Concerns mount over looming budget deficit
Four months into its fiscal year, the state General Fund is barely taking in enough tax revenue to meet budget projections, and legislators are hearing some bad news about more tax repayments and shortages in other areas. Although budget conditions can change (the holidays usually pump extra millions into the state coffers), officials are beginning to worry over what could amount to a revenue shortfall of $320 million for the year that ends July 1.

With October's numbers counted, the state has collected $3.86 billion in tax revenue. The good news is that's about 3 percent more than last year at this time. The bad news is it's about 4 percent less than the state had hoped to collect in the first four months of the year. The biggest concern is over individual income tax collections, with came in nearly $22 million under budget in October. The state expected to collect $607.8 million in individual income taxes in October but actually took in $585.9 million. After four months, individual income taxes are $143 million under budget.

Bottom line, total tax revenue over the first four months of the year is $181 million under budget, or 95.5 percent of what the budget is built on. The numbers get a little worse, at $189 million under budget, after adding in non-tax revenue, such as interest income on state investments. 

Refunding another illegal tax
The budget numbers came in after officials learned the state has lost another $60 million in lawsuits. The Joint Legislative Commission on Governmental Operations was told last month the state had been ordered to make refunds to Chrysler Financial Corp. and Ford Motor Credit Co. over state taxes charged on wholesale financing for Chrysler and Ford cars sold in the state from 1994 to 1999. The automakers had contested paying the taxes and sued. A judge in Mecklenburg County ruled in Chrysler's favor in February 1999, and a judge in Wake County ruled for Ford Motor Credit in August 1999. The state Court of Appeals upheld Chrysler, saying the transactions took place in Michigan, not North Carolina. When the state Supreme Court declined an appeal, the state Revenue Department threw in the towel and paid Chrysler $20.5 million and Ford $38.2 million in refunds and interest.

The state already has made the refund to Chrysler out of corporate income tax receipts -- a big reason why that line item is in the red in the chart above.  Also, the chart shows corporate income tax numbers net of transfers to other accounts, mainly the school building fund. Gross corporate income tax collections stand at $135.8 million after four months of the current year. But that compares to $332.6 million at this point last fiscal year.

And more lawsuits over improper taxes may be out there. At the Joint Legislative Commission on Governmental Operations meeting, Senate Finance Committee Co-chair David Hoyle asked if there were any other judgments pending. Legislative fiscal analyst David Crotts said some state agencies could lose $65 million to $70 million in a lawsuit filed by public-school systems over certain state fines and forfeitures. The state Constitution says fines and forfeitures must go to the public schools, but school systems argue that some of that money is going to universities, the Revenue Department and even the DMV. "We will probably lose that case," Crotts told legislators.

Medicaid may be $110 million over budget
And that's not all. Dick Perruzzi, director of the state Medicaid program, recently told legislative leaders that rising prescription drug costs and higher use of medical services have pushed state Medicaid costs 30 percent higher than expected. If those trends continue the rest of the fiscal year, he said, the state Medicaid program will spend $110 million more than budgeted. 

State Budget Officer Marvin Dorman, who is retiring next month, said he has some doubt about the Medicaid shortfall because the 30 percent increase in costs is far higher than the 12 percent average nationwide. Dorman, who plans to retire in January, said he hopes to cover most of what now looks like a $320 million budget shortfall by doing what he did after Hurricane Floyd -- asking state agencies to return a portion of their operating budgets. But most departments already are running on razor thin margins.


