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The Senate this week unveiled and adopted its version of the state budget for 2005-2007. It was not a pretty sight.

The [Raleigh] News & Observer, in a strongly worded lead editorial titled “Budget Fiasco,” debated whether to call the budget “embarrassing,” “painfully ironic,” or “budget by blackmail,” before settling on “disgraceful.” Chris Fitzsimon of NC Policy Watch called it “scandalous.” Sorien Schmidt with the NC Justice Center ranked it “among the WORST” she has ever seen.

Briefly, the budget includes the state lottery (but in a convoluted manner described below) and many other substantive changes in law that should have been in separate bills, not folding into the budget; reduces corporate income taxes; eliminates the top bracket on personal income taxes; makes less-than-adequate increases in tobacco taxes; eliminates Medicaid coverage for many people who are elderly, disabled, or blind; reduces other important programs for vulnerable people; and gives new protections to the pharmaceutical industry.

The procedure was disturbing, too, at least for those of us who still think representative democracy should include letting our elected representatives have reasonable input into legislative decisions. Many Senators got their first look at the budget bill, hundreds of pages of material, on Tuesday evening. Passage on second reading came late Wednesday. Only amendments approved by the leadership were passed. Lottery opponents, thought to be a majority of Senators, tried to have the lottery provisions removed from the budget. But Senate leaders used a parliamentary maneuver to replace the anti-lottery amendment with one improving the state employees health plan, which passed. The second-reading vote on the budget was 29-21, strictly along party lines. The Lieutenant Governor, who is the presiding officer in the Senate, interpreted a call for the question on Wednesday afternoon as a call on the full bill, so no debate was allowed on the budget on Thursday morning, when it quickly passed third reading.

Senate leaders and all Senators who support the lottery should be proud of the clever ways they have used the process to achieve their goals. Unfortunately, once again, they have shown us how rules of procedure can be used by those in power not only to quieten a large minority but, apparently, to stifle the will of a small majority.

This week has been a terribly discouraging one for those of us working for progressive social change in North Carolina. The budget bill passed in the Senate because all of the state’s progressive Senators voted for it. They are not the sort you expect to see voting for cuts in taxes on those who can most afford to pay, for cuts in Medicaid services, for protections for the pharmaceutical companies, for cuts to the Center for Death Penalty Litigation, for the lottery, and for all the rest of this bad budget.

No, it was not a pretty sight.

THE BASICS

· General Fund spending for FY ’05-’06 would total just under $17 billion. (While the budget also includes FY ’06-’07, the figures in this report will be for FY ’05-’06 only, unless otherwise noted.)

· Three big-ticket items come right off the top: $125 million for the Rainy Day Fund, $50 million for the Repairs and Renovations Fund, and $100 million for the Clean Water Management Trust Fund.

· The continuation of the “temporary” additional half-cent of sales tax, one of the state’s most regressive taxes, will bring in $413 million. This tax is made permanent.

· Other new or newly-available revenues bring in about $400 million more. (See below.)

· When all is said and done, the budget leaves almost $250 million unspent and available for use in FY ’06-’07.

THE DETAILS

REVENUE

In addition to the $413 million from the continuation of the sales tax, changes on the revenue side include:

· An increase in tobacco taxes. The cigarette tax would rise from 5¢ per pack to 40¢, and other tobacco taxes would rise from 2% to 4%. The cigarette tax increase is less that half the amount that had been recommended by health advocates as a way to reduce youth smoking. The increases in the budget bill would raise $201 million in new money. But an increase to 75¢ would almost double the revenue and would lead to reduced smoking by young people.

· A phase-out of the top personal income tax bracket, also added “temporarily” in 2001. The current tax is 8.25% on income over $200,000 for a married couple filing jointly (and comparable incomes for other filing categories). The budget bill would lower this bracket to 8% for 2006 and eliminate it completely in 2007. This means that the top bracket would be 7.75%, and it would apply to all income over $100,000 (married, filing jointly). Because this tax had been scheduled to expire completely, its phase-out actually shows up in the budget as $20 million of new money. However, do not be deceived! What the phase-out actually represents is a $40 million reduction in taxes on the state’s highest-income people, whose average annual income is $800,000, at the same time that health care and other services to lower-income people are being reduced. This eliminates what is one of the most progressive parts of the state’s tax structure.

· A reduction in the corporate income tax from 6.9% to 6.4%, a loss of about $75 million in revenue. This tax has already been reduced from a high of 7.5% in 1997, and, because of various corporate tax loopholes, many profitable corporations already pay less than 6.9%. The 0.5% to be eliminated currently goes for public school buildings and would be supplanted by lottery revenues. While Senate leaders and business leaders claim they need this reduction and the elimination of the top personal income tax bracket to recruit new industry, North Carolina continues to be rated as one of the nation’s best places for business.

· New fees amount to $20 million. These include a $10 increase in most court fees, an increase in the renewal fee for most drivers licenses, an increase in automobile registration from $20 to $28 per year, and similar increases for other vehicles.

