Irresponsible Budgeting Leads to Huge Shortfall

“State headed toward $1 billion shortfall,” screamed the October 2 headline from the Triangle Business Journal. “Another shortfall?” asked an October 5 Charlotte Observer editorial. What was predicted as far back as May 15, almost two months prior to Governor Mike Easley signing the 2006 budget into law (June Civitas report), is now becoming a reality.

So how did it happen?

• Last year’s budget was $18.9 billion.
• In its forecasting model for 2007-2008, the General Assembly Fiscal Research Division assumes spending will increase 6.5 percent or $1.2 billion, for a total budget of $20.1 billion.
• Fiscal Research forecasts that recurring revenues from this year will grow at 3.2 percent or $582 million (deduct the $677.7 million in nonrecurring revenue from this year since we know it won’t be there next year) for total expected revenue of $18.8 billion.
• Using the Fiscal Research model, 2007-2008 spending will be $20.1 billion; but revenues will be $18.8 billion.
• The resulting shortfall will be $1.3 billion, at least.

That’s assuming only a modest economic downturn. The bigger assumption, however, is will the new General Assembly that will convene on January 24 have the fortitude and discipline to keep the increase in government growth to only 3.2 percent.

The 2006 General Assembly passed a budget that increased spending by 10 percent. They committed the state to $882 million in new recurring expenditures, with only $500 million in recurring revenue to pay for these new ongoing obligations. When the 2006 budget was enacted, Governor Easley and the General Assembly knew a shortfall of at least $350 million would occur in the next fiscal year. But they passed the budget anyway.

Now it’s time to start planning for next year’s budget, which lawmakers will consider when the 2007-2008 General Assembly convenes in January, after being elected in November. Initial estimates of revenue baseline growth for the next fiscal year were 5.2 percent. However, the Fiscal Research Division has already modified that estimate to 3.2 percent. Why has this estimate for next year’s available revenue been lowered?

According to a September 5 economic forecast by Dr. John Connaughton of UNC-Charlotte, the economy is cooling. The gross state product, an indicator of the health of North Carolina’s economy, grew 4.2 percent in 2005, 3.1 percent in 2004, and 2.4 percent in 2003. Expected growth this year is only 1.5 percent and 2.6 percent in 2007. In addition, sales tax growth is down and interest rates are also going up. Volatile revenue sources, like capital gains and the corporate income tax, are projected to decrease considerably from last year. The real estate market has likewise cooled at both the state and national level. This bad news is confirmed by the Fiscal Research Division’s September 8 Economic and Revenue Outlook.

Consider that current lawmakers love to spend money. They increased government spending 10 percent last year, 8 percent in 2005-06, more than 6.5 percent in 2004-05, and more than 3.5 percent in 2003-04. With the economy slowing, and with people and businesses not spending as much, saving as much or making as much money, tax revenues will decrease.

With an anticipated revenue shortfall of more than $1 billion, voters should expect to pay higher taxes next year. Expect services to be cut. Expect to have less money for Christmas and summer vacation, not to mention bread and milk. Expect the same old tax-and-spend policies that are hurting North Carolina children and working families to remain the order of the day … unless things change.

When Senate Bill 1741 (2006 North Carolina budget) came up for a vote, many legislators did a lot of soul searching and gave the new budget thoughtful consideration. It was a tough vote. Along with pay raises for teachers and state employees, the budget temporarily froze counties’ share of Medicaid, temporarily capped the gas tax, funded community mental health facilities, and included several election-year goodies. But 15 senators and 35 house members recognized that political rhetoric and pandering do not lead to good public policy. The legislators who voted against the 2006 budget had the foresight and wisdom to recognize that the budget, with all its frills and extras, was hurling the state headlong into an economic train wreck. Unfortunately, they were not able to stop it. And, now, what they so clearly saw last summer is coming true.

Instead of continuing to go back to taxpayers and demand more money, lawmakers with vision and long-term plans should make wise and thoughtful budgeting decisions. Priorities need to be imposed on government spending. Zero based budgeting needs to be applied to every government agency. Limiting the growth of government to population growth and the rate of inflation through the Taxpayer Bill of Rights needs to be implemented.

Who is responsible for the more than $1 billion budget shortfall? Who is going to break the cycle of increased taxes to pay for more and more spending? Who will lead North Carolina out of this crisis and in the right direction?