Analysis of state budget impact on counties
State budget reduces county lottery share by $63M

General Assembly uses $63 million in county lottery fund growth and county lottery funds for classroom teachers and college scholarships; allocates remaining lottery dollars on per pupil basis and allows counties to spend on classroom teachers; fully restores mental health funding cuts; requires online travel companies to remit sales and occupancy taxes on the full retail room price; recommends minor cuts to county budgets

By Rebecca Troutman
Intergovernmental Relations Director

For the first time in seven years, the General Assembly adopted a budget before the end of the current fiscal year when the Senate and House both gave final approval to the 2010-11 state budget on June 30. Governor Beverly Perdue signed it into law two hours after its ratification. S897, "Appropriations Act of 2010," reduces the second year of the biennium's budget by $600 million to just shy of $19 billion. No new revenue sources other than court fee increases are included, and the spending plan relies on an anticipated $519 million in enhanced federal Medicaid dollars yet to be enacted by Congress.

The General Assembly uses all of the projected growth in lottery sales for classroom teachers and scholarships, reducing the county's statutory 40 percent set aside of net lottery receipts for school construction to 25.8 percent. Based on higher lottery sales projections, the 40 percent with its growth would exceed $176.5 million; the General Assembly reduces the county appropriation in school construction lottery funds to $113.7 million. A special provision allows counties to authorize their local school administrative units to use all or part of the remaining county school construction lottery funds for classroom teachers (current statutory language limits these funds to school capital facility expenditures). LEAs must request use of the funds for classroom teachers, and if a county did allow lottery proceeds for classroom teachers, these funds could not supplant existing local current expense funding and would not count toward the charter school current expense allocation. The budget changes the county-by-county allocation to a straight per pupil basis. With 2009-10 lottery sales greatly exceeding appropriated levels, nearly $32 million in excess 2009-10 lottery revenues will go to those counties with effective tax rates below the statewide average. Any excess lottery revenues for 2010-11 above appropriated levels will be distributed to counties for school capital needs on a per pupil basis. County-by-county estimates are online here (PDF).

By using county lottery funds, the General Assembly leaves K-12's management flexibility cut at the $305 million already budgeted for 2010-11. A special provision effectuates the Senate's proposal to permit LEAs to furlough school employees with salaries in excess of $32,000 for a maximum of two days to manage the flexibility reduction (Sec. 29.1). The provision prevents counties that have LEAs that implement furloughs from supplanting existing local current expense funds and requires the LEA to hold a public hearing to disclose school finances before implementing the furlough. No furloughs are authorized for state employees outside of university personnel. State agency cuts are largely through line item reductions and the elimination of vacant positions.

S897 fully restores the $40 million in state-funded community mental health services and adds $9 million in additional investments in local in-patient bed capacity. Community colleges will receive $33 million in new equipment investments per COPS funding.

Budget conferees agreed with the Senate's proposal to require online travel companies such as Expedia.com and Hotel.com to collect and remit state and local sales and local occupancy taxes on the retail price of room rentals (Sec. 31.6).

To offset state revenue declines, the budget redirects for one year the grant program funds for the scrap tire and white goods reserves to the general fund (Sec. 2.2). Direct county allocations from the scrap tire and white goods taxes continue as statutorily required. Local beer and wine revenues are fully restored.

The budget contains a contingency plan should the $519 million in enhanced federal Medicaid funding not be realized by Jan. 1, 2011 (Sec.2.3). By order of priority (first taken, last restored), the state budget director will use disaster relief funds, unclaimed lottery prize money and excess receipts realized in 2009-10, other funds' interest, and the remaining General Fund availability. Next in line would be a reduction in Medicaid provider rates, use of some of the $150 million in rainy day reserves, a reduction in the state's retirement contribution ($139 million), and last but not least, a 1 percent across-the-board cut to state agencies ($177.5 million).

Budget conferees compromised on the governor's request to return environmental health services, such as food, lodging and septic inspections, from DENR to DHHS's Division of Public Health by calling for a study on the merger of these services (Sec. 13.2). The budget rejects the governor's proposal to make the jail and detention inspections program receipts-supported, which would have charged counties a $420 per facility plus a $17.50 per bed fee, for a total statewide charge of $417,533.

The budget includes no additional salary enhancements for teachers or state employees and rejects the governor's recommendation for four bonus vacation days for state employees. A special provision (Sec. 29.7) would allow local governments to supplement the salaries of non-elected judicial employees to "attract and retain the best qualified … employees."

The revenue picture remains largely unchanged from April's revised consensus forecast between the General Assembly's Fiscal Research Division and the N.C. Office of State Budget and Management. Projected revenue growth contained in the second year of the biennium is lowered from 3.3 percent to 2.7 percent (historical growth averages nearly 6 percent). Baseline sales tax growth is reduced to a 1.5 percent increase, which is below the average growth rates but is a much welcome relief after two years of near double digit declines. The overall growth reduction, coupled with a lowered base going into the 2010-11 fiscal year, reduces revenue availability by roughly $700 million.

The budget includes Governor Perdue's North Carolina Mobility Fund (Sec. 28.7), but does not recommend the fee increases to support transportation funding. It redirects remaining funds from the Turnpike Authority in 2010-11 to seed the fund, and like the governor, would gradually redirect the Highway Fund's transfer to the general fund. The Yadkin River Bridge would be the first project completed under the mobility fund concept.

Conferees accepted the House's proposal to create the Joint Broadband Task Force to investigate last mile broadband deployment and review the best way to address the lack of broadband access (Sec. 6.18). The NCACC would have a representative on the task force.

For highlights of those expansion and reduction items of interest to counties, click here (PDF).