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Joint | May 15, 2014 | Committee Room | Base Budget

Full MP3 Audio File

We’ve got a large room of people here today, so anyone in the back, if you have a conversation, please taker it outside. Appreciate that. We want to welcome the Pages who are with us today from Tarheel Challenge. Kale on the Senate Pages – Kale Sterling, sponsored by… and all of these are sponsored by Senator Jackson. Kale Sterling, Erin Scotland, Brian Hicks, Levarus Acock and Percy Clark, appreciate you being with us today. On the House side, also from Tarheel Challenge, Ollie Anastasia – I probably pronounced that wrong; I apologize – Wesley Anderson, Gabriel Don, Peter Glenn and Brian Lee. Thank you for being with us. Our Sergeants at Arms who are with us today are Bob Rossi, Joe Crook, Young Bay, B.H. Powell and Doug Harris from the House, and from the Senate, Mark Verbeen – I think I have that; I’m not sure I have the spelling right here – Anderson Meadows, Cantin Lewis, Ed Kester, Charles Marsalis and Ernie Sheryl. So they will be helping with the crowd this morning. We’re very pleased to have with us Mister Art Pope, who is the Budget Director – I think technically Deputy Budget Director – for the state of North Carolina, and his team, to present to the Joint Senate House Appropriations Committee the Governor’s recommended budget for 2014 – 2015, and without further comment, I would recognize Mister Pope to come to the well of the Committee and to present the Governor’s budget recommendations. [SPEAKER CHANGES] Thank you. Mister Chairman, members of the Committee, members of the general public, thank you for allowing me this opportunity to present to you Governor Pat McCrory’s recommended budget adjustments for his second year to be biennium, fiscal years 14 – 15. In the interest of time, I’m going to just cut right to the chase. One of the main questions that has been asked, and legitimately so, is that we are projected to have a 445 million dollar reduction in this year’s revenue, and reduction in this year’s revenue not only obviously effects this year, but effects next year’s biennium budget, the second year of the biennium, because it effects the beginning balance and the overall availability, so how are we going to address that shortfall and address the Governor’s priorities, and I hope the General Assembly’s priorities, including a 262 million dollar pay increase for teachers and state employees? I apologize for the small print. We should also all have hard copies, and most of these tables are also in the Governor’s Recommended Budget, the green volume. Well to get right to this part of it, you’ll see that this un-appropriated balance remaining from the previous year this year is 323.7 million dollars. Now that’s going to get reduced by the 445 million dollar shortfall, the negative number. Last year we had over-collections, this year we have under-collections. It will also be reduced by the anticipated reversion of 290 million dollars in the operation of this year’s budget. So the simple math, 323 plus 290 minus 445, still leaves us with 168.3 million dollars. So the very responsible, sound budget enacted by the General Assembly last year and signed into law by the Governor didn’t spend all the money we had. We left 323 million dollars on the bottom line unspent. By the way, that’s in addition to 230 million deposited into the Savings Reserve Account, known as the Rainy Day Fund, to over 500 million dollars was unspent, 323 million dollars available for any shortfall or changes, and then we have the reversions. On the 290 million dollars reversion, we feel very good. That’s a solid number that is based on a survey of the agencies. The detailed information is provided to the Fiscal Research Commission that has very comparable…

to the 297 million dollars reversions that we have to last year's budget, and if anything, we expect that number to go up, possibly over 300 plus million, and we're still getting information from the agencies and you will get revised information as you work towards the enactment of the budget. So at the start of that 368 million dollar credit balance, you'll see a big overview of how the money is spent. We deposit the statutory amount of the beginning credit balance, 25% into the savings reserve account and 25% of the repair and renovation account. That leaves a balance of 84 million. As you will see later, our government quarry strongly believes that a strong repair and renovation fund will repair the infrastructure of the state as well as we continue to build up the rainy day fund, so we're going to add 8 million dollars to each of those accounts under appropriations to bring those totals up to 50 million dollars each. The four corning statutes should only be 42 million dollars each. That leaves a subtotal credit balance of 84 million dollars. The revenue consensus forecast - this is a new consensus forecast, I'm not going to take the time to go into detail but it was prepared May 2nd release - it's already been discussed, it's available from staff and on the general assembly's website. So this is 191 million dollars less than originally forecast of '14-'15. Now I'll go into more detail on that in a second. That leaves 20 billion, 962 million dollars in the consensus forecast. In addition to revenue on changes, there are no major changes in the law being proposed to this recommended budget - statutory law. However the state of North Carolina reached a settlement with a major retailer who collects - does their transactions by the internet - for the collection of sales and use tax from out of state. This is based on the annualized list of collections start in February. The 40 million is based on the annualized collections resulting from that settlement plus the settlement - the additional enforcement and compliance by other out of state retailers. So we feel that 40 million dollars is a good number and 4 million dollars to adjust for how much FICA tax was withheld by the state gives them an additional 44 million dollars, for total availability of 21 billion dollars. Recommended appropriations are 20 billion 990 million - that still leaves us unappropriated 100 million dollars. And I will go through the other changes in the risk reserves and other areas of change that brings up how this budget is also going to be very fiscally responsible, conservative. Now then. There are two comparisons to be made by this year's recommended budget. The first - and I think the most important comparison - is the previous year's budget. And that's what I want to go over now. However this is an adjustment to what's already enacted in law - what this general assembly and the governor enacted in law last year for fiscal year '14-'15 to also city comparisons from the original enacted budget for '14-'15 and these revised adjustments. Now last year in '13-'14 is the left hand column and the second column is the recommended budget for '14-'15. And you'll see we start off with unappropriated balance again but reduced by the 445 million dollars. Now pay close attention to that anticipated under over collections. Last year we had 537 million in over collections - more than originally projected. Part of that is - we knew at the time, said at the time - was due to an acceleration of income from 2013 into 2012 with federal tax law changes as individuals, companies, businesses took dividend payments, bonus payments, real life capital gain. They shifted income into 2012 which meant we had very strong collections in April of '13 - in fiscal year '12-'13 - 'cause they realized all that income in '12. But that meant the income wasn't available for this year. And that is one of the reasons - not the only reason - but one of the reasons our projections were lower. When you combine those two years together, fiscal year '12-'13 plus 537 million of over collections, fiscal year '14-'15 minus 445 million, we're actually 92 million dollars plus for the projections for those two fiscal years. That does show that the overall trend is still an increase in the economies even though because of the timing issues and other issues that we are reducing incomes this year. That's a big shift from the beginning last year's budget with a big surplus over collections versus a minus. Second you see the anticipated reversions, again last year it was 290 million 742, this year we're at 290 million. And I'll emphasize again, that is not a plug in number based on last year's reversion, based on an actual survey of the departments where they are now and we expect that number to go up. The good news, which we'll go into more details, last year we did have a negative number to reduce availability because of the appropriations, supplemental appropriations that was needed for the Medicaid over

