Budget differences could lead to long legislative summer

Posted June 21, 2015

State budget

— If writing a state budget were a football game, we would have just entered the fourth quarter with the score tied and the clock quickly ticking toward overtime.

With North Carolina's new fiscal year set to begin July 1, leaders in the House and the Senate, as well as Gov. Pat McCrory, all Republicans, have all offered different visions of how they would like the state to raise and spend money. They must now reconcile those different visions into a single budget that will run the state for the coming year and lay out the blueprint for a second year of spending.

Speaking just after the Senate had passed its draft Thursday, President Pro Tem Phil Berger acknowledged it was unlikely the House would just accept a version of the budget that looks drastically different from what House lawmakers drafted last month.

"I suspect, if they (the House) don't concur, it will probably take us a while to get to the point where we've got an agreement," Berger, R-Rockingham, said.

When asked if a continuing resolution, a temporary spending bill that runs the government while lawmakers negotiate a final deal, was coming, he said, "That's possibly what we're going to be dealing with."

Berger's counterpart in the House also allowed it could be a longer-than-typical summer for the legislature in Raleigh.

"We'll be here as long as we need to be," House Speaker Tim Moore told the Associated Press. "I'm in no hurry."

It's not unusual for House and Senate leaders to differ on spending priorities, even when the chambers are controlled by members of the same party. Before Republicans took control of the General Assembly in 2011, Democrats regularly struggled to reach consensus.

This year, the gap is particularly large due to vastly different approaches taken by the two chambers regarding how much money should be available, how much needs to be socked away in reserves and whether to include broad policy changes as part of the spending plan.

While there are differences in how the House and the Senate handle dozens of items, several big ticket questions must be resolved before other pieces can fall into place.

Total state spending

House: $22.15 billion in 2015-16; $22.41 billion in 2016-17
Senate: $21.47 billion in 2015-16; $21.52 billion in 2016-17
Governor: $21.52 billion in 2015-16; $22.23 billion in 2016-17

The House spends nearly $700 million more in the first year of the budget than senators would and spends roughly $900 million more in 2016-17. This basic difference is one of the first things the two chambers need to resolve. Lawmakers can't decide what they're going to spend money on until they know how much money they have to work with.

Broadly speaking, House members viewed a $400 million budget surplus and favorable economic projections for the coming year as a way to make up ground for programs that lost funding during the recent recession, particularly courts and public schools.

Senators have argued that the growth of government spending ought to be kept under control, even if revenue projections show a windfall. To that end, senators included a package of tax cuts in their budget that would lower income taxes for many individuals and corporations. As well, the Senate budget puts more money into reserves and stops an annual transfer from the Highway Fund to pay for non-construction needs, such as the State Highway Patrol, both of which are moves that limit the amount of money available to spend on other programs.


House: The House budget raises a number of fees, including Division of Motor Vehicle fees for renewing driver's licenses and inspections. Those increases are somewhat offset by a decrease in the gas tax. However, the House budget does not make major adjustments to North Carolina's income or sales taxes.
Senate: Senators included a sweeping tax reform proposal in their budget bill. The measure locks in cuts to the corporate tax rate and expands the amount of income on which individual taxpayers don't pay any income tax. The bill also repeals a privilege tax levied on banks and makes other changes to lower taxes for businesses.
Governor: McCrory did not suggest any sweeping change to income or sales taxes in his budget proposal.

The Senate tax package expands the state sales tax to include certain services, such as car repairs and veterinary care. As well, it shifts where sales taxes go once they're collected.

Under current law, 75 percent of the sales tax goes to the county and city where the purchase is made, while 25 percent is distributed across the state based on population. Over the next four years, that formula would change so that, effective July 1, 2019, 20 percent would go to the county where a purchase is made, while 80 percent of sales taxes collected across North Carolina would be distributed based on population. Most counties would be given the option of raising their local sales taxes by a half-cent to offset the shift.

"The sales tax distribution would literally be a new tax on millions of people in North Carolina," McCrory told reporters on Thursday. "It's going to be a hidden tax that's going to be transferred to county and local governments."

Meanwhile, House leaders have spoken forcefully against a piece of the plan that would require large nonprofits to pay more in sales taxes every year.

Without settling on how much they will change taxes and fees, House and Senate leaders will not be able to determine how much money they will have to spend.


Governor: McCrory has proposed borrowing nearly $3 billion to improve roads, build new university buildings and make other capital improvements to the state. Such a bond issue would have to be authorized by voters through a referendum either in November or the following year.
House: House leaders set aside money to pay costs associated with borrowing, and the House budget includes a backup provision that calls for $269.5 million in two-thirds bonds – money the state can borrow without voter approval – if nothing akin to the governor's bond package passes.
Senate: The Senate doesn't contemplate any new borrowing in its budget.

