North Carolina State Budget
2005 and Beyond
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Budget Overview
INFORMATION SOURCES
GPAC, 1991 Recommendations (Updated June 2002) Governor‟s Commissions on Efficiency (December 2002) David McCoy, Director, State Budget Office Office of the North Carolina State Auditor James D. Johnson, Director, Fiscal Research Department, North Carolina General Assembly Dan Gerlach, Senior Policy Advisor for Fiscal Affairs Office of the Governor U.S. Census Bureau, Department of Commerce Department of State Treasurer Fiscal Research, North Carolina General Assembly
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Road to Crisis
• Built-in Spending Increases • Budgets not Balanced • 5 years of budget deficits exceeding $1 Billion
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A Budget „Out of Control‟
30 25 20 15 10 5 0 1971 1981 1991 2001 2003 2005
1990-2000 average growth in revenue was 6.8%. Spending growth was 8%.
NC General Fund Total NC Spending
In Billions
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Out of Control Spending
North Carolina Growth: • Population Increase 1990 - 2003:
Up 27 percent to 8,407,248*
• State Spending Increase Last Decade:
Up 130 percent, $6.9 to $15.9 billion
*Department of Commerce, 2003 Census Update
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Obsolete Budget Philosophy:
• Out of Control Spending • Raise Taxes • Raid Trust Funds • Take Local Money
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Trust Funds Used for Spending
2000-2005
Health & Wellness Tobacco Trust Fund Special Funds 911 Funds Highway Trust Fund Retirement System Cont. Medicaid Trust Fund
$90 million $113 million $84.3 million $58 million $1.24 billion* $100 million $351.7 million
* $3,472,151,281 raided since 1989
(Equal To amount needed to meet delayed road needs)
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Updated November 30, 2005
Comparison of NC Tax Rates
Corporate Income Sales
North Carolina Tennessee Alabama Virginia Georgia Florida South Carolina
6.9% 6.5% 6.5% 6.0% 6.0% 5.5% 5.0%
8.25%1 0.00% 5.00%2 5.75%3 6.00%4 0.00% 7.00%5
4.50% 7.00% 4.00% 3.50% 4.00% 6.00% 5.00%
Source: Tax Foundation, As of December 31, 2003
Notes: 1. >120K, 2.>3K, 3.> 17K, 4. >7K, 5.>12K
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Tax Increases 2001-2005
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Comparison of State Business Tax Climate Index, 2004
2004 State Business Tax Climate Index Score
Rank
U.S. North Carolina Tennessee Alabama Virginia Georgia Florida South Carolina
5.000 4.861 5.668 5.664 5.737 5.443 6.925 5.182
30 15 16 12 20 2 24
Source: Tax Foundation Note: The higher the score, the more favorable a state’s tax system is for business.
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Companies North Carolina has lost to Virginia, South Carolina, and Tennessee
Partial Listing: Total of over 400 companies, $4 Billion capital investments, and nearly 50,000 new jobs over the past 3 years.
Louisiana Pacific Asurian Asset Acceptance Verizon Depository Trust Corporation Quanta Computers Household Beneficial Cinram
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Grid South Prairie Plastics Wells Fargo Lear Corporation Dei-Tec Pella Corp. UPS Plastic Pac and Employee Benefit Services
Revenue Increases in Years After Tax Cuts
NC State Government Tax Collection
Billions
$16 $14 $12 $10 $8 $6 $4 $2 $0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
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Source: Census Bureau, http://www.census.gov
Revenue Increases in Years After Tax Cuts (continued)
…leading to a boom in tax revenue.
800 700
Individual income tax receipts
600
500
$ billions
Corporate tax receipts
400
300
200
100
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0
FY2003, through May
FY2005, through May
Funding Requirements
Priorities: Capital Funding Budgeted: $300 million Actual (2004): $27.6 million $215.0* million $150.0 million
$133.3 million FY 2004 $249.0 million FY 2005
Repairs and Renovations $200 million Rainy Day Fund Debt Service Community Colleges, 3/03 $570 million $50 million
Restore Trust Funds
$400 million
$0.0
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*$200 million in debt obligation – (COPS) FY2004
Projected General Fund Shortfalls
2,500,000,000 2,000,000,000 1,500,000,000 1,000,000,000 500,000,000 0 2005-06 2006-07 2007-08 2008-09 2009-10
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Source: General Assembly Fiscal Research 4/7/2005
U.S. Census Bureau:
State Government Employment and Payroll Data March 2003
AL FL NC GA VA SC TN Full Time 85,518 186,861 131,265 121,255 15,818 77,275 83,495 Part Time 16,603 24,597 20,961 23,749 29,829 13,480 13,373
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Source: Census Bureau, www.census.gov, data extracted on 2/1/2005 Note: These are non-academic state employees only and does not include local government employees. 1. Based on March 2003 payroll data and July 2003 estimated population
Labor Statistics 2001-2004*
North Carolina experienced a net loss of 182,000 private jobs
State government jobs increased by 31,000
*Bureau of Labor Statistics, U.S. Dept. of labor
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Spending Issues
General Fund 2005-2006
Education Health Human Services Justice & Public Safety
$9.5 Billion (55.2%) $4.0 Billion (23.4%) $1.7 Billion (9.9%)
(Personnel: 17-45% Administrative)
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Education Administration
System
Percent of Personnel Administrative
UNC System
Community College System
45%
17%
Public School System
35%
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Source: General Assembly Fiscal Research
Community College Funding
Fiscal Year 2004-2005
Over $822 Million in funding for Community Colleges 188,610 Full-Time Equivalent Students (FTE) Average per student funding: $4,539
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Community College Funding (continued)
Community College AVERAGE Central Piedmont Wake Technical Pamlico Montgomery Roanoke/Chowan Funding per FTE $4,539 $4,097 $4,097 $6,821 $5,324 $5,238 % from Average
-10.78% -10.78% +33.45% +14.74% +13.34%
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University Funding
$3.45 Billion Budget ($1.96 Billion General Fund, $1.49 Billion Receipts) 189,615 Students 30,457 employees (45% or 13,705 employees are administrative/overhead. 16 Universities
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University Funding (continued)
UNC-Charlotte is the 2nd lowest-funded in the UNC-System in per student funding From 1993-2005 average FTE spending was $7,734. UNC-Charlotte‟s 12 year average was $5,959 or –22.96% from the average per student funding.
