News: CJ Exclusives

How the State Budget Deal Got Done

Lawmakers used temporary fixes & taxes, ignored efficiency ideas

Lawmakers on June 30 heralded the “balanced” budget they produced through bipartisanship, which surprised many political observers because it emerged before the beginning of the new fiscal year July 1.

However, as in recent years, legislators depended on tax increases and nonrecurring revenues, which included $551.6 million in relief from the federal government.

In each of the last two years Democrats, despite possession of the governorship and majorities in both chambers of the General Assembly, failed to produce a balanced budget before mid-autumn. Delays were largely blamed on the near equally split House, where a group of liberal Democrats often joined unified Republicans’ 58 votes to block regressive tax increases.

This year, loyalties shifted. Despite a 60-60 vote split between Republicans and Democrats in the House, the liberals’ leverage diminished and GOP solidarity, already fragile, dissolved. Instead, a small group of Republicans led by Co-Speaker Richard Morgan joined with now-unified Democrats to craft a timely budget. The new coalition marginalized legislators who opposed tax increases and budget growth.

The realignment didn’t change budgeting habits from recent years. Government spending will grow by 3 percent in 2003-04 and will grow 5 percent by 2004-05. More than $1 billion in higher taxes will be collected through the end of fiscal 2005.

Finding new money

The extra levies didn’t alleviate the need to find other sources of revenue, though. North Carolina joined most other states, which are in similar budgetary difficulty, to plead for relief from the federal government. After much hand-wringing, Congress came through with $20 billion, which included $551.6 million for North Carolina.

Lawmakers also took $130 million from two of the state’s trusts that were funded by its share of the 1998 tobacco lawsuit settlement. Of those two funds the Health & Wellness Trust Fund, which was to finance public health programs, will lose $50 million the next two years. The Tobacco Trust Fund, which was established to give tobacco farmers relief for their product’s diminished demand, will lose $80 million.

Budget writers also took: $10 million from funds recovered as the result of the attorney general’s lawsuit settlements; $58 million from taxes earmarked for the improvement of the 911 emergency telephone system; $109 million from the Hurricane Floyd Disaster Relief Funds; and $40 million originally headed to other special funds.

Lawmakers in recent years have transferred increasing amounts from the Highway Trust Fund. The reserve was sold to taxpayers as a way to finance special road projects through gas taxes and car taxes. This year the legislature moved $252 million out of the designated fund.

Fee increases brought in another $11.5 million in revenue to the General Fund.

Legislators think also that the state will be able to gain $216.3 million through improved tax collection measures. And they expect to raise $40 million through the sale of surplus property.

According to legislative staff, the budget relies upon nonrecurring funds of $618.2 million in fiscal 2003-04 and $698 million in fiscal 2004-05. The total $1.3 billion is mitigated by nonrecurring expenditures of $197.2 million over the two years. In 2005 lawmakers will need to replace what amounted to a nonrecurring $1.1 billion in revenue in the 2003-05 biennium.

Brother, can you spare a prison?

Lawmakers also expanded plans this year to borrow money for capital projects through a controversial method they began two years ago. In 2001 the legislature authorized a new way to get financing without the need for voters to approve new debt, as the constitution mandates. The method was used to build three prisons.

Called “certificates of participation,” the legislature authorized the treasurer to create a nonprofit corporation, which would be owner and landlord of the prison properties. The state was able to skirt the voter-approval requirement because technically it is the finance corporation taking on the debt, then turning around and allowing the state to use the facilities under a lease-purchase agreement.

Local governments have been allowed to use the financing method for years.

“I don’t like it and I think it’s something we need to put a stop to,” said Rep. Martin Nesbitt, D-Buncombe. “I didn’t like it when the local governments did certificates of participation. I guess everyone can justify it by saying there’s no other way.”

Nesbitt said he was concerned about the rapid growth of the state’s bond debt over the last 10 years.
“Now we’re going into self-financing, which will put us into it even further if we don’t put a stop to it,” he said.
Lawmakers authorized lease-purchase agreements to build three more prisons at a cost of $234 million, in addition to several other capital projects that pushed the state $650 million further into debt.

What efficiency commission?

Gov. Mike Easley established the Commission on Government Efficiency and Savings on State Spending in February 2002. In December the panel released recommendations that paralleled proposals by a similar commission 10 years ago. In the early 1990s, members of the Government Performance Audit Committee estimated that their recommendations could save taxpayers about $275 million the first year, and greater long-range savings thereafter.

Few of those ideas were implemented back then, and most were forgotten when the economy improved in the mid-1990s. The Efficiency Commission, which was unable to reach the level of dollar-figure specificity that GPAC did, revived many of those suggestions, and added some new ones.

“We didn’t have the resources or the time to drill down to see what dollar savings might be there,” said Jim Hyler, chairman of the Efficiency Commission, and vice chairman of First Citizens Bank. The group was not given any funding in the budget.

Hyler said instead the commission focused on broad themes. “We didn’t get into any policy issues; we just looked at processes,” he said.

The commission’s report, full of consolidation and reduction ideas, also took on somewhat of a finger-wagging tone.

“The commission has noted the work of previous commissions has tended to be ignored when the economy recovers and the immediate fiscal crisis passes,” the report read. “Several steps should be taken…to avoid that process.”

The commission identified dozens of specific areas for potential government savings. The major recommendations included:

• Zero-based budgeting.

