North Carolina Aims for a Deal

For Gov. Jim Martin, it started with breakfast. The Republican governor would invite some Democrats, whose party ran the General Assembly at the time, to hear what he’d like to see in the NC budget.

“It was free talk,” Martin told The Assembly recently. “Those breakfasts didn’t move anything, there was no vote. It was a discussion for them to go back and work on in committees.”

Martin, who was governor from 1985 through 1992, wasn’t the first or last governor to talk policy with state lawmakers over a meal, often served in the ballroom or the library of the ornate, Victorian-style Executive Mansion in Raleigh. It was there that Martin’s instincts helped him navigate a legislature that didn’t need his help writing a budget.

In those pre-veto days, four Democrats from the Senate and four from the House wrote the budget. If Martin thought they were out of line, as he did when they included local “pork barrel” spending to favored legislators, he’d give up the breakfast club approach and go public with his criticism.

“I kept pounding on [them], called them the ‘Gang of Eight’,” Martin said. “They didn’t come to me to negotiate anything, because they didn’t have to. But I had a voice. I had the bully pulpit.”

Thanks to a referendum passed in 1996, Gov. Jim Hunt became the state’s first governor with the authority to veto legislation, but he never had to use it. Hunt was adept at making his case directly to the public and to legislative leaders. That helped him overcome Republican majorities in the House and opposition within his own party on budgetary and other issues like teacher pay, recalled Gary Pearce, his senior adviser at the time.

Today’s split government, with a Democratic governor and Republican-controlled House and Senate, is reminiscent of the Martin years, and the power dynamics are similar: The majority party in the legislature controls the budget, but the governor has the biggest platform.

An extraordinarily large state budget surplus has created a rare opportunity for Gov. Roy Cooper and legislative Republicans to strike a historic deal that would give the key players much of what they want. The budget being crafted now has far-reaching consequences, including the possibility of eliminating the state corporate income tax and giving substantial raises for teachers and other state employees.

But the surplus doesn’t guarantee there will be a grand bargain. Cooper and Senate Leader Phil Berger must get beyond an acrimonious history. Despite increased federal incentives to expand Medicaid, multiple lawmakers from both parties told The Assembly that Republicans are not likely to grant Cooper his longtime desire to include more lower-income people in the health-insurance program.

Still, Cooper might be able to get enough of the other issues he wants—raising state worker and teacher pay beyond what the Republican legislature has proposed and funding for infrastructure, for example—to make a deal.

The state constitution requires the governor to propose a budget, which Cooper did in March. The Senate released its budget in June. On Thursday, the House began rolling out its budget in pieces and will release the entire document on Monday. Once that happens, a handful of legislators are expected to confer and then meet with Cooper’s staff to see what’s negotiable. Representatives of all three parties have been in communication with each other.

“Hopefully, we’ll come to a compromise,” said Rep. Julia Howard, a 17-term Republican who represents Davie and Rowan counties and serves on the House Appropriations Committee. “I don’t know of any lines in the sand that’s going to stop things.”

For the most recent fiscal year, which finished on June 30, the state budget was $24.8 billion. The state is projected to have $6.5 billion in additional revenue during the next two years—the largest expected surplus in modern state history.

Cooper would spend more than the Republicans. His instincts are to take advantage of the financial windfall to bolster his drive for more accessible health care, raise pay for educators and state employees, invest in job training and infrastructure, and carry out a court’s mandate to provide students with a sound, basic education. Those are issues Cooper has promoted since 2017.

His budget doesn’t include broad tax cuts but does provide tax credits for low- to moderate-income people and for child care. Teachers would get a 10% raise over the next two years, plus bonuses. The governor has said nothing is off the negotiation table.

The Senate budget calls for phasing out the corporate income tax, which is now 2.5%, and for lowering individual income taxes from 5.25% to 3.99% by 2026.

The Senate would put a historically large amount of money into UNC system renovations, spend $12 billion for capital projects over the next 10 years, expand rural broadband, and fix bridges.

It would also use one-time federal money for state employee bonuses, including teachers, on top of a 3% salary increase over the next two years.

Berger is inclined to stash the surplus money in the state’s rainy day fund to guard against future financial crises and continue his commitment to reduce and eventually eliminate as many taxes as possible.

The overall philosophy in the Republican-controlled Senate is to increase state spending gradually so it doesn’t exceed population growth and inflation each year.

Cooper’s final proposed budget would spend $26.6 billion this fiscal year; the House and Senate agreed to cap spending at $25.7 billion.

The very size of the surplus presents its own problems. When budgets are tight, everyone dials back their expectations. When they’re flush, everyone clamors for a bigger piece of the pie.