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Spending Issues…continued
Budget items, which will surface from Review, will include but not be limited to the following:
286,125 State employees (payroll) 208,798 K-12, Universities, Community Colleges personnel (17-45% Administrative Personnel)
–
Largest State employment per capita in the southeast
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Spending Issues…continued
13,000 buildings: Inventory Analysis needed
– –
–
Sell surplus assets Generate revenue and create new tax base Commission formed to review choices
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Non Governmental Organization Accountability?
More
than 3,000 „NGO‟s‟
800 700 600 500 400 300 200 100 0 $600 million to NGO's (2004) 1997 1998 2001 2003 2004
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No outcome performance audit in 20+ years (1/3 required to have audit, 2/3 submit personal statement)
Spending Issues…continued
29 work development programs
–
–
Separate bureaucracies spread over 7 departments State funding $ 487 million Need for administrative consolidation
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Spending Issues…continued
Medicaid Review
– – – –
$ 5.5 Billion federal & $ 2.5 state funding
1.5 million recipients, expected 100,000 added annually 52,000 providers – 34 fraud investigators Need for oversight Note: North Carolina Medicaid standards and eligibility exceeds Federal Medicare standards (costing an additional $86 million in 1991, current estimate is $300 million.) Under present eligibility, within 5 years Medicaid increases will exceed all new revenue. (Medicaid Fraud amendment added to Senate Budget) 50% of Medicaid services not required by federal government
– –
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Spending Issues…continued
Health and Human Services Secretary Hooker Odom affirmed in a recent Appropriations Hearing that the SAS software pilot program initiated by Senator Pittenger was successful and could help identify substantial waste, fraud, and abuse.
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Spending Issues…continued
$5 million, state employee medical benefit – Vested after 5 years for life at no cost. – Projected growth in teachers and state employees benefits is 7% higher than comparable states. – 125,588 retired state employees. – Senate did pass legislation (SB 837) to make vesting effective after 10 years. Legislation is still in House Health Committee. 500 Boards and Commissions – Staffing and discretionary funds
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Spending Issues…continued
Transportation Spending (per capita)
Top Ten Counties 1 Tyrrell County (Marc Basnight‟s district) 2 Washington County (Marc Basnight‟s district) 3 Hyde County (Marc Basnight‟s district) 4 Madison County 5 Lee County 6 Graham County 7 Ashe County 8 New Hanover County 9 Richmond County 10 Alleghany County
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Spending Issues…continued
Transportation Spending (continued)
Metropolitan Counties Rank 71 80 49 91 80 58 99 95
Mecklenburg / Charlotte Wake / Raleigh Guilford / Greensboro Forsyth / Winston-Salem Buncombe / Asheville New Hanover / Wilmington Gaston / Gastonia Union / Monroe
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Source: Dept. of Transportation Maintenance Condition Report 12/2004
Debt Service FY 1999 – 2012
(Assumes $310 million debt issued in FY 2005 and $153 mm in FY 2006)
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Outstanding Debt 2005
Total: $6.75 Billion*
$6.38 Billion in General Fund obligations and $756 Million in Highway Fund obligations
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* NOTE: Does not include estimated ‘off the books,’ and unfunded, $14 Billion liability for State Employee Retirement system or $400 million liability for DISH payments
Spending Issues…continued
Need for statewide Enterprise Review and Planning for all government agencies and departments, yielding a Zero Based Budget. Structural and Systemic Changes needed in government. “Unless structural problem addressed, shortfalls likely to continue.” (NCGA Fiscal Research Division, 2005) State Government was last restructured by Gov. Holshouser (1973) Presently, there are 22 Departments plus the UNC System, K-12 Education and the Community College system, with over 40 personnel systems $1.1 Billion in recurring obligations have been funded with nonrecurring revenues.