[0:00:00.0] …Last year that is zero this year, I will elaborate on that in later slide there is a metaphase over this year as well. This is gonna addressed by current year revenues are not include in the reversion so I will go to that later. When you look at the again same information transfer ___[00:22]?? account, go down the baseline revenue consensus forecast. Last year the revenue was 20 billion 603 million, this year it’s 20 billion 962 million that’s a plus 359 million dollars and it’s absolutely correct and clarify and the revise projection there is a 191 million dollar decrease what’s projected for 2014-15 last year we see on that next page but even after you take out the 191 million dollar reduction we still have 359 million dollars more in revenue this year than last year based on existing law let’s say 1.7% increase and then you will see the same information that come down to total recommended appropriation and you will see this year’s budget compared to recommended budget of the last year is 359 million dollars more or 1.7% increase and spending over last year. We do have reduction that left un-appropriated with 100 million dollars. So, again to summarize this year’s recommended budget compared to last years we do have an increase in revenue, we do have an increase in appropriation let’s say 1.7% growth after taking the account lower beginning credit balance due to that shortfall. Now, here is the comparison to what was an active last year for 2014-15 versus what is recommended, the beginning credit, some of this repeated obviously beginning credit balance, the shortfall, the reversions, 168 million dollars plus, you will see for transfer to same as reserve account last year’s budget appropriated 37 million dollars to the Rainy Day Funds same as reserve account. The government’s budget increases at 42 million statutory amount and that’s ___[02:10]?? myself and that’s actually going up to the 50 million after appropriations, ___[02:12] motivations is 12.7 million, ___?? last year, the Governor recommend 42 million plus 8 million appropriations up to 50 million. So, we are appropriating more money to the same reserve account ___[02:26]?? in this adjusted budget and it was acted last year, then we go down to base revenue forecast and originally for fiscal year 2014-15 last year the projection was 21 billion 153 million dollars in revenue that’s been revised to 20 billion 962 so there you see the 191 million decrease. So, flipping back & forth compared to last year we got 359 million dollars more revenue and 191 million dollars originally projected for this year. Now, going down to the total recommended appropriations you will see last years inactive budget is 20 billion 998 million and this year is 20 billion 990 million so only an 8.5 million dollar decrease overall and what was recommended inactive last year versus the Governor adjustment and off course the big emphasis overall because there are many net changes and the appropriation committees and the various committees and departments which we will go through. Now, definitely this is too small for you to read at least from the PowerPoint presentation but again this document is in your budget book it shows the lower head details and the adjustments in the committee, we are gonna over that and detail later. So, I did want to give you the single shot of that and then the same detailed information, comparison of the 2013-14 this year’s budget to the proposed budget for next year as adjusted by the Governor and the top half is what we saw before and the lower half gets to breakout by committee and it shows by the top half 1.7% growth of revenue as compared to last year and about 1.7% growth and spending compared to next year. Again, it’s too small to read from the PowerPoint the comparison of the 2014-15 inactive budgets inactive last year versus the Governor’s recommendation. Now, I wanna go to a little bit more detail on the revenue forecast, this graph right here shows the actual revenue in the black line for fiscal year 2006-07. The fiscal year 2013, and you will know and I have more detailed slide next page and fiscal year 2011 as well the revenue was the actual revenue was 19.5 billion. In fiscal year 2013 it was 20.5 billion that’s a 1 billion dollar increase. But again as I showed on the previous slide that’s 500 million dollars in over collections. [0:04:59.9] [End of file…]

Originally projected 20.6 billion for this current fiscal year and came out at 20.2 billion. Again that's a 445 million dollar decrease. But that's after that huge collection so the reason we have this slide in here, I'm going to go to the next one, I think it's a legitimate complaint at times you see head and shoulders charts, which the next page is going to be. This shows from zero to 22.6 billion, where we think we have been, where we think we will be. And it shows a fairly smooth line after of course that big dip from the great recession of 2009. So this is a head and shoulder chart, which makes it easier to read the numbers. But look at the steep slope when you just look at the head and shoulders versus the overall slope based on the entire budget from zero to 20 billion dollars plus. What this more detailed head and shoulders graph shows you again, you see the big jump from fiscal year 12 - that sharp, upward slope - to the fiscal year 13 of over 1 billion, again 500 million dollars increase in collections, the light blue line shows the original consensus forecast for this biennial. Going from 20.5, a very modest net increase because again, we were trying to anticipate that fiscal year effect, money ?? accelerate to 12. And then 2.7% after adjusting for the tax law changes for this year to 21.2 billion. In fact, we went down to 20.2 billion but we will still go back up to 4% growth and partially catch up so we'll be at 21 billion rather than 21.2 billion for this fiscal year 14, 15. That's 191 million revision downward. Now, the right two lines are I think the appropriate term is scenario rather than forecast, because it's premature to do that forecast - we don't do those forecasts until next year. But we do need planning and the darker blue line on the top is a relatively modest conservative realistic estimate that was done for HB 998, the tax reform package, to show what the overall impact would be. The light bottom line, the pink line is an even more conservative estimate prepared by the office of state budget management for this presentation but it still shows more modest growth. It still shows growth even though it's more modest. Now I'm going to go back one more time, you may say that's a very steep growth curve, but again that's because it's head and shoulders versus when you see it based on the 20 billion dollar budget. So we do think these are responsible growths, and this budget's based on the consensus forecast for this coming year, but do want to give you a heads-up; a shot at where we're going in the long-term. Now then, on the general fund revenue by source. In the interest of time, Mr. Chairman, I’m going to go fairly quickly over these slides, because I know this is familiar to many of the members already. But there's a little bit of a change here, but I also want to focus on the sales and use tax of 6.3 billion dollars. There's been some concerns and even some criticism about the state's reliance on the sales and use tax. Well actually, the state’s reliance on the sales and use tax peaked in the 2010-2011 budget when it was 30.6% of the overall revenue. That’s when the state sales tax was 5.75%. After that rate sunsetted in the 2012-13 budget for the full year, that share fell down to 25.7%. This year and projecting for next year, you will see the effect of tax reform. Part of tax reform is making rates more uniform and simpler, closing loopholes. So there was some base broadening for the sales tax. Also we did reduce rates for the personal income tax. So you see that the percentage of the total sales tax has gone back up to 30%. That’s actually rounded up from 28.9%. So we're still below our reliance on the sales tax in this budget being proposed at 29.9%, compared to the peak in 2010-2011 at 30.6% when the state rate was 5 and ¾, versus the current state rate of 4 and ¾. All right, this is where I want to go into more detail on Medicaid, and later on when we have the presentations by our senior budget officer Pam Kilpatrick from health and human services, we’ll expand on this. I want to emphasize on the availability sheet, we are not saying there’s not – again, we are agreeing that there is a Medicaid shortfall in this year’s budget. And we estimate that to be 70 million dollars. This number is going to be subject to revision. 70 million dollars is based on information from health and human services, in their forecasting and where we are year to date. It has been reviewed by us and the information has been shared with the fiscal research division. The ??

