By Brian Balfour

Governor Bev Perdue (D) has signed into law North Carolina’s 2010-11 state budget. The new budget was authorized before the start of the fiscal year for the first time since 2003. The spending plan increases actual spending over the current fiscal year, adds 864 full-time positions to the state payroll and offers a misguided package of targeted tax breaks intended to help small business job growth.
Worse still, the budget fails to address the roughly $3 billion structural gap looming for next year’s budget.

Total Spending Up Again, Contingency Plan in Place for Federal Funds Not Yet Approved

North Carolina’s fiscal year 2010-11 state budget includes appropriations totaling $18.96 billion, but that doesn't tell the whole story. The $18.96 billion does not count $1.6 billion in American Recovery and Reinvestment Act (ARRA) funds. That is money counted as a "cut" in the state budget, but backfilled by federal dollars.

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Among the $1.6 billion is $561 million in additional Medicaid funds not yet approved by the U.S. Congress. In case these extra funds are not approved, North Carolina budget writers included a back-up plan to make up the difference. This back-up plan includes raiding several trust funds and state lottery monies, as well as reductions to the annual state employee pension system contribution and a one percent across-the-board “management flexibility reduction” for all state agencies.

All told, total spending on state programs including the federal funding comes to about $20.6 billion in the 2010-11 state budget.
Compared to 2008-09 actual appropriations of $19.65 billion, this year’s state budget will hike state spending over a two year period by nearly a billion dollars – roughly 4.8 percent - during the “greatest recession since the Great Depression.”

Ineffective Attempt at Small Business Relief
Included in the budget is $34 million designated for a targeted tax credit intended to encourage job growth among North Carolina small businesses. The temporary refundable credit will amount to 25 percent of a business’s unemployment insurance liability. The credit would be limited to businesses with annual revenue of less than $1 million, and expire at the end of 2011. Such a small, targeted and temporary tax break is not likely to sway the hiring decisions of business owners.

Lawmakers Pile on More Unauthorized Debt
The State Treasurer’s most recent Debt Affordability study specifically warned that North Carolina state government has “substantially exhausted its General Fund debt capacity until FY 2012.” Moreover, the study strongly recommends that the state no longer rely on “special indebtedness” instruments such as Certificates of Participation, which do not require voter approval.

In spite of these warnings, state budget writers authorized another $175 million of Certificates of Participation to be issued to finance repair and renovations of state buildings and purchase equipment for the UNC and Community College systems. In other words, the state is going against the advice of its Treasurer, and will again deny voters a voice over an increase in the state debt.

North Carolina voters haven’t been allowed to vote on new state debt in a decade, in spite of the state’s Constitution directing new state debt be authorized by a vote.

Setting the Stage for an Even Worse Crisis in 2011-12
The implications of the 2010-11 state budget will be felt heavily next year. By relying on more than $1.5 billion of non-recurring federal stimulus funds and $1.3 billion in temporary tax revenue to help balance the 2010-11 budget, North Carolina lawmakers and Gov. Perdue are setting up North Carolina for a major state budgetary crisis in 2011-12. Absent those two significant sources of funding, state budget writers will be facing a revenue hole of $2.8 billion when they reconvene next year to craft the 2011-12 state budget.

Combine this massive revenue hole with several mounting spending pressures and the 2011 session will present the most daunting budget crisis to date. Rising spending obligations include state pension contributions, a massive and growing unfunded liability for state retiree health benefits, rapidly climbing state debt, and billions of dollars owed to the federal government in exchange for their loan to cover unemployment insurance benefits.

Instead of implementing meaningful spending reform, short-sighted state lawmakers decided to pull together a patch-work budget that creates an even greater financial mess next year.

Brian Balfour is a policy analyst with the Civitas Institute specializing in budget and taxation issues. He most recently worked for the Charles G. Koch Charitable Foundation in Washington, D.C., as a tax policy associate. Prior to that, he was employed for several years in the fields of marketing, distribution and project management. Brian earned a Master’s degree in economics from Wayne State University in Detroit; and received a Bachelor’s of business administration from the University of Cincinnati.