Moore, R-Cleveland, said the state was unlikely to call for as much borrowing as McCrory has asked for, and both Moore and Berger said they would like to find other ways to pay for transportation needs other than borrowing.


House: House leaders set aside money to begin remaking the state's health insurance program for the poor and disabled in their budget, but they have put the nuts and bolts of the process in a different bill.
Senate: Senators spend more than 90 pages in their budget bill laying out how they would like to see the Medicaid system change.
Governor: The governor sets aside funding for a Medicaid transition. Although his budget doesn't delve into details, McCrory favors a transition process much more closely aligned with ideas put forward by the House.

Under current law, most doctors, hospitals and other medical providers who care for Medicaid patients receive a fee for each service that they provide. Both the House and the Senate want to change this so that those who care for patients have more incentive to keep people healthy.

The House Medicaid plan would rely mostly on "provider-led entities," groups of doctors, hospitals and other medical providers that would assume responsibility for a particular group of Medicaid patients. A PLE would get a set amount of money per patient and make money by keeping that patient healthy, and therefore spending less on care. House leaders envision a transition that would take five years.

Senate leaders would rely much more heavily on managed care organizations – large insurance companies – but allow for the type of PLEs envisioned by the House. They demand a much faster two-year transition. The Senate bill also would turn Medicaid over to a new oversight board, taking it out from under the purview of McCrory, who said he objects to such a move.

Lawmakers in the House and the Senate have been debating how to fix the Medicaid system for years. Including reform efforts as part of negotiations could delay a final budget bill, but Senate leaders insist they are committed to arriving at a compromise this year.

"The Senate's position is that it is enough of a priority that we need to take the steps necessary to solve that issue ... this time and not continue that to some other time," Berger said.

Teacher, state employee pay

House: House leaders provide a 2 percent across-the-board pay increase for teachers, state employees and retirees. The budget would raise the salary of starting teachers to $35,000 per year and would pay for teachers to move from one salary step to the next.
Senate: Senate leaders say they provide an average 4 percent raise for all teachers, although the specific amount depends on how long a teacher has served and where they are in the series of salary steps. Like the House, the Senate budget raises starting teacher salaries to $35,000 per year, but it does not fund an across-the-board pay raise for teachers or state employees or a cost-of-living increase for retirees. Like the governor, the Senate budget sets aside money for agencies to target raises for high-performing employees.
Governor: Like the House and the Senate, the governor's budget would bring starting teacher salaries up to $35,000 per year. It would then focus pay raises on teachers in much sought-after specialties, such as math and science, or who are identified as high-performing. McCrory also provided funds for targeted pay raises so that state agencies could retain certain high-performing employees or keep those in hard-to-recruit positions, such as prison guards.

Teaching assistants

House: House leaders keep the number of teacher assistants steady.
Senate: The Senate budget would both decrease state tax support for teaching assistants and not replace money from the lottery that had gone to TAs. The net affect would be to lay off roughly 8,500 TAs over two years.
Governor: The governor's budget leaders keep the number of teacher assistants steady.

Many educators argue that teachers in lower grades rely on teaching assistants the help manage students who cannot be left alone and often need extra hands-on assistance. However, Senate leaders say they would rather shift money away from teacher assistants and hire more teachers so that overall class sizes would be reduced.

State parks, zoo and aquariums

Governor: McCrory has argued that state parks, the North Carolina Zoo and state aquariums should be taken out of the Department of Environment and Neutral Resources and turned over to the Department of Cultural Resources. This reshuffling, he said, would allow DENR to focus on regulation and Cultural Resources to focus on running state attractions.
House: House leaders ignored this recommendation from the governor.
Senate: The Senate budget has the realignment suggested by the governor.

Economic development

House: The House budget quadrupled the size of the state's grant program for film and television productions and restored a tax credit to those who rehabilitate historic properties. House leaders also passed a separate economic development bill that would put more money into North Carolina's Job Development Investment Grant program, the state's primary economic development fund. The bill also includes money for a refocused rural economic development program and extends tax breaks for airlines and large computer data centers.
Senate: Senators crafted a more modest expansion of the JDIG program but would allow for more spending to lure a large manufacturer that planned to hire more than 2,000 workers. Senate leaders have argued that changes to the state's tax code would also help lure businesses to the state.
Governor: The governor sought an expansion of the JDIG program similar to what the House has passed. He also has encouraged lawmakers to expand grants for film incentives and renew the historic preservation tax credit.

McCrory has been calling for lawmakers to pass an economic development bill since January. It's unclear whether the House and the Senate will include those changes in the budget or a separate bill. In 2014, disagreements over economic development issues prompted the two chambers to let the issue drop entirely.

"The House passed exactly what we wanted," McCrory said, adding that that the Senate budget doesn't renew JDIG for a long enough time period.


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