Reason we think this number’s smaller than some of the numbers we saw earlier is two-fold. One, we have been surveying the providers – primarily the major hospitals – as to “what are you owed?” I know that some of you have received emails or seen verbal comments that there is a huge backlog in Medicaid payments that have not been made. There is a backlog but based on the surveys to date and the information we have today, the backlog due to providers are about where they were last year. There’s not the big backlog we had. To be perfectly blunt, some providers who gave us a large number, and I said, “Well fine, show me. Show me your accounts receivable and show me your claims pending. And so we can take that information.” And when you say “Show me”, the number comes down, but we’re doing the actual survey. Now there are two categories to this backlog. One is the normal billing, where you provide services and then you bill through NCTracks health and human services. There’s always a one-two month lag between when you provide the services, bill it, and it gets paid. But we’re looking at that number to make sure that’s not a larger number compared to last year. The second area which is harder to pin down are pending claims. This is where services have been provided but not yet billed. Again, there are always going to be some pending claims for services that are provided in June of this year, that aren’t billed until July. This year has even a bigger issue because there have been challenges with NCTracks qualifying people, with NCTracks receiving the payments from the providers and also due to a larger number of individuals who are directed to Medicaid from the federal exchanges under the Affordable Care Act, who have not yet been processed. But we still believe that 70 million dollars will cover the pending claims as well, which also leads me to the second point why this number is lower. Last year’s budget for the second six months of this year and the full twelve months of next year included substantial increases in spending for what’s called the Woodworking Effect. These are people who are eligible for Medicaid but have not participated in Medicaid, but were going to be directed into the Medicaid system by the Affordable Care Act and North Carolina’s federal exchange and the navigators and others. There’s also related to that deemed eligibility where you shell out for services, for example the emergency room, you don’t have insurance, they’re going to deem you eligible for Medicaid until proven otherwise. Well, the early indications, we’re working on actual numbers, is that while the number of people referred to Medicaid is about where we projected – over 80,000 – the numbers actually eligible for Medicaid, the true count is substantially lower than that. Out of a sample of about 18,000, there were about 6,000 people already enrolled in Medicaid. So apparently what is happening, and this is partly anecdotal, but we’re in the process of documenting it, that individuals who did not qualify, who went to the federal exchange and did not qualify for the insurance got automatically referred to Medicaid. And that’s the initial number, even though some of them already were on Medicaid. Some of them were even out of state residents. So it’s for those two reasons, based on actual surveys of accounts receivable in process, getting information on the accounts receivable and pending claims from providers, looking at the number of participants in the Affordable Care Act, that are actually going to be eligible for Medicaid, we believe the 70 million dollar number is more realistic. But here’s the two important points. We are not going to carry over that liability without the money. So the cash remaining in the Department of Health and Human Services, what would have otherwise reverted within Medicaid, is being carried forward to meet that obligation. So we’re not carrying forward a Medicaid liability without carrying forward the cash. So the cash used for this obligation is not in that 290 million dollar reversion. We have kept that separate. Second, as many of you know, there’s a substantial payments throughout the year of drug rebate money to the state of North Carolina. Approximately two thirds of it is due to the federal government because they pay two thirds up front and approximately one third to the state. In the past this has been treated differently. And particularly the state auditor challenged and criticized the practice that was done in June of 2012, treating that drug rebate money received in June as being 100% state money, helping balance the books for the fiscal year ending June 2012. But then they had to start off in the hole in July of the next fiscal year, because they owed two thirds of that money to the federal government. Well after taking into consideration the auditor’s very legitimate criticism ?? with the state comptroller, we are not going to treat that drug rebate money received in June as 100% state money. Instead, two thirds is going to be set aside for the amount we know is going to be due the federal government in July. So we’re not carrying forward Medicaid bills in general without the money and we’re not going to treat the drug rebate as 100% state when it should be considered partly federal so we’re not doing either of those two ??

but also, as we'll elaborate more, if that numbers is wrong, that 70 million dollars number is wrong, the Governor is recommending a 50 million dollar Medicaid risk-reserve. So if the 70 million dollars is wrong and there are bills that are due beyond the cash-carry forward, we'll have an additional 50 million, brings that up to 120 million dollars. So we think this is responsible budgeting, we don't have the luxury of doing a range. You, the General Assembly, will have the advantage of one more month's information. Our calculations were based on data through March. You will have the data for actual payments and accounts receivables through the end of May, excuse me, through the end of April. That information is coming available now and you may, if you're still working on the budget in June, have some of the May information available. So you will have better information, more recent information than the fiscal, fiscal staff have better information than the budget office and it helped ?? service ahead for this year, excuse me, for this budget. But we will to continue to work with you and provide you that update information. Next on the General Fund Appropriations, and this is comparison the fiscal year of '14-'15, the budget that was enacted. Here you see for fiscal responsibility, that additional 7.9 million to 8 million dollars we were appropriating to the Rainy Day Fund save in Repair and Rennovation, and the 50 million dollar Medicaid reserve. So this is from appropriations not from ?? the beginning credit balance, it's total 65 million dollars. You will then see the net changes from the '14-'15 enacted budget to this recommended budget. I don't want to repeat that cost. These can still represent increases over this year's buget but the law you are adjusting is this year's enacted budget and another important point is the 262 million dollar pay increase, we had the information to allocate that by agency in the major committees. So rather than being one big reserve of 262 million dollars at the end in reserve to then be allocated through the certification process after the budget's enacted and everyone starts taking their pencils and adding, "well how does this add for Education, how much is for the Department of Public Safety," we have gone ahead and allocated that money in the recommended budget for you so you can see it by the departments where they are. I also want to emphasize, especially for Education, that some of these reductions from the enacted budget are reductions of projected increases. In particular, for Public Education, the average daily membership, the enrollment, is giong to be 37 million dollars less than originally projected. So it's definitely more than last year but it's not a 37 million dollar cut to the public schools, it's because enrollment's not as much, therefore funding's not as much. Likewise, each year the Department of Public Instructions adjusts the amount they need for their base salary because as the more senior teachers retire and newer teachers are hired the amount salary actually needed is usually lower and that number this year is a reduction of 64. 49 million dollars. Again, we're not reducing teacher's salaries or the budget for teacher's salaries, they just need less. So those two reductions alone account for 102.3 million dollars in the public schools. Likewise, the community college system has lower enrollment so that will be a 17.2 million dollar reduction from the enacted budget for this year, even though enrollment's going to go up. As you'll see we're reapplying that amount to the community colleges and the university system is also experiencing lower enrollment and so that will a reduction of seven point million dollars for universities from the projected increase budget for '14-'15, not from the previous year's budget. Also, as we go through these reports through the committees, through the senior as proposed by a committee in subject matter, now all of the general fund savings are reduction means there can be less spending by the agency. We do, as appropriate, maximize use of Federal dollars and other receipts in order to save General Fund dollars, make more money available for other parties including the same employ in teacher pay rates. So that will be reviewed in more detail by the senior budget officers for those committees. Again, this is pretty well, you've seen this information beforehand. This just includes the details by a committee compared to '13-'14 to '14-'15 and down the right hand side you see the 1.7% overall increase from last year and then again, this is more detailed, but what you've seen before compares them to the '14-'15 enacted budget from last year to this year. And you'll see it's only eight and half million dollars less than originally enacted in total. Again, you'll see the General Fund Appropriations by Sub-Committee, minor changes from last year overall, and I'm going quickly in the interest of time, but this is an important slide right here. This is the issue

