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Gov. Roy Cooper recently released his proposed budget for the biennium 2017-2019, Common Ground Solutions for NC. The governor said he wants to focus on “invest[ing] in a better educated, healthier and more prosperous North Carolina without raising taxes or fees.” The plan contains no proposals to increase taxes or fees, nor does it deploy nonrecurring funds on recurring needs. 
 
The $23.5 billion plan includes an additional $1.1 billion of spending over the current budget, reported USNews. Gov. Cooper defended this as “’catch up’ after years of neglect in education spending by GOP lawmakers.” The governor opined that the GOP had spent too much on income and corporate tax cuts, thus highlighting the main policy differences between the parties. Indeed, one republican lawmaker criticized the proposal as “reckless,” warning that the “$1 billion spending spree would surely return us to the days of high taxes and multi-billion dollar deficits.” 
 
The budget document explains that about half of the state’s total revenue comes mostly from indi¬vidual income taxes and the sales and use tax, which make up the General Fund (GF). Other GF sources include corporate income and franchise taxes, taxes on insurance premiums, and excise taxes on alcohol and tobacco products. 
 
With respect to revenues, the budget anticipates the following: 
 
  • 2 percent and 4.3 percent increases in income tax collections in fiscal year 2017-18 and 2018-19, respectively; 
  • 4.7 percent and 4.6 percent increases in sales and use tax collections in fiscal year 2017-18 and 2018-19, respectively; 
  • For fiscal year 2017-18, corporate income tax collections are expected to drop by 9.8 percent, but increase by 1.9 percent for fiscal 2018-19. This is primarily the result of revenue lost from the corporate tax rate reductions, and other previously enacted and recommended corporate tax changes. 
 
The other half of total revenue comes from the federal government, highway funds, the Education Lottery, and other receipts and fees, like tuition, along with nontax revenue, such as judicial fees and earnings from investing state funds. 
 
Highlights of the governor’s budget priorities include the following:
 
  • Raising Teacher Pay by 
    • Investing an additional $271 million in each year of the biennium to raise teacher salaries. This equates to a more than 5 percent average increase annually in 2017-18 and 2018-19, and is the largest investment in teacher pay in a decade; and 
    • Providing all classroom teachers with an annual stipend of $150 to help offset out-of-pocket expenses for school supplies; and
    • Increasing salaries by 6.5 percent for principals and assistant principals. 
  • Making North Carolina a Top 10 Educated State by 2025 by 
    • Increasing enrollment of 4 year-olds in pre-kindergarten program from 22 percent to 55 percent; 
    • Improving high school graduation rate from 85.6 percent to 91 percent; and
    • Increase the percentage of adults with higher education degrees (associates or higher) from 38.7 percent to 55 percent. 
  • Improving the health and safety of families and communities by
    • Expanding Medicaid, in a cost-neutral manner, to cover an additional 624,000 individuals, which would inject over $4 billion into North Carolina’s economy annually;
    • Reinvesting $12 million in mental health funds to help combat the opioid crisis; 
    • Investing $3 million to provide in-home aid, transportation and meals to older, low income residents;
    • Reinvesting $6 million to hire 56 new probation officers, among other things;
    • Adding $9 million for behavioral treatment to support the successful transition of formerly incarcerated individuals back to the community; and 
    • Adding another $2 million to enhance local law enforcement’s effort against opioid abuse. 
  • Increasing state employee pay by 
    • Providing $178 million to support a recurring compensation increase of 2 percent or $800, whichever is greater, for all state employees not part of the education system; 
    • Providing $79 million for a $500 one-time bonus for employees not on the teacher salary schedule; 
    • Providing $6 million to fully fund step increases for Assistant and Deputy Clerks, Magistrates and State Highway Patrol Troopers, and $20 million for additional pay adjustments for Correctional Officers, State Bureau of Investigation and Alcohol Law Enforcement agents, and Department of Labor Occupational Safety and Health inspectors; 
    • Investing $7 million to allow Law Enforcement Officers to retire with full benefits at 25 years of service; the current requirement is 30 years’ service; 
    • Providing $67 million to give retirees a 1.5 percent one-time cost of living adjustment. 
  • Growing the economy by
    • Investing $85 million in local government infrastructure and assistance, including $30 million for site development, $20 million to expand access to broadband, and $22 million for $22 million to assist with more safe and affordable housing units for low and moderate-income citizens;
    • Investing $48 million in business recruitment and development, which includes $20 million to support site acquisition and onsite preparation needed to attract major manufacturing employers, $15 million to encourage the production of motion pictures, television shows, and commercials in the state, and $3 million to market tourism, agriculture, and other North Carolina products and services.
    • Investing $21 million in university research and innovation, which includes $10 million to help universities identify, market and implement commercially useful technologies; and
    • Investing $40 million to begin replacing the state’s 25-year old accounting and business systems. 
  • Rebuilding after Hurricane Matthew, wildfires, and Tropical Storms Julia and Hermine by
    • Directing $15 million remaining from FY 2016-17; and 
    • Investing an additional $100 million to meet immediate cash flow needs. 
 
For each year of the biennium, the governor’s recommended GF appropriations are as follows:
 
 CATEGORY  2017-18       2018-19
 Education  56.83%  57.62%
 Health and Human Services  22.7%  23%
 Justice and Public Safety  11.77%  11.62%
 Debt Service  3.11%  3.25%
 Natural and Economic Resources       3.02%  2.43%
 General Government  2.06%  1.92%
 Capital Improvements  0.1%  0%

North Carolina Policy Watch (NCPW) characterized the budget as pragmatic and promising, because it “makes some important strides in reversing several years of negative budgeting trends.” Even so, 
 
Unfortunately, the Governor is greatly constrained in this work by the regressive tax cuts on wealthy individuals and profitable corporations that state lawmakers have enacted in recent years. As a result, even with the Governor’s best efforts, Year Two of his proposal takes overall state investments as a percentage of state personal income to a new low that is nearly 17 [percent] below the 45-year average.
 
Pleased that there is an increase – of 5.2 percent, or $1.16 billion – over the current budget, NCPW calculates that this is “just the beginning… in addressing the backlog of unmet needs.” The group points out that investments still remain below the 45-year average; in fiscal 2017-18, investments are 5.14 percent as a share of the economy, and in fiscal 2018-19, the drops to 4.99 percent.
 
Additionally, NCPW asserts that the state’s revenue collections are constrained by prior tax cuts, and in fiscal 2018-19, the budget does not maintain the progress from fiscal year 2017-18. This is because tax revenue collections are not projected to meet communities’ needs, which will worsen with implementation of the various proposed credits, for child and dependent care, and the film industry.
 
Despite the cautious optimism by some, it should be noted that prior to the governor’s release of his budget, the new State Treasurer, Dale Folwell, CPA, told ABC11 that “North Carolina is going to face financial challenges with the pension and the health care plan that the state has never seen before.” He revealed that the $90 billion pension plan is underfunded by about $15 billion, and the health plan is unfunded by $32 billion. 
 
Regarding the pension fund, last year, North Carolina paid Wall Street fees of over $500 million to manage the state pension fund. Just 15 years ago, the fees were a mere $50 million. Folwell wants to reduce this by “at least $100 million.” High-risk investments have also increased costs. 
 
The health plan’s problems stem from ballooning health care costs, the fact that more people are being employed by the state, and the state "pay-go" system, which means that it pays its bills when received from a doctor, hospital or pharmacy. 
 
Nevertheless, “if we invest in our people responsibly, North Carolina will once again be viewed as a top place to live, work, and raise a family,” declared Gov. Cooper in his budget letter.
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