NCGA Week in Review

February 14, 2020

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A select group of legislators returned to Raleigh this week to participate in their assigned interim committees. The Joint Legislative Oversight Committees on Health and Human Services, Medicaid and NC Health Choice, Capital Improvements, and Small Business Retirement Options, as well as the Revenue Laws Study Committee all convened. Interim committees allow lawmakers the opportunity to review in-depth presentations on policy topics which were not resolved in the previous session, or which may be on the docket for the upcoming session which are presented by experts in their respective fields. Oversight committees afford House and Senate members more time than regular standing committees to ask questions and hold debate in order to get a deeper understanding of the topic at hand. The committees give members the opportunity to come up with compromises, generate new ideas, and formulate proposed legislation to file on behalf of the committee in the next session. The North Carolina General Assembly will reconvene for its short session April 28, 2020 at noon. 

Revenue Laws Study Committee

Currently, when sales tax is collected, the Department of Revenue relies on complex and, some say, outdated formula to redistribute the funds throughout all 100 counties in North Carolina. Some lawmakers are looking to change this. The Revenue Laws Study Committee met this week to look at a variety of ways lawmakers may be able to simplify and modernize the way in which sales tax is distributed back to counties. Staff from the General Assembly’s Fiscal Research Division and the Department of Revenue presented a few possible routes the legislature could take if they choose to revise their current sales tax formulas. Presenters made it clear from the beginning that the options presented were just a few of countless possibilities, and that the presentation did not serve as an endorsement of any given option.

One of the options presented before the committee would be to distribute sales tax revenue on an ad valorem basis, which is calculated using the counties’ property tax values. The second option discussed was distribution with an equity factor allocation, which would allocate a small percentage to every city and county based on the county’s population. The current formula uses two main elements as the basis for distribution – point-of-sale and per capita. Urban counties and high-tourism counties often prefer the point-of-sale method, which distributes the revenue collected in a manner proportionate to where the purchases were actually made. The per capita method distributes the sales tax revenue collected based on the number of people in the county – a method preferred among more rural counties.

In order to reduce the negative impacts a change like this could have, staff suggested integrating the new elements together in combination with the current formula’s elements. The updated formula that staff presented would consist of allocating 60% on a point-of-sale basis, 30% on a per capita basis, 7% on an ad valorem basis, and 3% on an equity basis. While there would be some losses and some gains at the individual county level, the change would be minimal. All individual county losses would be within 5%, and all individual county gains would be within 10% of the current allocation they receive.  

The only vote up before the committee was on the Internal Revenue Code Update (IRC). This proposed bill would update the state revenue codes for January 2019 – January 2020. The primary change in this bill would be for the state to meet the federal threshold of the medical expense deduction, which was lowered by the federal government. The bill continues to decouple the few extenders in the federal legislation. The bill will be heard in House and Senate Rules committees during the short session. 

Members also received an update on digital property tax and online learning from the Legislative Analysis Division. In 2017, 15% of college students were enrolled in completely online courses. North Carolina is a member of a streamline tax agreement called the Streamlined Sales and Use Tax Agreement (SST). The SST arose out of issues created by the difficulty of imposing state and local taxes on digital purchases of products and services made across state lines, particularly when the business involved in the transaction does not have a physical presence in the state where the purchase was made. Member states are not required to tax digital products, nor do member states have to align their tax policies with everything in the agreement. States do not have to tax all of the digital products that other states choose to tax and they can also tax additional items that are not taxed in other states. States cannot impose a tax on an online version of a service if the equivalent of the offline version is not taxed per federal legislation. North Carolina made a change to this taxation last year. The General Assembly passed a bill that made it clear that there does not have to be an actual, tangible version of the digital product. The UNC system raised questions about the impact it would have over how their online courses would be taxed since they would be considered audio/visual digital taxable products. Members were asked to think about how they would want to define the courses, what other conditions should be added to those courses, and how broad to make to law to avoid violating federal law. The committee will continue to work on the framework of the taxation. 

Joint Legislative Oversight Committee on Health and Human Services

The Joint Legislative Oversight Committee on Health and Human Services met Tuesday to receive updates on the coronavirus, newborn screening, and Certificate of Need (CON) laws. NC Department of Health and Human Services (DHHS) Secretary Mandy Cohen updated the committee on the progress that the Department has made during her tenure. Those highlights include infant mortality reaching its lowest rate in the 31 years it has been tracked, a drop in unintentional opioid-related deaths for the first time in five years, and Medicaid remaining on budget for the sixth year in a row. Looking ahead, Secretary Cohen emphasized that DHHS will continue to work toward a healthier North Carolina by building an “innovative, coordinated, and whole-person centered heath system,” ensure all children in the state get a healthy start to develop to their full potential, and significantly reduce the opioid epidemic. She also asked lawmakers to reconsider their plans to move DHHS out of Wake County and to restore previous funding levels to ensure that the Department can operate at its full capability. 

Zack Moore, the State Epidemiologist, updated the committee on the coronavirus and the impact it could have in North Carolina. As of February 9, the virus has had a 2% mortality rate in the 37,558 reported cases. The number of cases continues to rise daily across the world as doctors seek to stem the spread of the deadly virus. Moore stated that there is a chance for widespread transmission in North Carolina with the possibility of containment. The Department is preparing for the worst case possibility of widespread transmission so that they are not caught off guard. Labs around the world continue to work to find a solution to the problem. DHHS recommends that people treat the coronavirus like the flu and take similar hygienic precautions. 