Recurring versus non-recurring spending. Absolutely it is a poor budget process to use non-recurring dollars for recurring expenses. And even as late as this morning reading certain newspapers that are saying, Oh you are using non-recurring money for recurring expenses. You are using non-recurring money for the recurring pay increase. We are not, this budget does not do that. In particular, the main source of non-recurring money is the beginning credit balance at 168 million dollars. But as we've already shown, 50 million dollars of that is going to rainy-day fund non-recurring, 50 to repair and renovation non-recurring and 50 million dollars to the Medicaid risk reserve. So that's 150 million dollars non-recurring being set aside from that non-recurring beginning credit balance only leaves 18 million dollars in non-recurring money for the rest of the budget. And as usual when you go through the budget books, we break out the costs of recurring reductions and recurring expansions, non-recurring reductions and non-recurring expenses. Another way to look at, it is not start with 168 million but 184 million beginning credit balance that carries over to appropriations. And there you will see in the dark green that we have non-recurring revenue of 20.9, almost 21 billion. We have non-recurring revenue, 110 million because besides beginning credit balance, there are some other non-recurring money becomes available, surpluses from last year, various dedicated revenue sources. We see on the expenditure side, the total recurring expenditures, only 20.8 billion dollars. So we have 100 million dollars more in recurring revenue than recurring expenses, including paying for the pay increases. Or look at it another way, we have 140 million dollars in non-recurring expenditures which we are making up in part, paying for part of that with recurring recurring dollars. So we're actually doing the opposite, we're using recurring dollars for recurring expenditures, and this is very sound budgeting. So we are not doing that technique, which I think is very poor budgeting process. Mister chairman, we now have the highlights of public education. In the interest of time I'm not going to thank them all by name, but we have an excellent staff at the Office of State Budget and Management. All these Senior Budget Officers you'll see except for one were here when Governor McCrory appointed me State Budget Director. It's been a joy to work with them, and our new guy is going to get a good introduction to the general assembly today, and I think you will find him very good at his topic as well. So mister chairman with that I want to start turning it over to the senior budget officers, starting with Elizabeth Grovenstein on education, I will come back at the end to address the specifics on the pay increases and answer questions.[SPEAKER CHANGES] Proceed. [SPEAKER CHANGES] Thank you mister chairman and members of the committee, may name is Elizabeth Grovenstein, I am the Assistant State Budget Officer for Education and I will be presenting the highlights of the education budget recommendations. And as you will see on slide seventeen, the recommended budget for 2014-15 of 8.09 billion dollars for public education is a 226.5 million dollar increase, or 2.9 percent increase, over the current 13-14 certified budget. It is also a 46.4 million dollar increase, or 0.6 percent over what was the original enacted budget for 14-15. Several highlights of the public education budget include 162 million dollars in this budget for pay increases for teachers and other school personnel. This fulfills the commitment to raise starting teach pay to 33,000 dollars and provides a step increase for teachers and principals. In addition, there is 9.8 million dollars from education lottery receipts used to fund the career pathways pilot program. This program is directed at retaining quality teachers who take on increased responsibilities for students and success of their peers and impacts of student achievement in the classroom. 23 million dollars is provided from lottery receipts which doubles the textbook budget, it's an increase of 23 million dollars. Also, this budget provides 18.7 million dollars, this continues the master's degree salary that was announces earlier this year for those who have taken a course towards the master's

00:00 as of July first 2013 in addition the budget recommends that those who achieve this masters degree and are teaching in their field for 70 percent of time or more will continue to receive the salary supplement as well turning to slide 18 on the community college system the 2014/15 recommended budget for community colleges is 1.03 billion dollars this budget is 12.1 million dollars or 1.2 percent higher than the current 13/14 certified budget it is also a 16.9 million dollar increase or 1.7 percent above the budget that was enacted already for 14/15 this budget provides 18.6 million dollars that funds the 1000 salary and benefit increase for all community college employees funded with state funds it provides 16.8 million dollars that had been reinvested from the reduction in the remedial course enrollments throughout the community college system due to that reduction in remedial course enrollments these dollars are reinvested to those programs that will help us in closing the skills gap there's also a 1.9 million dollar appropriation in the budget and that appropriation will offset the anticipated tuition that will be waved for military veterans who have served at least four years or within two years of exiting their service and have been stationed in and currently reside in or have home of record in North Carolina at their time of enrollment on slide 19 are the highlights of the university system in the 14/15 recommended budget for the university system is 2.55 billion dollars this is a 32 million dollar or 1.3 percent decrease from the 13/14 enacted budget and is 49.4 million dollar or 1.9 percent decrease from the 14/15 enacted budget included in the budget recommendations for the university provides the 33.4 million dollars for the 1000 salary and benefit increase for university system employees it also provides 5 million dollars from education [??] receipts this will establish a new financial aid program NC serve this program will provide a financial aid for military veterans enrolled in universities and those veterans similar to the community colleges program those who have been stationed served at least four years or within two years of exiting service and have been stationed in and reside in or have home of record in North Carolina at time of enrollment finally I wanna highlight 3 million dollars that is appropriated this was one of the board of governors' request that will assist the UNC campuses with transitioning their laboratory research into the market place Mr chairman I'd like now to turn to Pam Kilpatrick my colleague will present a health and human services budget [SPEAKER CHANGES] Good morning and good morning to the chairs the members of the committee and to the public I'm Pam kilpatrick with the office of state budget and management and I will be reviewing the DHHS budget overview so the slide before you is the summary of overall funding to the department of health and human services total state appropriations last year's actual spending 5 billion dollars you'll see that total requirements at 17 almost 18 billion dollars quite a bit higher which accounts for federal primarily federal funds and all other receipts that are going into the department next column is the certified budget for the current year followed by 2014/15 certified budget the recommended adjustments to the department's budget are an increase of 70.3 million dollars in total spending authority 92.9 million dollars in increased receipts within the DHHS budget and a net reduction of a hundred and twenty two almost a hundred and 05:00

