Opinion: Daily Journal

A Budget Deal at 7-Eleven

Two weeks after the start of the 2014-15 fiscal year, the North Carolina House and Senate still haven’t reached an agreement on adjusting the state budget. If you’ve been around the General Assembly for any length of time, the situation ought to look awfully familiar. The rapid resolution of budget negotiations we’ve seen in recent years has been an outlier, not the norm. I’ve often seen budget deliberations stretch into August, and sometimes beyond.

Still, there’s no doubt that the current impasse has proven to be immensely frustrating for all concerned. It’s not helping matters that critics of the new Republican-led government in Raleigh have strong incentives to exaggerate the differences between the chambers and aggravate the resulting tensions between them. Rather than give Democratic politicians, liberal media outlets, and left-wing activists what they want, however, Gov. Pat McCrory and legislative leaders need to step back, take a few deep breaths, and begin again with a focus on values in common, not differences in detail.

I have a proposal for bridging those differences. But first, a review of recent events.

The Current State of the Negotiations

The Senate’s latest offer to the House proposes a 11 percent average pay raise for public school teachers, a $469 million item in FY 2014-15 funded in part by transferring $233 million currently budgeted for teacher-assistant positions in the second and third grades. The House’s latest proposal leaves current TA appropriations alone and gives teachers average raises of 6 percent, costing $219 million in 2014-15.

The Senate offer also includes tighter eligibility rules for Medicaid’s “medically needy” population. Combined with other reforms, this means that the Senate proposal for the Department of Health and Human Services is about $135 million lower than the latest House figure. (Both plans now set aside $186 million as a hedge against possible Medicaid overages, albeit in different parts of their respective budgets.)

There are two other key differences on Medicaid. The Senate proposes that after years of chronic mismanagement, Medicaid ought to be brought out from under DHHS into its own separate agency. Senators also want as much of the program as possible to be converted from a fee-for-service model to a competitive-contracting model in which both provider-led and insurer-led networks compete to serve patients and are fully at risk when their costs exceed fixed state payments per recipient.

The House currently accepts neither of these proposals. It favors leaving Medicaid within DHHS and proceeding with a competitive-contracting model that includes only the provider-led networks (the so-called accountable care organizations) and excludes private insurers, although the latest version of the House reform plan does assume that provider-led ACOs will bear financial risk after several years.

The Senate’s Conservative Principles

The problem here is not that one side is conservative and the other isn’t. Both Senate and House leaders are citing core principles of fiscal conservatism to defend their respective positions.

Two of those principles are fiscal priority-setting and empirical policymaking. The Senate argues, quite correctly, that if everything is a priority, then nothing is a priority. There is widespread agreement that teacher compensation ought to be the priority in 2014. Even adjusted for cost of living, non-wage benefits, years of experience, and other factors, North Carolina’s average teacher compensation is now below the national and regional averages. Thought of another way, the ratio of North Carolina teacher salaries to the national average is lower than the ratio of North Carolina private-sector salaries to the national average. This is a fundamentally different situation than in the past, when North Carolina’s teacher compensation was at or above average when properly measured, which is why the consensus in favor of a large teacher-pay increase in 2014 includes my colleagues at the John Locke Foundation, among other fiscal conservatives.

The Senate also argues, again correctly, that a major reason why North Carolina’s spending on teacher compensation has grown relatively slowly is that North Carolina’s spending on Medicaid has grown relatively rapidly. As a result, North Carolina ranks below the national average in real, per-pupil education spending and above the national average in Medicaid spending per recipient (about 10 percent above the average if you take into consideration the fact that the cost of medical services in North Carolina is relatively low). Because education has at least the potential to be an effective public investment in state economic growth, while public assistance funds consumption rather than investment, rebalancing the two within state government’s portfolio would likely bring future fiscal and economic benefits.

That’s why the Senate offered a plan that spends less on Medicaid and more on teacher compensation. These decisions reflect clear, firm priorities.

As for the details of the Senate plan, they reflect a willingness to apply empirical research to produce policy innovation. Conservatives believe that intentions do not guarantee results. Some well-intended policies fail to achieve their objectives. Others actually harm more than they help. One policy that North Carolina pursues — to improve student achievement by putting teacher assistants in second and third grade — has little empirical support. Most studies find no effect, particularly as TAs are normally used. (This used to be a widely appreciated fact, by the way, including here in North Carolina. Years ago, under Democratic rule, school districts obtained the flexibility to convert funding for teacher-assistant positions into funding for other positions, including new teachers to reduce average class sizes. Many districts have done so. To suggest this insight is somehow new or a product of “radical Republicanism” is either to exhibit ignorance or to mislead the public.)

Similarly, whatever you think of the Senate’s proposals to rewrite the “medically needy” standards for Medicaid eligibility and allow insurer networks to bid on providing Medicaid services, they are based on the empirical fact that many of North Carolina’s peer states do Medicaid differently than we do, freeing up tax dollars those states are able spend on other priorities, including education.

The House’s Conservative Principles

So, does that mean that the Senate’s budget offer is conservative and the House offer isn’t? Not necessarily. House leaders justify their latest offer on the basis of conservative principles, too. Two of them are fiscal discipline and policy stability.

While raising teacher pay by 11 percent in one year may be dramatic, says the House, it may not be wise. Because it increases the base of teacher compensation, across-the-board raises in years two, three, and beyond will be that much more expensive. Moreover, while average compensation is a concern, how that compensation is apportioned is of even greater concern. Conservatives have long argued that high-performing teachers who work in hard-to-fill jobs and schools ought to make much more than mediocre or low-performing teachers who work elsewhere. The House and the McCrory administration argue that taking a disciplined, slow-and-steady-wins-the-race approach — with an initial hike of 6 percent and more large hikes in subsequent years tied to the Career Pathways proposal — would serve as a hedge against future budget problems while ensuring that teacher compensation is reformed in the long run, not merely raised in the short run.

