Why Republicans aren't too worried about $200 million

by Patrick Gannon, The Insider, January 20, 2015.

For many of us, being just a few thousand dollars in the hole at any given time would be cause for concern.

So why aren't state Republican leaders in North Carolina sounding the alarm about a revenue shortfall of $199.2 million, six months into the fiscal year?

For one, they say, it's about perspective. The shortfall number – the difference between actual state revenues through December and the amount forecast – represents a small percentage of the $21 billion spending plan lawmakers passed last year.

Republican leaders also say they've weathered much greater deficits in recent years, including more than $2 billion – 10 times the current shortfall – when they took control of the General Assembly in 2011.

Also, legislative leaders point to Medicaid reserves and "rainy day" funds and other savings they could tap into if dollars come up short. Combined, those reserves top $800 million.

"We might take a risk, but we're going to hedge our bets with some rainy day funds and some funds we know we can go get if we need to," said Rep. Mike Hager of Rutherford County, the House majority leader, in a recent interview with UNC-TV.

In the coming weeks or months, state budget officials also could call for belt-tightening measures – such as leaving vacant positions open and postponing planned purchases – to ensure that spending remains within available revenues. Such initiatives are often unpopular with state agencies and employees because it leaves them with fewer resources to do the same jobs.

They also would give Democrats and other critics of recent Republican tax cuts ammunition to criticize those decisions and question whether the state has enough money to adequately serve and educate its residents.

Rep. Nelson Dollar, a Wake County Republican and senior budget chairman during the last session, said he expects state agencies will get some sort of directive to control spending from the State Office of Budget and Management.

"I would certainly encourage the administration to take the appropriate steps to ensure state spending stays within available revenues, and I would anticipate that's what would happen," he said. He added that he believed this year's shortfall is in the "very, very manageable range."

According to the latest quarterly revenue report from the General Assembly Fiscal Research Division, total revenue came in about 2 percent shy of the six-month target of $9.8 billion. Personal income tax revenues through December came in $247 million below target. Franchise taxes also lagged behind projections, but higher-than-anticipated sales taxes and corporate income taxes have offset some of the shortfall.

An important part of the state revenue equation – the so-called "April surprise," when individual taxpayers send in what they owe or get refunds – is still about three months away. No one knows for sure what the revenue picture will look like as the fiscal year ends.

But what happens if today's shortfall isn't just timing issue and continues to grow during the next six months?

Asked about that last week, Senate leader Phil Berger said he doesn't want to get into hypotheticals.

"We were able to deal with a $2.5 billion shortfall," he said, referring to 2011. "If we end up with a situation where we are short from projections, we'll manage, and we'll manage in a way that will continue to move North Carolina in the right direction, continue to move North Carolina forward."

But with less money to spend on government programs and services, such as education and Medicaid, the best way forward would depend on who you ask.