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Joint | February 12, 2015 | Committee Room | Joint Appropriations

Full MP3 Audio File

Before we get going I want to introduce our pages who are with us today. From the Senate, we have Brianna Yoho, from Swansboro, sponsored by Senator Brown. From the House, we have James Fury III, Wake County, sponsored by Representative Pendleton. Sarah Lane Cochran from Forsythe Counties, sponsored by Representative Hanes. Denisha Harris from Wake County, sponsored by Representative Rodney Moore. Lydia Noonan from Wilson County, sponsored by Representative Martin. Amanda Padden from Orange County, sponsored by Representative Meyer. Calia Ramos from Cumberland County, sponsored by Representative Glazier. Carrie Rough from Rutherford County, sponsored by Representative Hager, Ragen Waits from Wake County, also sponsored by Representative Pendleton. Our sergeants at arms with us today, from the House Bay Young, Reggie Sills, Marvin Lee, Charles Godwin, Warren Hawkins, Bill Morris. Our sergeants at arms from the Senate, Steve Wilson, Marcus Kitts, Giles Jeffery, Terry Barnhart, Donna Blake, Dale Hough, and Larry Hancock. So don't anybody get out of line because we have plenty of sergeants at arms to take care of you. What we will do, we will have two presentations this morning and I appreciate everyone being here at this joint meeting with the House and the Senate. We'll have two presentations this morning, the first presentation will be by Dr. Barry Boardman on the 2015/2017 consensus revenue forecast. We will follow that with a presentation by Karen Hammonds-Blanks from Fiscal Research Division, Budget Development Team on the budget outlook, some of the budget pressures. What we will do is have both of these presentations, one after the other, and then we will, in the time remaining, we will open it up to questions, not statements, but questions at that time. So with that, if there's no further business from anyone, we welcome Dr. Boardman for his presentation. [SPEAKER CHANGES] Thank you, Chairman Dollar, Barry Boardman with Fiscal Research. I'd like to spend the next 20-25 minutes or so going over with you the 2015-2017 consensus revenue. Members should have all received the memo providing a little more detail on that forecast. They should have received that Tuesday morning and I'd like to provide an overview for you, give some of our thoughts of what inform that forecast. Before I get into the actual 15/17 forecast I want to talk a little bit about current revenues and then we'll talk about the economics, conditions, we take in forming the consensus forecast and some of the key assumptions. I first want to make sure that members are aware, when we talk about the General Fund revenue, what exactly are we talking about? What's the pie chart? What's those sources? We have over 22 sources of revenue that feed into the General Fund but we really have three key revenue sources that make up about 91%, starting with personal income tax which ranges around 50-51%, sales tax around 29-30% and then business taxes, which include your corporate franchise and also includes your insurance gross premiums tax, which takes you up to around 91% of your total General Fund revenue. Some of the other revenue sources are your excise taxes on alcohol and tobacco, and then we have a lot of other small sources that feed into the General Fund. So far, through 14/15, and this is collections through January, we're $215M below the $11.8B target. When I say target, what we do, we take the revenue forecast for 14/15 and then begin to spread that out over all 12 months of the fiscal year. Each month has different collection trend, and we're not quite done yet. There are also some anomalies with

and timing and those things that we also go in and try to tweak until we get an accurate reflection, or relatively accurate reflection, of month to month what are our expectations based on the revenue forecast for the full fiscal year. That is, when we refer to a revenue target, what we're referring to. With respect to that target, we're running a little bit behind, $215M. The main reason is personal income. Personal income tax is lagging behind. The fundamentals behind that are simply the forecasts envision 4.5% growth in personal income, mostly driven by wage growth, that hasn't materialized. Our sales taxes are doing quite well, they're actually 2.3% above our expectations through January, as well as corporate and franchise tax, which are both running above expectations as well. So again, the real culprit when we think about what the $250M shortfall or coming short of target, is it really is just our personal income growth has kind of lagged behind our expectations when we made this forecast back in May of last year. That's kind of the backdrop, when we sat down as forecaster, what we were looking at and dealing with. So now I want to move forward and talk about the consensus forecast. Before I get into the meat of it, I want to give you an idea of what this process is like. The consensus forecast is a non-statutory informal process. It's actually been in place since the 80's and has worked quite well for the state. The way it works is OSBM and their forecasters get together to create their own independent forecast while we at Fiscal Research do the same thing. Then several weeks before, or even a month or so before the governor presents his/her budget, we begin to meet and I try to iron out the differences in our forecasts. That's what has led us to this point. We've been working on this for several weeks now, trying to work out some key differences in our forecasts, and we finally reached that point earlier this week. In May, part of the process is certainly in May after key April collections, and I'll have more to say about that in a little bit, but after key April collections that may come in there is almost always a reason to revisit the forecast. So that, again, is at the call of the legislature or the governor, obviously Fiscal Research and OSBM would be advising the executive and legislative branch as to what's happening in April and make that determination. In even numbered years we come back in, this is the second year of the biennium, we'll come back in and have the opportunity to revise the second year forecast. That usually occurs in May, right after, again, April collections have come in. So that's the process. So where did we land this time with the consensus forecast? For 2014/2015, we're anticipating $20.7B in revenue. That represents 2.9% growth over last year, or $586M over last year's collections. Going forward into the biennium, we expect 2015/2016 to be $680M over our projections for 2014/2015, that's 3.3% growth. Then 2016/2017 is $890M, or approximately $890M additional revenue for 2016/2017, representing 4.1% growth. I will say that what you're looking at is a cautious forecast. The growth ranges, and I think this picture kind of helps show you, can vary considerably. In fact, if I were to chart the business cycle here, you would see how revenues are dependent on the business cycle. In strong expansionary periods, our revenues expand rapidly. In downturns, our revenues turn down as well. When you focus on the forecast, these are the last three bars at the end, you see that we've taken a fairly cautious approach with respect to where we are. There are two key reasons to that and I want to spend a little bit of time talking about that. One is our economic outlook for the biennium and what that says, and then some of that has to do with what we're working with in terms of a new tax code, a new tax regime, and the reasons for caution there.

