Capital Goods - March 2011

Bitter medicine’s gag factor
By Scott Mooneyham

Tom Ross hadn’t been president of the University of North Carolina long before expressing a sobering thought. “This isn’t a temporary economic downturn,” he told members of the university system’s board of governors. “This isan economic restructuring.” That assessment might not seem surprising to most folks, not with the unemployment rate still hovering near 10% and home sales expected to be soft for the foreseeable future. Still, economic restructuring is a concept that Ross’ fellow administrators overseeing state government may struggle to get their minds wrapped around.

In a state where the budget must be balanced, the economy is tied to the budget, the budget to the economy. When times are good, tax revenue increases, the state’s purse strings loosen. When times aren’t so good, the purse strings cinch. Legislators and governors have two choices. Neither involves borrowing their way out of the mess. They must raise taxes or cut spending. Either decision will ripple through the broader economy.

The new Republican majority in the General Assembly shows no inclination to extend $1 billion in tax hikes scheduled to expire in July. “We will not extend those temporary taxes. We are going to keep the promises we made to the people,” says Phil Berger, the Senate’s new boss, sentiments his counterpart in the House, Thom Tillis, seems to share.

The line they drew in the sand on the opening day of the new legislative session doesn’t provide much wiggle room. Another player in the debate — Democratic Gov. Beverly Perdue — might have a different take. Earlier in the year, she said she’d like to see the sales and income taxes adopted two years ago as an emergency measure expire as well. On the eve of the session, she sounded less sure.

Assuming legislative Republicans carry the day, state agencies, including the university system, could be forced to make about $2 billion in real, year-over-year cuts to a $19 billion state budget. Without drastic improvement in the employment picture, the outlook for those agencies won’t get better anytime soon. The reason: Individual income-tax collections account for more than half of the state’s operating budget. So state government will experience some of that restructuring. Perdue already has laid out plans to consolidate some state agencies to save money on human-resources and information-technology operations. It won’t stop there.

You can’t make significant cuts to state government without whacking education. Public schools, universities and community colleges eat up more than half of the budget pie. Republicans began the session by floating the idea of raising class size and cutting teaching jobs. Education officials, meanwhile, sent Perdue potential cuts that would eliminate 5,300 teaching jobs. At N.C. State University, Chancellor Randy Woodson began preparing for the inevitable by announcing that he would put together a plan to consolidate departments and eliminate some degree programs. Talk circulated around Raleigh that Perdue or legislators might respond to the financial woes with an across-the-board pay cut for state employees.

After education, social services take up the biggest chunk of revenue. Medicaid, the health-insurance program for the poor, consumes most of that, about $3 billion. About 30% goes for optional services, care that the state agrees to provide but the feds don’t require. Some of those — such things as in-home care, chiropractic care and even dental care — could be on the chopping block.

Why shouldn’t they be? After all, some teaching jobs probably will disappear. Spread the pain, right? Well, there is that little matter of the budget affecting the economy. Medicaid money, in particular, ripples through it, flowing directly to that home-health business owner and her employees down the street and that chiropractor whose advertisements pop up on television now and again. Medicaid also draws down two federal dollars for every state dollar spent.

That’s the Catch-22 for the new Republican majority in the General Assembly: Tax hikes might hinder economic growth. Drawing back public dollars that have traditionally moved through the economy can hurt growth, too. Reduced payments to private-sector health-care providers can mean layoffs of their private-sector employees. Unemployed teachers don’t have money to spend at the stores of local merchants.

Now that state government is running out of federal stimulus money and feeling the full, delayed effects of the recession, its policymakers have no choice but to dish out some bad medicine. Taxes or not, the bitter taste will extend beyond those working in government.

Scott Mooneyham is the editor of The Insider, www.ncinsider.com.