Senate and House unveil spending proposals during budget gridlock

• Budget negotiations remain stalled largely due to contrasting visions for the personal income tax rate
• On Monday, the Senate released disaster recovery and continuing operations bills
• On Tuesday, the House responded with two spending bills of its own

With budget negotiations stalled over disagreements on personal income tax rate cuts and revenue triggers, both chambers unveiled two spending bills this week. On Monday, the Senate released a revamped disaster recovery bill that the House initially submitted in May and a continuing budget operations bill. On Tuesday, the House submitted continuing budget and salary adjustment bills.

Below are highlights from each of the bills:

House Bill 1012 (Disaster Recovery Act of 2025 — Part II)

House Bill 1012 was filed and passed by the House on May 21–22, 2025, before undergoing an extensive overhaul in the Senate this week.

The House version proposed transferring $574 million to the Hurricane Helene Disaster Recovery Fund (Helene Fund) by reclaiming $500 million from the controversial nonprofit NCInnovation and reallocating an additional $74 million in unused funds from previous projects. It then recommended appropriating $464.8 million for disaster recovery.

In contrast, the Senate version did not propose recouping the $500 million from NCInnovation. Instead, it recommended the following measures:

• Transfer $700 million to the Helene Fund, drawing from unspent funds and a combination of reserves, including the State Emergency Response and Disaster Relief Fund, the Federal Infrastructure Match Reserve, the Medicaid Contingency Reserve, and the Information Technology Reserve.
• Appropriate $480 million from the Helene Fund to support recovery efforts.
• Redirect $560.2 million in Department of Transportation funds for cash flow and to fulfill federal matching requirements related to the Helene recovery.
• Utilize $685.6 million in federal Environmental Protection Agency funds to support infrastructure recovery initiatives.

Initially, the House rejected the Senate’s version of the bill, but a conference report was negotiated and adopted by both chambers on Thursday, which is now heading to Gov. Josh Stein’s desk for approval.

House Bill 125 (Continuing Budget Operations)

House Bill 125, as originally filed, would have officially adopted a state star. The Senate gutted it and transformed it into its first proposed minibudget of the fiscal year. It advances a package of targeted allocations amid stalled broader budget negotiations. Relevant recommendations include the following:

• Transfer more than $1.1 billion to the Savings Reserve.
• Allocate $60 million for state matching requirements related to federal disaster recovery funding.
• Allot $94.9 million in recurring funds to the North Carolina Community College System for increased enrollment, $19.9 million of which is funded by receipts.
• Appropriate $104.2 million and $46.4 million in recurring funds to the Department of Public Instruction and the UNC System for enrollment growth, respectively.
• Allocate more than $2 billion from the Education Lottery Fund across the biennium.
• Allot $640 million in recurring funds for the Medicaid Rebase to account for projected changes in enrollment, enrollment mix, service and capitation costs, and federal match rates.
• Allocate $49.2 million in recurring funds and $34.4 million in nonrecurring funds each year of the biennium to support contracts necessary for operating the state’s Medicaid managed care program.
• Transfer $118.1 million in fiscal year (FY) 2026 and $133.9 million in FY 2027 in nonrecurring funds from the Stabilization and Inflation Reserve for site acquisitions and improvements for an airplane manufacturing project in Guilford County, presumably the JetZero facility.
• Transfer another $250 million in nonrecurring funds from the Stabilization and Inflation Reserve for FY 2026 to the Department of Agriculture and Consumer Services for the Agricultural Disaster Crop Loss Program.
• Appropriate $42 million in nonrecurring funds from the cash balance of the North Carolina Veterans Home Trust Fund to the Department of Military and Veterans Affairs for FY 2026 to renovate and repair the Fayetteville State Veterans Home.
• Appropriate $197.6 million in recurring funds from the General Fund to cover increasing employee benefit costs.
• Transfer from the State Capital and Infrastructure Fund $1.75 billion in nonrecurring funds for FY 2026 to be allocated by the Office of State Budget and Management across designated capital projects.
• Ensure state and public school employees are eligible for step increases, merit raises, and bonuses. It would also allow state agencies to implement salary adjustments using existing appropriations, provided the increases are funded through vacancies, savings, or internal reallocations and do not include scheduled experience-based raises.

Senate Bill 177 (Continuing Budget Adjustments)

Senate Bill 177 was originally introduced as a bill related to Medicaid reimbursements for psychiatric hospitals. The House transformed it into a proposal that outlines adjustments to support the continued operations of state government. Relevant suggestions include the following:

• Allocate $500 million in recurring funds for the Medicaid Rebase to account for projected changes in enrollment, enrollment mix, service and capitation costs, and federal match rates.
• Transfer from the State Capital and Infrastructure Fund $713.7 million in nonrecurring funds for FY 2026 to be allocated by the Office of State Budget and Management across designated capital projects.
• Transfer $197.6 million in recurring funds from the General Fund to a Benefits Contributions Reserve within the Office of State Budget and Management to cover an increase in required state contributions.
• Allocate $20 million for state matching requirements related to federal disaster recovery funding.
• Transfer $142 million in nonrecurring funds from the State Emergency and Disaster Relief Fund for FY 2026 to the Department of Agriculture and Consumer Services for the Agricultural Disaster Crop Loss Program.

House Bill 192 (Salary Adjustments and Budget Offsets)

House Bill 192 is the House’s first proposed minibudget, primarily focused on providing salary and benefit increases for state employees, teachers, and retirees, while also funding government operations and infrastructure. Relevant components include the following:

• Allocate more than $2 billion from the Education Lottery Fund across the biennium.
• Allot $94.9 million in recurring funds to the North Carolina Community College System for increased enrollment, $19.9 million of which is funded by receipts.
• Appropriate $104.2 million in recurring funds to the Department of Public Instruction for enrollment growth.
• Increase teachers’ salaries by 6.4 percent on average in FY 2026, reinstate education-based salary supplements, and authorize bonuses and additional supplements to support teacher pay.
• Increase North Carolina Community College and UNC systems’ employee salaries by 2.5 percent in FY 2026.
• Increase most state employees’ salaries by 2.5 percent in FY 2026.
• Provide a one-time payment equal to 1 percent of the annual retirement allowance to retirees of the Teachers’ and State Employees’ Retirement System, the Consolidated Judicial Retirement System, and the Legislative Retirement System in FY 2026.

With the 2025–27 biennial budget at a standstill, both chambers’ release of spending bills reflects an effort to address immediate funding needs while broader debates over personal income tax rate cuts and revenue triggers continue.

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