So that's where I want to move next. The economic outlook is actually a positive one considering where I've stood up here the last couple of years and talked about our struggles in getting started and gaining momentum and can the economy gain traction. Well I can say that it has and I can say that we are gaining momentum. It's still at a modest pace but it is a far steadier pace than we have seen and we project that that continues throughout the biennium. We're not expecting any robust take off in the economy. There's no reason to expect that but we do expect steady gains to continue. So what does that mean for employment. That is one of the key drivers of revenues quite obviously and we think that that means that employment growth is going to hover around 2 percent and actually possibly above 2 percent through out the next biennium. That's strong employment growth that will add 85 to 95 thousand jobs a year. Possibly even up to 100 thousand jobs per year. This in non farm total employment which is a narrow measure of employment. That is good strong growth for the state to add that kind of growth. That's what is part of the forecast. We do think that eventually this growth in employment will offer up pressure on wages. We sent through a period, the Great Depression or recession. It felt like a depression. A great recession where we actually saw our employment drop by more than 6 percent, almost 6 1/2 percent. Well that's three times the employment drop on average than we've experienced since the depression. So it was a big loss in employment and with that slack in employment there hasn't been much pressure on wages to rise. We think now with the employment gains that we are experiencing. The forecast for those continued gains that there eventually there will be some upper pressure on wages as we move through the biennium and that again is again what's part of our forecast. And then finally on the sell side households took a real beating during the recession. The balance sheets were really thrown out of whack as home equities for some were wiped out. They found themselves actually under water, loss of jobs and so forth. So household balance sheets were really out of whack. Those are really improving, in fact you can see that fact as consumers are willing to take on debt again and you also see that in retail sales that are coming out. Then I'd also think that you are going to see households feel a little more confident about the economy as employment numbers pick up. So all of those things kind of feed into a better sales picture than we've really forecast over the last 4 or 5 years. The only point of caution right now is that as you are aware is there are still a lot of global uncertainties. There is weakness in the global economy. There is always instability in some of our middle eastern areas of the world. Those are always worthy of tracking and keeping a close eye on but right now from a national perspective the national economy seems to have finally gotten itself on solid footing as has the states. So, to the consensus forecast I will say, we always take a cautious approach to the forecast because it is for budgeting purposes. So we want to be cautious. It's important to take that approach. We had to add extra caution this year because enacted in 2013 were over 2 billion dollars in revenue changes. Now let me explain that it's a big number. What that is is it's a lot of small moving parts, some big. It's not the net impact of those changes but it's the fact that we've moved for example almost 300 million dollars out of franchise tax on electricity and put that into the sales tax base. Repealed the pipe natural gas and put that into the sales tax base. Repealed deductions, exemptions we've changed tax rates. We changed tax bases and all of that summed to over 2 billion in revenue changes and behind each of those are fiscal estimates and some uncertainty obviously any time you are talking an estimate. Just knowing that that's part of the landscape we decided we had to take an additional step back or be a little more cautious because of that. That's part of what's embedded in this forecast. So we looked at 14/15 and we had to decide where are we going to land. Where does 14/15 put us at the end of the year.