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How much is enough?
• North Carolina raised taxes for the 5th consecutive year.
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Source: Tax Foundation: State Finance
The 2005-2006 Budget
Raised Spending well over $1 billion • Massive 8 percent increase in spending;
only 5.5% increase in revenue collection. • Financed with one time revenues, Trust Fund raids, and “temporary” and new taxes.
• $1.5 Billion in new revenues needed to cover
enrollment and other routine expansion items.
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The 2005-2006 Budget (continued)
Over $150 Million in pork Takes over $252 Million from Highway Funds Funds over $200 Million in Vacant positions Allows illegal immigrants to receive in-state tuition
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President Bush‟s 2005 Budget
Good news for North Carolina‟s Children
• Increases federal education funding in NC to $2.5 Billion (54 percent more then when he took office) • Additional $447 million to help NC implement No Child Left Behind reforms • Increases Title I funding to $290.5 million ($113.6 million over 2001 – for NC‟s neediest children)
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Senate Budget Solutions
„Non-Governmental Organizations‟
–
20% reduction $120.4 million 5,358 positions (Set asides for critical & core functions) $200 million
Vacant Positions
–
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Senate Budget Solutions
Work Development –
Consolidate administration $97.4 million (= 20% of state funded portion)
Inventory Analysis – State Properties
Sell surplus $50-$75 million estimated per year
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Senate Budget Solutions
Golden LEAF Foundation –$261.2 million
2.5
Billions
Tobacco Trust Fund Health Trust Fund Golden Leaf
0 2003 2013 2025
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Senate Budget Solutions
Medicaid Fraud –
– – –
Government Accountability Office (GAO) estimates 10% fraud in the system 10% of $2.5 Billion in State monies $250 Million in savings
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Senate Budget Solutions
Department of Public Instruction –
Reduce appropriation additional 10 percent $3.4 million
Tort Reform –
Senate Bill 44 $175 million* 5-9% Savings in Medicaid from reduced defensive medicine
*Quarterly Journal of Economics
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Senate Budget Solutions
Total Estimated Savings –
$1.182 Billion
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Savings Programs in Other States
Massachusetts – Turned a $3 billion deficit in 2003 to $700 million surplus in 2005 through efficiencies and transportation and public construction reforms. Texas – Saved over $13 billion in the past 12 years through e-Texas program and Texas Performance Review. Florida – Governor Bush‟s goal of reducing state government personnel by 5% per year over 5 years.
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“State Senator Robert Pittenger has demonstrated remarkable leadership by identifying over $1 billion of efficiencies through the elimination of waste, fraud and duplication in state government. Robert is working hard to reduce the cost of state government, reduce tax rates and attract new industry and jobs to North Carolina.”
Senator Elizabeth Dole
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“As an economist trained in Public Sector Economics, focusing on questions of government taxation and expenditure, I have no doubt that lowering both individual and corporate tax rates would help the state of North Carolina both attract and maintain small and large businesses. While companies obviously base location decisions on many factors, such as availability of skilled workers or the presence of prestigious universities, and the importance of the different factors will vary across companies, having a tax system whose burden compares favorably with the states competing for the same companies would only help North Carolina to attract businesses and jobs.”
Dr. John Akin Carr Distinguished Professor and Department Chair Department of Economics University of North Carolina at Chapel Hill
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“Taxes act as an incentive or disincentive to economic activity. We may increase taxation on alcoholic beverages as a disincentive to discourage consumption. We offer tax reductions for economic activities in poorer communities. Taxes also motivate businesses to expand or reduce their activities and employment in our state to the extent our taxes are greater than our neighboring states. Today, both our personal income tax and corporate tax rates are higher than our border states. This creates a disincentive to grow and create jobs in our state particularly along border communities and communities along major highways into and out of our state.
I would support a serious effort to reduce our corporate and personal income tax rates to levels competitive with our neighboring states.”
John E. Silvia, Ph.D Chief Economist Wachovia Corporation
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“I have been concerned over the past several years with the current rates of both the state personal income tax and the state corporate tax rate. Both taxes have top marginal rates that are amongst the highest in the Southeast. Historically, North Carolina has achieved excellent growth, reaching annual growth rates that by far exceeded the performance of other southeastern states. In recent years this has changed. Competitor states have lowered their effective corporate tax rates while North Carolina has increased its personal tax rates in light of budget problems. Potential relocating firms and high income individuals now choose to locate in states adjacent to North Carolina, in order to lower their tax liabilities. As a result we loose twice. First, North Carolina’s economic development suffers, and the tax base grows slowly. Second, we are put under additional pressure to raise taxes again. This is a viscous cycle with very costly consequences. High tax rates lead to a reduction in the tax base and consequently to lower tax receipts. It is no solution to raise tax rates in order to deal with short run budget problems. Rather, raising tax rates creates serious long term economic growth problems as well as an erosion of the tax base.”
John E. Connaughton, Ph.D TIAA-CREF Professor of Economics UNC Charlotte
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N.C. STATE BUDGET
Thank You
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