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Joint | February 5, 2013 | Committee Room | Appropriations

Full MP3 Audio File

and we'll move on over to the budget overview. [SPEAKER CHANGES] I'm Evan Roadwall from the fiscal research division of the general assembly. To set the stage for work on the budget over the coming months, my teammate and I, Christian Walker, are providing you with a broad overview of the budget. I'm going to be talking about the budget in broad terms, I'm also going to talk about growth trends and budget drivers, and I'm also going to talk about some of the factors that affect the condition of the budget, particularly the general fund. Kristen will then cover recent budget shortfalls and budget pressures that'll be facing you in the current session. This first chart shows 2 ways of looking at the budget. The first is the general fund, general fund appropriations, the general fund budget covers some of the most basic functions of state. Government, in general fund appropriations or the portion of the general fund that are funded through revenues rather than agency receipts. The general fund appropriations generally get the most focus and the most attention, and it will be the focus of our presentation today. This first pie chart shows that between public schools and higher education, education is over half of the general fund budget, about 55%. The next largest segment is medicaid, about 15%, justice and public safety, which is what JPS abbreviates, comprises the court system, correction, the department of public safety. NER and general government are lumped into one segment for purposes of this chart. NER stands for Natural and Economic Resources. It covers commerce, the department of environment and natural resources, agriculture, labor, and general government agencies are those most closely associated with the administration of state government. So the department of administration, for example, is in general government. As is the general assembly, the governor, the department of the treasurer, and insurance. The pie chart labeled all sources, includes all over governmental funds. So the highway fund, the highway trust fund, enterprise funds like the lottery and internal service funds like motor fleet management, and also includes federal receipts, and if you look at medicaid, when we look at the all funds budget, medicaid is the single largest portion. That's a result of the large amount of federal receipts the program draws down. NER and general government are much more significant portions of the overall budget then they are the general fund budget, that's due in part to the Employment Security Commission, which is part of the NER function, and in general government you have the ?? fund, and internal service funds like information technology services and motor fleet management. Transportation budget doesn't register in the general fund pie, but it is a significant portion of the all sources funds. You've got the highway fund, the highway trust fund, which are both state funds, and there area also significant federal receipts that are made available for transportation. The education portion of the all funds chart includes institution, does not include institutional funds such as endowment funds, and it doesn't include Federal research dollars, but it does include tuition. The central point here is that although the general fund gets the most attention and discussion, the state budget is larger and more complicated than just the general fund. I'm going to talk a little bit about budget drivers now, and this first chart shows per cap- the general fund budget per capita. And the shaded areas are periods of recession, and you could see from looking at the chart that those recession periods correlate with slight downward trends in a generally upwards sloping graph. But when we adjust for inflation, the

per capita is much more modest. This next chart shows 3 snapshots of the operating budget at different points in time. And these are numbers that have been adjusted for purposes of programmatic comparison. So fiscal year 2000/2001 was the bottom of the previous recession. 2008/2009 was the last budget that was passed before the Great Recession, and fiscal year 2012/2013 is of course, the current budget year. The c hart shows how education dominates the general fund. It's more than half, and throughout this entire period. If you look closely at Medicaid, you'll notice that that represents pretty significant increase between 2001 to 2009, it more than doubles, But then between 2009 and the current fiscal year, it's been reduced somewhat. And it's important to note that Medicaid budget shortfalls over than last 3 years suggests that the Medicaid budget has not been quite large enough to fund actual expenditures. This next chart, these are the numbers the previous chart is based on. And I just show it here because there are a couple of details that sort of get lost in the previous graph. I'd like you to take a look at the NER line, at about the middle of the page, and you'll see some pretty significant growth between 2001 - 2009, it not quite double, but it grows significantly. that's largely, although not entirely the result of the establishment of and the increased funding for the Clean Water Management trust fund. And similarly some pretty significant reductions in the period since then, and that is again, partly a result of cuts to that particular program. And before I leave this chart, please take a look at the debt service line. That shows the most dramatic increase in this period of time, There were some large bond issues at the beginning of that decade, general obligation bonds, and also some later certificates of participation bonds that dramatically increase debt service.. And it's increased at a much lower rate since then, but it's interesting to note in that last column, debt services is the only segment of the budget, over this period of time,that's seen any increase at all. Alright, I'm going to focus now on some of the drivers imbedded in the budget, and behind some of the growth. This chart represents cumulative change in percentage terms, so as an example of what the data is, let's direct your attention to the yellow line, which is just overall North Carolina population. So over this period of time between 2001 - 2013, the North Carolina population grew about 21%. And the numbers aren't shown here, it went from 8.2 million to about 9.9 million. And this chart plots that percentage increase over time. Population influences demand for many if not most government services, DMV, highway, vehicle miles travels, environmental permits, Secretary of State filings. But this chart plots the largest enrollment driven programs within the state, with the exception of Medicaid which I'll talk about later. So, the lowest line there is K-12 Full Time Equivalent Enrollment, I apologize for the abbreviation, FTE, stands for Full Time Equivalent. And for the majority of the period we plotted here, K-12 public school enrollment track with population. It's since decreased some, or not increased