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Confidence household balance sheets and so forth. Again, overall the approach has been a cautious approach. I think it’s because of some of the developing impacts and understanding those in respect to tax law changes that were enacted in '13. I am going to conclude at this time and I am going to turn it over to Karen and let her talk the budget outlook. I just want to say again, that for the first seven months we're slightly below target. We're at forecasting a 1.3% shortfall for 271 for this fiscal year. To put that in context, the long-range forecast error, and this goes back into the 80s, has been 2.5%. Plus or minus 2.5%. Any time we as forecasters feel that we can land within that pus or minus 2% range, we feel like we have done a pretty good job forecasting. A 21+ billion dollar revenue with over 22 sources of revenue. So 1.3% if that comes to fruition, we'll have served us well. It's a pretty good forecast. Again, key assumption a lot rides on April. It's always the case. Maybe a little bit more so, this year. Again, I think that the stable conditions allowed us to be a little bit more aggressive in our forecast but still the overall theme of this forecast is one of cautiousness and being prudent in our forecast. At this point, I am going to turn it over to Karen and let her provide a... [Speaker Changes] Good morning. I am Karen Hammonds-Blanks and I am going to be providing a relatively brief overview of the budget and then we will talk a little more about what the budget outlook is for '15 for this particular session. But over the biennium. If you would just turn to your next page, actually you can skip the next page. The next page is just really...let's see if I can figure out how to work this. That may not be the way. Okay, there we go. It's just the presentation overview and as I've mentioned we are going to talk about the current year budget and what happened in the last two sessions. Then we are going to look at the outlook and we are going to talk about the budget in terms of the base budget. Explain a little bit about what that is. And what the budget pressures are that fiscal research is aware of at this point. As many of you will be as well. As many of you may recall, because you were here. In 2013 our session started off with our fund balance relatively healthy and the collective goal was to look at revenue and to look at your taxes and to do some sort of reform. That really was the central focus of the 2013 session. From the appropriations of the budget side of things, everything was revolving around a target that those, the finance committees in both the House and Senate was working towards. In the end as you can see from your handout and from the overhead, major tax changes were implemented. Tax Simplification and the Reduction Act, House Bill 998 passed. The first year, '13-'14 the net projected reduction was only about 87 million but in the second year, the current year that we are in, it was almost 438 million dollars. Barry's talked about that so I am going to move on and focus on the budget side of it. The budget was healthy at the time and still is of course. Even though we are experiencing some of the revenue issues that Barry mentioned earlier. But at that time you were able to make a sizable transfer into the Savings Reserve, 232 million dollars. That brought the Savings Reserve up to 651 million dollars. That is the current balance, today. By the way that balance has increased significantly since 2009 and at the time that balance was 150 million dollars. Several infusions have been made into the Savings Reserve account. In addition to the Savings Reserve, 150 million dollars was appropriated for repairs and renovations. One of the other big areas or big significant actions that was taken was to address the Medicaid needs. As many of you know Medicaid has become a perennial problem for this state. Although things have improved significantly…

Since 2013 and especially since the great recession, during the 2013 session, there was a projected medicaid shortfall of almost 500 million dollars. The impact of that shortfall was to take from the fund balance over three hundred million dollars. The other portion that covered that shortfall of medicaid was take from within the Department of Health and Human Services budget. In the second year, an additional 434 million dollars was appropriated. That was for the 13/14 year. That was not an unusual amount of money, but it was significant in that it was beginning to approach identifying areas where there was difficulty in budgeting, identifying how much money was needed for medicaid and then appropriating a certain amount for that. As you will see in the next slide, it did not quite cover it all but it made significant progress in that direction. Fast forward to last session, things changed substantially. Prior to the General Assembly coming into session, we were made aware of under collections. Our collections were lagging. That was to the tune of 453 million dollars. So in reality, the fiscal year 13/14 budget was running in the red on the revenue side. Fortunately, the executive branch through Governor McCrory’s administration was able to cut most of that by instituting significant budget and spending constraints on agencies. As a result of that, what was going on in the economy and the effect on our revenue (as well as some other changes that had taken place), the consensus forecast had to be revised. It always is, but it was significantly revised downward almost 200 million dollars. That placed a bit of a pressure on the General Assembly on how to balance the budget and meet the needs. Clearly one of the significant issues that had arisen was pay for teachers. As you can see from this slide, for the first time since 2012, a significant pay increase was provided. Perhaps not as significant as previous years, but for teachers in particular, the new pay schedule was implemented and the cost of that was about 283 million dollars. The rest of that increase was for state employees and to pay for some of the pay plans that are out there that we will talk about in a minute (in particular, highway patrol magistrates have a separate pay plan as well). The three key areas or highlights for that particular session were addressing medicaid, even though the amount of money was not as significant in terms of putting more in the budget, there was a 186 million reserve set aside. That has not been touched. As far as we can see right now, absent anything happening on the spending side, that money should be available and considered as part of the fund balance. I will say that there is some risk of that 186 million dollars needing to be used for the current fiscal year in case those budget measures that the McCrory administration is considering do not totally cover the revenue shortfall. Okay, so, now we get to the current budget. The current budget that we are in right now is 21 billion dollars. It should come as no surprise to members that the lion’s share of the budget is dedicated to education. Primarily, that would be public schools. The second area is Health and Human Services at about 24%. The interesting thing in looking back at the last 10-15 years, these percentages have not changed substantially over time from a sub committee perspective. As you can see on the next slide, this is just another way to look at it as terms of where the money goes and where the appropriations are. As you can see from this slide, we have identified what the key budget drivers. While the percentages on a subcommittee basis have not changed very much over the last 10-15 years, that is not true when you look at the key budget drivers. Public Schools still get the lion’s share of the budget appropriation at 38%. Community colleges and universities get 17%. Medicaid is 17%.