• Introduce incentives to control costs.

• Prospectively eliminate longevity pay and fund additional pay for excellent performance.

• Change eligibility standards for retiree health insurance and retirement benefits to mirror the private sector.

• Reduce duplicative personnel systems.

• Aggressively work toward the elimination of positions that become open as a result of attrition.

• Change the administration of the state’s $700 million information technology service programs.

• Privatize additional state government services.

• Sell certain state properties.

• Consolidate administrative functions of small school systems and small community colleges.

• Consolidate the many workforce preparedness programs.

• Simplify the tax code.

“If we simplified the tax code,” Hyler said, “it would make some of the compliance issues go away.”

But the recently completed legislative session demonstrated that legislators mostly ignored the commission’s lecturing. Most of the recommendations weren’t considered, and most that found their way into a bill failed to go anywhere.

NCCBI determined that only 14 bills that addressed government efficiency issues were introduced in either chamber of the Assembly.

Only two of the bills passed both the House and the Senate, but as of mid-August they hadn’t been signed by Easley. One would allow government agencies to receive sales tax exemptions instead of refunds. The other would authorize the sale of state-owned property in Raleigh’s Blount Street Historic District. That measure would allocate proceeds to the maintenance and upkeep of the Governor’s Mansion.

Two more of those bills were rolled into the budget bill. The first was to consider the sale or lease of state property. The legislature hopes to jettison $40 million worth of the state’s assets over the next two years.

The other bill that was placed in the budget will establish a statewide State Employee Benefit Committee, which consolidates the evaluation and selection process of optional benefit programs. Currently each state agency has its own committee, hindering economies of scale for the bid process.

“A couple of [bills] are still alive and in study,” Hyler said. “There’s been a little bit of action, but there’s still a lot to be done.”

Four bills that would have considered government program consolidation or reduction were themselves combined into a larger studies bill. Passage of that bill along with an appointments bill and a technical corrections bill is typically perfunctory, but not this year. Efficiency commission supporters aren’t sure how that bodes for their recommendations.

“I don’t know how to answer that because it’s so unusual [for it not to pass],” said Steve Tuttle, vice president of communications for NCCBI. “We’ll just have to wait and see.”

The efficiency commission also proposed that the state explore consolidation of community colleges , an idea that an independent consultant posed as feasible. MGT of America determined that the state’s three community colleges with enrollment below 1,000 could be merged with larger neighboring schools, which would save the state $2 million a year. However, the consultant said political and technical hurdles probably make the idea not worth the trouble.

But MGT said changing the formula by which the state’s community colleges receive money is worth pursuing. Community college officials and state system President Martin Lancaster discounted that idea, claiming that at least 36 schools would lose money.

“What we really need is more money,” Lancaster told The News & Observer of Raleigh.

Only so much was possible

Tuttle said legislators could do only so much on efficiency, given their busy agenda.

“I think we made a good start,” he said. “At least the issue of improving government efficiency received a good airing in the General Assembly, given they had to spend so much time balancing the budget.”

But lawmakers who opposed the budget thought a lot of the efficiency com-mission’s suggestions could have improved the budget immediately.

At the beginning of the year the commission identified the elimination of half of the state’s 10,000 vacant positions from 2001-02 as an instant and significant way to help relieve budget pressure. The panel estimated that if half of those positions were eliminated at an average annual salary of $30,000, about $180 million could have been saved.

“We’re going to fund over 5,000 empty positions,” said Sen. Fred Smith, R-Johnston. “No-body’s in those jobs.”

“I think the state should look very hard at these positions that have become vacant and have a disciplined program to eliminate them,” Hyler said last month.

The efficiency commission also said quick savings could be had in the state’s technology purchases.
“Just a slight improvement in the present disarrayed information technology expenditures could save $70 million in spending,” Hyler wrote in an August 2003 article for NCCBI.

Yet budget critics didn’t see that the legislative leadership had the will to overhaul government practices. Sen. Robert Pittenger, R-Charlotte, successfully amended the budget to include the purchase of a software program that helps identify Medicaid fraud — a problem the state is trying to control.

“This software program has identified $100 million in fraud in Georgia and Utah,” Pittenger said. “The vendor guaranteed the results.” The program was deleted in conference committee.

“In our excessive spending, we’ve not brought in any cost-saving efficiencies, and therefore we maintain the highest corporate, personal, and [state] sales tax rates of any state in the Southeast,” Pittenger said. “That clearly hinders our ability to attract economic development.”

‘Pretty good budget’

Legislators who voted for the budget, or were at least involved in the negotiations, found some positives in the midst of what was a struggle to keep from cutting what they considered essentials.

“I think for the shape they were in they did a pretty good budget,” Nesbitt said. “We’re still in a recession.

“I look for us in these difficult times to make sure we don’t dismantle an institution or leave some people behind. We needed to spread the pain, and I think they did that.”

Nesbitt also believed a little fiscal restraint was shown, at least by the House. “That cancer hospital at UNC — we resisted some temptation to spend dollars in future years.”

And of course, there was at least some time efficiency.

“The taxes would have remained in force under any form of House leadership when you take into consideration the ‘less than conservative’ Senate and governor,” said Rep. Debbie Clary, a Republican Appropriations Committee chair who voted against the budget. “The good news is, it didn’t take 10 months to do what was inevitably going to be done.”

Chesser is associate editor at Carolina Journal.