October 4, 2002

Summary of NC Budget and TANF Block Grant

In this Living Income Update:   
          • The Big Picture Impact of the 2003 Budget and Sales Tax Increase
          • North Carolina's 2003 TANF Plan
          • Congress Continues TANF and Child Care Fund for Another Three Months

THE BIG PICTURE IMPACT OF THE 2002-2003 FINAL STATE BUDGET AND SALES TAX INCREASE

Contributions to this report by Elaine Mejia, Senior Budget Analyst, NC Budget & Tax Center.
For more details on the budget see the latest BTC Report and TANF Comparison Chart.

Almost three full months after the start of the state fiscal year, the NC General Assembly adopted a 2002-2003 state budget of $14.3 billion (Senate Bill 1115). The budget creatively fills a nearly $2 billion budget deficit with a precarious balance between spending reductions ($1 billion), additional revenue raised, borrowed and found ($890 million), and funding for essential expansion items ($582 million). The final budget cuts are not as bad as they were in some earlier budget versions, but are still devastating to many programs, services and citizens. The budget, combined with another half-cent increase in the sales tax, has a much harsher impact on low-income households than on corporations and upper income individuals. Next year looks little better. At this time, the NC Budget and Tax Center anticipates another $1.7 billion budget deficit in the 2003-2004 fiscal year.

SOME KEY POINTS:

• Money Raised - The budget includes a revenue package, which raises $890 million in additional revenue this fiscal year. The largest components of the package are reclaiming local government reimbursements, taking funds from the highway and tobacco settlement trust funds, delaying middle-income tax breaks, and closing a corporate tax loophole. Approximately $331 million of this new revenue is non-recurring or only available this year.

• New Spending - There is $582 million in new spending. Sixty percent (60%) of this goes toward education primarily to cover higher enrollment in public schools, universities and community colleges, continue to reward public teachers and schools that show marked improvement in test scores (ABC bonuses), and reduction of first grade class size. Nearly twenty percent (20%) is allocated to cover increased caseload and rising health care costs covered by the Medicaid program.

• Program, Services and Staff Cuts - Of greatest debate were the nearly $1 billion in cuts throughout state government. The largest reductions are in education ($191 million cut in public education alone), health and human services ($189 million & 294 positions cut) and justice and public safety ($97 million & 586 positions cut). The deepest reductions, relative to their share of total spending, are in natural and environmental resources and general government. In other words, severe cuts are made in all state departments.

• More Cuts to be Identified - Of the $1 billion in cuts, $139 million are spending reductions that are yet to be identified. These hidden cuts are to be made at the discretion of various state or local government agencies. In order to balance the budget, local school systems must cut $43 million state dollars from their budgets, UNC must cut $50 million, Community Colleges $5 million and the Governor, based on the recommendations of department secretaries, must cut another $41.5 million. Already rumor has it that Smart Start will be cut an additional five percent (5%), the state Division of Social Services must cut another $4 million and the Whitaker School will be closed.

SALES TAX INCREASE UNFAIR SOLUTION TO LOCAL GOVERNMENT REVENUE ISSUE

For the last several years, the state has allocated $333 million to local governments as a reimbursement for other revenues they no longer receive. As part of their effort to fill the state's budget deficit this fiscal year, the legislature withheld the local government reimbursements. This created budget deficits at the local level and necessitated cuts in local budgets most often to social services and public education.

To make up for this loss of funding, the legislature passed a separate bill that provides county governments with the option of increasing their sales tax by a half-cent starting on December 1. The increase will only raise $188 million at the most this fiscal year, covering only slightly more than half of the $333 million local governments lost.

This sales tax increase is in addition to a half-cent increase the legislature enacted last year - making the sales tax 6 ½ cents per dollar in 99 counties and 7 cents per dollar in Mecklenburg County - which is scheduled to sunset on June 30. In those counties where this half-cent increase is made, residents will pay a 7% sales tax, which hits the bottom 20% of earners five times as hard as the top 1%. The impact of the increase falls disproportionately on low- and moderate-income taxpayers, relative to their ability to pay. Some local governments have already voted to implement the increase and others are hesitant to vote to raise taxes just before an election. In those counties where it is not increased, more critical services will have to be cut.

THE FUTURE LOOKS GRIM

A preliminary analysis of the 2003-2004 budget done by the NC Budget and Tax Center, shows there is likely to be at least a $1.7 billion shortfall. The economy would have to improve enormously causing a growth in state tax revenue of more than 10% this year to overcome this deficit. Early indications are that state revenues are not growing.

This shortfall estimate does not include critical new budget items that should have been funded this year but were not. These include pay raises for state employees other than public education employees, and funding for repair and renovations of the state's aging facilities. Adding these items increases the shortfall to $1.9 billion.

Unfortunately, many of the funding sources used this year to fill the budget gap are not available next year because they were "one time" moneys. Furthermore, the state will be facing a loss in revenue from the sunset of ½ cent of the sales tax and the newly added top income tax bracket, both enacted last year. The pressure to maintain the higher sales tax rate will be great, in spite of its unfair burden on low and middle-income individuals. It is essential that the Governor and legislators follow through with realistic, fair plans to update the state's revenue system so that it adequately supports state and local governments and the essential services they provide to North Carolina residents.

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North Carolina's 2003 TANF Plan

The legislature also passed a new plan detailing how the state will spend it's federal Temporary Assistance for Needy Families (TANF) moneys in 2003. This also was quite controversial, since legislators had nearly $24 million less TANF money to spend than in 2002 and they had to allocate almost $4 million more for cash assistance due to increase in the caseload during the recession. In some cases the cuts made could result in the loss of federal moneys or will cause the closure of offices or programs. Hardest hit are:

While pregnancy prevention programs did get a small amount of one-time state funds, this made up for only a small fraction of what they lost in TANF. As a result, some county programs will be severely curtailed or eliminated altogether. A new TANF expenditure that resulted in cuts elsewhere was $4.6 million for SACWIS repayments. SACWIS was a federal program that provided the state with about $9 million to make technology improvements but the state did not make the improvements required and thus must pay back the money. The remainder of the repayment is made in state funds. If this money had not needed to be repaid the state would have had enough TANF funds available to continue to fund the two pregnancy prevention programs, Individual development accounts program and more child welfare worker training. Attached is a chart comparing the 2002 TANF plan with the House, Senate and Final 2003 plans.

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Congress Continues TANF and Child Care Fund for Another Three Months

Before the TANF block grant and the Child Care Fund expired on September 30th, Congress continued them with their current funding level and federal rules for another three months. It appears Congress will meet again soon after elections, but it is uncertain whether they would take up TANF and Child Care reauthorization for real debate. There is talk that Congress may just extend both programs for anywhere from one to three years. What is essential is that more funding be put toward child care and training for work first parents. North Carolina has a child care waiting list of around 20,000 children. Recent national estimates are that only one in seven federally eligible children are getting a child care subsidy. To learn more about TANF and child care reauthorization and the bills currently under consideration, go to the Center on Law and Social Policy web site.

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