$22.6 million, for a revised recommended total appropriation of just over $5 billion, or a .43% change from the current inactive budget, a decrease in overall state appropriations. But as you look to the top of the chart you see that it is largely offset in increases in other receipts in lieu of state appropriations. Medicaid mental health, their appropriations account for 86% of total DHHS funding from general fund revenues. And, they account for that now, they account for that in the recommended budget for the Governor. Other major appropriations, DCDEE is the next largest, and then followed by Social Services. So, this chart is to put into context all of the distinct or discreet appropriations that are made by the general assembly to the Department of Health and Human Services. There are 11 different appropriations, hundreds of programs and services that when they roll up turn into these 11 appropriations. We're showing general fund share here. So the current certified budget of $5.1 billion is adjusted again by that $122.5/.6 billion, for a revised total appropriation for the upcoming state fiscal year of just over 5 billion dollars. We would also note, as with all the presentations today, the impact of the proposed salary increase for state employees is included with the department totals in this presentation. So, how did we achieve savings in the DHHS? It was done, primarily, in three ways. It's achieved by refinancing, by provider assessments, and by updating budget forecasts and creating efficiencies within DHHS. So, highlighting the refinancing without reducing services, $22 million in federal block grants and the Education Lottery proceeds are being put into proposed to be invested in the NC pre-k program. Of that, about 14.6 million is TANIFF, and 7 million is from the lottery, 15 million in federal block grants for subsidized childcare, and refinancing the regulatory staff in the Division of Child Development onto the DCCF block grant. Most of these dollars are due to updates and availability from carry-forward from previous budget periods, as well as updates the Department has received subsequent to the enactment of the biennial budget on their federal grant awards. So these are primarily TANIFF bought grants and Child Development block grants. In addition, 3.8 million dollars is invested into the AIDS Drug Program. It is a one to one swap of state appropriations. The program realizes excess drug rebates. We are proposing to budget those, to finance these services. And an additional $3 million that was not included in the biennial budget that is being earned in the current year is available next year and can be used to finance Aid App without any change from the current eligibility, from the current service level, or without a waiting list. The next category of change is provider assessments. These are in the Medicaid Program. This budget would achieve $75 million, which would again be a one to one, in lieu of state appropriations by establishing a $59.6 million state retention of a new assessment on local management entities and managed care organizations. In addition, following a recommendation included in the Governor’s budget to the general assembly last year, this budget would propose increasing the state's retention of the existing assessment program with hospitals by $15 million. Finally included in the budget, $28 million in efficiencies and updates of budget estimates, for example, health choice as a result while we're seeing

Growth in the second year, as we’ll get to in the next slide. Health choices underspending it’s budget as a result of children being moved from the Health Choice Program into Medicaid. So, we will account for those savings in the budget proposal. In addition, State County Special Assistance updates for the actual value of payments and the number of payments being made. We have gotten a revised forecast from the department results in a savings to the State of about $4 million and a savings to the counties as well, as we split that cost 50/50. So in total, total general fund savings NDHHS $145 million. The Governor’s budget proposes investment in health and human services primarily targeted to at risk children. Metal health services primarily from block grants and core public health infrastructure and thus, propose an investment to get started with Medicaid reform. So, just to touch on the $6 million which is State share for employee pay raises at DHHS, most positions cost allocated so that’s a little less than half what the total cost will be when it’s implemented. $2.7 million to improve the State’s ability to help the county’s in oversight in protecting children and their welfare. $5 million to support growth in the case load of the children in foster care. $3.6 million from increased lottery funds to add to the NC Pre-K Program serving at risk 4 year olds. $10.7 million of savings occurring within the current funding of the mental health system are proposed to be re-directed to shore up the mental health budgets which have had chronic shortfalls. Whether we characterize that as patient receipts or spending, they are not balanced in their budget. So we are proposing to invest on a permanent basis $10.7 million so that that critical part of our in-patient care system can be sustained and while, we use block grants to fund community services including the Governor’s initiative on substance abuse prevention and treatment. $1.3 million to fund something that Secretary Vaush has certainly made a high priority for us to be aware of is the amount and quality of the public service that’s being delivered through the Office and the Chief Medical Examiner. About $1 million is going there for transportation cost, for medical examiner autopsy costs, to increase what we pay our Medical examiners and also to train them to do the best job that could be done and then, $350,000 or so going into the vital records agency to do a better job in serving the public and getting out public records to folks. Finally, $1 million is proposed in this budget to get started with Medicaid reform. This would fund data, analytics, temporary assistance to the Medicaid Agency to do this and some system work on their NC tracks as it might be needed to implement reform. Overall, the Governor’s budget will propose to you $23 million in State funded expansion. It will recommend to this body re-investing existing State dollars to critical needs and then, using Federal and other receipts to maintain services for some of our existing programs. The net change in DHHS $122 million. So, the next slide is the Medicaid budget. What we’re showing you is Medicaid 2014 as an actant in current session law. So, the top line is the current budget $13 billion, $9.6 billion in receipts and $3.4 billion in State appropriations. The enacted budget that’s already in place allows for spending growth of $405 million, $258.9 million in receipts and an actual net growth in overall State appropriations already in place for Medicaid for $146 million. The State’s investment in Medicaid since the 2012-13 enacted budget has grown by a little over a half billion dollars as we look at the 2014-15 budget. So where we stand today, our director actually did a fabulous job of giving you an update of where we stand and I’d like to recap and hit a few highlights of, of where

we are so, what we've done is we are using the latest financial data available at the time of budget development, which was actual North Carolina accounting system information through March of 2014 and using a historical analysis of expenditures for the first three quarters of the year and projecting what fourth quarter expenditures would be. We are making the assumption, at this time for budget development, that because claims are lagging the budget we are not seeing the growth that was anticipated when the budget was developed, that the difference between the two is a lag in reimbursement for services. Whether those are incurred but not reported, whether are those are pending and tied up in the NC track system, or whether they are attributable to delays in processing enrollments as a result of rolling out the new enrollment system NC Fast. So net of all, we looked at a macro level. We looked at overall spend in Medicaid and we said that in some funds they are underspending their budget, in some funds we are right on target, the net of the pluses and the minuses is that we expect that, at June 30th, the Medicaid agency will have liabilities that have not been liquidated of a net 205 million dollars. The calculated state share of that is 70 million. Because those claims and payments are not being made this years we do expect there to be cash-on-hand at June 30th. The amount is variable at the point in time we did this based on the rate of collection of drug rebates. We assumed that would be 30-35 million dollars. Depending on how those things occur it could be a little higher. We don't think it will go lower but it could be. So that's what were estimating in this. And again, to reiterate, the Federal share of drug rebate has been handled variably over time. This state fiscal year we will carry forward all of the federal share of drug rebate that is collected by Medicaid after the last check write in June, after the last opportunity to credit it back to the Federal Government and it will thus improve the outlook going forward in July of next year. In terms of next year's budget, we are using that enacted budget that the General Assembly has put in place that enables an additional 146 million dollars net growth in state money and multiplied for Federal share. In addition, the following changes are being proposed , which are, I think I've gotten a slide ahead, I'm sorry. We are looking at the 2014 base, it includes the 2014, the 2013 shortfall of 70 million dollars, and then taking that as a base, because the current year would not reflect all the measures that were enacted in the appropriations bill, all of the savings, and all of the annualized increases that were made, we have done the annualization and we have assumed all of the health choice children, greater than was initially budgeted, 71,000, are counted into our Medicaid budget. We are assuming lower than budgeted impact from the woodworking of the Affordable Care Act and we are adjusting the base for FMAP increase Federal participation and spending. So with that, we would recommend, at this time, based on our limited data but with good analysis we think of what we have, moving forward with the budget as enacted. Then we would recommend some changes. We're proposing the state share of the salary increase for the DMA employees, partial funding for a portion of the shared savings program that was enacted, a millioin for Medicaid reform. The next two items are adjustments for savings in the Medicaid budget, private duty nursing rates, as well as the prior authorization of mental health drugs, and as we mentioned earlier, the last two items are a refinancing of the Medicaid program using a state retention of provider assessment in lieu of state appropriations. So those state retentions just about equal the amount of the savings being shown, which nets at about to a zero. The unknowns and variables at this time, again, the accuracy of the backog, the estimate of growth, we will have debate I'm sure and we look forward to working with your staff with updated information on what is the right assumption to make about growth in the Medicaid

