Governor’s Budget:

The Governor released his administration’s final budget last week totaling $21.4 billion, excluding capital, reflecting on how the state’s economic condition facing this budget differs considerably from that facing his first in 2001. Back then, the rainy day fund had been depleted but now it exceeds $800 million. In 2001, North Carolina was losing jobs rapidly but today we’re ranked in the top 3 states in job growth. However, employment growth has not kept up with demand as the unemployment rate edged up to 5.2% in March and is expected to reach 5.5% in 2009.

Although the Governor’s budget analysts believe that the U.S. economy has likely slipped into a mild recession during the first half of 2008, North Carolina’s economy seems to be in somewhat better shape - especially in the urban areas. While NC’s economy is expected to continue to decelerate in 2008, a modest rebound is expected in 2009. Job growth will likely lose speed in 2008 as manufacturing continues to struggle and construction employment reflects the downturn in housing starts (projected to decline 1.7% in 2008 and 1.5% in 2009 before finally realizing job gains in 2010). Solid growth in the education and health services sector and professional and business services sector (forecast to expand 2.9% in 2008 and 4.6% in 2009) should keep job growth comfortably positive, yet below the very strong growth realized in the past few years.

All told, the $21.4 billion general fund budget would increase state spending by 4.2% or roughly $900 million. Unlike the past several years with over-collections in the billions, the state anticipates $152 million in over-realized receipts. The governor’s budget lowers the projected revenue growth contained in the second year of the biennium, costing the state an estimated $250 million in anticipated revenues. State agencies and programs would see nearly $400 million in cuts. The governor’s budget begins a phase out of the controversial highway fund transfer, reducing the transfer to the general fund by $25 million which has been earmarked for the North Carolina Turnpike Authority.

Significant funding increases for mental health would be largely supported by a requested increase in alcohol taxes. The governor’s other recommended tax change would increase the cigarette tax from .35c to .55c to offset a 7 percent increase in teacher’s salaries. School administrators would see a 6 percent increase on average while all other state employees would receive an average 4 percent increase through a recurring 1.5 percent increase and a one-time $1000 bonus. State employees would also receive an additional week of bonus leave.

New funding initiatives, in addition to those for mental health, focus on university safety, greater probation resources and oversight, and drought response resources. The governor’s budget also expands many of his signature programs such as More at Four and Learn and Earn.

Specific Highlights include:

Overall

• Increases spending by 4.2%
• Increases “sin” taxes on alcohol and cigarettes
• Adds over 700 new positions – mostly in mental health
• Recommends $742 million in construction projects
• Increases the state’s rainy day fund
• Provides for almost $400 million in budget reductions
• Proposes salary increases for teachers of 7% and state employees 1.5% plus one-time bonus and one week additional vacation

Education

• Fully funds K-12 enrollment increases
• Continues class size reductions in grades k-3
• Increases funding for transportation fuel
• Adds funding for More at Four and Learn and Earn
• Full funds Community College enrollment increase

Transportation

• Reduces the Highway Trust Fund transfer ($172 million) to the general fund by $25 million and earmarks these funds for toll project gap funding and urban loop projects
• Reduces funding for DOT administration by $12 million

Natural and Economic Resources

• Promotes water quality BMPs with 50/50 cost share to soil and water districts and counties
• Provides funding to clean up 100 orphan hazardous waste sites
• Develops groundwater database system
• Establishes river basin water supply planning and drought response unit
• Funds 20% state match for federal wastewater and drinking water grant match requirements
• Funds drought reserve to assist local government in leak detection, develop conservation programs, inventory interconnections, and supplement emergency infrastructure

General Government

• Supports energy efficiency projects in state facilities
• Develops GIS layers for water resources and transportation systems and enhances state GIS administration
• Continues floodplain mapping program

Capital

• $280.5 million for 5 UNC projects
• $109 million for Green Square Project
• $25.7 million to match federal and local funds for water resource and sewer development projects
• $40.4 million for new capital Area Visitors Center and parking deck in downtown Raleigh
• 7.5 million for berth construction at Wilmington Port and Morehead City Port

As well as other university, prison and state agency facilities (including the NC Zoo)