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Legislator Talks to Tribune about State Budget

NC General Assembly RS

Appealing to the press was no help. Trying to figure out what was happening to teacher pay by reading the newspaper was reminiscent of the old riddle, “What goes up a chimney down, but can’t go down a chimney up?”

To help clarify things, state Representative John Szoka (R-Cumberland) agreed to field questions for the readers of the Tribune. Szoka was sought out as an interpreter not only for his inside angle, but because he is retired from a career of identifying savings in military budgets. He is not only good with numbers, he has the rare talent of applying his equations pragmatically. He ran for office to be a voice of commonsense, and in communications he leaves no reason to believe he is being anything less than honest.

Teacher Pay –

The issue with teacher pay is political. Szoka referenced a chart on his constituent service site: It showed that every teacher would receive a pay increase. The state appropriated an extra $282 million for teacher compensation this year.

As has been widely published, increases will range from 0.29-18.51 percent. Increases were weighted more heavily toward new teachers, and that, Szoka said, is in response to what school administrators were telling the legislators; namely, recruitment and retention were their greatest problem. New teachers were harder to retain, and money was a major reason why they were going to greener pastures.

According to the old system, teachers would work for about $30,000 a year for five years without a raise. Now, starting pay has increased to about $33,000, and new teachers will get their first raise after three instead of five years. After that, pay raises will come every five years instead of every year. Once somebody has taught for thirty years, he will simply get $1000 more each year. A 36-year veteran teacher will now be getting almost $57,000.

Szoka said the chart, which was based on data provided by the Fiscal Research Division of the General Assembly, compares the sum of base and longevity pay in the old system with base pay in the new system. Longevity pay has now been lumped in with base pay, and it will be added to each pay check rather than awarded once per year. The change was made for the sake of transparency. “States don’t calculate teacher pay the same way for state-to-state comparisons,” he explained.

As for other benefits, Szoka said counties still have the discretion to give teachers supplemental pay. The average amount is somewhere around 8 percent of the state salaries. On top of that, teachers get benefits. Szoka said, “Most people working outside the government sector don’t have anybody [meaning their employer] paying their health insurance.” For example, a single teacher will receive Blue Cross Blue Shield health insurance, worth about $5000 a year, while accruing defined-benefits for their retirement package.

Szoka said teachers’ organizations want to have their cake and eat it too, but the teachers with whom he speaks one-on-one “get it.” That is, they understand the state is upgrading the pay scale for the first time in six years. But most of them aren’t concerned with pay. The legislature has begun addressing one of the major complaints, that children are being over-tested, by getting rid of Common Core. Remedies for the other oft-heard complaints, like allowing teachers more freedom in the classroom by reducing the amount of paperwork they must submit, fall under the authority of the Department of Public Instruction or local boards of education, and not the legislature.

No Medicaid Expansion –

According to Szoka, ”One part of the Affordable Care Act, also known as Obamacare, gave states the option to expand Medicaid or not. That was before the president got his pen and started changing things.” Szoka explained, “The whole premise is good in a perfect world, but in the real world, it doesn’t work.”

He continued, “I’m responsible to the taxpayers in North Carolina, not to President Obama, not to members of Congress, and not to people in another state. Expanding Medicaid was not the best deal for North Carolina. The law said the federal government would cover roughly 287,000 more people in North Carolina for 3 years at 100 percent.” Any objective assessment would conclude that the cost of “free” healthcare is an open invitation to woodwork consumers, so Szoka asked, “As Obamacare needs more money, the federal government will go up on the percentage that states must contribute.” It was entirely possible the state would have to come up with another $2 billion to cover costs in a few years. In addition, the state would incur $150-250 million annually in new administrative costs.

Medicaid is a major reason why the state has trouble balancing its budget. For 2012-2013, $20.2 billion was budgeted for Medicaid, but in May another $497 million was provided in a supplemental transfer. Medicaid comprised 18 percent of the state’s general fund this budget cycle and 72 percent of HHS spending. Further muddying the waters is a backlog of reimbursement claims submitted by doctors compounded by a backlog of consumer applications all messed up by changes in federal requirements and needing to read the bill to find out what’s in it. For the current budget, the state increased its Medicaid appropriation by $227 million and also created a Medicaid Reserve Fund.

Szoka said the last time he had heard numbers, a total of 7 million people had signed up for Obamacare, and 7 million had lost their private insurance because of Obamacare. “It’s just trading private insurance for government/tax-paid insurance,” he said. Szoka said he often talks to doctors because his wife is a family nurse practitioner. Many complain that it’s impossible to bend to keep the law without breaking. “Obamacare’s a mess!” he stated, “And you can quote me on that.”