Program. Overall we believe this budget allows for growth and at the bottom of it all we thing that the most important thing is to make provisions for variance based on what we know and don't know and are recommending a $50,000,000 nonrecurring cash reserve. [SPEAKER CHANGES] Thank you Ms. Copatric. Let me, for the balance of the presenters, you don't have to read every line if you would just hit the high points in the interest of time that would be appreciated. [SPEAKER CHANGES] Thank you Mr. Chairman. Welcome, good morning to the chairs, members of the committee, I'm Jay Drake, assistant state budget officer for general government. I'll be presenting the 2014-2015 recommended budget for general government. Looks like 29 overall, 2014-2015 budget requirements increased by 40.9 million to 622.3 million. 7% increase from 2014-15 certified budget. General fund recommended appropriation increase by 1.9million to 420.7 million. .9% decrease from 2013-14 and .5% increase over 2014-15 certified budget. Highlights and priorities include, providing 3.6 million in recurring funds for $1000 salary and benefit increase for over 4,000 agency employees. Restoring 520,000 for Trion palace on a recurring basis to maintain funding for basic operations at the FY13-14 level and continue operation of the history education center. Programs to increase visitation and grow revenue. The budget recommended establishing a challenge grant for the battleship North Carolina that provides a total of 3 million in nonrecurring funds to match the battleship commissions in 5 million in non state funds which will enable the construction of a coffer dam, that will allow major hull repairs. The budget recommends increased funding youth advocacy involvement office to the FY13-14 level to continue to invest in North Carolina youth. Through internships, community service, and prevention programs. And recommends increasing funding for the historically unutilized business program to the FY13-14 level to fill executive order 24. And continuing initiatives to grow and sustain small business development throughout the state. The highlighted increases in received supported activities include, recommending 18.3 million in recurring receipts to fund our veterans nursing home program at the FY13-14 level. To accommodate additional operating expenses associated with opening vertans homes in Black Mountain and Kingston. 10.2 million in nonrecurring receipts is recommended to support upgrade of the tax information management system, TIMS, which will modify the state's processing and management of tax information. The release three upgrade will improve tax schedules for alcohol, tobacco, estate, and gift taxes. The funding will also support establishing a redundant site at the western data center. And lastly 7 million in receipts is recommended to establish a Gilford County call center. Which will supplement the existing rocky mountain call center and improve responsiveness in tax services for citizens. Funds will be generated from the 20% collection assistance fee. Mr. Chairman that concludes general government, I'd like to introduce my colleague, Mercidy Benton, who will present the NER, JPS, and Transportation recommended budget. [SPEAKER CHANGES] Good morning Mr. Chairman and members of the committee. I'm Mercidy Benton, assistant state budget officer for justice and public safty, natural and economic resources and transportation. I will present highlights of the government budget for each of these areas. I'll start with natural and economic resources, followed by justice and public safty, and transportation. The slide before you represents the budget overview for the natural and economic resources areas. The 2014-15 recommended budget is $381 million. It's 2.7% more than the 13-14 certified budget and 1.2% more than the 14-15 enacted budget. Highlights of the NER area include $3.6 million for $1,000 salary benefits increase for all general funds supported positions in the NER area. Starting with the agencies, the department of agriculture and consumer services. This endorsement is a recommendation from the ???.

The project to transfer the animal welfare section and the spay and neuter program to the law enforcement division of the department of public safety. This will be a $622,000 deductment to the department of agriculture with a corresponding increase to the department of public safety. The department of environment and natural resources provides $1.2 million in recurring and $596,000 in non-recurring funds to effectively monitor ?? ponds throughout the state. It also provides $1.3 million for state-wide aquatic weed control measures and $3.5 million for the non-commercial leaking underground storage tank funding program. The department of commerce recommends re-organizing the department of commerce to create a public private partnership for economic development effective July 1st, $3 million for state-wide support of small businesses, state matching funds for federal contracts for the one North Carolina small business program $2.5 million and competitive local grants for the main street solution fund of $500,000. The last item reflects $350,000 that's actually $300,000 transfer from the community house system to allow the fee to be waived for participants in the apprenticeship program for the school year 14-15. J.P.S. budget overview, 14-15 recommended budget is $2.7 billion this represents a tenth of a percent than 13-14 certified budget and 1.22% more than the 14-15 enacted budget. Highlights for the J.P.S. area: provides $27.2 million for salary increase for all general fund supporting position in the J.P.S. areas, for the judicial branch they recommend $6.5 million for a one step increase for all deputy clerks, assistant clerks and magistrates that have been frozen for several years. employees who are on these statutory plans who are not eligible to receive that increase as of June 30th will receive an increase in the same amount as other state employees. Judicial branch ?? defense provides $3.5 million in non-recurring funds to help address the shortfall of funds from privately assigned counsel that represent ?? clients. The department of justice, $689,000 in recurring funds and $546,000 in non-recurring funds for expansion of crime labs to improve the efficiency and turnaround time for law enforcement, and there's also $229,000 in funds for investigative activities in the department. Department of public safety provides $1.5 million for partial step increase for state highway patrol troopers who are not at the top of their pay range, these have also been frozen for several years. All other troopers will receive the same salary increase as other state employees. Provides $1.8 million in non-recurring funds to purchase 100 additional vehicles for new probation parole officers approved during the '13, 2013 legislative session. These funds are transferred to the department of administration, the motor fleet management division who purchases the vehicles and then they're leased back to the department of public safety. There's $15.9 million for 14-15 and $25 million in annualized savings for 15-16 from operating efficiencies throughout the department. Transportation budget overview, the 2014 recommended budget is $3.1 billion dollars, this is .56% less than the 13-14 certified budget and 3.8% more than the 14-15 enacted budget. Highlights: for the highway fund, provide $7.5 million for a $1,000 salary/benefits increase for our highway fund supported positions in the department of transportation as well as other state agencies supported with highway fund appropriation. It redirects $30 million in highway fund appropriations generated from efficiencies to support other transportation priorities.