All the other areas have grown slowly over time, but not as significantly as Medicaid. In looking back at Medicaid since 2001, that percentage has grown pretty consistently; there have been some changes in policies, some bailout by the Federal Government during the Great Recession, but overall, when you adjust for those variables, the one area of state government that continues to grow significantly is the Medicaid budget. So, that's sort of where we were in 2013 and 14, but how does North Carolina's budget today compare to other states? For the first time in a while, North Carolina is not included in any of those states that are counted in the slides in front of you. There are 12 states that currently predict budget shortfalls according to the National Conference of State Legislatures. Those states would include Maryland, Virginia, although Virginia has closed their gap, Massachusetts. Most of those shortfalls are the result of overspending in areas, and revenue shortfalls. In addition to those states, we have 23 states that predict some areas of overspending; again, North Carolina, for the first time in a while, is not included in any of those numbers. 14 states have indicated that they are overspending in Medicaid, I believe Virginia and Maryland were counted among those. Corrections: nine states, K through 12, public schools, eight states, and then social services, four states. These numbers are significantly better than what we've seen over the last 2 or 3 years, and these updates provided by NCSL, but again, it's the first time North Carolina isn't included. At the time this survey was done last fall, it was too soon for North Carolina to say that we had a revenue shortfall; the trends were just not there at the time and so we're not counted in those numbers. Again, what are the top issues that other states are facing? North Carolina isn't really that different than most states. Most states continue to struggle with Medicaid, and how to curtail spending. Some are obviously grappling with how to provide coverage, but for the most part, most of them are still seeing the trend that has been steady for the last decade, and that is the growth in spending for Medicaid and health care. 21 states are dealing with education funding, state tax policy and transportation. Although we don't focus as heavily on transportation, because it has its own funding source, of course you all are currently involved in conversations about what to do about North Carolina's transportation needs as well. So, what do we see for the budget outlook for the 2015 session in particular? What we do in fiscal research is throughout the year, when you are not in session, is we monitor the implementation of the budget, and we monitor what issues, what things are coming up, what's going on, and we identify, we continuously identify what the pressures are in anticipation of your coming into session and having to deal with them. So this represents the collective wisdom of your fiscal research staff, for the most part. What I'm going to present to you will not be exhaustive. It's really the high level and most significant areas that we identify for your consideration. It is by no means an indication of something you will have to do, but it's areas that we know that you will be confronted with this session. When we put together a budget outlook, the first thing we do is we look at the base budget. In previous years, that was referred to as the continuation budget, but in the 2014 session, the general assembly changed that definition to clarify, specifically what was to be counted as a base, a beginning point in building the budget. What it does include, and what we have not yet received but we're expecting any day now, the base budget from the McCrory administration, is the number, the amount of money needed to continue funding programs at the current level. Not to reflect any inflationary increases, or the things that have traditionally been included in the budget, but just a clean base budget. It does, the law currently as written does allow the executive branch to annualize partially funded programs, and to fund federal payroll tax changes, but very little else, so we would expect the budget to be pretty straightforward in terms of the base.

Speaker changes: it should on medicate those are things that will have for public schools seen in the past but it wont been include?? we dd those res we have some commitment funding ?? planning to promise for teacher paid plan ?? so we consider that is budget commitment we also know that medicate growth for some addition funds required for medicate how much ?? as well as rooms ?? in the last yer we consider in the budget those res re not included in the budget that we are dealing with and some of those res in fairly we have to address some way or the other ?? how the consistent revenue for the ??21.4 in the first and 22.3 in the described base don very preliminary numbers ?? and based on ?? could see what we except remaining ?? what we see in this budget so what 550 pounds in the year in the first billion ?? show these numbers there could be some differences in the base budget ?? typically so is spend time looking fund balance how much reversion ?? because we have issues we have outstanding ?? will there be any reversions over and above might be necessary ?? we don't have any components in turns of presenting number so budget pressures ?? the final outcome is on the currently short fall on the revenue ?? it will help the governor and general assembly and put into ?? budget together in terms meeting ?? I'll be talking to you bot medicate growth ?? probably health plans for teachers ?? few other funding commitment s her re the estimated for the preliminarily estimates for the budgets pressure and let me first say that everyone is exited ?? million be ?? and somehow i managed to drop the two of ht it should be 218 million these numbers by the way re ?? waiting i the governors budget will be working through ?? growth 17 million ?? million dollars the plan 45 million dollars i would like to say some of the ?? better number then we did for others ?? recommending there could be ?? changes this numbers ??

