1. 1 State of North Carolina Budget and Legislative Update Office of State Budget and Management Annual Conference October 17, 2007

2. 2 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

3. 3 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

4. 4 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

5. 5 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)

6. 6 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)

7. 7 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%

8. 8 Authorized Budget Summary FY 2007-08 (as adjusted for actual 2007 collections) ($ millions) Unappropriated Balance as of 6/30/07$ 0 Overcollections FY 2006-071,343 Reversions FY 2006-07198 Earmark Savings Reserve Account-175 Earmark Repairs and Renovations Account-145 Beginning Unreserved Credit Balance 7/01/07 1,221 Tax Revenues Existing Tax Structure18,643 Non-tax/Highway Trust Fund875 Adjustments (Tax Changes/Transfers)238 Total Availability20,947 Recommended Appropriations20,658 Funds Unobligated (left on table)$ 319

9. 9 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

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

11. 11 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

12. 12 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

13. 13 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

14. 14 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

15. 15 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

16. 16 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

17. 17 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

18. 18 Other Legislation Senate Bill 1132: Establish Program Evaluation Division of the General Assembly - Divisions 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 divisions recommendations - Establishes the Joint Legislative Program Evaluation Oversight Committee (9 Senate and 9 House members) - Committees powers and duties include reviewing evaluation requests; establishing an annual work plan; receiving reports; and recommending changes to the General Assembly