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Daily Journal

How to Read State Budgets

Aug. 2nd, 2013
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RALEIGH — Since the end of the 2013 legislative session, I’ve had dozens of calls, emails, and Facebook messages from North Carolinians asking for help in sorting out the various and conflicting political claims about the new state budget.

Did state spending on public education go up or down? Why didn’t state employees and teachers get pay raises? How much money did lawmakers set aside in case of emergencies? These are among the most common questions this year. In fact, these are the kinds of questions I’ve been fielding about North Carolina’s state budgets since I first starting analyzing them in 1989.

To answer the questions, I need to start with a few terms and definitions. North Carolina operates within a biennial budget cycle. That is, in odd-numbered years the governor proposes a two-year budget plan. The legislature takes the proposal and reworks it. In reality, the enacted budget is more relevant for the first fiscal year of the biennium — in this case stretching from July 1, 2013 to June 30, 2014 — than in the second fiscal year, because the governor and legislature always come back in even-numbered years and “adjust” the second year budget significantly. For example, items such as school enrollment and health care spending always get adjusted, usually upward, in the second year.

In state budgeting, there is a critical distinction between authorized spending and actual spending. At the beginning of a fiscal year, the budget authorizes an amount of money for each agency, program, and function in state government. In a sense, this is a prediction of what will be spent. By the end of a fiscal year, actual spending will come in at, above, or below the authorized amount.

Sometimes the difference is a surprise. Medicaid enrollment, for example, might grow faster than expected. Or an equipment purchase might come in under budget. But there are also built-in differences between authorized and actual spending. The most important one has to do with employee compensation. At the beginning of the year, money authorized for contributions to the state health plan, the pension plan, pay raises, and other changes to compensation are not allocated to particular agencies and programs. The authorization is in a “reserve,” to be drawn on as needed. By the end of the year, however, actual dollars spent are allocated by agency and program.

I’ve repeatedly seen this distinction trip up reporters, lawmakers, and outside analysts trying to make sense of annual changes in state spending. Generally speaking, you can’t just compare last year’s actual budget to this year’s authorized budget. That’s apples vs. oranges. To make a valid comparison, you have to either compare last year’s authorized budget to this year’s authorized budget (which is pretty easy) or compare last year’s actual budget to a reasonable projection what this year’s actual budget will be (which is harder but not impossible).

Now I’ll throw in a third category: the continuation budget. Every two years, the governor’s budget office asks state agencies to submit requests for the amount of money they think they will need to maintain current services. The budget office then produces a final version, called a continuation or base budget. While some think this process is strictly mathematical — expected caseload plus inflation, or something like that — the truth is that agencies often ask for far more than such a formula would produce. The process is as much internal lobbying as it is mathematical calculation.

More importantly, the continuation budget is itself based on an agency’s actual spending, not its authorization at the beginning of the year. So, again, there is an apples-to-oranges problem with comparing a continuation budget to an authorized budget.

Keeping all this in mind, here are my answers to the FAQs:

Authorized General Fund spending on K-12 education will be about 4.8 percent higher than last year’s authorized amount. If you project actual spending for 2013-14 based on historical trends, it will be about 4.6 percent higher than last year’s actual spending (and higher than the continuation budget). Inflation and student enrollment are projected to rise by a combined 2.5 percent or so, far lower than the General Fund spending increase.

• Gov McCrory’s original budget plan this spring included one-percent raises for public employees and retirees in 2013-14, a $171 million item. The final budget didn’t include them, although it did increase paid vacation days. Liberal critics argue that the inclusion of the Republican tax reform nuked the pay raise for 2013-14, but that wasn’t the real problem. The addition of the tax reform plan changed the governor's revenue availability for 2013-14 by only $35 million (that's $87 million for the final tax package minus the $52 million McCrory originally set aside for just the estate-tax component of the package). What really knocked McCrory’s first-year budget out of whack was $185 million in higher-than-expected Medicaid costs through the fiscal year ending in June, plus $235 million in higher-than-expected HHS spending, mostly for Medicaid, for the 2013-14 fiscal year.

• The final budget increased state savings by depositing $233 million in the rainy-day fund and keeping $250 million in the General Fund balance. By the second year of the biennium, cash reserves are projected to reach about $1 billion, including $688 million in the rainy-day fund and a General Fund balance of $355 million. That may sound like a lot of money. But keep in mind that authorized General Fund spending will be at least $21.6 billion in 2014-15. According to budgeting best practices, the rainy-day fund alone should be increased as soon as possible to about $1 billion (5 percent of budget) and ideally closer to $1.7 billion (8 percent of budget).

Lawmakers had the right priorities this year: cut tax and regulatory burdens to foster economic growth while building up cash reserves. Next year, if the state can get Medicaid costs under control, there should be enough revenue growth to raise public-employee salaries and continue building up reserves. My opinion may be wrong, of course, and I welcome contrary points of view. But please read the relevant budget documents first, and properly.

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Hood is president of the John Locke Foundation and author of Our Best Foot Forward: An Investment Plan for North Carolina’s Economic Recovery (2012).