Legislators dig in to McCrory budget proposal

lbonner@newsobserver.comMay 15, 2014 

  • Revenue shortfall Q&A

    The state has a $445 million revenue shortfall this year, meaning the state isn’t going to take in as much tax money as it thought.

    Q Why is there a shortfall?

    A A memo from the State Office of Budget and Management and the legislature’s Fiscal Research Division says the shortfall is related to personal income tax collections.

    Q Forecasts were for growth in personal income tax revenue, but collections are off 5.6 percent from last year. Why is that?

    A The memo gives three reasons.

    1. Less money was withheld from employee paychecks than estimated. Withholding was expected to grow 3.9 percent from the previous year, Pope said. It’s grown about 3 percent instead.

    2. A new tax law reduced personal income tax rates and broadened the tax base. A flat personal income tax rate of 5.8 percent replaced rates of 6 percent, 7 percent and 7.75 percent, where the percentage paid depended on income. But the rate reduction is being felt this year, while the effect of collecting taxes from more places won’t kick in until next year’s tax returns are filed.

    3. The 2012 federal “fiscal cliff” had many high income taxpayers “shifting” their income from 2013 to 2012 to avoid paying higher federal taxes.

    Q So the state is collecting less money this year than expected. Why isn’t anyone panicking about paying the bills?

    A The state has a gob of money in the budget that it didn’t spend on anything. In official budget speak, that’s called the “unappropriated fund balance.” This year, it’s $213.4 million, and next year, it’s $323.6 million. Pope estimates that the state will have an additional $290 million in “reversions” it can use to pay next year’s bills. Reversions are unspent money state agencies send back to the state treasury. The reversions plus the unappropriated money add up to more than the $445 million revenue shortfall, which is why McCrory’s budget starts with a $168 million surplus.

— The state Senate is diving into the details of Gov. Pat McCrory’s proposed $21 billion budget and will put out its own version in two or three weeks.

“I’m sure we’ll be seeing a little different budget,” said Sen. Harry Brown, a budget writer from Jacksonville.

State Budget Director Art Pope formally presented McCrory’s plan to legislative budget committees Thursday, where highlights include teacher and state employee raises.

The Senate will pass its own version of the state budget, then the House will write and pass its version. Then the two chambers will get together on a compromise, approving a plan for the budget year that begins July 1.

The legislature never agrees entirely with the governor’s budget. There are already some differing opinions on how the state should handle Medicaid spending.

McCrory estimates that the Medicaid budget shortfall this year is $70 million. Legislative analysts don’t agree, putting the shortfall range at $62 million to $94 million. Brown said the Medicaid shortfall may be higher than the McCrory estimate.

McCrory’s budget also includes $50 million for a new Medicaid Reserve Fund to “allow for variances in budget estimates due to data limitations and the potential for greater than anticipated Medicaid spending.” The state has had trouble getting information out of its new Medicaid software NC Tracks.

Brown said the Senate may not agree with the creation of a Medicaid reserve. “We’d rather get it right on the front end and not on the back end,” he said.

Budget writers also must work around a $445 million revenue shortfall.

But the state has more than enough money to cover expenses for the rest of this year and the budget year starting July 1, Pope said.

Revenue shortfall Q&A

The state has a $445 million revenue shortfall this year, meaning the state isn’t going to take in as much tax money as it thought.

Q: Why is there a shortfall?

A. A memo from the State Office of Budget and Management and the legislature’s Fiscal Research Division says the shortfall is related to personal income tax collections.

Q: Forecasts were for growth in personal income tax revenue, but collections are off 5.6 percent from last year. Why is that?

A. The memo gives three reasons.

1. Less money was withheld from employee paychecks than estimated. Withholding was expected to grow 3.9 percent from the previous year, Pope said. It’s grown about 3 percent instead.

2. A new tax law reduced personal income tax rates and broadened the tax base. A flat personal income tax rate of 5.8 percent replaced rates of 6 percent, 7 percent and 7.75 percent, where the percentage paid depended on income. But the rate reduction is being felt this year, while the effect of collecting taxes from more places won’t kick in until next year’s tax returns are filed.

3. The 2012 federal “fiscal cliff” had many high-income taxpayers “shifting” their income from 2013 to 2012 to avoid paying higher federal taxes.

Q: So the state is collecting less money this year than expected. Why isn’t anyone panicking about paying the bills?

A. The state has a gob of money in the budget that it didn’t spend on anything. In official budget speak, that’s called the “unappropriated fund balance.” This year, it’s $213.4 million, and next year, it’s $323.6 million. Pope estimates that the state will have an additional $290 million in “reversions” it can use to pay next year’s bills. Reversions are unspent money state agencies send back to the state treasury. The reversions plus the unappropriated money add up to more than the $445 million revenue shortfall, which is why McCrory’s budget starts with a $168 million surplus.

Bonner: 919-829-4821; Twitter: @Lynn_Bonner

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