“This budget is particularly challenging,” says former Republican House budget-writer Chuck McGrady, who served during three administrations and retired last year to join the state Board of Transportation. “They’ve got a lot of money. When you’ve got a lot of money, it’s even more difficult.”

McGrady says he has asked legislators about their strategy. “They actually seem optimistic they can roll out a budget that can ultimately become law,” he said.

A resolution could take many forms. It could come as a single straightforward budget bill or legislators could pass several mini-budgets that address narrower issues such as taxes and raises.

House and Senate budget-writers think the outcome won’t include Medicaid expansion. Sen. Brent Jackson, a Republican from Sampson County, told Spectrum News earlier this year, “I don’t see Medicaid expansion—but I never say never. We can do a budget he will sign.”

In an email to The Assembly, Jackson said lawmakers are eager to complete a two-year budget after failing to do so in 2019, which froze most spending at those levels. Legislators passed a series of mini-budgets after failing to pass a full budget.

“We want to hear what everyone has to offer and then decide what the most productive course of action will be that gets everyone to the table without being irresponsible with what we have,” he said.

House budget-writer Rep. Donny Lambeth of Forsyth County, a Republican with a background in health care, said in an email, “Medicaid expansion is a long shot and not likely to be part of a budget deal. Just not enough support in House and Senate at this point.”

Instead, he said, the focus will be on tax cuts and teacher raises. “There are other minor differences, but none greater than these two. So if tax cuts and raises cannot be worked out by leadership with [the] Governor, we will turn to a series of mini budgets as we did last term.”

House Democratic Leader Robert Reives suggests the budget might not come down to Medicaid and taxes; rather, it could be about state employee raises or bonds.

“I feel good at this point there will be a deal,” Reives told The Assembly in a phone interview. “That may be incredibly naïve on my part. What I’ve heard in meetings is the desire by all parties to reach a deal.”

Berger told reporters recently he and Cooper are in more frequent contact by cell phone, a development in contrast with their bitter public fights over the past five years.

Their conflict has its roots in a national Republican surge in the 2010 elections, when Republicans took over both chambers in North Carolina.

Berger immediately became the leader of the Senate; House Speaker Tim Moore did not assume that position until 2015, and he has tussled less with Cooper.

Cooper and Berger are two of the state’s most accomplished politicians of the last quarter century.

Cooper has never lost an election. He rose through the ranks at the General Assembly, starting with an upset victory over a veteran representative from Nash County. After 14 years in the legislature, he served four terms as state attorney general until he was elected governor in 2016.

Berger has lost just one election—his first, by seven votes, in a Republican House primary in 1994. The lawyer from Eden has gone on to spend 11 terms in the General Assembly. He helped engineer the GOP takeover of the legislature and has led the Senate for the last decade.

There have been instances of reconciliation between the two, including an agreement on when to re-open schools and how to spend initial pandemic relief.

While most agree that relations between Cooper, Berger and Moore have mellowed this year, all are still working to appeal to the legislative caucuses and to voters back home.

“Tim Moore and Phil Berger are very mindful of their respective caucuses,” McGrady said. “They rarely get way out front. That’s not to say they don’t lead.”

Uncommonly, all three leaders are lawyers with courtroom experience who know how to resolve contentious issues, he noted. “I do think they approach public policy issues with a litigator’s perspective. That’s not the norm and that’s not the norm in North Carolina.”

Catawba College professor and political analyst Michael Bitzer says divided power requires sacrifices. “The system is inherently designed for conflict,” he said, “but also requires compromise. You’re not going to get everything you want.”

Yet compared to earlier conflicts, Bitzer says, “It feels to me that things are not as heated as when Cooper first took office … It set the bar so low for trust between the two branches.”

In January 2019, Berger sat down at his statehouse office with a News & Observer reporter to assess the 2018 election results.

A shift in power presented him with new challenges. The GOP-controlled House and Senate had lost their veto-proof majorities. There had been lawsuits and legislation contesting the governor’s powers, followed by a flurry of vetoes and override votes. And more would follow.

Berger acknowledged the Republican majority in the legislature would have to listen to the Democrats more than they had in the past. But, he added, it’s also possible that some Democrats might be willing to join Republicans in voting to overturn a veto from Cooper.

Later that week, Cooper sat for an interview in the Executive Mansion, and echoed Berger’s guarded optimism and the need for compromise.

But he also had a pointed message for the Republican lawmakers: “They’re going to have to realize that they can’t just pass anything that they want … We’re not going to let the people of North Carolina be walked on.”

Before the year was out, the legislature’s and governor’s inability to agree on a budget derailed what Berger intended to be his signature legislation: improving early childhood reading. Over the course of nearly two years, Berger’s staff interviewed stakeholders and researched data in preparation for legislation.

