The Final Budget Agreement: An Affordable Investment in North Carolina’s Future

BTC Reports, Vol. 13, No. 5, September 2007

BY MEG GRAY, POLICY ANALYST AND ELAINE MEJIA, PROJECT DIRECTOR

Executive Summary

• The final 2007-09 budget increases state spending over the 2006-07 fiscal year by $1.79 billion, or 9.5%, in the first year and by an additional $27 million in the second year.
• With this increase, the general fund budget returns to the inflation-adjusted per capita spending level of the 2000-01 budget. Real per-capita spending grew only 7% during this period.
• More than $1 billion of the $1.8 billion increase goes to education through expanded and new programs and increased teacher and faculty salaries. Other significant spending increases include funds for local water and sewer improvements and a 4% pay raise for state employees.
• The revenue plan includes a 3.5% refundable Earned Income Tax Credit, makes the 0.25-cent increase on the sales tax permanent, and eliminates the top income tax bracket, resulting in a tax reduction for the wealthiest North Carolinians.
• The plan includes a three-year state takeover of the counties’ share of Medicaid costs. In exchange, the state will get some local sales tax revenue. Also, the state will allow county voters to enact additional local sales or land transfer tax increases.
• The budget is structurally balanced in that it responsibly uses the $1.49 billion surplus, most of which is one-time revenue. The plan sets aside $175 million for the rainy day fund and $145 million for repairs and renovations.
• The budget for the first year includes only $100 million more in recurring spending than will be collected through recurring revenue sources. It also includes $107 million in tax reductions and $344.6 million in tax and fee increases, leaving about $1.96 billion for new spending. The first year of the budget leaves $270 million unspent and therefore available to be spent in 2008-09.
• If revenue forecasts for year two remain on target and unspent agency funds are typical, lawmakers will have approximately $645 million available for budget increases in 2008-09. After contributing to savings and restoring the nonrecurring ABC bonuses appropriation, around $300 million will be left for pay raises, restoring other nonrecurring items, and funding any capital projects. A one percent pay raise for all employees costs more than $100 million.
• Despite the positive overall character of the budget, lawmakers will face ongoing pressure to address calls for transportation financing overhaul, more comprehensive state and local tax reform, and additional funding for mental health services.

Overview

The final 2007-09 budget agreement is an affordable and responsible approach to moving North Carolina forward. The plan will increase state spending by $1.8 billion, or 9.5%, in the first year and another $27 million, or 0.13%, in year two. The plan includes several major policy initiatives on both the tax and the spending sides of the ledger. The spending plan includes new programs such as the Learn and Earn and Earn Scholars programs and NC Kids’ Care, which will provide health insurance to 12,000 uninsured children. The revenue plan includes a new refundable tax credit for working families and new revenue options for local governments. This issue of BTC reports analyzes the plan in detail and discusses some looming, unresolved fiscal issues facing the state in the coming months.