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State of North Carolina

Budget and Legislative Update

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

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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

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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

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State Update: 2006-07 Results

Revenue Collections• GF tax revenue collections grew by 9.9% (2.4%

growth budgeted)• Net changes include:

– Individual +11.8% (budgeted 2.5%)– Corporate +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

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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)

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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)

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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%

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

($ millions)Unappropriated Balance as of 6/30/07 $ 0Overcollections FY 2006-07 1,343Reversions FY 2006-07 198Earmark Savings Reserve Account -175Earmark Repairs and Renovations Account -145Beginning Unreserved Credit Balance 7/01/07 1,221

Tax Revenues Existing Tax Structure 18,643Non-tax/Highway Trust Fund 875Adjustments (Tax Changes/Transfers) 238Total Availability 20,947

Recommended Appropriations 20,658

Funds Unobligated (left on table) $ 319

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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

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Debt Update

• The State’s outstanding debt on 6/30/07 totaled approximately $6.96 billion GO Debt

Millions• General Fund $ 5,197• Highway Fund-Supported 702

Special Indebtedness• Tax-Supported 874• Trust Fund –Supported 99

Other 86

Total $ 6,958

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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

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Retirement System

• Current market value of approximately $75 billion

• 11th 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

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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

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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

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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

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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

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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

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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