Elsewhere in state government . . . 
ESC notifies employers of new tax rates
The Employment Security Commission said it has mailed 2001 unemployment insurance tax rates to North Carolina’s 170,419 employers. The 2001 unemployment insurance tax rate schedule changed to reflect the 6.3 percent increase in wages paid to North Carolina workers in 2000. The tax rate is based on a ratio equal to the Unemployment Insurance Trust Fund balance divided by taxable wages as of June 30. ESC Chairman Raymond W. Goodman Jr. said that 22 percent (38,573) of N.C. employers will have a lower tax rate in 2001, 42 percent (71,489) of employers will keep the same tax rate, and 35 percent (60,357) of employers will have a higher tax rate. "Because of North Carolina’s strong economy and growth in wages, we were able to maintain a stable tax rate structure for our state’s employers," Goodman said. Some employers can lower their tax rate even more by making a voluntary contribution within 30 days of receiving their tax notice. Locally-based ESC tax auditors can assist employers in determining whether a company may benefit by making this contribution.All unemployment insurance taxes are due quarterly and fund the state’s unemployment insurance system. The first payment at the new tax rates will be due April 30.

Other news
The education spending gap between rich and poor counties is widening. The 10 wealthiest counties spent $2,941 per pupil on average for operating and capital expenses, compared to $691 in the 10 poorest counties, the Public School Forum said in an annual assessment. That's up 13.4 percent from a year ago, the Forum said. The gap in school operating expenses between the richest and the poorest counties rose from $1,097 per student last year to $1,201 this year. The difference is partly reduced by state money given to low-wealth and small school systems, which provide an additional $147 per student to the bottom 10 counties, the forum said. The difference in capital spending per student grew from $863 last year to $1,020.

North Carolina lost more textile jobs between 1997 and 1998 than any other state, according to the U.S. Census Bureau. The survey put the state's textile-job losses at 9,541, about 5 percent of the workforce in those industries. The study listed 208,741 people working in N.C. textile mills and apparel plants in 1997. One year later, that number dropped to 199,200.

North Carolina and 12 other states will seek diesel-engine emission standards for trucks, buses and heavy equipment that are tougher than federal rules. The plan would affect an estimated 400,000 heavy-duty truck and bus engines build in 2005 and 2006. In North Carolina, the Environmental Management Commission discussed the concept last month, and a draft rule will be presented early next year, said Tom Mather, spokesman for the Division of Air Quality.

The last oil company that sought to drill for oil and natural gas off the N.C. coast has given up its federal leases. Conoco controlled eight drilling leases off the Outer Banks that the federal government sold in the early 1980s. By giving up exploration rights, Conoco joined Mobil, Marathon and Chevron on the list of companies that dropped plans to drill off the N.C. coast amid heavy political opposition.

Average faculty salaries at our community colleges are almost 20 percent below the national average, according to a consultant's report being circulated by the State Board of Community Colleges. The study recommends bringing pay for faculty and professional staff to the national average over the next biennium at an estimated cost of $79.2 million. The report also recommended raising N.C. community college salaries to the top 20 percent nationally in the 2003-05 biennium, a goal that would cost another $174.5 million. The study found the average faculty salary in N.C. is $36,205, compared to a national average of $43,637.

North Carolina's seasonally adjusted unemployment rate increased from 3.6 percent in September to 3.7 percent in October, the Employment Security Commission said (see chart below). The change put the state rate within two-tenths of a point of the national rate, which was unchanged at 3.9 percent. The N.C. rate is a half-point higher than the 3.2 percent state rate for October 1999.

The Coastal Resources Commission is easing up a rule that requires all new beach homes and businesses to be built at least 30 feet back from rivers and sounds. It approved a temporary rule setting criteria for building homes on undeveloped lots of 5,000 square feet or less that are between houses on adjacent waterfront lots. Under the change, those homes can be built as far into the buffer area as the neighboring homes.

The casino on the Cherokee reservation will double in size under an agreement signed by Gov. Jim Hunt and Leon Jones, chief of the Eastern Band of Cherokee Indians. The agreement also creates a foundation to promote smart growth, environmental protection and preservation of Cherokee culture. The document amends and extends for 30 years a 1994 agreement allowing the Cherokee to open a video poker casino. The agreement must be approved by the U.S. Interior Department.

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