Two weeks ago, Governor McCrory announced his budget priorities. No real surprises — he wants more compensation for teachers, targeted raises for other state employees, and recommends substantially more money for mental health among other things. The details of his budget were sent over to the legislature the following week.
Last week, with little fanfare, the legislature’s fiscal research staff and the Administration’s budget staff reached agreement on how much revenue we’ll have based on tax collections, primarily income and sale tax projections. The media’s focus, though, was on an agreement between the NC House and Senate on a spending target. McCrory had a spending target of $22.3 Billion, and the legislature’s agreed upon cap is $22.225 Billion.
While Asheville Citizen-Times reporters said that the difference “probably reduces the chance of teachers getting all of the 5 percent pay raise and 3.5 percent bonuses, and state employees getting a 3 percent bonus McCrory proposed,” there is not a really big difference between the Governor’s target and the legislature’s target. It is true there is slightly less money in the legislative spending target than the Governor’s target, but the reporters’ premise struck me like almost everything else put out about the budget over the past few years: mostly a figment of the media’s imagination.
I think back to last year. For months, the media (and Democrats and liberal bloggers) moaned about the huge budget deficit we were facing and how that would mean cuts to education and other programs. Of course, that didn’t turn out to be true. In fact, we ran a large surplus which triggered tax cuts.
As a budget writer, I think the agreement on a budget target this early in the session only suggests that it shouldn’t be a long legislative session since we’re working on numbers in the same ballpark. It is just a “spending target.” If there were some significant change, for example, a natural disaster, a target could be changed.
Rather than worrying about the spending target, the more important number announced last week was that the state’s revenue number was adjusted upward. We’d been expecting a budget surplus but the surplus was adjusted upward. A few weeks ago, the projection was for a $237 million revenue surplus, but the new number was a $330 million surplus.
To understand why that is a more important number, one has to understand the concept of “recurring funds” versus “nonrecurring funds.” Recurring funds are monies that can be expected from year-to-year based on the history of fund collections. Nonrecurring funds are monies that represent a one-time bump in fund collections. In any budget, you have things that happen that bring one’s revenues in a bit higher than expected, but you can’t expect whatever happened to happen again—thus, nonrecurring funds. On the other hand, we project income tax collections and sales tax collections but, if no changes are made to the tax code, one can fairly reliably project what funds one will have next year — thus, recurring funds.
While I’m glad we have a spending target because it signals that the budget process is likely to be short, the better news is that we’re going to have slightly more recurring funds. Why? You can’t give a pay raise with nonrecurring funds, since you don’t know whether those funds will be available next year. With more recurring funds, we have slightly more flexibility on compensation issues.
The Governor worked around this issue by providing “bonuses”—one-time compensation which might not occur next year. While the legislature may have a lower spending target than the Governor, it has more flexibility than he did when he put together his budget.
So don’t fall for the narrative that focuses on the wrong numbers. What I’ve learned is that the media and pundits on the right and left usually has little idea of what the budget numbers actually mean.
The General Assembly adopted a two-year budget last September. Technically, we are not adopting another budget. Rather, we are modifying the second year of that budget to reflect the new revenue projections, to modify appropriations made in the budget to reflect the needs, and providing new monies for new priorities.
This week, the various House-side appropriations committees, transportation, justice and public safety, health and human services, among others, have put together their recommendations. Those recommendations [Agriculture and Natural Resources, Capital, Education, General Government, Health and Human Services, Information Technology, Justice and Public Safety, Transportation] will be cobbled together by the so-called “Big Chairs,” and on Monday afternoon the House’s proposed budget is likely to go public when it appears online.
If all goes as planned, by the end of next week, the House will pass its budget. After that, the Senate will use a similar process. Most likely, there will be differences between the House budget and the Senate budget. The two bodies will then appoint a conference committee to iron out the differences. That is scheduled to happen before the end of June. If the schedule holds, a budget will go to the Governor for his signature before the end of the fiscal year on June 30.