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Monday, January 10, 2011

Getting on with the dirty business

The enormous budget deficits of North Carolina and other states are about to force the hands of governors and legislatures. Here, the deficit is projected at 15% of the current budget.

I hear many proposed actions that are misguided:
  • Cut all state employee salaries by 15%. This ignores the reality that healthcare costs, retirement costs, office/IT costs, and so forth would remain essentially unchanged for each employee. Employee cost is not just salary. To reduce the total outlay for employees by 15%, individual salaries would have to be cut more than 20%... a very regressive step for low-income workers.
  • Cut one miscellaneous program or another. Those programs may indeed be superfluous, but education and human services account for 60% and 21%, respectively, of state spending. Debt service is another 4%. Ironically those three numbers comprise 85% -- all the spending that we can afford next year. Thus, without cuts in education and human services, one would have to shut down every remaining function of state government – public safety and prisons, transportation, courts, commerce, labor, insurance, etc – to balance the budget. It won’t happen.
  • Raise taxes. Although a loophole may be closed here or there, the reality of the November 2010 election is that tax increases are impossible. Besides, there are a lot of unemployed or underemployed North Carolinians whose households are bleeding cash already. Higher taxes are the last thing they need. Most taxes levied in NC are regressive.
What, then, to do? The big spenders must be throttled back.
  • Reduce the appropriation for education by 15%. Specifically, the university system should be cut 20%, the community college system 5%, and public schools 15%. Regretfully these cuts will require layoffs and some forced retirements. I’ve blogged previously that NC overspends on its university system. It’s very unfortunate that in recent years the state has instituted programs in the public schools that it cannot sustain, but that’s what we now see. The community college system, on the other hand, is desperately needed to retrain unemployed workers so that they can get jobs and resume paying taxes.
  • Reduce human services by 10%. Mainly this will impact Medicare. Mental health programs, which are embarrassment in NC, should be exempted from cuts.
  • End accruals in the defined benefit program for state employees, and convert them to a defined contribution plan going forward. It is insane to prolong a program that the state cannot pay for.
These steps will balance the budget. Painful? Absolutely. Avoidable? No.