There was strong support from both parties in both chambers, but Cooper vetoed the bill. He said the program cost too much and was a failure. Newspaper editorials said Cooper was retaliating against Berger over the budget standoff.

“This legislation tries to put a BandAid on a program where implementation has clearly failed,” Cooper wrote in his veto message.

Berger responded in an opinion piece for EducationNC, a nonpartisan digital publication covering education issues in North Carolina. “I cannot for the life of me understand how Gov. Cooper can constantly call for bipartisanship,” Berger wrote, “and then veto perhaps the most bipartisan bill I’ve seen in my time in the legislature.”

It took several years but Berger’s reading project went through numerous revisions, and an expanded version was passed into law this spring.

Berger was also displeased when he felt Cooper, then about to assume office, had interfered with a fragile, bipartisan coalition of lawmakers to repeal HB2, the gender bathroom bill that had brought unwanted attention and financial repercussions to the state.

The bill was scotched by Democrats, who opposed a moratorium blocking cities or counties from attempting to enact similar anti-discrimination ordinances. Cooper urged Senate Democrats to stick with a repeal-only deal, he acknowledged at the time.

“Disappointed is not a strong enough word,” Berger told The N&O at the time.

But time passes and some wounds might have healed—or at least been treated with a healthy dose of money. Republicans still control both chambers, but Democrats have enough votes to uphold a veto from Cooper.

“So, if there was a budget deal reached in this current divided government, I’d say it’s a very big deal,” Bitzer said.

Word of the surplus came in mid-June in an email to state Budget Director Charlie Perusse: North Carolina would have additional revenue of $6.5 billion during the next two years. That’s so much surplus that it has the potential to transform the state with unprecedented revenue—or tax cuts—over the next two fiscal years.

“When I got that email I had to take a deep breath and then read it again three more times to make sure I was reading it correctly,” Perusse recalled later in an interview with The Assembly.

Within 15 minutes, Perusse said, he was on the phone to the governor and told him about the projected $6.5 billion surplus.

“Are you sure?” Cooper said.

Of that $6.5 billion, $1.9 billion is one-time money, and $4.6 billion is recurring. Separate from that, the state has received about $9 billion from two federal coronavirus relief packages.

Larger-than-expected federal pandemic aid boosted the state’s economy and led to an increase in individual and corporate tax collections. Sales taxes were also surprisingly strong. Other factors include the rising stock market and home sales, and widespread COVID vaccine distribution led to the lifting of many commercial restrictions.

State spending hadn’t grown as much as expected because legislators and Cooper never agreed on a two-year budget in 2019, generally forcing agencies to operate from the previous year’s budget. Taken together, it meant lower spending, along with federal pandemic relief and strong state revenue, gives the state an unusual level of budget flexibility.

All in all, it should provide the state with a degree of budget stability and confidence, Perusse said, which the state has traditionally valued.

Perusse says Cooper knows how to use budgets to reflect his priorities and vision: educator pay, job training, healthcare, schools, and infrastructure. Over the past 15 months, Perusse’s office has put together an unprecedented five potential budgets as it tried to be flexible enough to address funding and priorities based on uncertain financial scenarios.

Cooper has publicly weighed in on the surplus, saying it was enough to fund his entire proposed budget and Berger’s tax cuts, with money left over.

Berger says it’s important to conserve the money for tax cuts and emergencies. “A huge surplus does not mean we’re spending too little,” Berger said in a statement issued by his office. “It means we’re taxing too much.”

On the eve of the Senate’s final vote on the budget, Cooper tweeted: “Senate budget mortgages the future health and education of our people to the corporations and wealthiest among us ($13B tax cut). Just awful. A measly $1.5% raise for teachers next year after no raise last year? Thank goodness the budget process has a long way to go. — RC”

Ford Porter, a spokesman for Cooper, said in an email, “The governor has been clear that there have not been ultimatums … on any specific issue, but that a compromise budget must reflect the shared priorities of legislators and the governor.”

Last month, four Democratic senators supported the Republican budget, with tens of millions of dollars potentially heading toward their home districts.

Reives, the House Democratic leader, told The Assembly in an interview that legislators’ top priority is taking care of their districts.

“That doesn’t mean they’d vote to override,” Reives said. “The telling vote isn’t the initial vote. It’s the veto vote.”

With high-profile issues like Medicaid and tax cuts to resolve, Cooper and his fellow leaders will be burnishing their legacies as they work into the summer. The long view from McGrady, the former legislator, could guide them:

“North Carolina generally is about incremental change, not about real quick change,” he said. “Throughout its history, it has been willing to reach some compromises, to move past differences of opinion.”

And there’s one other factor to consider: “They’re not name-calling any longer,” McGrady said, “so that’s a good sign.”