As fast a rate, that's at least partly the result of recent changes in the kindergarten age requirements which have reduced enrollment somewhat. The dark blue line that sort of bends and goes up and then bends downward is the North Carolina prison population. And for many years the prison population was growing at a rate much higher than the that of the general population. Surprisingly it's moderated a great deal and in fact in the last year it's decreased and this is not just a state trend but a national trend. UNC head count has grown pretty significantly over the period but has leveled off somewhat and then community college enrollment is measured in full time equivalent units really took off during this period. Community college enrollment is counter cyclical so one of the ways that people responded to the lack of employment opportunities was enrolling in community college. This next chart, the enrollment trends on the previous chart basically put pressure on the budget. In the form of new positions and increased salaries and benefits and that's what this chart illustrates. So this chart shows the cumulative percentage increase over this period of time, 01 to 11-12 and you can see salaries and benefit spending is growing at a faster rate in the public schools then the state agencies. After the public schools you've got UNC and then the community colleges so you will remember that education makes up over half the budget and this just shows that some of the growth and trend factors are driving those numbers upward. This next chart shows that higher education where North Carolina has seen so much enrollment growth is also where the state offers fairly generous funding relative to other states. So the state constitution says that higher education as far as practicable shall be extended to the people of the state free of expense and that sort of underlines the North Carolina tradition. In the area of K-12 North Carolina ranks 22nd in spending among...in per student spending among the rest of the states and the District of Columbia but when you add federal and local spending to that number our rank drops to 45 of the 51. By contrast in higher education, North Carolina spends the most per university student of the states in the southern region. It spends the most per student in community college students in that same region. And then per higher education student which includes both community colleges and the universities we spend the third highest of the fifty states. And then the tuition information is basically the inverse of that. Our tuitions in higher education are relatively low compared to other states. I need to mention medicaid enrollment growth and health care spending before I move on to...before I leave the discussion of budget drivers. So this chart is similar to an earlier chart but it compares cumulative percent growth in medicaid enrollment as compared to the population. You'll see that it's growing significantly higher than population just as higher education is. The most expensive medicaid enrollees are the disabled who account for about 15 percent of enrollment but 44 percent of medicaid costs. We don't have quite as many years of enrollment data for the disabled but you can see that they are growing at a rate approaching that of overall medicaid enrollees and well above the North Carolina population. I'm going to shift from enrollment for a second to price inflation. The best measure of health care inflation is from the health care cost institute. We don't have a lot of years of data so I'm showing you one year of data between 2010 and 2011 in unit prices for in patient health care increased 5.9 percent

Outpatient visits increased 9.6%, and that's as compared to 2.1% in the economy at large, as measured by the CPI. So there's some evidence that health care inflation is higher than that in the economy at large. I mentioned, in an earlier chart I showed the Medicaid budget increasing rapidly between '01 and '09 and then decreasing. But Medicaid is not the only way that health care impacts the state budget. You also have the state health plan and you have inmate medical expenses, for example. This shows, for context, annual growth for some other sources of health care cost data. The first series of number are for the state health plan, and the last two are national data. For the state health plan, where contribution rates per employee have more than doubled over a 12 year period, at a time when benefits were actually being reduced. The second series of numbers are from the Bureau of Labor Statistics on employer health costs per employee hour worked. You can see that they have not quite doubled over a 10 year period. And you have similar but slightly lower numbers from the Center for Medicare and Medicaid Services. That's national data. The key points I want to leave you with on budget drivers are that General Fund per capita spending has been increasing significantly over the years. But after adjusting for inflation, that growth is much more modest. Education is about 55% of the general fund. And the drivers of education are strong enrollment growth and a tradition of higher education support more generous that most other states. The Medicaid budget is being driven by strong enrollment growth, particularly among the disabled population. and health care inflation and increases in utilization impact the state budget through Medicaid, the state health plan, and inmate medical. I'm going to talk a little bit about some of the factors that influence the overall condition, the overall health of the General Fund. The first of these is the Savings Reserve. Think of that as the rainy-day fund. It was established to help manage natural disasters and economic downturns. The green blocks of the bars represent the balances in the Fund, and the red blocks in the bars represent the gap between the statutory goals and the balances. You can see there that it's waxed and waned, more or less correlating with the economic cycle. I should mention the dramatic increase in the height of these bars is because the statutory goal was changed in 2008 - 2009, from 5% of the previous years' operating fund to 8%. So the bar is literally higher. Right now, the balance is around, I believe, $419 million, and the target is $1 billion, 576 million. Although the budget is always balanced at the end of the Legislative session, typically there are not enough recurring funds to meet recurring requirements. And so surplus nonrecurring funds are used to temporarily plug this gap. This chart illustrates that problem. On the bottom of the page in red, you have the recurring shortfall, and on the top half of the page you have the use of the surplus. Where it's blue, it's being used to meet the shortfall, and where it's green, it's actually excess funding that goes into the credit balance. For example, the worst year for this was 2002-2011, when $3.2 billion in