is what we're using as of today as our best numbers in just looking at what the budget outlook is like. We know by way of funding commitments, again, teacher pay to $35,000, you can see how much that would cost. Broughton Hospital is supposed to come online within the next biennium, and while that money as originally appropriated in the last biennium, that money was taken out last session and so that's for equipment for that hospital in order to be open and operate over the next biennium. Again, some of these things are must-do's, the Job Maintenance and Capital Development Fund, many of you know that this represents a commitment. No grants can be given without the appropriation, but to the extent that the Department of Commerce is already planning to make some commitments, we feel like this is another budget pressure you'll have to deal with. It is a typical budget pressure for the General Assembly. So, in addition to those budget pressure, which we would ordinarily say these are sort of on a list separate and apart from what we're going to talk about now. The next set of pressures are those things that you dealt with over the last biennium, they are issues that come up periodically for the General Assembly and so we've included them. Last session you funded economic development in the Film Incentives Grants to the tune of $30M. That was nonrecurring, it hasn't been used yet. Those are areas where you probably are going to talk about it. Some folks are talking about the film incentives in particular. So we include those as other budget pressures. The historic tax credits have gotten a lot of interest and so we included an estimate of $9.6M for those tax credits. The Housing Loan Program, which is usually a pretty popular program for the General Assembly, $10M was appropriated last session. There may be a strong interest in keeping that amount of money in for the next biennium. There are a couple items we call structural budget items, where we have a recurring receipt problem in our state psychiatric hospitals, $10M, those things we've included as well. They've been carrying that deficit on for a while. It may have gotten smaller but it's still sizable and we would add that to the budget pressures. And then most of you are aware of a desire that's been expressed as intent in legislative language to eliminate the transfer from the Highway Fund over to the DPI for driver's education for public schools. That's about $26M. In the current budget it's nonrecurring so you'll either have to replace that money or phase it out, create fees, increase fees, whatever is necessary to fund it but whatever it is, whether it costs you or not, we put it on here as a pressure. We know that will be something you'll talk about. The last set of budget pressures are the ones that involve some of the things that we always look at as a budget pressure and that has to do with your, primarily with your state work force. The cost for 1% for state employee salary increases is $134M, that includes teachers as well. If you were to give a corresponding increase for retirees, that amount is about $39M. Other state employee pay plans, as I mentioned earlier, there's some talk about funding areas of the new teacher schedule, it's called the teacher step increase, it's about $65M. Let me say, because I know there's some folks who know that we typically do are take adjustments in the education budget to true up the numbers so that we balance out some, let me see if I can get this straight without confusing you. We know that when we budget we don't have the best information so we look at it and we assume all the teachers are being hired at a certain level and then after some time we get better information and so we're able to adjust the budget. At this point, the $65M makes a certain set of assumptions but we know that there could be a technical adjustment that would bring that number down and the adjustment would just be to bring it to actuals. So more in line with what we think the real experience levels are for teachers. We don't have that factored in here as we would normally not have because we don't know at this point, but we do know that that could be adjusted. The other pay plans are the Highway Patrol, Magistrates and Clerks of Court, those are all statutory pay plans and

To fund those would be $7.2 million. We mentioned the court system funding because we've heard quite a bit from members about the need there. There's an estimate of about $50 million if you were to fund their formulas for how they should be staffed. Capitol, we know there's just a backlog of capitol issues and again, savings reserve and the RNR funds are areas that the general assembly typically tries to make some appropriation into. Just to give you some magnitude of what these numbers would look like if you put it all together, the budget pressures that we mentioned before that are those things that we feel like you're probably going to have to deal with, it's a little over $500 million. So you had a $500 million balance when you looked at the base budget, here's $500 million in budget pressures. Those numbers could be adjusted, but that pretty much wipes out the balance. The rest of this is about $400 million. So you're talking about $900 million right off the bat. Of course, some of that could be adjusted downward for a variety of reasons. But this list is by no means, by no means exhaustive. We have a long list of budget pressures that we've identified. These are the ones that we would bring to your attention just based on the information we have and to give you some idea about what your outlook is in going into the budget process. Mister chairman, that concludes my remarks. [SPEAKER CHANGES] Thank you, Karen. Now if, Dr. Boardman, if you could come up as well and Ms. Hammond, if you could stay right there. Appreciate your presentation, and now we will take questions. Representative Stam. [SPEAKER CHANGES] Thank you. For Dr. Boardman, I read a lot about reduction in revenue. I'm over here if you need to see me. You don't. Is the 2.9% growth in revenue over the prior year. If you adjust for inflation and population, is that an increase, a decrease, or can you get that to a ?? [SPEAKER CHANGES] Actually that, it's something we, we look at. We kind of, it's kind of a sanity check. What is inflation doing with respect to overall prices, population growth. The 2.9% growth in, in 14-15 really fairly, fairly well aligns with the estimates for population and inflation growth, which is between 2.8 and 3.0, so it's, it's right in there. [SPEAKER CHANGES] Senator Ford. [SPEAKER CHANGES] Thank you mister Chairman. Just real quickly, looking back at last year's budget and the way that it was balanced in the short session. If I recall correctly, there was $152 million in one time money that was used to balance that budget. Do you take into account in any of your budget pressures the, the way that we balanced the budget last year and what kind of impact that's gonna have going forward? [SPEAKER CHANGES] One of the things we do, Senator Ford. One of the things we do is we, we along with the budget office, we, we create a base. We take out all those kinds of things. We remove any nonrecurring spending. For example, we usually have a sizable appropriation for nonrecurring items, so when you match the recurring and nonrecurring spending and revenue, it usually balanced out. Over the, over the years, the district, the split between recurring and nonrecurring revenue has improved significantly since the Great Recession and so we don't think that there's a big problem. We do take it into consideration. We look more, we're more in tune with it though as we move through the process to see where the spending is coming from. So. [SPEAKER CHANGES] Thank you mister Chairman. One quick followup. When will you have the Medicaid number? I know you had mentioned the governor coming over with his budget, but to me that's the pink elephant in the room. [SPEAKER CHANGES] Well, I'm gonan try to answer the question, but I certainly don't have the answer about when we'll have it, because as you know, the process is that we wait typically for the executive branch to provide the budget to us. I will say that our staff has an ongoing, have ongoing meetings with the executive branch, focusing the human health and resources as well as state budget, monitoring and looking through numbers, so that we're all on the same page. We may not agree with the final number, but we know what the assumptions are and we have the same numbers we're working from. As to when we'll have it, I think that's probably not going to be for a while, but we do

