News: CJ Exclusives

Report: N.C. Budget Hole Worst in Southeast

State would have faced $5.6 billion shortfall in FY 2011, report finds

Next year could be a perfect storm for North Carolina budget writers, according to an analysis by the bi-partisan National Conference of State Legislatures that ranks the Tar Heel State’s budget gap as the fifth worst in the nation and worst in the Southeast.

The report comes on the heels of legislators’ finalizing of a $20.6 billion budget for the new fiscal year, passed June 30, that kicks the ball down field on a number of key fiscal issues.

Congress is poised to pass a rescue package that would cover $343 million of North Carolina’s $519 million liability for Medicaid. The remaining $176 million will be filled by diverting funds from six other budget line items, including disaster relief dollars and unclaimed lottery prize money.

If the federal government doesn’t allocate the funds, state lawmakers would take the unprecedented move of diverting $139 million from the state employee pension plan to help cover the difference, in addition to other cuts.

The NCSL report lumped North Carolina in with Nevada, New Jersey, Arizona, and Maine as the five states with the worst shortfalls as a percentage of their general fund budgets. Based on the Tar Heel state’s initial continuation budget, and factoring in declining tax revenues, the report authors estimate the state would have faced a $5.6 billion budget gap for the 2011 fiscal year — amounting to about 25 percent of the state’s general fund budget.

During the short session, lawmakers managed to whittle that gap down by raising taxes and cutting programs, but experts predict the shortfall still will be more than $3 billion.

The report also estimates that North Carolina will experience a $3.2 billion shortfall in the 2012 fiscal year, or about 17 percent of the general fund budget. Most of that is due to a loss of $1 billion in federal recovery funds and the expiration of $1.4 billion in temporary state taxes.

Republicans, the perennial minority party in the General Assembly, claim that Democrats missed an opportunity to shore up the financial scenario during the past session.

“They’ve proven that they either don’t get [it] or don’t want to make cuts, and we have to,” said state Rep. Thom Tillis, R-Mecklenburg. “It should be alarming to everybody that our structural deficit is higher than any other Southeastern state.”

Rep. Hugh Holliman, a Davidson County Democrat and top leader in the House, told The Lexington Dispatch that unless the economic situation improves, Democrats would be ready to make cuts of up to $2 billion and extend tax increases.

“I don’t think there will be any more stimulus money, so we will have to go in and do some serious cutting again,” he said.

Nationwide, 24 states reported fiscal year 2011 gaps of 10 percent or more of their general fund budgets. Of the 45 states reporting tax-change information, lawmakers’ actions this year resulted in a $3 billion increase in taxes.

Collectively, states reduced income taxes but raised corporate, sales, health care, tobacco, alcohol, and motor fuel taxes.

“State budgets are in transition, apparently improving as state revenues stabilize and begin their slow march to pre-recession levels,” the authors conclude. “But many uncertainties lurk, with their impact poised to hit state budgets next year.”

David N. Bass is an associate editor of Carolina Journal.