writer Amy Gardner can be reached at 829-8902 or agardner@newsobserver.com.

[MotleyGirl70]

I think Wisconsin has that beat at $3 billion. Cigarette taxes just went up AGAIN! If it weren't for smokers the bureacRATS wouldn't know what to do. They would probably end up taxing, uhhmmmm. Nevermind EVERYTHING is taxed (just not as much as cigs are).

[scooby321]

Another Dem on the Losing List in 2004

[willyone]

One common thread that will be found for all the states suddenly running these big deficits is they all will have had a recent large increase in the number of illegals in the state. That cheap labor ain't cheap.

[captnorb]

You forgot....The states have dems controlling them...

[ctnoell]

As recently as four years ago, the state budget ran a substantial budget surplus as state tax payers were given a another state tax refund. All of this happened with the Republicans controlling both houses of the state legislature, the state sales tax at 4.5%, and other taxes and annual fees such as gas taxes, car inspections, and utility taxes significantly lower. After the Democrats took back control of both houses in 2000, the state budget ran up a $1 billion deficit in 2001. The result: sales tax increased to 6.5%, all other state controlled taxes increased across the board (even the first ever state tax on the reception of satellite television). Also, millions of dollars of local tax reimbursements owed by the state to local municipalities were withheld, causing hardship for town and city budgets who relied on the reimbursements. After all of these tax increases and minimal spending cuts, the result was the budget deficit increasing to over $2 billion. Things have gotten so ridiculous that I drive 20 miles across the state border to Virginia to buy all of my groceries/other merchandise (sales tax in VA is 2% lower than NC) and while there, I fill up on gas ($0.15/gallon cheaper in VA:lower gas taxes). Now there's hope as the Republicans recently won control of the state house of representatives. If we can only defeat Democrat governor Mike easley in 2004, we may be able to balance the budget down here in NC again (which is required in the state constitution, by the way). Let's hope!

[angelbaby1111]

A mere $2 billion sounds heavenly; out here in CA, ours is $26 billion and growing every darn day....and Californians re-elected the goofball again for 4 years. It's dowright scary!

[warchild9]

It's not the illegals here in NC. Thousands of Yankee illegals flooded my home state in search of IT jobs, and have either been laid off or turned into temps for IBM.

[jern]

Constitution Day; mykdsmom

[mykdsmom]

NC PING!

[billbears]

Thousands of Yankee illegals flooded my home state in search of IT jobs, and have either been laid off or turned into temps for IBM.

I'd laugh if it weren't too true. I appreciate RTP and all that it has done, but good grief you're right. BTW, did anyone else see the report that an 'average' house in southern Orange County was now going for around $400,000?

[TheLion]

Likewise in Virginia....Mark Warner (Dem) got in and the budget has zoomed to deficits. His response: Cut essential police force jobs etc. No effort is made to go after the real source of the spending nonsense.

[Overtaxed]

BTW, did anyone else see the report that an 'average' house in southern Orange County was now going for around $400,000?

Hehehe....is that the actual price or the tax value?