Cutting Unemployment Benefits –

“In 2013, the legislature owed the federal government $2.8 billion it had borrowed to continue to pay extended unemployment benefits.” Normally, unemployment insurance is paid by employers through federal and state unemployment taxes. States build up a reserve for hard times, but around 2006-2008, times were so tough, the state had to borrow money from the federal government. “The alternative would have been to increase the employment taxes to unrealistic rates,” and that made no sense during a rash of layoffs. In Szoka’s words, “Unemployment insurance debt is a drag on job creation.”

At the time, North Carolina was offering up to $525/week for the unemployed. Other states in the region offered maxima of $265-415. In North Carolina, the average amount drawn was only $297. So, the legislators cut the maximum benefits to $350/week for 20 weeks instead of 26. The legislators also altered the tax rate to replenish its reserve for the next crisis.

“It’s working out great!” said Szoka. North Carolina was the first state to reduce its extended unemployment benefits. “It was also the first state to see unemployment rates go down precipitiously.” The debt should be paid off in about a year, and that will save businesses $200 million a year in interest. Much to the surprise of the “talking point people,” removing a perverse incentive, that made the combination of income and leisure time of unemployment more attractive than labor, really did spur people to get to work.

Tax Reform –

Szoka credits a number of legislative reforms implemented since 2011 with improving employment rates. In addition to changes in unemployment insurance and workers’ compensation, he credits tort and medical malpractice reform, the Farm Act, regulatory reform, and an overhaul of the tax system.

As has been stated in multiple sources, an attempt was made to streamline taxes. The tax rate for individuals went from 6, 7, or 7.75 percent to 5.8 percent this year, and it will drop to 5.75 percent in 2015. Deductions, exclusions, and credits – most notably the $50,000 business exemption and the NC Earned Income Tax Credit – have been eliminated. “We increased standard deductions, and took away special deductions.” The exemption for a single filer went from $3000 to $7000; for married couples filing jointly, $6000 to $15,000; and for heads of households, $4400 to $12,000.

North Carolina used to have the highest tax rate in the Southeast. Szoka said people like to talk about the global economy, but more business prospects are lost to surrounding states. Consequently, the legislature decided to drop the corporate tax rate from 6.9 percent to 6.0 percent this year and 5 percent in 2015 with opportunities to go as low as 3 percent by 2017 if “hard revenue targets” are met. According to Szoka, South Carolina’s Governor Nikki Haley is taking notice.

Legislators also provided some relief with what is often referred to as an indirect tax on business, costs of compliance with regulation. Szoka said Buncombe County’s Tim Moffitt was the “primary architect” behind the movement. North Carolina was the first state to subject regulations to periodic review. Cities and counties in the state are now prevented from imposing special-interest burdens that neither state nor federal agencies deem useful.

The tax base was expanded. While lawyers and accountants still have enough pull to exempt their services, utilities; namely, electricity, propane, and natural gas, are all taxed at 7 percent as of July. Szoka noted the tax on electricity is only going up 0.78 percent, but, as with teacher pay, little, and sometimes “hidden,” components are being lumped into one number for the sake of transparency.

Nonprofits, like theatres, are also required to collect sales taxes as of July 1. Szoka did not think 70 cents on a $10 admission ticket imposed an “undue burden [sufficient to] change audiences.” He also dismissed claims about needing to set up new accounting systems, noting most theatres already sell concessions.

Since being elected, Szoka appears to have changed his mind on the subject he does not like to call corporate welfare. He used to say what the state collects in corporate taxes could pay for what it gifts to select businesses. He still disapproves of giving money to the film industry. “My job is to look after the taxpayers of North Carolina,” he reminded. The film industry has carried a negative return on investment.

But now, he says if the state could give a few million dollars to a company to offer 7700 jobs to North Carolinians instead of South Carolinians and generate business for surrounding suppliers, he could be supportive. Conditions under which the state provides grants, which he thinks should be essential for the process, include making the process competitive, skewing selective criteria in favor of businesses locating in economically depressed areas, and including clawback clauses to require companies to pay the state back if they don’t generate the levels of jobs and business promised in their contract.

Other Stuff –

Szoka said former budgets were based on the assumption that population, inflation, and therefore tax revenues will always increase. With the bursting of economic bubbles, particularly in 2008, Szoka and his colleagues had evidence to make persuasive arguments for walking the size of the budget “back down to realistic levels” this year.

“The private sector does it all the time,” he said. “If you’re the director of a department and you get less, you’re going to use less. It makes you go back in your budgets and start wringing out the excess. You have to think, cut, and economize.”

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