RALEIGH — In yesterday’s column I sought to clarify the fiscal choices facing North Carolina as the General Assembly convened in Raleigh to receive Gov. Mike Easley’s proposed adjustments to the 2004-05 budget.
Today I’m going to tap into the budget debate from some different directions, offering several points of clarification. Consider it my Fiscal Tap Mark II. I hope you enjoy my new direction.
First, there’s the matter of how big a spending increase Easley is actually calling for. His budget documents say $876 million. But a simple subtraction of the FY 2003-04 General Fund number ($14.8 billion) from the proposed 2004-05 number ($15.9 billion) would yield a far larger $1.1 billion increase, or 7.4 percent. So is the administration trying to pull a fast one here?
Depends on how you look at it. Dan Gerlach, Easley’s fiscal aide, explained that the FY 2003-04 baseline should really be about $15 billion, not $14.8 billion, because nearly $200 million of Medicaid expenses were temporarily financed by federal dollars during that fiscal year, expenses that must now be covered by state dollars. Effectively, he said, we should treat this spending as a constant, not as something that went away for a year and then came back. Moreover, he provided what is a nearly impeccable source for doing so (scroll down to see what I mean).
On the other hand, if we count that Medicaid spending for FY 2003-04, then everybody underestimated last year’s spending increase. There is no free lunch here. And this is important because last year, Easley and state lawmakers argued that they needed to impose another set of “revenue enhancements” — you know what they meant — to preserve critical state programs, not simply to fuel more government growth. By this new fiscal math, last year’s increase was about $630 million, or 4.4 percent. Hardly a “tight” budget.
Here’s another point to consider about this year’s debate: the big news may not be what happens in 2004, a year of scrutiny and competitive elections, but what will happen in 2005. Once again, the budget plan being advanced will finance ongoing expenses — including the governor imposing new fiscal obligations in areas such as class-size reduction, health entitlements, and corporate subsidies — with hundreds of millions of dollars in one-time money. The most obvious example would be the sales and income tax increases enacted over the past couple of years and scheduled to disappear next year. Will they? There’s no apparent fiscal cushion to pick up the slack, and economic growth alone won’t be enough to close such a gap given the other demands on the treasury that lawmakers and spending lobbies will surely assert.
Next: before the Left starts to hyperventilate about the $348 million in budget “cuts” that the Easley plan cites to offset some of its expansion items, these provisions aren’t cuts. By my count, virtually every department in state government would receive increases in state funding for 2004-05 under the plan (the offices run by State Auditor Ralph Campbell and Labor Commissioner Cherie Berry being conspicuous exceptions). Some of the increases are staggering: 13 percent each for Health and Human Services and Commerce, for example, though the former’s spending increase is lower if you add $200 million to last year’s Medicaid total as Gerlach suggests.
Speaking of, some of the “reductions in the rate of increase” are, as was true in 2003-04, little more than redefinitions and fund shifts. Easley’s plan predicts lower growth in Medicaid expenses ($22 million) and higher federal funding rate for Medicaid ($40 million). It shifts some state-only expenses for rest homes into Medicaid, where some of the costs will now be picked up by Washington ($5.1 million). Some new University of North Carolina buildings won’t meet their construction targets, so fewer operating funds will be needed in 2004-05 ($5.7 million). And so on.
These kinds of budgetary savings have no impact on services. But expect interest groups and others to call them “cuts” anyway.
This brings up my final point: focusing on the General Fund part of the state budget is traditional, often handy, but it can mislead. Because some items are flopping on and off the General Fund books over time, you can get a false reading about what’s really being spent by state government on programs in North Carolina. The total authorized state budget will go from $24 billion in 1999-2000 to more than $30 billion in 2004-05 under the Easley plan, a 25 percent increase over a five-year period that supposedly contained some of the most painful “budget cuts” in the state’s history. Spending will have grown relatively slowly for a couple of years, but the longer-term trend is way, way up — a 20 percent increase over the past decade after adjusting for inflation and population growth
Reality intrudes. And, for some, bites.
Hood is president of the John Locke Foundation and publisher of Carolina Journal.