N.C. Budget Director Lee Roberts met with editorial and newsroom folks this week to talk about Gov. Pat McCrory’s budget proposal. Here are my NOT VERBATIM notes and video of his addressing the concerns of taxpayers who believe they’re paying more.
I’m not foolhardy enough to try to predict what the General Assembly is going to do (with Gov. Pat McCrory’s budget proposal). We have had a very good dialogue with them. I did work with them closely. I came in without the same kind of pre-existing relationships of my predecessors had. I tried to build those relationships. Hopefully that makes for a process that works in everybody’s best interest.
Q: What’s the biggest difference in doing a government budget as opposed to a private one?
ROBERTS: There are a couple of significant differences. There is much more attention and focus on every aspect of the budget. Every part of the budget has a constituency, people around the state paying attention to it, which translates into attention from the General Assembly. Every component also implicates a large well-staffed government department. The whole process is more complex from that perspective. Two other significant differences are one, without a profit motive there is a lot more different layers of policy required in a budget. For example, most agencies don’t pay rent to the state if it’s a state-owned building. Accordingly, there’s not a built-in incentive to use space effectively. We have offices, budget offices that are empty, piled up with old binders, some piled up with old furniture. You see that wherever you go around state government. If there were a mechanism in place to charge agencies rent, to be accountable for space used, we might see more efficient use of space. That’s not a problem you have to solve in the private sector. Anyone with profit motive already has those incentives.
The third thing that’s unique to government budgeting, I’ve never come across anything like Medicaid before, the complexity and the lack of predictability. There’s a range on the Medicaid forecast, five different forecasts, and they add up to plus or minus swinging $300 million on each side. I’ve never come across that kind of variance in the private sector.
(As for Medicaid expansion) we need to learn more about what it entails. We don’t know the financial impact of expansion. We don’t know the financial impact of what we have now. The governor has been clear he’s interested in exploring expansion, but it has to be right for North Carolina and we have to understand what it entails in terms of financial commitment we’d be taking on.
The Supreme Court, in June when we get a decision, that will affect the shape of Medicaid. Shouldn’t we wait and see what the Supreme Court has to say?
Q: What are we losing economically in terms of money and jobs by not expanding?
ROBERTS: We are not receiving federal dollars we would have to match, though not right away. The federal match in existing Medicaid now costs 18 percent of the overall budget. It’s easily the most unpredictable part of the budget.
Just because federal dollars are available, as long as you have a state match associated with it, we have a responsibility to understand what that liability is.
We are responsible for understanding the overall impact on the state’s economy, the impact on providers of the existing system and all the rules changes just come through routinely, and on reform or expansion it requires understanding what it means for providers and patients and everybody else. We hear a lot from all those interest groups.
Q: Could expansion negatively affect the state budget but have a positive impact locally? Could the overall benefit exceed your costs if you took all of the benefits and costs into account?
ROBERTS: I agree that’s possible.
Q: Some people say the state should be run like a business. Is government like a business? Should it be?
ROBERTS: It can be and should be in one sense. We have a responsibility to use taxpayer money as effectively and efficiently and accountably as possible. Private businesses have the same responsibility to stockholders.
The big difference is lack of profit motive makes that more difficult. There are things the government does that private businesses won’t do or can’t do. I doubt there is an entity that will take over the zoo and run it on a for-profit basis. It doesn’t mean we shouldn’t have a zoo. But could it be run more efficiently and managed better? I’m not trying to pick on the zoo, but most places in state government there is room to run it more effectively.
I don’t think government overall can be run in the same way business is run. We have a whole series of roles only the government can be. The motivations and the incentives are different.
Q: Are you sticking by your analysis that there’s no tax increase in the budget proposal? What about the gas tax?
ROBERTS: We don’t have a gas tax proposal in the budget. That’s something that gets lost in the discussion. There’s a Senate proposal and a House proposal. The budget assumes a legislative change, but it isn’t a proposal. There’s no gas tax or any other tax increase proposed in the budget. The only way you can argue there is is to forecast a certain level of wholesale prices. People get paid millions every year to do that, and no one has been able to predict that so far.
Q: Can you envision any scenario when it would be appropriate to have a tax increase?
ROBERTS: Other states that have had to close significant shortfalls, they’re relatively the same size as we are and have had shortfalls 10 times the size of what we’re talking about. When you have a shortfall that great, you have to look at all options. What we’re talking about, shortfall should be in quotes because it’s still in the context of an increase in revenues. Our forecast is for an increase in revenues this next fiscal year and the fiscal year following. The vaunted shortfall is the difference between the original forecast of revenue and the revised forecast, but both are in context of revenue projections.
The comptroller’s report comes out every month, and the one last week with February numbers, the drop to 159 million (in shortfall projections) is attributed almost entirely to lower refunds. That’s not predictive. But for our forecast to be true, that’s the kind of trend you’d need to see.
We’ll stay with the 271 (million in shortfall projections) until after April. We’re not going to put out a new forecast ... not going to have additional meaningful data until we see what personal income tax season brings.
Our expectation is that refunds will be lower and final payments will be higher. February is the smallest number for income tax filers, but based on that report, that theory is being borne out. We’ll know for sure in two months.
Q: If revenues perform better than expected, do you have a priority list of departments or agencies that could get more money? Is the court system a priority?
