MARCH 16, 2001

“Monetary stimulus and the prospect for federal tax cuts (possibly retroactive), will spark an acceleration in consumer spending and new business investment, leading to robust economic growth in 2002. As U.S. industrial production recovers. North Carolina will outpace the nation in relative economic performance in 2002-03.” 
-- Gov. Mike Easley

See a chart of major revenue sources in the governor's budget proposal
Read the budget executive summary

Easley sees better budget
times just around the corner

The good news about North Carolina’s budget crisis is that the bad news is almost over, or so one can conclude from poring over the 200-page budget document that Gov. Mike Easley submitted to the General Assembly on Monday. The governor is so confident in his forecast of rosier economic times that he’s proposing hiking state spending by about $1 billion a year each of the next two years.

In his assessment of the state’s near-term financial prospects, the governor says the state’s lean financial times will continue through the end of this year as the shakeout continues in the state’s huge manufacturing sectgor. By the end of this calendar year, things will begin looking up, Easley says.

“Despite the current gloominess, there are reasons for optimism looking forward,” the governor says. “Monetary stimulus and the prospect for federal tax cuts (possibly retroactive), will spark an acceleration in consumer spending and new business investment, leading to robust economic growth in 2002. As U.S. industrial production recovers,” he adds, “North Carolina will outpace the nation in relative economic performance in 2002-03.”

He predicts that personal incomes in North Carolina will grow by 5.5 percent next year and by 6.4 percent in 2003. Growth in personal income, retail sales, housing starts and other factors will spur increases in the gross state product of 3.1 percent next fiscal year and 5 percent in the second year of the biennium.

All of which means that Gov. Easley, whose first weeks in office were preoccupied with slashing state spending by hundreds of millions of dollars to keep the budget balanced as state revenue growth slowed dramatically, believes he will have some extra money to spend over the coming two years.

His budget proposes spending $357 million on new programs in the fiscal year beginning July 1 and $785.2 million on new programs in the following year. Most of that new spending is for K-12 education, including reducing class sizes in kindergarten through third grade to no more than 18 pupils and starting a pre-kindergarten program for at-risk 4-year-olds.

Overall state spending, including growth in existing programs, would rise from $13.48 billion this year to $14.58 billion next fiscal year, an 8.2 percent increase; and to $15.45 billion in fiscal 2002-03, a 5.9 percent increase.

But it will take more than a reinvigorated economy to produce the revenue that Gov. Easley needs to support his spending plan. His spending plan assumes that the General Assembly will eliminate many of the tax preferences being studied by his N.C. Efficiency and Tax Loophole Closing Commission, increasing General Fund revenues by $150 million a year.

The governor also is proposing raiding the Highway Trust Fund for an additional $30 million a year above and beyond the $170 million that normally is transferred from the trust fund to the General Fund. The increase is to account for inflation, the governor said. And he’s counting on an additional $18 million a year coming from unspecified “enhanced collections” of taxes by the state Department of Revenue.

Easley proposes to help fund the pay increases by reducing the state contribution to the state employee retirement plan by $181 million 

Public school spending would rise from $5.74 billion this year to $6.26 billion in the year beginning July 1. The UNC System’s appropriation would increase from $1.80 billion to $1.82 billion, and the budget for community colleges would rise from $644 million to $663 now million next year.

Easley balanced the budget by proposing that the state freeze government spending at July 2000 levels and cut waste. Easley's continuation budget is nearly $600 million less than the budget he inherited, and his expansion budget represents only 1.1 percent of his recommended budget in 2001-2002.

More than 80 percent of Easley's $170.4 million expansion budget is earmarked for education improvements and workforce investments, including recommendations of $6.5 million for a pre-kindergarten program, $49.6 million to reduce class size, a 2 percent increase to fund the teacher salary schedule, and a $200 expense account to reimburse teachers for classroom supplies.

In addition, Easley set aside funds to expand enrollment in CHIP, the plan that provides health insurance for children from families who work but cannot afford health care. Under Easley's plan, CHIP would receive an additional $10 million to expand enrollment from 68,000 to 85,000 in the first year and $20.9 million to expand enrollment to 100,000 children in 2002-03. Other budget highlights:

Lower Class Size: Every kindergarten student will have the opportunity to begin their education in a class of 18 or below. In addition, the plan provides resources to reduce class size in grades 1-3 beginning with schools where only 60 percent of students are performing at grade level.

More at Four: Easley has recommended the creation of a new community-based pre-kindergarten program to help prepare at-risk four-year old children for success in school. The program will team with public and private schools, Smart Start, Head Start and community-based child care centers across the state to ensure that the greatest needs are met. More at Four will be phased-in over the next five years and will be supervised by a task force led by Carmen Hooker Buell, secretary of the Department of Health and Human Services, and by State Superintendent of Public Instruction Mike Ward.

School accountability report cards: Easley's low-ticket items ($1.5 million total) are designed to bring more accountability and discipline to public schools. Report cards will be distributed in January to all parents, giving them updated information about the size of their child's class, the overall performance of the school and the certification background of their child's teachers.

Teacher Recruitment:  Easley's budget includes a $3 million package designed to keep and attract the best teachers. Easley has proposed expanding the Teaching Fellows program, and providing additional resources for scholarships to encourage teacher assistants to get the education they need to become certified teachers.

Higher Education: In an effort to better prepare North Carolina's workforce, Easley has included a package that enhances training programs and college scholarships. His proposal calls for a $1.4 million dollar boost to the UNC Distance Learning Program; $8 million for UNC need-based financial aid; $6.9 million for faculty/staff enhancement for community colleges.

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New revenue and new spending
dollars in millions