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
"We haven't had the political courage to squarely face that
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
Hunt, in an interview Saturday, said North Carolina's
budget would be in good shape if the economy had not taken a
"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
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,
"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
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
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
"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
"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
"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."