 Weak
April tax revenue widens
state budget deficit by $61 million
but officials are confident crisis is over
Instead
of an “April surprise” of unexpected revenues that would
have gone a long way toward solving the state’s budget
deficit, a fresh appraisal of tax revenues for April and the
rest of the fourth quarter shows the deficit worsening by
$61.7 million. Those numbers from the Fiscal Research Division
indicate that the budget deficit, which had been put at $635.3
million, will more likely be $698 million by the end of the
fiscal year on June 30.
During a Wednesday briefing with legislators, Senior Analyst
David Crotts of the Fiscal Research Division said he was
disappointed but not surprised that there will be no
unexpected surge in state income taxes after the April 15 tax
filing deadline and from estimated first-quarter tax payments
from high-income individuals. However, Crotts told us the
numbers reassured him that the budget crisis is easing. “We
think most of the worst situation is over because the monthly
collections are stable,” Crotts said.
Crotts said he and other
budget officials now are convinced that Gov. Mike Easley’s
emergency order in February directing $960 million in budget
cuts, hiring freezes and other stop-gap measures will be
enough to cover the projected year-end budget deficit. The
question now is when and if the state can release the $95
million local government reimbursement money it has been
holding and whether the state will have to tap the $157
million in the Rainy Day Fund.
Easley answered that question Thursday in a letter to House
and Senate leaders. The governor said the state may need every
dime of the $965 million he set aside in February to cover the
budget shortfall. Therefore, he will not release any of the
reserve before the end of the fiscal year, including all of
the $157 million left in the Rainy Day Fund, $95 million in
reimbursements to local governments, and $151 million in state
employee retirement fund contributions.
"At this point, I cannot responsibly release any of the
funds that have been set aside to deal with this growing
deficit," Easley said in a letter to Senate President Pro
Tem Marc Basnight and House Speaker Jim Black.
The text of Easley's letter is printed at the end of this
story.
While the governor
continues to take a conservative stance toward the budget
crisis, others said they were encouraged by news that the
state plans to trim Medicaid costs by $80 million by reducing
reimbursements to doctors. The reductions are included in a
study that found that the state’s $1.5 billion a year
Medicaid program pays the highest reimbursement rates of the
12 Southeastern states. Medicaid, which provides health care
services for the poor, accounts for 10.3 percent of the state
budget.
Crotts told legislators
Wednesday that most budget line items held their ground or turned up a bit in
April. Sales taxes are 2 to 3 percent above last year's levels
although they were projected to increase 4 percent to 5
percent this year.
But corporate income tax collections continued a worrisome
slide. “We think for the year on a baseline basis corporate
will be down 15 percent or so from last year,” Crotts said.
“That situation did worsen in April, when corporate income
tax collections were down almost 30 percent for the month.”
Crotts said he attributes the decline in corporate income
taxes to rising energy costs and the recession in the
manufacturing sector.
With confidence rising that the state has a firm handle on its
immediate budget problem, work is beginning in earnest on
drawing up the spending blueprint for the coming biennium, a
process that begins with projections of just how much tax
revenue the state will collect.
Crotts told legislators this week that he believes the state
can safely forecast revenue growth of 5 percent next fiscal
year, a level that would produce around $700 million in
additional revenue in the current $14 billion state budget.
Crotts said that’s a conservative figure. Historically,
state revenues grow between 7 percent and 7.5 percent in
economic recovery years, Crotts told legislators.
While that sounds like a lot of extra money to spend, Crotts
and others warned that the state’s commitments are rising
even faster. “Off the top you have Medicaid requirements
next year that will cost an extra $502 million,” Crotts
noted. “In addition, we’ve got enrollment growth in the
public school, universities and community colleges. Plus, we
have increases in the cost of the state health plan. So, just
the existing budget requirement growth we know of now will use
up more than” the anticipated $700 million revenue growth,
Crotts added.
Financial conditions should be much better in the second year
of the coming two-year budget cycle, Crotts told us. “I’m
much more optimistic about the second year of the new
biennium,” he said.
Easley repeatedly has said the state shouldn’t cut education
funding to balance its budget, a message he repeated Tuesday
in remarks to directors of the Charlotte Chamber of Commerce.
"Of all the cuts we have to make, education is not the
one to make," he said. The governor’s reassurances
apparently weren’t enough to satisfy about 2,000 college
students who marched on the Legislative Building on Wednesday,
shouting "Hey, Hey, Ho, Ho, these budget cuts have
got to go!" and, "Get our budget in the black -- you
trade in your Cadillac!"
Here
is the text of Gov. Easley’s letter to legislative leaders:
May 3, 2001
Dear Senator Basnight and Speaker Black:
Based on the April
collections, the State Budget Office has revised their
estimate of the budget shortfall for the current fiscal year.
While the state met targeted numbers for individual income tax
collections in April, collections in the areas of withholding,
sales and corporate tax for the month fell well below
projections. In fact, corporate income tax collections are
down 26% from last year. Given the new numbers, our experts
now estimate the current fiscal year shortfall to be $850
million.
In February of this year, when I declared a budget emergency,
the shortfall was estimated to be between $605 and $791
million. Preparing for a worst-case scenario, I set aside $1
billion to deal with the shortfall. Last month, I released $40
million for Hurricane Floyd recovery efforts, bringing the
balance of our reserve to $965 million. This leaves only $115
million should the budget situation worsen between now and
June 30. As you know, the money for the reserve was identified
from a variety of state funds.
These new numbers definitely indicate a worst-case scenario.
The good news is that we prepared to deal with this situation.
The bad news is that we will likely need to use money from
nearly all of the identified sources including the local
inventory tax, the state retirement fund, and the rainy day
fund. At this point, I cannot responsibly release any of the
funds that have been set aside to deal with this growing
deficit.
As you know, this year's shortfall does not disappear when the
new fiscal year begins. The latest estimates indicate that we
are facing a growing shortfall for the 2001-03 budget. I look
forward to working with you to bring the biennial budget into
balance.
As we deal with the current fiscal situation, I urge you to
look for ways to continue the progress you have made in the
past decade. We must maintain our progressive attitude and
move forward with initiatives that will keep North Carolina
competitive. I urge you to make efforts to cut government as
we expand education opportunities for all North Carolinians.
Working together, I am confident that we can succeed. I am
looking forward to working with you to meet this challenge. My
confidence in you and the General Assembly could not be
greater, and I stand ready to assist you in any request.
With warm personal regards, I remain,
Very truly yours,
Michael F. Easley
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