· A $34 million transfer to the General Fund from the Tobacco Trust Fund.

· While the budget continues the estate tax and shows $30 million of revenue from it, the budget also contains language suggesting that the state will stop collecting the estate tax when the federal government eliminates the inheritance tax. These taxes are already limited to only the largest, multi-million-dollar estates.

· Sales taxes will be charged on candy and on service contracts and warranties, collecting about $20 million.

· Sales tax revenues are increased by $72 million as part of the Streamlined Sales Tax Agreement (under which most states are working together to simplify sales tax laws). For example, telecommunications services, satellite TV, cable TV, and digital satellite services will all be taxed at the same rate of 7%.

· And one more loophole opened up: The 1% sales tax on mules is repealed, so long as the mule is being used by a farmer!

SPENDING

The following are changes to the Senate’s Continuation Budget, i.e., additions or cuts to the current budget’s spending levels. As you see the cuts in spending, remember that this budget also reduces the corporate income tax, eliminates the bracket for the richest personal income tax payers, gives the cigarette tax increase that the tobacco industry was willing to accept, and leaves about $250 million on the table, unspent.

Health and Human Services

· Cut Medicaid by about $150 million. (This is just the cut in state funds and does not factor in the reduction in federal funds drawn down by state spending.) These cuts include: eliminating Medicaid coverage for about 60,000 in the Aged, Blind, and Disabled category; freezing rates paid to most providers; reducing reimbursement rates to physicians; reducing reimbursements to pharmacies; reducing the monthly limit for personal care services (which help people stay at home, not in more costly institutions) from 60 hours to 40; reducing payments for private duty nursing; increasing co-payments by Medicaid recipients for chiropractic services, optometry, podiatry, non-emergency visits to emergency rooms, inpatient and outpatient hospitalization, and generic prescription drugs; and limiting the number of prescriptions per patient each month.

· Add $7.5 million to programs in Mental Health, Developmental Disabilities, and Substance Abuse Services (MH/DD/SAS). Funds would go for crisis intervention services, adult day vocational programs, child mental health care, and substance abuse services for children and for adults.

· Add $5 million to the MH/DD/SAS Trust Fund.

· Add $75,000 for El Futuro, a program to improve MH/DD/SAS services for Latinos.

· Add about $3 million for additional staff to monitor care in the following facilities: those providing 24-hour residential care for people with mental illness, developmental disabilities, or substance abuse needs; adult care homes; and home care agencies.

· Add $1 million for the state’s food banks.

· Add $2 million to hire additional child protective services workers.

· Add $250,000 for a pilot project of providing interpreters at local public health departments.

· Add $2.5 million for fifty new school nurses.

· Add $1 million for the AIDS Drug Assistance Program, but the budget bill also specifies that income eligibility limits cannot be raised above the current 125% of poverty.

· Add $2 million for community health centers.

· Add $16.5 million to expand the More At Four program.

· $14.6 million was added to NC Health Choice, which provides insurance for children of low- and moderate-income working parents. However, a proposal to move children under the age of five from Health Choice to Medicaid, which would have freed up more funds to add additional children to Health Choice, was deleted. Advocates for children remain concerned that there is not adequate funding in the budget to keep Health Choice enrollment open throughout the two-year budget period.

· By 2007, the rates paid to most providers through the NC Health Choice program would be shifted to Medicaid rates, lower than those currently paid, which are based on the state employees health plan. Prescription drugs and dentists are exempt from these lower payments.

· The state would have to develop a long-range MH/DD/SAS plan.

· The pharmaceutical industry was successful in getting a special provision added to the budget prohibiting prior authorization requirements for drugs treating stroke or chronic obstructive pulmonary disease. What prior authorization does is to encourage the use of generic drugs instead of more expensive brand name drugs. The impact of this special provision will be to increase the purchasing of those more profitable drugs.

· A pharmacy cost containment provision was deleted.

Education

· Add $9.4 million for increased enrollment in public schools.

· Delete $57.5 million for teacher assistants, about 15% of total funding for teacher assistants. School boards are encouraged to concentrate TAs in grades K-2.

· Delete $5 million for assistant principals.

· Cut $2.6 million (6%) from the Limited English Proficiency program.

· Cut $600,000 (2%) from the budget of the state Department of Public Instruction.

· Transfer $70 million from lottery receipts to local school construction and technology, supplanting money from the corporate income tax which currently goes to local school construction.

· Add $47 million to local schools as a “Flexibility Fund”. They are encouraged to use the money to replace money taken away in other parts of the budget (including teacher assistants and assistant principals).

· Add $47.5 million for “Disadvantaged Student Supplemental Funding,” a.k.a. meeting the requirements of the Leandro decision, in which state courts have held that the state is not meeting its constitutional requirement to provide a good education to all students.

· Add $100 million to fund ABC bonuses.

· Add $650,000 for additional Teaching Fellows scholarships.

