NC Senate budget has lower raises, bigger tax cuts and a threat for large hospitals

The bill also has $1.2 billion in tax cuts over the next two years and a threat to close urban hospitals if they don’t generate savings for the State Health Plan, which provides health insurance for state employees and teachers.

Republican Senate leader Phil Berger said the proposal “proceeds with caution,” keeping money in reserve in case a rocky economy batters tax revenues in coming years, and to cover inflation in state construction project costs.

The proposed raises likely will disappoint teachers and state employees, particularly since the House of Representatives already proposed higher percentages. But the Senate's proposed raises aren't the final word. The final pay increase could come up as the chambers reconcile their proposals in the coming weeks.

State employees would get 5% across-the-board raises over the next two years under the Senate's plan, though the budget also has another $94 million in it for targeted raises to help fill some of the hardest-to-fill jobs at state agencies, community colleges and universities.

“We keep hearing that there’s a real problem as far as getting folks into the teaching profession,” Berger said.

What's in the NC Senate's proposed budget for K-12 education?

Those figures don't include local salary supplements, which vary by school district and often add thousands of dollars to a teacher’s state salary. Legislative Republicans also created a program in recent years to fund local supplements with state tax dollars in poorer counties.

The Senate budget will move through committee starting Tuesday, a process that often brings dozens of tweaks, but rarely wholesale changes. Republican leaders expect the budget to clear the full Senate Thursday. After that, House and Senate leaders will negotiate over significant differences between the Senate budget and the House budget, which passed that chamber in April.

Berger, R-Rockingham, said the legislature is on track to finish that process and pass a final budget before the new fiscal year begins July 1.

The Senate proposal says any hospital in a county of more than 210,000 people must help the State Health Plan, which covers nearly 750,000 people, realize $125 million in savings in 2026 or risk losing their license, which would effectively close the hospital.

That would be about 8% of the $1.6 billion the State health Plan expects to spend at hospitals in 2025, according to State Health Plan staff.

The threat is part of a running battle between hospitals and State Treasurer Dale Folwell, who has pushed hospitals to cut prices and be more transparent about what procedures actually cost. Senate budget writers said they don’t expect hospitals to actually lose their licenses, but that this is a move to force better contracts.

“Those costs are growing out of control,” Senate Appropriations Co-Chairman Ralph Hise said.

Hise, R-Mitchell, also said the budget “takes a sledgehammer” to the state’s certificate of need rules, which limit competition in the hospital sector. Lawmakers repealed some of those rules earlier this year as part of a deal to expand Medicaid health insurance in the state, a dealt expected to pump billions of dollars into the state’s health care sector.

The Senate budget goes further, opening more segments of the industry to competition without requiring a lengthy state approval process. That has been a priority for Senate Republicans, but House Republicans have resisted the idea, setting the stage for more tense negotiations.

“It’s way past time to do away with certificate of need laws,” Hise said.

A spokeswoman for the N.C. Healthcare Association, which lobbies for hospitals in the state, said the association didn’t know the licensure or certificate of need proposals were coming until Monday, and that association executives needed to study them before commenting.

Berger has said repeatedly some raises were needed to deal with high vacancy rates, which in many agencies run higher than 20%. He said during a Monday press conference that budget writers didn’t want to raise pay so much that it would exacerbate an economy-wide labor shortage and impact the private sector.

Berger’s office said average teacher pay in the state will reach $59,121 by fiscal 2024-25, the second year of this budget, putting it just below North Carolina’s median household income.

His office said this budget includes minimum 10% salary increases for nursing faculty at community colleges, which have struggled to hire enough instructors to train nurses, since nursing jobs are in such high demand. Officers with the State Highway Patrol, State Bureau of Investigation and Alcohol Law Enforcement would get 12% pay bumps over the biennium, Berger’s office said.

But the across-the-board raises for rank-and-file state employees are the lowest proposed this year by state lawmakers. The State Employees Association of North Carolina said employees deserve better. The group is calling for 5% raises in each year, plus $5,000 retention bonuses.

"The Senate expressed a reluctance to increase state employee wages too much because it might increase private sector wages," SEANC Executive Director Ardis Watkins said in a statement. "Working people are not living large in North Carolina. Thirty-two states have higher average wages than this state. So, if everyone does better, how is that a bad thing?"

The House proposal contemplated 7.5% raises across the board for state employees over the next two years. The House called for 10% raises — again, over two years — for K-12 teachers.

Gov. Roy Cooper also proposed a budget, though the Republican’s General Assembly majority holds enough seats in the House and Senate to ignore the Democratic governor’s pitch. Cooper requested 18% raises for teachers over the two year cycle and 8% for state employees.

North Carolina Association of Educators President Tamika Walker said in a statement Tuesday morning that her group was evaluating the Senate proposal, but "it's clear we have a long way to go in funding North Carolina's future."

"The Senate’s proposed pay raise for teachers will not make up for cost of living increases and is a step backward from the House budget which called for a 10% raise over two years as well as funding for master’s pay for teachers and paid parental leave for school employees," she said in a statement.

The Senate included a 1% bonus for state retirees in each year of its budget. The House included 1% each year as well, but that was a permanent cost-of-living adjustment that would carry forward beyond those two years. The Senate’s COLA is non-recurring, and would go away after two years.

The bigger change would come in 2025, when the rate would fall to 3.99% for all personal income taxpayers.

That 3.99% was the rate floor in a tax cut plan the legislature approved in 2021. The new Senate budget proposes more cuts in the future, dropping the rate to 2.49% after 2029.

The Senate budget would also expand the state's Opportunity Scholarship program, which provides families with vouchers to cover private school tuition. The plan would do away with income caps, opening the program to families regardless of household income, and increase the program's annual funding by $1.3 billion over the next seven years, bringing it to $500 million a year by 2032.

The House did not include that in its budget, but House leaders have since gotten on board with the idea.

Cooper has sought in the past to phase this program out altogether, and Democrats are calling for more public school funding in lieu of vouchers. Democratic lawmakers plan to roll out an education plan Tuesday morning, and advocacy groups plan to be at the statehouse for much of the day, pushing for increased public school funding.

The Senate budget would raise a number or fees that GOP leaders said haven't increased in decades.

Many of those fees go to the state's Department of Environmental Quality, which would find itself pressured to speed up or ease a number of permitting processes if this budget becomes law.

One section would prohibit the department from refusing to permit natural gas and other projects because the project failed to get another required permit, unless the refusal is required by state or federal law.

Another budget section would cut the processing time for air quality permits and expand the scope of construction that could occur before a permit is required.