ROBERTS: We do have scenarios tiered by amounts, both high and low. If revenues are up 50, 100, 200 million or down 50, 100, 200, what would we do? We do that work in advance because by the time we know for sure, it’s too late. If we end up with greater availability than we forecast, the governor said state employee salaries is one area we’d like to do more.
Q: What constituencies are yelling the loudest about the budget?
ROBERTS: We hear from a very broad range. I’ve tried to meet with and hear from as many as possible, in part because I’m new in the role. There’s not been (a loudest) that I can identify a theme to the criticism. Obviously, we’ve heard plenty of feedback. Budgets require making choices. There are always people who think you should have made a different choice. But I haven’t heard a theme that rises above anything else.
Q: Has the budget been accurately described as a hold-the-course budget?
ROBERTS: I think it’s a conservative and disciplined budget that’s balanced and protects our credit rating without resorting to gimmicks or tax increases. It continues efforts to make government more efficient and accountable and to help the disadvantaged and invest in those who can’t help themselves.
Q: Where does it take the state?
In education, we’re spending half a billion dollars on increased teacher salaries. That’s a significant move forward.
Q: Do we get smarter kids?
ROBERTS: The question about the degree to which higher amounts of raw spending translates into classroom outcomes is obviously an ongoing debate. I do think that the governor said and I would say there’s too much focus in education funding on how much adults are paid and not enough on what kids learn in the classroom. That’s partly why we have created the educational endowment to move away from a rigid seniority-based system and try to recognize and reward teachers based on performance.
There’s a significant amount of money identified in the budget to help disadvantaged school districts. There’s a formula that gives more money to low-wealth school districts, a series of programs designed to help school districts through the allotment formulas, allocating $70 million over the biennium to instructional supplies and giving school districts more discretion over how to spend that money in addition to teacher salaries and full funding of enrollment growth. There’s no lack of commitment to funding public schools appropriately. We’re trying to get rid of very rigid formulas that govern how every dollar gets spent.
We have one school district in Mooresville that says it hasn’t bought a textbook in six years. If we continue to give them money earmarked for textbooks, that doesn’t make much sense. School districts have to be more involved in decisions on how to spend those resources.
Q: What about the proposal to send more sales tax revenues to rural areas?
ROBERTS: I haven’t seen the proposal. I have talked to Sen. Brown and Sen. Rucho about the concept generally. In Brown’s district, Jones County and Onslow County, there are relatively few retail outlets in Jones County. Most people shop in Onslow County, which gets most of the benefit. I can’t comment on specifics we haven’t seen. We don’t have a proposal on the sales tax, but we’re eager and willing to work with the Senate and House to address anything they think needs discussion. The politics around doing something like that could get very complicated.
Q: What’s been the biggest surprise?
ROBERTS: A positive surprise was the quality, commitment, experience and dedication of state employees. I wasn’t sure what to expect. I think state employees are unfairly characterized. Almost without exception everyone is very hard-working, extremely experienced. They are a valuable resource for the taxpayers of North Carolina. They’ve been very positive and helpful to me.
The negative surprise, this whole public records structure is broken. It’s broken from your perspective and our perspective. It costs a lot of money to comply. It’s more important on the impact on how people do their jobs and the amount of time it takes to comply. Everybody can agree that the public has a right to know what state officials are doing. We’ve tried to be as transparent as we can. We put the budget and all the worksheets that go into preparing the budget online. But what we have is a public record system designed for a pre-electronic era. I think there’d be value in working with, for representatives of state government and representatives of the media to work together on something that’d be more effective for everybody.
Q: What’s getting your hardest push?
ROBERTS: We’re in the middle of effort on NC Competes on development proposals. That’s important for continued competitiveness and job creation. The historic tax credit is important for towns across North Carolina. I’m not going to identify particular priorities in the budget. The budget needs to be taken as a whole. It required a whole series of tradeoffs. To start picking it apart, given that it’s balanced and has to be balanced, if there’s areas where people don’t want to see reductions we need to identify areas where that money otherwise comes from.
Q: You’ve proposed two bond issues, one for transportation and one for infrastructure. Which is more important?
ROBERTS: They are formally not in the budget. It requires separate legislation. But we view them as tied to overall economic policy. One focuses on transportation and one on general infrastructure needs. Those are needs across the state. They will be between $1.2 and $1.4 billion each. We chose those sizes based on the debt affordability report. Nobody wants to do anything to jeopardize our bond ratings, not even to raise the question. We’re not going to do anything to cause the bond market to raise an eyebrow. But we have a very strong balance sheet. We’re one of only 10 states that have AAA ratings from all three agencies. Our debt service metrics are better than average for those 10 states and gives us the ability to finance on a long-term basis. If we can borrow at historically low rates money for 20 years for infrastructure that lasts 50 years ...
Q: Where is that $82 million on salaries going? It’s not across the board. Will the cafeteria workers in state government get a raise?
ROBERTS: DOT knows it’s having trouble keeping a certain type of engineer, and the same is true for certain IT jobs. In other areas we’re trying to identify the most effective employees and keep them. This new employee management system will make a huge difference.
And anybody who doesn’t think those cafeteria workers aren’t integral to running the legislative building doesn’t know anything. That’s ground zero.