When North Carolina lawmakers finalized the current state budget during the summer, most observers described that budget using figures ranging from $19 billion to $21 billion. That’s only part of the story. Joseph Coletti, John Locke Foundation Director of Health and Fiscal Policy Studies, says the real annual budget figure is about $49 billion. Coletti discussed the topic with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Martinez: Forty-nine billion? I’ve never heard this figure. Why don’t we hear this?
Coletti: Well, because the $49 billion is a lot of sources of funds, and the $19 billion, $20 billion … that’s the part that [legislators] have control over and think about on a regular basis. And actually, they don’t even think about the full $19-$20 billion. They think about the part that they, that the governor, suggests that they either cut or increase. So they only talk about a tenth of that. But that’s the General Fund. That’s the place where you can move things around — cut things, add things. The rest of it is federal money and some specified funds that the General Assembly can eliminate or can go into and pull it back out and put into the General Fund. But those are more difficult to maneuver around.
Martinez: And it’s about $29 billion, so that’s a lot of money that is there, but people really don’t look at or think about much.
Coletti: Yeah, I mean it’s 60 percent of the budget. That’s kind of a big deal.
Martinez: Wow. My bank account doesn’t work that way. Let’s talk about some of those areas, then, where this money is coming from, who receives it, and where it goes. We’ve talked about the General Fund. … Then we have something called federal funds. Now that’s anywhere from, say, $11 billion to $14 billion. What is that?
Coletti: Well, part of the increase from $11 billion to $14 billion that we’ve seen in the last year is the stimulus money. So what the General Assembly has done is cut state spending on some programs and supplemented that and supplanted that with federal funds. So that’s a portion of that. The rest of it is matching money from Medicaid, because for every dollar that we spend on Medicaid right now, … we get $3 in federal money. In normal years, for every dollar we spend on Medicaid, we get $2. … So that’s the biggest portion of the federal money. Then we have federal money for education, federal money for transportation, federal money for all of the different activities that the state does, block grants and matching money and just straight federal funding into the local sources or to the organizations.
Martinez: Now, it’s not only interesting to think about just the sheer amount of money that comes from the federal government to North Carolina every year. Joe, what happens, then, if, say, the federal government decides to cut back for some reason? We haven’t seen that recently, but if the government were to do that, then North Carolina has a big problem, right?
Coletti: Yeah, some of what North Carolina does is create positions based on federal grants. Then, when the grant money runs out, the agency goes back to the state and says, “Please fund this position full time.” The state has, in past years, been more than happy to do that. In the last year or two, they’ve been creating more of these grant positions because there’s been more federal money coming down. The other side of it is that, when the federal money comes down, then it comes with strings. So we see that with education money. The reason why we have to worry about [the federal] No Child Left Behind [education law] is because the state wants to keep all of the federal money. We had all of the discussion about the Race to the Top grant. It’s not a lot of federal money, but it was federal money that influenced how states made their decisions. If you remember when we had 55 mile-per-hour speed limits across the country, and why we have a drinking age of 21, it is because the federal money tied to transportation requires that you do that if you want the federal money. So when we talk about all of the federal mandates and all of the spending that’s required for that … that’s what we’re talking about, and a lot of that, though, is what the state has opted into.
Martinez: You mentioned transportation and age to drive. The next category we have in this $49 billion pot is highway funds, and that seems to be anywhere from $2.3 billion to $2.7 billion. Where does that come from, and what is it spent on?
Coletti: Well, that’s highway dollars, state highway dollars, not including those federal dollars that we were just talking about. This is the money that the state gets from our driver’s license fees, from our vehicle registration fees, from our gas taxes, from all of those things. And most of that goes to fund some form of road. Not all of that goes to fund the roads that we need, then some of it gets diverted into public transportation, and some of that gets diverted into the General Fund and does all kinds of other things. But for the most part, this is the road money that we try to figure out how to distribute well.
Martinez: OK. The next category — and this is one of my favorites because it’s classified as “other departmental receipts” — and that accounts for, say, $7.6 billion to $7.9 billion. Where does that come from?
Coletti: That’s other stuff.
Martinez: That’s a lot of other stuff.
Coletti: Part of that is when you go to a museum, when you go to the zoo, when you go to some of the state-run facilities.
Martinez: So user fees?
Coletti: Yeah, yeah, that’s a big portion of that. Then again there’s other stuff.
Martinez: Now when that comes in from user fees, then where does it go once it’s received? Does it go directly to that institution or department that charged the fee?
Coletti: Tuition is part of that as well. The idea with those funds is that it comes from the organization. It’s a user fee, so it gets used within that area. So that’s money that the General Fund doesn’t have to subsidize.
Martinez: Then finally we have another catch-all category called “other funds and availability,” and this is around $6 billion. If that’s not user fees, what is it?
Coletti: That’s just some of the other special funds that have been set up, whether that’s for borrowing, for debt service — some of the tobacco money may end up in there. So you’ve got some different uses, some different places for that.
Martinez: Very interesting. So we’re talking about $49 billion here — the General Fund that we hear about when legislators work on the state budget, and then federal funds, highway funds, other department receipts, and other funds and availability — pretty amazing. Let’s talk a bit about this year’s General fund budget. I hear you often say, “Well, it’s $19 billion. It’s really not, it’s really $20 billion to $21 billion.” Why? What’s the difference in those numbers?
Coletti: It’s part of that federal stimulus money. When the state says that they are spending $19 billion and … legislators and the governor say, “Oh we’re cutting back all of these programs,” and you hear people, advocates for these programs, say “Oh, it’s awful, we’re leaving these poor people, and we’re cutting back on students,” part of the cuts that are being made that bring it down by $1.4 billion last year and $1.6 billion, including that extra money from Congress, is being offset by stimulus money. So, we’re still spending the same amount as we were in the past. It’s just coming from a different source. So that’s why I talk about it as a $20.5 billion budget, whereas the legislators often talk about it as $19 billion.
Martinez: You are also predicting roughly a $3 billion hole next time around on the budget. What are we going to do, and why $3 billion?
Coletti: Well we have $1.6 billion of federal stimulus money this year, $1.2 billion of new taxes — temporary taxes — that were added last year, and another couple hundred million dollars of temporary, one-time cuts. All of that is going to be back on the budget next year, and all of that is going to be something that the state has to fund or reduce.
Martinez: So we’re either going to cut spending or raise taxes?
Coletti: And that’s where we should have been in the first place — with lower spending so that we wouldn’t be in this hole.