February 16, 2001

Budget writers begin work with directive to ax some programs
With Appropriations committees now in place in the House and Senate, legislators next week will begin the tough job of writing a state budget amid lean financial times. Economists say state revenue growth will be stagnant or up just fractionally over the coming two years, which means legislators probably will have to cut spending on some existing programs.

To that end, House and Senate leaders circulated a memo to budget subcommittee chairs suggesting that they adopt a "modified zero-based budgeting approach" when examining spending on current programs. In other words, they are asked to identify all existing state programs that can be reduced significantly or even eliminated. All existing programs will have to justify their existence. Specifically, the memo suggests that the Appropriations subcommittee chairs eyeball spending in 17 areas. Here's the memo:

"The current year budget shortfall is anticipated to have a significant negative impact on availability in the upcoming fiscal biennium. Previous budget briefings have covered expected funding requirements in the areas of education, Medicaid, debt service, the State Health Plan, and other priorities. Given the magnitude of these items relative to projected revenues, the appropriations subcommittees are asked to implement a new approach to the routine continuation or base budget review.

"The modified zero-based budget approach assumes the 'zeroing out' of certain programs, line items and funds from the continuation/base budget to permit the subcommittees to hear information from state agencies and nonprofits justifying the continuation of expenditures for these purposes.

"As a starting point, the following are subject to this modified zero-based budgeting approach for the 2001-03 biennium. Subcommittees should use the authorized budget as of Dec. 31, 2000:

1. New programs or items added to the continuation budget since the 1996 session (including appropriations for the 1996-97 fiscal year) ; 2. Direct appropriations and grants to nonprofit organizations ; 3. Contracted personal services; 4. Miscellaneous contractual services; 5. Rental/lease of equipment; 6. Travel and other employee expense; 7. Cellular phone services; 8. Furniture and equipment replacement schedules; 9. Discretionary grants ; 10. Directed grants ; 11. Loans ; 12. Other aids and grants ; 13. Special fund cash balances ; 14. Positions vacant for 6 months or more as of Jan. 23, the date of Gov. Easley's letter to department heads and fiscal officers regarding the current year budget deficit. (Note: This excludes public school teachers and community college faculty, critical law enforcement and public safety positions, and positions responsible for the custody and care of persons for whom the state is responsible); 15. Budget flexibility, UNC System ; 16. Performance budgeting program, Community College System ; 17. Any other programs and expenditures identified by the subcommittees as appropriate for review using a zero-based budget approach.

"Subcommittees should also review:
1. The elements of various allocation formulas to determine if changes can be implemented to improve the method and achieve cost savings ; 2. Agency fees to determine if any increases are appropriate and can be used to off-set operating appropriations ; 3. Recommendations from GPAC and other audits available."

Meanwhile, state Treasurer Richard Moore (left) rushed before the cameras to reassure everyone that, despite the budget emergency declared by Gov. Mike Easley, North Carolina remains financially healthy and in the good graces of all the national credit rating agencies. He issued an extensive statement, which we reprint below:
 
"There has been a lot of discussion about how (Gov. Easley's announcement he was declaring a budget emergency) would affect our state's AAA rating. Since the announcement, our office has consulted with all three rating agencies, Standard and Poor's, Fitch, and Moody's. They all agree, that not only were the actions taken by the governor ... appropriate considering the circumstances, it is exactly the type of action that they expect a top-rated state like North Carolina to take. In my opinion, the plan as presented by the governor does insure maximum flexibility while also guaranteeing that our books will be balanced at the end of this fiscal year. Bob Kurtter with Moody's told us this morning that, "Gov. Easley's actions reflect the reason North Carolina is rated AAA -- quick recognition, honest and realistic appraisal, and a conservative plan of action including contingencies should the problem worsen."

"As to the escrowing of the state's upcoming retirement contributions, we want to assure our retirees around the state that the placing of these funds in escrow will not affect the payment of their monthly retirement checks. Let me repeat -- this will not affect the payment of their monthly retirement checks. Our office and many agencies throughout state government have already received numerous inquiries on this issue. While we understand our retirees' concerns, it is important to point out that the governor's actions yesterday have no practical effect on the system yet. The employer contribution funds will be escrowed so that they can be used if needed, and only if needed, to balance our budget. We are particularly appreciative and comforted by the fact that no monies will be diverted without consulting our office as to the actuarial soundness of our retirement system. In his executive order yesterday, the governor stated, "The office of the state controller, as advised by the state budget officer, is directed to receive the employer portion of retirement contributions for all state-funded retirement systems and to escrow such funds in a special reserve as established by OBSPM. Before taking such action, OBSPM is directed to confirm with the state treasurer that such action will not impair the actuarial integrity of the state retirement system. Return of such receipts shall be made to the retirement system, if possible, after determination that such funds are not necessary to address the deficit." We have no objection to the escrowing of the moneys, but obviously, cannot evaluate the permanent impact until an actual diversion is proposed.

"We are particularly comforted by the fact that the governor has made it known to our office and to the associations that represent the retirement community in North Carolina that he is not in favor of a reduction in the rate of the employer contribution for the state's upcoming biennium (2001-03) budget. This is important because any long-term reduction of employer contributions to the retirement system would, in all likelihood, adversely impact the actuarial soundness of what is currently one of the best retirement systems in the United States.

"In conclusion, we want to reiterate our support of Gov. Easley as he attempts to carry our the difficult constitutional duty of balancing our budget in the most prudent and fiscally responsible way."