|
 Here's
the problem:
Half-way
through last fiscal year, the state had collected $5.77
billion in taxes. Half-way through this year the state has
raked in $5.91 billion, which sounds great until you see that
the state has been spending money at a rate that anticipated
collections of $6.23 billion, creating a deficit of $322
million.
Tax
revenues are higher than ever before,
so why is
North Carolina nearly broke?
If
North Carolina is collecting a record amount of tax revenue
– most months it takes in more than $1 billion – why
is the state facing its worst budget crisis in a decade?
State tax revenues are higher than they’ve ever been;
through six months of the current fiscal year collections are
2 percent ahead of even last year’s blistering pace (see
chart below). Trouble
is, state spending also is increasing at a breathtaking rate.
The budget adopted last July approved an 8 percent increase in
state spending, a figure that now looks like so much
pie-in-the-sky.
Half-way
through last fiscal year, the state had collected $5.77
billion in taxes. Half-way through this year the state has
raked in $5.91 billion, which sounds great until you see that
the state was spending money at a rate that needed collections
of $6.23 billion, creating a deficit of $322 million. After
non-tax revenue is figured in, the budget gap widens to $367
million. And analysts say that if current trends continue the
deficit will balloon to nearly $500 million by the end of the
fiscal year on June 30.
For a much more detailed, line-by-line accounting of the
budget, click here.
Things
haven’t been so bleak since the recession of 1991, when the
state solved a $1.2 billion budget deficit by slashing
spending by $600 million and raising taxes by a similar
amount.
Getting
spending back in line with revenues will be the first item of
business the General Assembly takes up. Gov. Mike Easley, who
began sounding budgetary alarms even before he was
inaugurated, is preparing to submit a belt-tightening plan to
the legislature.
At first
glance it wouldn’t seem difficult to find $500 million
somewhere in the state’s $14 billion budget that could be
moved around to close what amounts to a 3.6 percent gap. On a
percentage basis, the 1991 budget crisis was four times that
size because the state budget was much smaller then.
But ending
this year with a balanced budget will be tougher than it looks
mainly because the state has so little financial wiggle room.
After funding $860 million in hurricane relief and refunding
$1.2 billion in illegal taxes in a two-year span, the
state’s cash reserves are dangerously low. What little
unencumbered cash the state had left was used to close a $140
million hole in last year’s budget, which meant the state
– for the first time in recent memory -- began this year
with a zero credit balance on its books.
(On an
accounting basis, the state actually violated its Constitution
by ending last year in the red. A recent report by State
Controller Ed Renfrow said the state finished the year $64
million in the hole -- with
a $257 million fund balance but with $320 million in
obligations for reserves.)
Things
almost reached crisis proportions in December. It’s not
unusual for the state to write checks totaling $100 million in
a single day, but just before Christmas the state had as
little as $10 million in available funds in its checking
account.
North
Carolina does have $147 million in its Rainy Day Fund, but
lawmakers are extremely reluctant to drain that last bit of
liquidity because doing so could mean losing the state’s
vaunted Triple A credit rating.
Raising
taxes to solve the problem doesn’t seem likely. A recent
Associated Press poll of lawmakers found 76 percent of House
members and 75 percent of senators favored budget cuts over
tax hikes. But agreeing on what to cut will be difficult,
because the spending increases in this year’s budget –
mainly for education, higher teacher salaries and economic
development programs – enjoyed wide bipartisan support.
To
close the budget gap, Gov. Easley on Jan. 23 sent a letter to
state agency heads directing them to slash spending wherever
possible. He increased the amount state agencies are
being ordered to revert from their budgets and ordered a
freeze on hiring, purchases, state travel and most
construction projects. He ordered agencies to return their
average five-year budget reversion plus two percent of their
General Fund appropriation. Before he left office, former Gov.
Jim Hunt had ordered smaller reversions. Easley said the state
faces another $500 million shortfall in the 2001-02 fiscal
year. Read the text of
the governor's cost-cutting letter.
Easley said trimming spending by state agencies will save
about $200 million. He said State Budget Director David McCoy
will propose other cuts involving unspent salary funds,
capital expenditures and repair and renovation reserves for
state buildings to make up the rest. Teachers, public safety
employees and health workers will be exempt from the hiring
freeze, the governor said.
State Treasurer Richard Moore said the money-saving measures
will help assure bond rating agencies the state is dealing
with its budget problems. He said he anticipated no problems
with the scheduled March sale of $450 million in public
school, clean water and higher education bonds.
Below is the state's current balance sheet:
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