State of North Carolina

Budget and Legislative Update

Office of State Budget and Management Annual Conference October 17, 2007 1

Presentation Topics

• FY 2006-07 Review – Employment – Economy/Revenue – Appropriations/Closeout • FY 2007-08 Summary – Economic Assumptions – Substantive Tax Changes – Appropriations – Statewide Studies – Other Legislation 2

Employment Update

• Job Growth remains higher than national averages – In FY 2007, State had net gain of 80,500 jobs (+2%) compared with National average and median growth of 1.4% and 1.3% – Unemployment rate ticked up slightly in July 2007 to 5% from 4.8% • High-end service sectors lead the way adding 46,000 jobs over year (Finance, Business, Health Services, Education) – Construction (+9,000), trade (+10,200), and leisure and hospitality (+11,100) showed gains as well – Manufacturing is stabilizing; small declines continue (1.4%) • Total nonfarm employment expected to grow by an average of 1.3% and 1.6% over next two years • Housing starting to show signs of slowing 3

State Update: 2006-07 Results

Revenue Collections

• GF tax revenue collections grew by 9.9% (2.4% growth budgeted) • Net changes include: – Individual – Corporate +11.8% (budgeted 2.5%) +20.5% (budgeted 12.6% decline) – Sales & Use + 2.1% (budgeted 2.8%) • Total revenue surplus for year = $1.343 billion – Approximately 7.4% over forecast 4

State Update: 2006-07 Results

Appropriations/Closeout

• Budget administration was “business as usual” for year (no major program shortfalls, weather-related emergencies, etc.) • Total year-end fund balance (cash basis) totaled $2.3 billion.

– Unreserved fund balance reached $1.221 billion up from $749 million on 6/30/06 – Reserved fund balance totaled $1.082 billion. Major components: • Rainy Day Fund ($787 million) • Repair and Renovation Account ($145 million) • Disaster Relief Reserve ($114 million) 5

2007-08 Budget Update

Substantive Tax/Revenue Changes

– State Sales Tax set at 4.5% (was due to decline to 4.25%) (Gain of $258.4 and $285.9 million in FY 2008 and 2009) – State and Local Swap of Medicaid and Tax Revenues phased in through FY 2009-10 (Cost of $60.8 million and $91.9 million in FY 2008 and 2009) – Top Income Tax Rate set at 7.75% (down from 8%) (Cost of $45.8 and $93.7 million in FY 2008 and 2009) – Earned Income Tax Credit for low income individuals and families (Cost of $48.3 million in FY 2009) 6

2007-08 Budget Update

• Base Revenue Forecast is on conservative side of “most likely”

– Individual 4.9% (grew 11.8% in 2006-07) – Sales & Use 2.9% (grew 2.1% in 2006-07) – Corporate (4.0%) (grew 20.5% in 2006-07)

• General Fund Tax and Non-Tax Revenues conservatively budgeted to grow at only 1.7%

7

Authorized Budget Summary FY 2007-08 (as adjusted for actual 2007 collections)

Unappropriated Balance as of 6/30/07 Overcollections FY 2006-07 Reversions FY 2006-07 Earmark Savings Reserve Account Earmark Repairs and Renovations Account

Beginning Unreserved Credit Balance 7/01/07

Tax Revenues Existing Tax Structure Non-tax/Highway Trust Fund Adjustments (Tax Changes/Transfers)

Total Availability Recommended Appropriations Funds Unobligated (left on table)

8 ($ millions) $ 0 1,343 198 -175 -145

1,221

18,643 875 238

20,947 20,658 $ 319

2007-08 Appropriations

• Major changes from 2006-07 Millions – Education Enrollment $218 – Disadvantaged/At Risk/Scholarships 148 – Medicaid/Mental Health 327 – Teachers/Employee Compensation 526 – Retirement/Health Plan 191 – Capital Improvements 231 9

Debt Update

• The State’s outstanding debt on 6/30/07 totaled approximately $6.96 billion GO Debt • General Fund • Highway Fund-Supported Other Millions $ 5,197 702 Special Indebtedness • Tax-Supported 874 • Trust Fund –Supported 99 86 Total $ 6,958 10

Debt Update

• 2007 GA authorized $669 million in Special Indebtedness – Projects for Higher Ed ($481 million), Land ($120 million), Correction ($33 million) and other – Issuance over 3 years; within Debt Affordability guidelines ($384 million/yr for 5 years) • All remaining General Obligation authorizations to be issued in 2007 • Authorized but unissued Special Indebtedness totals $1.83 billion – scheduled to be issued over 3 years 11

Retirement System

• Current market value of approximately $75 billion • 11 th largest public system • 1-year and 5-year returns of 14.8% and 10.3% (on June 30, 2007) • Funding ratio is 108% • Conservative interest rate assumptions of 7.5% • ORBiT (integrated online account transaction system) final phase launched on October 1, 2007 12

Statewide Studies

• Section 6.4: Budget Realignment - Allows OSBM to make transfers among programs to correctly align positions and operating costs - Report to Governmental Operations • Section 6.7: BEACON Staffing Analysis - Requires OSBM to conduct annual reviews of HR/Payroll staffing by January 1 - Also requires staffing analysis of business functions (fiscal, budget and procurement) to be completed by April 30, 2008 - Report goes to Appropriations and IT Oversight Committees 13

Statewide Studies

• Section 6.18: Use of Lapsed Salary - Requires OSBM to analyze the use of lapsed salary for the past five years - Report to Governmental Operations by April 1, 2008 • Section 23.3: Workers’ Compensation Program - Requires OSBM to do comprehensive study of program - Report to Governmental Operations by March 1, 2008 14

Other Legislation

• House Bill 1401: Internal Audit Act - Requires agencies to establish internal auditing program that 1) implements system of internal controls that minimizes fraud and abuse; 2) ensures programs and operations comply with laws and regulations; 3) reviews effectiveness of operations and service delivery; and 4) periodically audits major systems - Applies to agencies with budget greater than $10,000,000 or more than 100 full-time equivalent employees - Requires each agency to appoint a Director of Internal Auditing who shall report directly to the agency head 15

Other Legislation

• House Bill 1401: Internal Audit Act (continued) - Establishes the Council of Internal Auditing which includes the State Controller (chair), State Budget Director, Secretary of Administration, Attorney General, Secretary of Revenue and State Auditor (nonvoting) - Council responsible for preparing uniform guidelines and developing training manuals; recommending the number of auditors for each agency; administering a peer review system; and maintaining a central database for audit plans - Council is staffed by OSBM - If necessary, Council may conduct hearings, issue subpoenas and review effectiveness of any audit unit 16

Other Legislation

• House Bill 1551: Internal Control Act - Purpose is to ensure a strong and effective system of internal controls in state government - State Controller, in consultation with State Auditor, shall establish comprehensive standards and policies - Management of each agency is responsible for maintaining a proper system within their agency and may be subject to submitting periodic reports to State Controller - State Controller, in consultation with State Auditor, shall establish mechanism to allow for reporting and investigation of violations - Any willful or continued failure of an employee to adhere to these requirements may result in dismissal 17

Other Legislation

• Senate Bill 1132: Establish Program Evaluation Division of the General Assembly Division’s duties include examining program efficiency and effectiveness; developing quantitative indicators and unit cost measures; making unannounced visits to agency to evaluate program; and providing reports on any savings achieved by implementation of division’s recommendations - Establishes the Joint Legislative Program Evaluation Oversight Committee (9 Senate and 9 House members) Committee’s powers and duties include reviewing evaluation requests; establishing an annual work plan; receiving reports; and recommending changes to the General Assembly 18