When it comes to transferring TA funds to teacher raises and reforming Medicaid, the House position is that whatever the merits of these proposals, conservatives have to take into consideration the views and priorities of those charged with implementing them. No matter how sound a reform may look on paper, its success depends in part on whether the reform is implemented as intended and sustained over time. Reformers of both parties faced this dilemma in the 1990s on the subject of welfare. Rather than attempt to transform the entire welfare state at one time, they focused on cash benefits and imposed work requirements, time limits, and other rules that most people considered reasonable. (Some bitter-enders opposed welfare reform in its entirety. They were, properly, ignored or encouraged to find a different line of work.)

On education funding, then, Gov. McCrory and the House are unwilling to mandate the mass conversion of TA funding into teacher pay raises. They are also unwilling to overrule the objections of medical providers and other interested parties by tightening Medicaid eligibility and allowing insurers to present bids for covering Medicaid patients. I know for a fact that some of the individuals involved agree with the Senate on the merits of the proposals. But they don’t believe enacting them at this moment would produce reforms that would be sustainable over time.

Two Other Principles Can Help

Fortunately, there is a way out of this impasse. It begins with embracing two other core principles of fiscal conservatism: devolution and prudence. With regard to education, Senate leaders believe it is better to use tax dollars to attract and retain high-quality classroom teachers than to fund teacher assistants in the second and third grades. House leaders disagree. Instead of trying to settle this disagreement at the state level, why not devolve the decision to local school districts?

With regard to the Medicaid disputes, it seems imprudent to try to resolve them at the end of a short legislative session. Instead, each side should recognize that the other has legitimate concerns — about chronic mismanagement of Medicaid, for example, as well as the importance both of achieving significant Medicaid savings over time while ensuring that providers are treated equitably and fully engaged in the reform process.

So here’s my four-part plan for a compromise:

1. Start with the latest House offer, which assumes $21.231 billion in General Fund availability, a $25 million deposit into the repair and renovation reserve, an $18 million deposit in the rainy-day reserve, and $186 million in a Medicaid risk reserve that, if unneeded during the 2014-15 fiscal year, would be equally split between repair/renovations and the rainy-day reserve. This latest House offer spends less than the Senate in several categories, including the UNC system, and also resurrects an idea originally in Gov. McCrory’s budget to eliminate $19.8 million in expansion funds for teacher assistants, which is one reason why the House is now offering teacher pay raises of 6 percent rather than its original proposal of 5 percent.

2. Accept the Senate’s latest offer on compensation increases for state employees, education employees other than teachers and principals, and retirees. That comes to about $156 million, or $80 million less than the cost of the House’s compensation increases. Furthermore, accept $26 million of the Senate’s proposed savings in educational administration and support services. But also accept the Senate’s lottery revenue figure, which is $20 million lower than the House plan. Adopting all these Senate positions produces a net savings of $86 million, which would allow the average teacher pay raise to go up to 7 percent while adding another $22 million each to repairs/renovations and the rainy-day reserve (another good conservative principle is that it’s better to be safe than sorry).

3. Next, accept the Senate’s idea of converting $233 $213* million in current funding for TAs into pay raises for teachers — but don’t make it mandatory. Instead, allow school districts (and charter schools) either to spend those TA funds as they do now or to convert some or all of them into higher teacher pay. Current policy already allows districts to use the funding for TA positions to hire other personnel, including teachers, but not to hike their pay. Lawmakers should simply eliminate the latter restriction. If all school systems decide to convert all the money, average teacher pay will rise by a bit more than 11 percent. If all school systems decide against converting any of the money, average teacher pay for state-funded teachers will rise by 7 percent. Either result would constitute one of the largest inflation-adjusted increases in teacher pay in North Carolina history. Perhaps what would happen is a mixture: the maximum pay raise in some places, the minimum pay raise in others, and something in-between for everyone else.

4. Finally, rather than trying to implement the Senate’s ideas on Medicaid eligibility and separate Medicaid administration this year, authorize a study with a short turnaround time to borrow the best approaches on both ideas from states with tighter eligibility standards and lower, more predictable Medicaid costs than North Carolina’s (there are plenty to choose from). House leaders should clearly communicate their willingness to implement a version of both reforms during the 2015 session. Similarly, rather than trying to settle the accountable care/managed care debate right now, authorize the McCrory administration to continue preparing its competitive-contracting model while setting up a separate study commission. Its purpose would be to harmonize as much as possible the competing House and Senate versions of long-term reform — perhaps by starting with the ACOs, subjecting them to financial risk, and then at a subsequent point allowing insurers to join the bidding process, as is already commonplace in most states.

I know that lawmakers are exhausted and tempers are frayed. But a deal is possible here. The Senate, House, and McCrory administration actually agree on most of the major issues facing North Carolina, and on general budget priorities. The Senate is correct to stress the need for empirically based policy innovation and firm fiscal priorities. The House is correct to stress the need for budget discipline and sustainable reform. Let’s escape the education impasse by further devolving budgetary authority within a 7 percent/11 percent model for raising teacher pay. And let’s escape the Medicaid impasse by prudently choosing which reforms can be initiated now and which reforms need more prep work to ensure successful implementation.

What we need, in other words, is a study break and a stop at 7-Eleven.

John Hood is president of the John Locke Foundation.

* After this column’s publication, I discovered that the Senate’s original figure of $233 million for the teacher-assistant funds to be converted to teacher pay raises includes the $19.8 million in TA expansion funds that the House has already agreed to convert. Thus the optional amount offered in my compromise would be $213 million.