JUNE 1, 2001

Senate swallows hard in passing
austerity budget but relents a little
in how deep to trim social services

The Senate put the finishing touches on its version of a $14.62 billion state budget for fiscal year that begins July 1 and sent the spending plan to the House, where Republicans and some conservative Democrats say they will attack it for including $190 million in new taxes. The spending plan, S. 1005 Appropriations Act of 2001, was approved by the Senate Pensions & Retirement and Aging, Appropriations and Finance committees earlier in the week before hitting the floor Thursday and Friday, when it was approved on a party line vote of 35-15.  See a line-item summary of the spending plan.

As we reported to you last week, the Senate’s spending plan doesn’t cut education as much as was feared but does cut more than a thousand jobs from the state payroll and slashes several social services programs run by the Department of Health and Human Services. The Appropriations Committee backed away from some of the HHS cuts by delaying the proposed closings of Dorothea Dix Hospital, the state psychiatric hospital in Raleigh, from July 2002 until January 2003; the closing of two schools for the deaf from July 2002 until July 2003; and closing of a facility for the mentally retarded. The committee took the action after a chorus of complaints arose that the state was balancing its budget on the backs of the handicapped and the mentally ill. See the May 25 Bulletin, page 1.

The Finance Committee adopted a provision that would give the state a one-time windfall of $66 million by changing the way most small businesses remit employee withholding taxes. Under current law, businesses that withhold less than $500 a month in state income taxes from workers’ paychecks may remit the money on a quarterly basis. The Finance Committee’s provision would lower the threshold to $100 a month. Finance Committee member Sen. Scott Thomas (D-Craven), who proposed the change, said it would mean that many businesses that now file fourth-quarter payments in July, the first month of a new fiscal year, would make April and May payments before the end of the previous fiscal year, moving about $66 million from the 2003 fiscal year to the 2002 fiscal year. He suggested that the extra revenue should go toward replenishing the Rainy Day Fund.

Senate Minority Leader Patrick Ballantine (R-New Hanover) said requiring monthly payments of small amounts of employee withholdings would be burdensome to small businesses, but Thomas countered that it would be no different than paying the monthly telephone and power bills.

The only real fireworks during the Senate’s budget debate came from a heated exchange between the panel’s powerful co-chair, Sen. David Hoyle (D-Gaston), and the head of the State Employees Association of N.C. (SEANC). Testifying to the committee, Dana Cope, executive director of SEANC, said the Senate’s “so-called leadership, and I use that term loosely” was showing “utter contempt” for state workers by including in the budget a relatively small pay increase for them while also raising insurance premiums by 30 percent. The budget offers state workers a $625 raise – which is about a 2 percent increase to most state employees, who earn on average $31,500 a year.

Cope’s remarks infuriated Hoyle, who was already mad at being called a “cockroach” during a SEANC rally at the General Assembly two weeks ago. "I don't appreciate being called a cockroach by you or any of your colleagues. And I've been waiting for an apology. I haven't gotten one yet," Hoyle said to Cope’s back as Cope stormed out of the room.

Small raises also are in store for classroom teachers, who get a pay increase of 2.86 percent (1.86 percent to move teachers up one step on the salary schedule plus a 1 percent raise) instead of the 6-8 percent raises they have had each of the past four years. There would be no raises at all for the governor, legislators, members of the Council of State and cabinet secretaries.

Testifying to the Senate Finance Committee, NCCBI Vice President of Governmental Affairs Leslie Bevacqua thanked the committee for their work in trying to address concerns that were raised about several of the Finance Committee provisions. She pointed out NCCBI’s opposition to the 6 percent tax on out-of-state phone calls. “Fewer than half the states charge an out-of-state fee,” she said. “We feel this will put us at a competitive disadvantage. It will raise the cost of doing business for many businesses.”

Also during the Finance Committee meeting, former senator Sandy Sands, now with the Womble Carlyle Sandridge & Rice firm as a lobbyist representing Philip Morris and several other major firms, charged that a change in the way the budget taxes royalty income from trademarks used in North Carolina could be unconstitutional. Sands said the change “gives a tax advantage to in-state companies over out-of-state companies” and is therefore as unconstitutionally suspect as the state’s discredited intangibles tax. However, the Finance Committee staff said they were confident the royalties tax provision is legal.

As expected, the Senate’s budget bill levies $190.8 million in additional taxes next year and $232.9 million the following year, mainly from a new 6 percent tax on interstate long-distance phone calls and by closing several so-called tax loopholes.

Also left intact were the cuts in education we told you about last week. Spending on existing programs by the Department of Public Instruction will be trimmed by $95 million, the UNC System budget was cut by $4 million and tuition will go up 9 percent. Tuition also will go up at the community colleges, which had been asked to identify $40 million in possible cuts but received only a $4 million reduction in appropriations. But after accounting for new appropriations to handle increases in enrollment and support for other programs, the K-12 budget actually grows by 1.7 percent from last year under the Senate plan, while the UNC and community college budgets shrink by less than 1 percent. Fifty-seven percent of the total budget goes for education.

As the chamber was wrapping up its work on the budget, Senate President Pro Tem Marc Basnight, reacting to the outcry over the proposed cuts in the Department of Health and Human Services, suggested that the state could collect $100 million a year in new revenue by raising the tax on alcohol and directing the money toward human services. Basnight said that just raising the tax on a can of beer from five cents to eight cents would produce about $51 million a year – money that could be devoted to programs for mental health, substance abuse and the developmentally disabled. However, the budget bill passed without including Basnight’s idea.
 
Many senators talked about how difficult it has been to write a budget amid the state’s worst fiscal crisis in a decade. The slowing economy has produced roughly a 2 percent growth in state tax revenues at a time when expenditures were rising by 8 percent. Making matters worse has been the fact that, as a result of natural disasters and court-ordered tax refunds, the state’s reserves were dangerously low. Just how tough the job of drafting a new budget has been can be seen by looking at where the Senate assumes the state will end its current year – essentially without a dime to its name. The budget for the new year assumes that the state will have zero in its checking account on June 30, can expect nothing in excess revenue collections, not one dollar in reversions returned by agencies and a beginning unreserved credit balance of exactly zero.

Senate leaders said the budget eliminates 1,360 state jobs, although Republicans said the actual job cuts were much smaller. The legislation abolishes the Department of Crime Control and Public Safety and collapses the state Division of Motor Vehicles into a unit of the DOT. The budget also cuts the state's contribution rate to the teachers' and state employees' retirement plan from 5.33 percent to 1.82 percent and gives retirees a 1.6 percent COLA.

Although the budget reduces some education spending, it does include $93.1 million in bonuses for teachers at schools that meet or exceed academic expectation, $11.4 million to reduce class size in schools with a lot of at-risk students, $25 million to reduce class size in all kindergarten classes, $45.3 million to hire additional teachers to meet enrollment growth, and a $200 stipend for each teacher to make up for their out-of-pocket expenses buying classroom supplies. The budget delays replacing many older school buses, saving $23.9 million. Tuition at UNC campuses would go up 5 percent, on top of a 4 percent hike in tuition already approved for next year by the Board of Governors. The budget eliminates 324 non-teaching university positions plus 33 positions in UNC General Administration.

The Department of Environment and Natural Resources would lose 35 positions, but the Clean Water Management Trust Fund would get a $10 million infusion. The Department of Commerce would gain two new economic developer positions, the Industrial Recruitment Competitive Fund would get $1 million, the N.C. Technology Development Authority $2 million and the N.C. Minority Support Center $200,000.


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