Expect at this point, we’ve been told that we can expect the Governor’s budget by the end of the month, early March, so. [SPEAKER CHANGES] Representative Micheaux. [SPEAKER CHANGES] Yes Mr. Chairman. Dr. Boardman first, and then I have a question for Miss Hammon White. Dr. Boardman, I’m interested in the statement in your report concerning a lower refunds and high final payments. And I’m trying to interpolate that and move it over into what that means for the average taxpayer. There’s some concern there as to actually what that means. [SPEAKER CHANGES] It’s a good question because it’s difficult to wrap one’s mind around the fact that you have tax, your actual tax liability, and that’s the actual tax that you owe, versus what the average taxpayer say, has taken out of their paycheck. Those two never align perfectly, or rarely align perfectly. So at the end of the, end of the tax year, the taxpayer’s going to have to file and expect some refund if they’re used to it. What’s, what is happening now with the new tax rate, it’s a flat rate so it’s fairly easy to build a very tight withholding table. Here’s your rate, here’s your income, here’s what we withhold. And because of that, you don’t have as much variance. So that same taxpayer, without getting into what their tax liability may be, that same taxpayer may have been accustomed to getting 400 dollar refund. They may file their taxes this year and find that it’s only a hundred dollar refund. Their liability may have actually gone down, but they’re looking at that refund and saying, “Oh, I’m not getting as big a refund as I used to.” And it’s just because the withholding tables are much more tightly aligned with, with actual liability. [SPEAKER CHANGES] Well, can I follow up, Mr. Chairman? [SPEAKER CHANGES] One follow-up. [SPEAKER CHANGES] On this one. Then, going to the high final payment portion of that, Mr. ?? could you go into a little bit more detail on that? [SPEAKER CHANGES] Yes sir. The final payments for example, itemized deductions. Itemized deductions were constrained. There’s a cap now of 20,000 dollars that can only be applied to your property tax, and your real estate interest on that property, and unlimited charitable contributions. Other types of deductions, if your mortgage interest is higher than 20,000, you’re constrained to max by 20. Taxpayers throughout the year are not going to make adjustments, either in their withholding or their estimates, based on some of the subtleties of these base-broadenings. We also eliminated for business income, the 50,000 exemption, and that too we didn’t observe when that was instituted, taxpayers making lower estimated payments. They waited to make smaller finals. This kind of flips that on its head. They didn’t start making higher estimated payments, but they’ll make a higher final payment. [SPEAKER CHANGES] The gentleman is recognized for one more question. [SPEAKER CHANGES] Yes, for this is for Miss Hammon ??. Karen, actually on here on page 26, this dealing with the preliminary base budget and the balance remaining. I guess what I’m getting at is the preliminary base budget figure is the actual budget figure, actual budget figure we have for this year on the projections, something like 5, we’re going to have 540 million dollars more to make up in addition to these pressure things, which if I’m not mistaken, you did say it could amount to about 900 million dollars. Is that what I’m hearing? [SPEAKER CHANGES] Representative Micheaux, the number on page 26 of your handout refers to the amount of funds available for appropriations. The 900 million dollars was a total amount of the other pages that deal with budget pressure. So yes, when you look at it, if you in fact did nothing but tried to spend 900 million dollars more, you’d have a shortfall. But this doesn’t, we don’t make any assumptions about adjustments. We know there’ll be technical adjustments. We know there are areas in for example, you may actually use lottery for, to fund some of the needs. That’s not accounted for in the 900 million. There are a variety of ways that you can address that and obviously the way it’s been done for as long as I’ve been here, is a combination of

Additional revenue and budget reductions. So we expect that may be a combination.[SPEAKER CHANGES] I would just observe that contrary to the situation 4 years ago when we had a two and a half billion dollar hole we now have revenue that is there and I think we'll be able to tie those ends together rather well this year. Representative Iler.[SPEAKER CHANGES] Thank you Mr Chairman. Miss Hammond Blanks on several of your charts right here on several of your charts you refer to public schools and universities do those anywhere include community colleges or are they just not significant enough to be on the chart? [SPEAKER CHANGES] Community colleges are definitely significant but since the first time since the Great Recession we're actually not seeing a projected need for additional enrollment growth for the community colleges as a matter of fact the flat and there's a thought that there will be a decline because people are working people are not there are not as many people enrolling in Community Colleges [SPEAKER CHANGES] Follow up. One quick follow up. So when you address teacher pay for public schools and universities does that include community colleges anywhere?[SPEAKER CHANGES] Yes when we say the 1 percent for state employees it includes public school teachers universities etc. [SPEAKER CHANGES] Senator Bryant. [SPEAKER CHANGES]Thank you Mr.Chair I have two questions one for Miss Hammond Blanks and one for Dr.Boardman. Miss Hammonds Blanks you mentioned that in responding to Senator Ford that you backed out of your budget estimate the one time items funded with with one time monies. I think that's correct. So I remember there was some ADHS items like maybe child care subsidies that was funded with Tana funds so would my understanding be your base budget would not include child care subsidies or some of those other items, I don't remember what they all were. [SPEAKER CHANGES] The new definition for base budget what we're expecting to get from the governor's office or administration is a budget that would include the restoration of those non recurring cuts. I believe those cuts were non recurring because they used federal money to back fill we would expect to see that fully funded in the base budget. [SPEAKER CHANGES] Thank you and is that in your figure on the follow up Mr.Chair is that in your figure is that in the figures[SPEAKER CHANGES] It is. It's included in the 28 billion.[SPEAKER CHANGES]Thank you. Dr.Boardman on the issue of personal income lagging and sales tax corporate tax slide 3 I have a two-fold question 1 is the sales tax figure I mean I'm assuming that includes the changes in electricity natural gas whatever changes we made and I'm curious as to how the corporate tax and franchise tax are ahead and yep personal income is lagging any other reasons aside from the fact that you have more people out of work that can be hired I guess or something.[SPEAKER CHANGES] The sales tax numbers when we develop those numbers and the target we incorporate all all those changes so the move for the pipe natural gas and electricity and the sales tax we make those adjustments and then say what are our expectations. So the 2.3% is over and above after we've made those adjustments. The difference right now in wage growth I think you said it's just the labor market has had a lot slack in it and we're seeing that finally go away. That doesn't say that the overall hasn't been improving we still see that in corporate income collection which are up slightly. I will note that the forecast actually three or four years of good corporate income we actually see flattening out during the again in the bianum it's a fairly volatile source that we've seen swings of 20 25 percent. [SPEAKER CHANGES]representative Fisher[SPEAKER CHANGES] thank you Mr Chairman. Hi I'm over here. First of all I want to thank you for a really concise presentation I appreciate that basic and my question first to Dr.Boardman is you mention in one of the slides upward pressure on on wages and I would like to hear how you see that manifesting itself. [SPEAKER CHANGES] Yes what we've had is