The committee also revisited CON laws that have been heavily debated in the General Assembly for decades. CON laws require hospitals and other medical service providers to obtain permission from a state planning board to build a new facility or expand an existing one. North Carolina is one of 36 states that still impose such restrictions on the provision of health care in the state. Opponents of CON laws argue that they allow established providers to dictate who can enter the market to compete with them, thereby stymying competition and raising costs for the consumer. The presentation from the State Health Coordinating Council and DHHS staff gave lawmakers a refresher on where North Carolina stands compared to other states in the CON reform process. Members of the committee expressed the need to work together to ensure the state has a system that works for all, and in particular does not harm rural hospitals which are already facing financial trouble. Sen. Kraweic (R-Forsyth) who has been a vocal voice in amending the laws stated, “North Carolina is the fourth most regulated state with New York, Vermont, Hawaii all ahead of us. I think this presentation shows how complicated this process really is and all of the parts involved, and I think it gives weight to what myself, Sen. Hise, and Sen. Burgin have been saying about needing some changes to our CON laws.” The committee decided to continue to debate the issue during their next meeting, which will be held March 10.

Joint Legislative Oversight Committee on Medicaid and NC Health Choice 

Dave Richard, Deputy DHHS Secretary for NC Medicaid, and Jay Ludlam, Assistant DHHS Secretary for Medicaid Transformation, presented the committee with an update on Medicaid transformation. When the transformation process kicked off, DHHS broke the state into 6 regions, awarding enrollment broker contracts and working with vendors to ensure they were ready for the rollout.

Department officials say DHHS was on track to move forward with the state’s planned Medicaid transformation, but were force to temporarily suspend the project in November of 2019. 75 days prior to going live, the extensive transformation process was suspended, leaving providers and beneficiaries in limbo. Representatives from DHHS stated that they cannot take the project live without the passage a full state budget. Richard stressed the importance of Governor Roy Cooper and the General Assembly coming to a budget compromise before the April short session. While DHHS has not complete suspended their work on the transformation to managed care, the delay means that they will have to go back and re-review and re-validate enrollment broker readiness, re-hire staff, re-send material, and confirm who would be eligible for the program again. 

Committee members argued that the transformation was delayed due to the inability to come to a vote on the budget or a mini-budget that would fund the needs of the Department to continue its work. During the budget impasse, the General Assembly attempted to pass a mini-budget that would have released $502 million for the project. Governor Cooper ultimately vetoed that mini-budget. Additionally, DHHS staff told the committee, the proposed $40 million cut to DHHS and the plan to move its headquarters out of Wake County would significantly hinder its ability to move forward. Now $14 billion worth of contracts have been delayed, leading to litigation between the five providers that were initially chosen. 

Rep. Dobson (R-Avery) stressed his fear that it could be another two years before the state saw anything significant happen without coming to a compromise on funding. The committee hopes to continue meaningful discussion on the delay in its upcoming meetings.

Joint Legislative Oversight Committee on Capital Improvements 

The Joint Legislative Oversight Committee on Capital Improvements met Wednesday to discuss the Connect NC Bondbuilding reserves for UNC projects, and an overview of the state capital and infrastructure fund (SCIF). 

Mark Bondo of the Office of State Budget and Management (OSBM) updated members on the status of the Connect NC Bond. The act, which created a $2 billion general obligation bond program, was passed by the General Assembly in 2015 and approved by voters in 2016. The program supports community colleges and universities, state and local parks, state agriculture and the NC Zoo. OSBM meets with recipients to review cash flow submissions and models cash flow projections based on actual draws. The 2018 Appropriations Act designated $68.4 million in additional funds for several bond projects. Currently the UNC system has 21 ongoing projects, but with the budget stalemate and increased inflation the agency sees the need for additional appropriations. Officials say they are seeing an uptick in costs associated with building and maintaining new state-of-the-art facilities across the state. $31.4 million out of $58.7 million in escalation reserves have been released so far due to inflation. 

Following the Connect NC presentation, members were presented with an overview of the SCIF. The SCIF supports general fund debt service for state-owned facilities, such as state agency buildings and UNC system facilities. It supports repairs and renovations, new capital, and also allocates money to growing rural economies for access to broadband and other technology. The fund comes from one quarter of the unreserved balance remaining in the General Fund at the end of each year, 4% of net General Fund tax revenue, additional appropriations from the General Assembly, and accrued interest on fund deposits. Highlights of the SCIF that were included in the vetoed House Bill 966: 2019 Appropriations Act include:

  • $448 million authorized for new state agency capital.
  • $632 million authorized for new UNC System capital.
  • $1.5 billion for Local Education Agencies (LEAs), amounts for each LEA specified within the provision.
  • $400 million for Community Colleges, amounts for each college specified in the provision.
  • $325 million for repairs and renovations of State agencies and UNC System for 2019-21 biennium.
  • $150 million for rural broadband.

Debate in the committee centered around the effectiveness of using the SCIF versus bonds. Proponents of the formula debated that most of the projects are paid off in the first year with no interest paid. The state could safely go up to 4% in debt as authorized by the Treasurer. They also favored “pay-as-you-go,” to allow the money to be allocated faster compared to using bonds which may drive up cost if released all at once.  House Minority Leader Jackson (D-Wake) opposed the method, debating that it ignores what the actual cost of a project will be in five to ten years since it does not take into account the value of time and money. The committee plans to examine the effectiveness of the fund over the next few months.

Upcoming Legislative Meetings

Wednesday, February 19, 2020
10:00 AM
North Carolina Child Well-Being Transformation Council
1228/1327 LB

Friday, February 21, 2020
10:00 AM
North Carolina Courts Commission, Subcommittee on Domestic Violence
NC Judicial Center 901 Corporate Center Dr. Raleigh