· Add $650,000 to create a new Future Teachers Scholarship Fund. It will award 100 loans to college juniors and seniors who have committed to teach math, science, special education or English as a Second Language. If they do actually teach for three years, the loans do not have to be repaid.

· Add $500,000 for the Communities in Schools program.

· Add $115,000 for a survey of teacher working conditions.

· Cut funding to the schools in the UNC System by $17.5 million (1%). In budget-speak, it’s a “management flexibility reduction,” which means that the UNC people get to decide where to make cuts, rather than having the General Assembly tell them where to do it.

· Cut $250,000 from the Juvenile Justice Institute at NC Central, leaving $250,000.

· Add $72.7 million to the UNC System for enrollment growth.

· Add $1.4 million to Legislative Tuition Grants for private college students, to cover increased enrollments at private colleges and universities.

· Add $300,000 for initiatives to close the achievement gap, funding that goes to the state’s historically-minority colleges.

· Add $7.8 million to the community colleges for increased enrollments.

· Increase tuition at community colleges by 4%, saving the state $5.5 million.

· Evaluations of principals will include teacher retention rates, teacher support and school climate.

· There will be recommendations of ways to give teachers at least five hours per week of planning time.

· UNC-CH and NCSU would be permitted to set their own tuitions, as long as those tuitions “remain affordable to ensure accessibility, as required” by the State Constitution. (Actually what the Constitution says is that college education shall, “as far as practicable” be “free of expense.”) Currently, tuitions for all schools in the UNC System are set by the System’s Board of Governors. This proposal, which like other special provisions did not get extensive debate, is stirring real concern, with some seeing it as the first step in the dissolution of the UNC System.

· All students attending schools in the UNC System on full scholarships would be considered in-state residents. This would have at least two results: 1) the athletic and academic foundations funding scholarships (e.g., at UNC-CH the Morehead Foundation and the Rams Club) would only have to pay in-state tuition rates, and 2) more out-of-state students could be accepted, since out-of-state athletes and scholars would be counted as in-state. Since there is no funding for this tuition break, however, the UNC System would have to absorb the loss of revenue. So the net impact financially is to shift the cost of out-of-state athletes and scholars from the private foundations to the UNC System.

Courts and Criminal Justice

· Cut $1 million from drug treatment courts, eliminating 12 of 14 positions.

· Cut almost $500,000 from the Family Court program, a 25% reduction in staffing.

· Cut funds for dispute settlement or mediation centers by $150,000 (10%).

· Cut $88,500 (15%) from the state’s support for the Center for Death Penalty Litigation.

· Cut $2 million from the Indigent Persons Attorney Fee Fund.

· Eliminate Sentencing Services, which has developed community-based punishment plans and kept some offenders out of prisons. Savings from eliminating the program are $3.6 million. The budget doesn’t say what the additional costs to the state will be for the more-expensive costs of imprisonment.

· Cut more than $1 million from support for Juvenile Crime Prevention Councils.

· Cut $100,000 from the Communities in Schools administrative office.

· Require prisoners to pay more for their health care and more to participate in work release programs, saving the state about $800,000.

· Reduce rates paid to doctors and hospitals for medical care for prisoners, saving the state $5 million.

· Legal assistance for inmates would be transferred, along with $1.9 million, from the Department of Corrections to the Indigent Defense Services Office. DOC has hired Prisoner Legal Services to do this work, but that nonprofit is involved in charges of discrimination against a pregnant employee and other women on its staff.

Other

· Add $1 million to continue the Home Protection Pilot Program in eight counties. The program assists those who are about to lose their homes after getting laid off from jobs.

· Most public school employees and other state employees would get a raise of 2% or $500, whichever is greater. Community college faculty and professional staff would get an additional 2%. (Raises for state employees in FY ’06-’07 would be 3%.) Raises for FY ’05-’06 would cost about $190 million.

· Add $906,000 to provide a minimum salary of at least $20,112 for all permanent full-time state employees and to provide increases necessary to fix pay inequities created by raising the lowest-paid workers to $20,112. Raising the lowest-paid workers only uses $156,000 of this appropriation, while $750,000 goes for raises to those above the minimum.

· The state currently provides health care insurance for its employees without making them pay any of the premiums for their coverage. Employees must contribute if they want coverage for their dependents. The budget includes $125 million to continue coverage for employees, and they still don’t have to contribute to their premiums. However, to keep the system solvent, there will be additional costs to employees. These include an increase in cost for dependent coverage, an increase in drug co-payments (except for generics), an increase in the maximum out-of-pocket payments, and an increase in co-payments to hospitals.

· Provide $10 million to the Health and Wellness Trust Fund for the program that provides prescription drugs to senior citizens. This will operate the program until 2006, when the federal prescription drug benefit for those on Medicare kicks in.

· Provide $2 million for Healthy NC, a program being developed by the Department of Insurance to help provide health insurance for small businesses. In words you may never have thought you’d see in North Carolina, the budget bill notes that the program is modeled on a successful program in New York!