Provides 43 million dollars for 2014-2015 over the enacted budget for the highway maintenance program. And there are several initiatives to continue modernization and improve customer service improvements for citizens that conduct business with the Division of Motor Vehicles. Mister chairman that concludes my presentation. I believe Mister Polk is going to come back up to close out. [SPEAKER CHANGES] Mister chairman, members of the committee, we've already discussed the department savings reserve account. With the fifty million dollars addition I've got the seven hundred one million. As overall, again about a two hundred eighty eight million increase in savings reserved under budget. Which is slightly over four hundred million at the end of 11-12. Repair/renovations will be an additional fifty millions dollars. It was one hundred fifty million dollars last year. This is probably the single most dramatic effect of the unanticipated decrease in revenue. Had we not had that forty five million. The beginning credit bounce would have been higher. And therefore, the repair/renovation allocation would have been higher. Again, we did increase from forty two to fifty million. Looking forward to next year the next budget. The government administration are in the process of completing both a twenty five year infrastructure capital plan with an emphasis on the next five years. And I think that next year will be the time the government will have a proposal on a biannual capital plan for the next twenty five years. At this point in time this budget does not, by the way, include any borrowing for either capital expenditures, repair and renovations, much less for operations. We continue the information technology reserve at the same level. Chris Estes has done a great job as our chief information officer. We have found that projects that take more time to go from the planning stage to the implementation stage. The ITS reserve that has already been budgeted for this year and last year. We reduced about eight point six million dollars because we can delay the implementation from this fiscal year to the next fiscal year. And we did that partly as a cost saving measure. We want to spend the money when we need to, not before we have to. Respectfully, this is an area where viability may increase with additional reversions or other sources that you may want to consider accelerating implantation of those plans rather than laying them. But this is responsible and still meets the needs for the state to delay eight point six million. As I indicated to you earlier, we get a little bit more detail on the pay increases. Most of this you've already heard before. For starting teachers years zero through seven have been frozen at thirty thousand eight hundred dollars, will be raised to thirty three thousand, which is a seven percent increase. And this is the first step of a commitment to raise teem to thirty five thousand dollars next year. Teachers on the existing pay plan, with more than seven years experience there is a revised pay step schedule. I've emphasized that. Had some inquiries. "Well under the pay step I'm only going to get a one or two percent increase." That's under the existing pay step. What we are doing is advancing teachers on the pay step, and we've revised it to provide an increase. That revised schedule has been provided fiscal research by the Department of Public Instruction. We have copies available for anyone that has immediate inquiries and of course it will be set forth in the recommended budget bill. As already indicated, highway patrol which is also suffering from frozen pay steps which affected their recruitment and retention. They will be receiving a bigger increase. Likewise, masters and clerks have been on frozen pay steps. Overall, most state employees on average will receive a one thousand dollar increase in compensation and benefits. That comes out on average to eight hundred nine dollars in cash, one hundred ninety one dollars in benefits. Where you are at actual compensation will affect that mixture. So, if you're earning fifty thousand dollars or less, you're getting basically a two percent increase. If you're earning more than fifty thousand dollars, obviously that goes down from two percent to one hundred thousand dollars to one percent. If you need a little bit more detailed information, this breaks it out by department as we said were going to go by allocation by department, the agency within those areas. On benefits, we have a retirement system and a contribution of seven point two million dollars, in addition to what we already contribute. And a one point nine percent cola increase for seventy million. You'll notice the fifty six million. Again, the budget you passed last year was very prudent, not only did it leave money on the bottom line, you went ahead and allocated ----

56.4 million for future benefits while the future benefits of the cola increase so we back that back out, so that really means it's an additional $14 million in addition to the 56 million for a total benefit of 70 million. Mr. Chairman, members of the committee, I appreciate your patience. We are here to welcome any questions. I know we're short of time. My staff is available for your subcommittee meetings and subcommittee briefings and of course a telephone call away. We look forward to your questions and working with you through this short session. [SPEAKER CHANGE] Thank you, Mr. Pope, for presenting us a very sound foundation from which the general assembly can craft the budget for the coming year. What we'll do at this time, we have to be out of this room no later than 10:15 and some people have to leave a little earlier than that, so if you will keep your questions short and keep them to questions, we will try to accommodate as many as we can at this time. Questions, Mr. Brandon? Representative Brandon? [SPEAKER CHANGE] Thank you Mr. Chair. I just have one question for the education piece. When you say masters pay, I was wondering if they were teaching 70% of the courses, does that include new folks or do other people still have to fall into that requirement of 2013. [SPEAKER CHANGE] Last session the master's pay supplement was sunsetted, it stopped for new teachers. This restores it for new teachers. A perfect step, I think the 18.9 million dollars in projected savings that this replaces was probably too much of a savings from them. Governor Corey will have a proposal to reform the master's pay for new teachers so that it applies the master's pay for teachers in their field. But for this coming fiscal year, either way it's going to be 18.9 million dollars. [SPEAKER CHANGE] Senator Robinson. [SPEAKER CHANGE] Mr. Chair. Mr. Pope in terms of the pre-K, let me find it, $3.6 million to fund 26,000 pre-K slots, can you tell me how many children are eligible and how many children does that leave unfunded. [SPEAKER CHANGE] Well first and foremost, 26,000 is the existing level of service, I wish we could fund 26,000 on $3.6 million. This will be an increase, I believe it's about 600, but I will defer to Pam Kilpatrick to answer that question in more detail. [SPEAKER CHANGE] Representative Harrison. [SPEAKER CHANGE] Thank you Mr. Chair and thank you Mr. Pope. [SPEAKER CHANGE] I'm sorry. I apologize. [SPEAKER CHANGE] Mr. Chair, thank you. Senators, so again, the basic of state dollars for pre-K slots is on average $5,000 per slot, so if you divide 3.6 by 5,000, it could potentially fund up to 720 new slots in addition to the 26,000 plus that are already existing. [SPEAKER CHANGE] Follow up, Mr. Chair. [SPEAKER CHANGE] Very quickly, please. [SPEAKER CHANGE] OK. The rest of the question is how many children does that leave unfunded based on eligible number of children. [SPEAKER CHANGE] I don't think they would have that number. That's a number that would be available from the department. They would not have that particular number. Representative Harrison. [SPEAKER CHANGE] Thank you Mr. Chair and thank you Mr. Pope. I'm off to your right. This might be better directed to your deputy on this, but in terms of the spay-neuter program, that's been something that's been historically underfunded, and we had found the funding source of I think a pet food tax, and I'm just wondering if that funding source goes with the spay-neuter fund transfer. [SPEAKER CHANGE] There's positions being transferred and that funding source from Agricultural Department to Public Safety I believe, but I will defer to again my budget officer. Thank you for recognizing that, that the spay-neuter funding is separate from that transfer. But, ??. [SPEAKER CHANGE] Yes, sir. The spay and neuter program is in a special fund that will also be transferred and there's an additional $100,000 recommended also in the JPS area for the spay and neuter program. But the receipts, I believe it's about $250,000 in receipts, and we have confirmed with the department of agriculture that those funds would be available also. [SPEAKER CHANGE] Senator Ford. [SPEAKER CHANGE] Thank you Mr. Chairman. Thank you Mr. Pope. I was looking through the Governor's budget and I did not see, and you may have alluded to it in your comments,

