11/10/10 — Civitas speaker: State budget looking 'bleak'

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Civitas speaker: State budget looking 'bleak'

By Steve Herring
Published in News on November 10, 2010 1:46 PM

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Brian Balfour, a policy analyst with Raleigh-based Civitas Institute, makes a point during his Tuesday morning presentation at the Golden K Kiwanis Club meeting. Balfour spoke about the state budget, taxes and what state lawmakers face when they convene next year.

Brian Balfour, a policy analyst with the Raleigh-based Civitas Institute, painted a bleak future Tuesday morning for a state budget scarred by years of ever-increasing spending and a devastating recession.

His message found an enthusiastic audience in the Golden K Kiwanis Club, and struck a responsive chord with club members, several of whom peppered him with questions or comments plainly expressing their displeasure with the growth in state government and taxes.

Balfour said that Civitas is non-profit, non-partisan think tank that focuses on state policy.

North Carolina's budget is no different from others across the country over the last couple years that have suffered in light of a sour economy with substantial revenue shortfalls and deficits, he said.

To better understand the long-term budget trends, Balfour said he had charted the budget over a 30-year period from 1979 to 2009, leading up to the most recent economic downturn.

"I compared the population of the state and its growth over that 30-year period, and compared that to the actual growth in the state expenditures," he said. "What I found was actually somewhat shocking in, when you contrasted how much difference there was, how much more escalated the growth in the state budget was relative to the population growth."

That finding stood out even more after adjusting for inflation -- state spending more than tripled during that 30-year period, he said. In comparison the state's population grew by 61 percent.

"A fairly healthy clip, but nowhere near what the inflation-adjusted expenditures had expanded by during that time period," he said. "In other words, the inflation adjusted expenditures in the North Carolina state budget grew at more than three times the pace as population."

That kind of trend becomes unsustainable, even more so when the state faces an economic decline or recession and revenues begin to drop, Balfour said.

And so that has led to a "lot of talk" this year about the budget, the deficit and potential budget cuts, he said.

He explained that normally when people talk about the budget, the focus is on the general fund.

In 2008, the general fund was $20.4 billion. Then in 2009, it $21.36 billion. That, however, was adjusted downward to $19.65 billion after revenues dipped because of the recession.

In fiscal year 2010, which ended June 30, the $19.9 billion budget included $1.4 billion in federal stimulus to backfill state programs, he said. This current fiscal year, the state budget, including stimulus funding, is $20.6 billion.

"Time will tell if they will get enough revenues to support that spending," he said, which still exceeds the budget from two years ago.

"You have 30 years of climbing, then a significant setback in the recession, but when you look at actual expenditures, the actual (budget) decline has been minimal," he said.

Also, he said, people need to keep in mind that the state receives another $15 billion, mostly from the federal government, and is actually spending in the neighborhood of $36 billion.

But the federal stimulus funding isn't the only revenue source expected to dry up in the coming year. The state also enacted a series of temporary $1.3 billion tax increases in 2009 that are set to expire in 2011. Among those are a sales tax increase, a surcharge on the high-end individual income tax bracket -- affecting not only individuals, but also many small businesses -- and a surcharge on corporate taxes.

Balfour described these surcharges as a "tax on a tax" -- a problem, he said, when North Carolina already has the highest income tax rate in the Southeast and the 11th highest in the nation, and 26th highest corporate tax rate in the nation, but the highest in the Southeast. Additionally, he said, the state's sales tax rate, along with the varying county rates, combine to give North Carolina the eighth-highest sales tax rate in the nation and second-highest in the Southeast.

However, Balfour said he expects there to be a "significant" change in the state with Republicans claiming control of both chambers of the General Assembly last week for the first time since 1898 .

"I am not envious of the new leadership when I look at the budget situation," he said. "We are far from being out of the woods here. We still face some daunting challenges in balancing the budget coming up this next year.

"Because of the temporary taxes set to expire come next summer, along with federal stimulus that state relied on fairly heavily, those are no longer going to be streaming into the state. There will be a lot of teeth gnashing and heavy debating going on."

Making the picture even bleaker are growing spending pressures, perhaps the most significant of which will be Medicaid, he said. Adding to that pressure are costs associated with the needs of a growing public school enrollment.

Also, the state health plan is not in the best of shape, and over the next two years could require another more than $582 million to cover, he said. The state pension is in trouble, too, he said, as it has lost so much market value over the years it will need more funds to remain solvent and could require hundreds of millions of dollars.

Other budget pressures are expected to come from the community college and university systems as they continue to grow, he said.

"I wish I could bring a little better news about the state budget," Balfour said. "Sadly though, it is still looking pretty bleak. It might be an even bigger challenge than they have faced in the last couple of years because certainly with the new leadership they have been promising to let these temporary taxes to expire and not to raise taxes and so forth.

"There are going to be a lot of programs under examination and looking to be consolidated or ways to trim them."

There are options that can be undertaken to balance the budget, he said.

"Obviously one would be what we call a cuts only," he said. "Allow the temporary taxes to expire and really go thorough the state budget and to bring it into line with the revenue availability simply by finding ways to reduce expenditures.

"Some may be tempted to extend those taxes. Again, that is about $1.3 billion in revenues. They might say because of a dire situation, 'Let's continue that revenue stream going forth for another year or two.'"

A similar situation occurred in 2001 when the state extended temporary taxes several times, he said.

Another option that has been discussed in the General Assembly is instituting a sales tax on services such as car repairs, haircuts and lawn services.

Discussed as more stable and consistent form of revenue that would spread the tax burden over a wider base, but lower the rate, he said.