February 9, 2001

See detailed tables of state revenues:
January revenues brighten some but not enough

Easley declares 
a budget emergency
Gov. Mike Easley declared a budget emergency Thursday and ordered cuts in state spending to cover a budget shortfall estimated at up to $740 million. 

Easley said the steps he was taking would allow the state to end the year with a balanced budget, even under a "worst case scenario." He said his order will tap financial resources worth up to $600 million, mainly by suspending contributions to the state employees'  retirement fund; suspending reimbursements to local governments of taxes held by the state; and impounding cash balances in accounts, including information technology balances and the FEMA reimbursement fund.

The cuts include $95 million earmarked for return to city and county governments to reimburse them for repeal of the inventory tax; $151 million in scheduled contributions to employee retirement funds; $95 million in federal funds, including Medicaid payments; and $157 million from the state's Rainy Day Fund. Easley said there was $165 million left in the state fund to aid victims of Hurricane Floyd, but he only set aside $40 million that officials said they expected to return to the state. Of the overall cuts, he said "I'm not saying we're going to use all this money, but we will have it if needed to balance the budget."

The action came a day after the governor met with Democratic and Republican legislative leaders at the Mansion to hear their input and gauge their reactions to a two-page list of possible cuts the governor had compiled.

The governor's order declaring a state of emergency involves three main actions:

Reviewing and limiting department budget allocations on a monthly rather than quarterly basis.

Establishing an interest-bearing escrow account in the Office of the State Controller in which funds will be aggregated from several sources to be available in June if needed to address the shortfall. The escrow account will be funded from: suspension of retirement contributions to the retirement fund; suspension of local government reimbursement; and cash balances in accounts including information technology balances and the FEMA reimbursement fund.

Authorizing other potential actions including access to the Employment Security Commission excess funds if needed.

Including about $400 million in budget cuts Easley ordered last month, the total budget adjustments he has now made total nearly $1 billion (see chart).

“The action we are taking today gives us certain and predictable security to deal with this problem with the maximum flexibility possible,” said Easley. “This will balance the budget even given a worst-case scenario. We have a responsibility to the people of North Carolina to get this under control and move forward. At this time, the shortfall for the current fiscal year is simply a projection. We will not have an accurate picture of the actual situation until mid-to-late June. At that time, we will make decisions on what specific funds should be used. Any monies that are not needed to address the shortfall will be expended as planned.”

In January, Easley directed agency heads to freeze hiring and purchases and limit travel except in the areas of public health, public safety and education. Agencies were instructed to revert the average of their past five year reversions plus an additional two percent. Through the actions already implemented, state agencies have already cut their budgets an average of four to five percent.

Easley also put together an efficiency study group comprised of deputy secretaries in his cabinet agencies and chaired by Department of Administration Secretary Gwynn Swinson. The group will review agency procedures to look for short-term cost savings to address the projected budget shortfall.

North Carolina isn't alone in its budget pickle because many other states have seen their finances deteriorate rapidly in recent months. Fifteen states, mainly in the South and Midwest that rely heavily on sales and manufacturing taxes, have seen revenue declines of up to 15 percent at the same time that their Medicaid costs are rising sharply.

(North Carolina lost 27,800 manufacturing jobs last year, the most of any state. Over the last five years the state has lost  57,000 manufacturing jobs, according to the Bureau of Labor Statistics. The  decline can be traced to foreign competition in textile as well as the economic slowdown in the computer and electronics industries.)

In South Carolina, tax revenues have fallen $513 million short of projections. Missouri's budget is $307 million short, Iowa has a $140 million gap, and Kansas is weighing a series of spending cuts. Michigan Gov. John Engler this week told state agencies to cut half a percent out of their budgets, the New York Times reported.

So far, the federal government and states that depend on income and property taxes are avoiding revenue shortfalls.

North Carolina's overall economy remains healthy. The state added about 26,00 jobs last year, mostly in finance, services, transportation and public utilities.

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Text of Gov. Easley's Feb. 6 budget memo to department heads and chief budget officers:

In my memorandum of Jan. 23, 2001, I advised you of a budget deficit in excess of $500 million confronting the state for the current fiscal year and requested your cooperation in implementing spending restrictions that would help balance this deficit. At that time, I advised you that this deficit would be revisited pending revenue collections and new economic data available through Jan. 31, 2001.

In meetings yesterday, last night and today I have been briefed by the Office of State Budget, Planning and Management regarding this year information and am advised that the deficit for the 2000-2001 fiscal year is currently projected to be between $605.9 million and $740.8 million. The actual shortfall will depend in large part on the April collections with the final number being confirmed on June 30. The increase in this budget deficit is attributed to a more rapid slowing of the economy than expected, particularly in the manufacturing sector. Up to now, I have been optimistic that the deficit could be managed within spending controls implemented in my previous memorandum. However, it is now becoming clear that further measures must be taken, some of which may require the issuance of an emergency declaration in order to meet the balanced budget requirement prescribed in Article iii, Section 5(3) of the North Carolina Constitution.

As we are now well into the eighth month of the fiscal year, and significant spending restrictions have already been put into place, the options for managing this deficit are decreasing. I will be meeting at length in the next 24 hours with OBSPM to discuss what action should be taken to maintain a balanced budget. Once a course of action has been determined, I will again contact you and advise the next steps necessary to manage this issue. I am confident that this matter will be resolved with your cooperation and excellent management skills.

I want to again express my appreciation to you and your staff for the spirit of cooperation demonstrated as you have implemented these spending restrictions. Together we will take the necessary steps to move North Carolina through this temporary economic problem.