Do you have the required five year forecast that compares expected revenues to expected expenses? [SPEAKER CHANGES] As you recall, I can’t flip back to it right away. We do have the general forecast, we call it a scenario, because of the range for it, but we will be glad to work with the fiscal research division through a specific five year forecast. So we have the information. Do I have it as a document? As a page in this recommended budget? No sir, but we will find that. [SPEAKER CHANGES] One quick follow up, it’s very important because not only is it a statutory requirement, there are severe penalties, at least a misdemeanor fine, penalty for not providing it. And given Mr. Chairman, what we’re going through in the legislation side, I think it’s important that we have that ?? five year projection so that we understand what the big picture is. [SPEAKER CHANGES] Well I think you would have to arrest some people in the past if you were going to enforce that. Representative Goodman. [SPEAKER CHANGES]?? chart that shows the two scenarios or projections for 2017 and we will extend it beyond that, provide that information to you. [SPEAKER CHANGES] Thank you for the further clarification. Representative Goodman. [SPEAKER CHANGES] Thank you Mr. Chairman. Mr. Pope, I’m over here on your right. Your own slide 17, says that there are salary increases for teachers and other school employees. Is that all other school employees and is that a thousand dollar minimum for all school employees? [SPEAKER CHANGES] Actually if you would go back to it towards the end of slide, you’ll see teachers and principals are 108 million dollars, and the second line are the other public school employees ?? both administrators and support, and that’s an additional 53.8 million dollars. And that does ?? the same as the other state employees with 1000 dollars on average, including benefits. [SPEAKER CHANGES] Senator Brown. [SPEAKER CHANGES] Two questions, Mr. Chair, but the first is on the lottery. You may, there were some shifts or some recommendations of some new areas to be funded so could you just give me a brief update on where that leaves the lottery with the funding for the counties in the other categories? What changes? [SPEAKER CHANGES] We increased the funding for pre-k from additional lottery funds. From the lottery surplus are this year the non-recurring, we’re using part of that for the pilot program for the Career Pathways for teachers. We left the capital funding for the counties at the same amount. I believe it’s 100 million. That was not changed. I will defer to Elizabeth ?? for that. [SPEAKER CHANGES] Yes sir, the 100 million dollars for the capital fund was the enacted level and that has not changed. The new areas funded: Career Pathways, 9.7 million, the UNC Serves NC Scholarship Program, 5 million, Pre-K is a total of 18.4 million, and text books, 23.1 million. [SPEAKER CHANGES] One more question, Mr. Chair. [SPEAKER CHANGES] Briefly. [SPEAKER CHANGES] Briefly, on the child and family support teams, in the DH budget where that 250,000 dollars was eliminated, I’m just concerned about what positions, are they all like state administrative positions? Will it affect the local programs in any way, could somebody explain the impact of that and what positions are actually eliminated? [SPEAKER CHANGES]?? Patrick. [SPEAKER CHANGES] Thank you Mr. Chairman. The two positions and the residual funding are for an evaluation contract. They are state level administrative positions. They were part of the pilot when this was being rolled out to the counties. It does not affect the service level. But that funding remains unchanged within DPI, and this is a state level administrative expense that has been deemed unnecessary since it is now fully operational. [SPEAKER CHANGES] Representative Adams. [SPEAKER CHANGES] Thank you Mr. Chair. Just one question about the masters on page 17. Am I to understand that if you’re working on a degree, that that degree must be in your area? For example if you’re teaching say, first or second grade, and you’re pursuing a masters in reading, would that not apply? [SPEAKER CHANGES] Representative Adams, I don’t know the details of it. The funding is recurring funding to restore it. Actually this current statute says it’s supposed to be quote, I’m not sure the exact language, supposed related to your field already. The governor will have a specific statutory proposal and the state board of education is working on the exact language on how to define what is related to in field. Some ways, it’s easy. If you’re a special education teacher and you have a masters in special education, that’s in field. If you’re a physics teacher and have a masters in physics, that’s in field. I’m not

Personally familiar with masters in reading for generally first and second grade reading. I presume that's going to be defined by the state Board of Education. This budget recommends the funding for it. There will also be work again in the Special Provisions and Statutes Unit and the implementation by the state Board of Education as to what is and is not in field. That's actually an issue in the current law and will continue to be so. [SPEAKER CHANGE] Senator McKissick. [SPEAKER CHANGE] Thank you Mr. Pope. Two questions dealing with the Health and Human Service area, and I'll wrap them all into one. Right now you're predicting this Medicaid shortfall at roughly $70 million, and as I understand from Ms. Kilpatrick's presentation, she was looking at numbers that were based upon March 30th, but as I recall in that timeframe, the projected timeframe, was $70-140 million, so I'm trying to understand what has changed to get us only to the $70 million level, and likewise, to what extent has our physical staff been consulted with, because I know at one point there were differences between physical and what the budget office was looking at. Secondly, within HHS we've got the $122 million cut overall, but I know I've heard the secretary mention on a couple of occasions that what she really needs is good staff to get in there, to fill the positions that are needed to be filled with the type of expertise and skills that can help her run the agency effectively. To what extent has that been taken into consideration with the 122 that's projected to be taken from that area? [SPEAKER CHANGE] In answer to your first question, the Health and Human Services provide a range of the potential shortfall. Part of that was, to be perfectly blunt, very simple math as to what they thought the unrealized statements would be that the General Assembly enacted as well as expected growth. We have met extensively with Health and Human Services, they provide the primary information, do the forecast. My office has taken an interactive role with them. We have met directly with the Fiscal Research Division on two occasions, sharing information with them so we know where we agree and where disagree. And we will continue to do so with Fiscal Research Division, but again, the primary information is from Health and Human Services. Unfortunately, part of NC Tracks both provided for a data warehouse and analytical software to do a better job of tracking, forecasting the balance of the year through, I believe the system is called Trueven, as well as the next year. That was delayed in a simple notation, and we don't have that information available, so hopefully we'll have more information next year. But I agree, I'll say it again, the $70 million that we think of state funds, the state share, we believe is realistic, the 50 million Medicaid risk reserve gives us room up to 120 million and the Fiscal staff and Health and Human Services and Budget Office will have more information as each month goes by before enactment of the budget. In regard to the staffing, first and foremost something that this General Assembly had already done, you provided a salary adjustment fund of $7.5 million last year. We actually requested 20 million, but we got 7.5 million. There was some debate on whether that was intended for Health and Human Services. The Assembly had authority to adjust their salaries by shifting around, but we did allocate part of that salary adjustment fund, a major part of it, to Health and Human Services, especially to those healthcare professionals. Also, this across the budget increase, salary increase already in here applies to Health and Human Services. But finally, Health and Human Services has about 1,800 vacant positions. We did not eliminate those vacant positions. You're absolutely right. We need to fill those positions, and they still have the authority to do some reallocation within those positions to give more higher compensation, they still have the authority, for example, to try and cut down the overtime and contract service for nurses and other healthcare professionals by providing better pay, so we did not take those positions. There are a few small areas we asked for efficiency among existing positions, but we did not take away those vacant positions. [SPEAKER CHANGE] Representative Farmer-Butterfield. [SPEAKER CHANGE] Thank you Mr. Chair. My question is in reference to DHHS. I notice that in terms of the North Carolina pre-K program it looks like state dollars are being swapped with federal counter funds. Is this due to an increase in counter funding or is it coming from some other allocated area of services? [SPEAKER CHANGE] It is an increase, but I will defer for your correctional elaboration from Pam Kilpatrick. It's an increase. [SPEAKER CHANGE] Further questions at this time? If not, Mr. Pope we thank you and your team from the Office of State Budget and Management and the committee is adjourned.