Situation where as I mentioned we, we had significant loss in employment. With respect to total non farm employment, really it was just this fall that our employment numbers actually recovered to where they were in February 2008. Imagine if you can, a big trough. Well, we finally got out of that, that trough. As we move out that, employers looking for folks are gonna find fewer and fewer folks waiting on the sidelines to find a job, and that will, we forecast, will put more pressure on employers to not only keep employees, as they have flexibility to move with more wages, but have to offer higher wages to bring some of those folks off the sidelines. [SPEAKER CHANGES] Thank you, and a, a, a, an additional question to Ms. ?? please. [SPEAKER CHANGES] And we're gonna need to speed these up. Want to make sure I get to at least everybody one time before we leave. [SPEAKER CHANGES] This is quick, quick one. You talk about savings reserve when you go over the budget, and I wondered, is there, and it's good to see that that's increased over the different budget years, but wondering is there an expected amount of money that should be put into savings reserve from the legislature each biennium? Because I know that we typically have raided that fund from time to time for weather disasters and the like. Is there a recommended amount? [SPEAKER CHANGES] That's a good question. Our current law says that there's an 8% goal of the operating budget, but I recently read a report that was done that there really is no good rule of thumb. Some states have gone with 5% and don't have any idea why it was 5%. We went with eight because that's pretty much what in North Carolina is the standard, and, but we've not, we've not come close to the 8% obviously. But 8% is what current law says. [SPEAKER CHANGES] Senator Davis. [SPEAKER CHANGES] Thank you mister Chairman. Although not part of your presentation this morning, it seems like to get a better post on the economic viability of our state, it would be helpful to have a sense of what our unfunded liability is for retiree healthcare, for the debt that our state has, and how that's gonna be paid off. In addition to our pension obligations, how fully funded that is. Would it be possible to get that information to the members? [SPEAKER CHANGES] Yes. [SPEAKER CHANGES] Thank you mister Chairman. [SPEAKER CHANGES] Representative Butterfield. [SPEAKER CHANGES] Thank you mister Chair. My question is for Ms. Karen but ??. What impact would it have had on the budget if we had accepted Medicaid expansion for three consecutive years in total federal dollars? Is there any information available on that? [SPEAKER CHANGES] I don't have that information. I'm looking to. Mister Chairman, if there's answer to that question, that's gonna have to be deferred to our Health and Human Services team. [SPEAKER CHANGES] All right, well, someone can get you the answer to that question. I would reserve that in expansion states they are spending more money than they had originally budgeted for that in state dollars, and that's been a trend in most of those states. [SPEAKER CHANGES] Follow up question. Follow up. [SPEAKER CHANGES] Representative Insko. Do, did you have another question? [SPEAKER CHANGES] Yes, I had one last question. On page 27, budget pressures, you had other funding commitments. Does that include all except the above in terms of the total budget, or are those some specific items that you're referring to here? [SPEAKER CHANGES] Let's see. The other funding commitments actually is on the next page where you see funding commitments, so those are very specific. Again, I do want to clarify that we have a laundry list of these things that I just selected the most significant ones to, to give you some perspective. [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] Senator Brown. [SPEAKER CHANGES] Thank you mister Chairman. I wanna ask Barry a question. He and I have talked about this briefly and just to comment before I do that, I don't know how anybody has said we hadn't expanded Medicaid since we've spent about 2 billion more a year than we had previously, but

