Published: Sunday, March 4, 2001 6:02 a.m. EST

Budget hole took years to dig

		Budget Woes: Discuss the results of Gov. Mike Easley's program cuts and the state hiring freeze. Do you agree with the targets of the cuts? What else needs to be done to balance the budget?
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By BILL KRUEGER, Staff Writer

The massive hole in the state budget that gapes at new Gov. Mike Easley has been in the making for the past few years, according to officials familiar with the budget.

While former Gov. Jim Hunt pushed ambitious, expensive projects such as Smart Start and raising teachers' pay, neither Hunt nor the Democratic-controlled legislature was willing to eliminate other major state programs or raise taxes. A series of tax cuts in the late '90s are now costing the state more than $1 billion a year in lost revenue.

As a result, many state agencies have been squeezed for years for every spare nickel and dime. Money intended for one program has been diverted to other programs.

Last year, for example, the state had to push $20 million in corporate tax refunds into the next fiscal year because money was short. And in building this year's budget, state officials used a low-balling projection on Medicaid that backfired when Medicaid costs continued to soar.

"The state has gotten itself into a really terrible place where its revenue generation can't keep up with its promised service delivery," said Dr. David Bruton, who recently stepped down as secretary of the Department of Health and Human Services.

"We haven't had the political courage to squarely face that question."

The result is a nearly $800 million hole in the budget that could grow larger by the end of the fiscal year in June. It has prompted Easley to declare a freeze on state hiring and some state spending.

To Hunt and his supporters, the hole in North Carolina's budget is simply bad luck.

The state has taken some hard licks in recent years. It scrounged through the budget to find $836 million to help victims of Hurricane Floyd. The state lost some costly lawsuits. And the once-booming economy slowed down. "We just got slammed in some areas," says Senate President Pro Tem Marc Basnight.

Hunt, in an interview Saturday, said North Carolina's budget would be in good shape if the economy had not taken a downturn.

"In hindsight, if we had known about the economy, obviously everybody would have done things differently," he said. "We couldn't have known that. We would have had a smaller budget and put more aside for the rainy day fund."

Others contend that the warning signs were already there last year, and that what the triple whammy of natural disaster, lawsuits and the economy did was reveal the beating that the state's budget has taken since 1991, when North Carolina last faced a serious budget crunch.

The result, by almost all accounts, is that there is virtually no margin for error left in North Carolina's budget.

"All this would have worked, but they had a recession," said state Rep. Martin Nesbitt, an Asheville Democrat who once led the House budget committee.

"And all of a sudden, the brakes get slammed on, and it's like a tailgate collision out on the interstate; 10 cars hit before they all stopped. That's what has happened here.

"The recession simply showed everybody what's going on. All the things were in place for this to happen because of decisions made prior to this year."

An example of such decisions can be found with the Medicaid budget.

Early last spring, after Hunt had sent his proposed budget to the legislature, Medicaid costs jumped dramatically. Officials hoped that the jump was a one-time spike, but the trend continued into May and June.

Officials at the Department of Health and Human Services updated their projections for Medicaid expenditures. They projected that an additional $21 million was needed and informed the governor's budget office and his budget director, Marvin Dorman.

"We raised as much hell as we could to get them to pay attention," Bruton said. "We kept telling Marvin Dorman and his group, 'Look here, here's what's happening.' "

Dorman said he decided to use the lower figure because he was not convinced that the higher costs were a trend.

When legislators learned of the problem, they were close to finishing their work on the budget. Dorman assured them that he could take care of the Medicaid problem.

No Medicaid fix

Rep. Lanier Cansler, an Asheville Republican, tried to get legislators to address the Medicaid problem before they approved the budget.

"There was not a lot of interest in backing up to fix Medicaid," Cansler said. "I got some people to admit we were in trouble, but that's not what the administration wanted to hear."

State Medicaid officials caution against looking for scapegoats. They say that even if legislators had used the higher figures, the state would still be facing a significant shortfall in the Medicaid budget.

"I don't believe there's any venality here," Bruton said. "And I don't believe there's any big incompetence. I believe it's just sort of the nature of the process."

It is the process, though, that some say is at the root of the problem.

Harlan Boyles, who retired last year after 23 years as state treasurer, said the Hunt administration made it a practice to routinely squeeze money out of state agencies so that it would be available for the governor's favorite programs.

"What they're doing is asking the agencies to cut back so that they can underwrite the costs of these new initiatives without the need for a suggested tax increase or any major reductions in the programs that the General Assembly wants to underwrite," Boyles said. "It has been the most effective strategy that I have ever seen."

Hunt defended his aggressive push for programs such as Smart Start, a $300-million-a-year program, and efforts to raise teachers' pay.

"The people voted for me knowing exactly what I was proposing to do," he said. "This wasn't a decision by me. This was a decision by the people of North Carolina."

Even if the budget had been smaller, Hunt said, he would have pushed for higher teacher pay and money for Smart Start while cutting back on some lower priorities.

Nesbitt said legislators rarely questioned Hunt's proposals. Nesbitt said that he suggested a temporary 1-cent increase in the sales tax to pay for the costs of recovery from Hurricane Floyd.

"The governor wouldn't hear of it," he said. "You weren't allowed to pursue that debate. You weren't allowed to pursue anything other than what the governor said he wanted to do."

Bruton said he argued for a temporary surcharge on the income tax to pay for Floyd recovery costs. He said the governor's office had polling data that showed people would not support such a tax.

"Given the information at the time, they made the only political decision available to them," Bruton said.

Hunt agreed that he was not receptive to tax increases that would have added to the burden of people already hit by Floyd.

Nickels, dimes take a toll

Dorman, Hunt's budget director, acknowledged that the practices in recent years have taken a toll on the budget. He noted that Hunt proposed various budget savings of $150 million a year in each of the last four years, and that the General Assembly often cut more than that.

"When you take the nickels and dimes out, eventually they grow to dollars, and agencies begin to have less cushion," he said. "No doubt about it."

But Dorman said that, in exchange, North Carolina has been able to take positive steps to improve the lives of children, raise teachers' salaries, and make other improvements.

"I think what people need to understand is that the state has had a big hit in the last two and a half years," Dorman said. "If you add together Floyd and the court orders, we're talking about over $2 billion that the state has had to put up.

"To say it's a budget structure problem, there may be a little truth to it, but it's not entirely that."

State Controller Edward Renfrow sees the consequences of the budget problems every day. As controller, Renfrow is responsible for managing the state's cash flow. He used to check on the state's available cash once or twice a month, leaving it to his staff to check on it more regularly.

Since last July, Renfrow has looked at the numbers each morning when he arrives at work. One morning last week, the figure was $261 million -- not much when you consider that it costs an average of $300 million a day to run state government.

"We've pushed the envelope as far as we can now to the edge," Renfrow said. "We've got to have a better way of fitting our political agenda to our actual financial agenda."

Staff writer Bill Krueger can be reached at 829-4522 or bkrueger@nando.com