Barry, Part of the Affordable Care Act determined what was part -time help at 30 hours and you and I briefly talked about this, I think what has happened, especially on wages, is because a lot of companies with over 50 employees are trying to hire more part-time help to avoid the insurance piece that the Affordable Care Act has implemented. Do you agree with that, or how do you see that playing out, and I know there's some legislation, possibly in Washington, to raise that to 40 hours and how that may play out as well? [SPEAKER CHANGES] It's a good question. It's one that, unfortunately, the data I work with doesn't allow me to put that fine a point on it and measure it but certainly any time you're putting constraints in the labor market it can have distortion, such that people that might be willing to work for a 40 hour wage would not entertain the idea of say a 25-hour job for whatever reason. If those at the margin, those kind of decisions are being made, then it could have some impact. [SPEAKER CHANGES] Representative Blackwell [SPEAKER CHANGES] Thank you, Mr. Chairman. My question is for Ms. Hammonds-Blanks and relates to several items on pages 28 and 30. Just for clarification in my mind, I'm concerned about whether some of these budget pressure numbers overlap. For example, on page 28 there's the teacher paid at $35,000 at $41,850,000 but if you flip over to page 30, I understood you to say that teachers were included in the state employee salary increases that's $134M and then other state employee pay plans there's teacher step increases, $65M, and I don't know whether highway patrol, magistrates, and clerks at $7.2M is included in the state employee salary of 1% and $134M above or if it's a separate item. Can you maybe clarify that? [SPEAKER CHANGES] Yes, Representative Blackwell. The $134M is just 1% for all employees, including teachers. There was a time when teachers and the others with separate pay plans would get their step, their plans paid for, so they'd be able to get their step increase and a 1% cost of living adjustment. So we've separated them out. Obviously the General Assembly can deviate from that but if you were to just give 1% to all employees and not fund the pay plans, that's the $134M. So they're not doubled up, they're not the same numbers, and that's why we present them as separately. [SPEAKER CHANGES] Follow-up. [SPEAKER CHANGES] With respect to the teacher's step increase of $65M, how does that relate to the $35,000 on page 28? Is that $41,850,000 just to raise teachers who are below $35,000 to $35,000 and no one else? [SPEAKER CHANGES] That's correct. [SPEAKER CHANGES] And then the teacher's step increase on page 30, does that relate to people who would be raised to the $35,000 or is it just with people who would be over $35,000. [SPEAKER CHANGES] That's the amount needed to give everybody on the pay plan their, just to bring them to their next step if they're entitled to a step. The other portion is to raise that step for the zero, I think it's zero to four, up to $35,000. So it's not doubled up, in other words. [SPEAKER CHANGES] Representative Insko. [SPEAKER CHANGES] Thank you, Mr. Chairman, and my question has to do with Medicaid and it follows-up, I think, on some of the other questions that have been asked. Karen, you said that over the past ten years there's been a significant increase in our Medicaid budget and in our enrollment and I got some figures yesterday from Steven Owen about the growth and the number of people who qualified for Medicaid. So in an economic downturn you would expect the enrollment to go up and as, economic downturn you expect enrollment to go up, people lose their jobs, they become qualified for medicaid, and Mr. Boardman talked about how we we're going to have a 3.5% increase projected in wages, you thought, over the next biennium, and so as wages go up and as people return to jobs, wouldn't you expect the growth in the Medicaid budget

Speaker Changes:to decline that people will no longer eligible we he done much to change our eligibility except for few isolated places r do you re looking t budget projections for looking into consideration ? Speaker Changes: ?? work that done through predict or evaluate pretty intensive in turn ?? so growth would not just be related to economy ?? the growth s it relates to medicate ?? I'm not sure sure exactly the is certainly has done ?? and i do know that the?? Speaker Changes:senator Jackson Speaker Changes:thank you Mr speaker this question is for Doctor ?? what is the projected inflation rate ?? so what re we counting and what is the actual number of last last 12 months Speaker Changes:inflation running t very low right now we re just projecting for 15 16 relation bout one end half round obvious energy price we re influence that ?? that we are settling in 1.5 percent and the next yer ?? so there is not much movement right now in the energy ?? or inflation Speaker Changes:?? Speaker Changes:thank you Mr chairman direct turn the page 22 i just ran though that and that it seems like ll though not believable that we take through that ?? projected budgets shorts falls projected overs ? physical responsibly s the body we taking in years in that position you Mr.chairman Speaker Changes:i s just on more person in the list before i call ?? i just wnn let you know corrected version of the presentation ?? corrected version will posted ?? join committee website little bit later ?? i just having one more question seeing else to be instant being recognized for question t this time ?? my question for just whoever is just to trying to understand the difference between s we doing the business under the continuation budget and the new definitions under base budgets and on age 26 the Balance ?? on the 540 million is that take into account to project it 271 million short the 1.5 million presentation ?? in the continuation budget Speaker Changes:Representative have seen prior to this current year what we started out with continuation budget and that was defined specifically what differently what we ?? the base

enrollment growth for the universities, for Medicaid, for public schools. It would have included inflation but this base budget excludes those items. So the numbers you're looking at there would be, basically, the current budget adjusted by nonrecurring and fully funding items and the only real increases would be for leases, if there are contracts that have some sort of agreement already in place, those would be included as increases, but other than that we pretty much are expecting it to be relatively flat. So there is a significant difference. In answer to your question about the revenue number, yes, the 21.4B already takes in to account the shortfall for this current fiscal year. [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] The objective there is to make sure we have the greatest degree of budget transparency in terms of what goes into the budget and what the elements are so that's the reason for those changes that you see. Any further questions? If not, thank you for coming this morning and the committee stands adjourned.