recurring needs were met with temporary tax revenue and about one point six billion in federal american reinvestment and recovery act funds, A R R A funds that were made available by the feds to help states manage the fiscal crisis. The problem's much smaller now and I think that that amount is just- is in the neighbor of four hundred million dollars for the budget for the current fiscal year. One difficult long term issue facing the state is retiree medical benefits and this chart compares the condition of the retirement system which is quite healthy by the standards of other states to retiring medical which is not so healthy. So for the retirement system the vast majority of the liabilities, we have assets to cover. So only- so of the liabilities, only three point seven billion are unfunded, that gives us a ratio of ninety four percent of our liabilities being funded and that we're second in the country in terms of the strength of our system and the reason for that is that, I guess the tradition of the general assembly of appropriating the actuarily required contribution each year, the amount recommended by the actuaries. By contrast retiring medical benefits, our liabilities are largely- we don't have the assets in large parts to cover those liabilities and our state ranking therefore is significantly worse. Forty second out of the fifty states. And, again, the tradition is we have not typically appropriated the actuarily required contribution. And then finally and briefly there is some evidence that we may not be meeting the repair and renovations needs of the state for our buildings. This is a estimate by the office of state construction for six years worth of repairs and renovations that they estimated in two thousand and eleven and funding for repairs and renovations since fiscal year two thosand ten, eleven has been a hundred twenty nine million. So, the key points I want to make on budget conditions is that the savings reserve is well below the statutory target but up significantly from two thousand nine, two thousand ten. Non recurring funds are being used to meet recurring requirements and the retirement system is one of the strongest state systems in the country but North Carolina retiree medical benefits are large relative to those of other states and there is some evidence that maintenance of state buildings is underfunded. And with that, I'm going to turn it over- [SPEAKER CHANGES] I'm going to have to interrupt you there. What we're going to do in- since we have about ten more minutes left, we're going to take some questions for you and then we'll let Christen finish with her part tomorrow and some further questions there. I have several people who have seen raise their hand. We'll start with senator Apodaca. [SPEAKER CHANGES] Thank you mister chairman. Evan, can we go back to page ten please. [SPEAKER CHANGES] Sure. [SPEAKER CHANGES] Line one. state spending. K through twelve. And that is twenty two, we're ranked twenty two out of fifty one? Is that correct? [SPEAKER CHANGES] Yes sir. [SPEAKER CHANGES] Why is it always here we're like at the bottom? Forty eight, forty nine, or fifty. [SPEAKER CHANGES] I'll turn this over to the education folks but I suspect it has something to do with that second number that when you- the first number is just state spending, the second number is state, federal, and local spending. So it probably has to do with which number- [SPEAKER CHANGES] We have somebody from education to answer the question. If you can go ahead and identify yourself please. [SPEAKER CHANGES] Good morning, Brian Madison with fiscal research. Good morning mister chair. Answer to your question is typically comparisons are made with special emphasis on state and local resources. Most states tend to have a kind of a half and half system where states comprise about forty five percent of the public school budget, locals about forty five percent

feds about ten percent. Outside of this recent fiscal situation. North Carolina is a litte different. Our system is much more state based and typically you'll see sixty five percent state, twenty five percent local, ten percent feds. That's where that comparison comes from. [SPEAKER CHANGES] Thank you. Additional question, of ??, not education. [SPEAKER CHANGES] ok. alright. [SPEAKER CHANGES] Did we not take steps starting last year to put a little additional money in the retiree health plan shortage? [SPEAKER CHANGES] I'd have to defer question to the salaries and benefits team on that. [SPEAKER CHANGES] We've got somebody step up on a mic. Identify yourself please. [SPEAKER CHANGES] Yes. Good morning, David ?? from fiscal research. I don't know if there were particular steps taken last year but we have steadily been putting in about fifty to a hundred million dollars more in the retiree health benefit fund each year more than we are paying out in premiums so that's the case. [SPEAKER CHANGES] follow up. [SPEAKER CHANGES] Yes mister chairman. Thank you. How does that work out in getting caught up? What is the expected time frame if we continue to put those monies in? [SPEAKER CHANGES] That would never be sufficient to fund the full liability compared to the thirty billion dollar liability. [SPEAKER CHANGES] Representative Dollar. [SPEAKER CHANGES] Thank you, just one quick technical question on slide twelve where we're talking about health care spending cost increases. Are those national numbers or those specific to North Carolina? [SPEAKER CHANGES] Those are national numbers. [SPEAKER CHANGES] Thank you. [SPEAKER CHANGES] Thank you mister chairman. I'd just like you to [SPEAKER CHANGES] For ?? sake, can you identify yourself. [SPEAKER CHANGES] Representative Horn from Union county. You talked about adjusted for inflation . What are you considering to be the inflation rates in the last couple of years and projection. [SPEAKER CHANGES] Simply the C P I. That's all we're using, the standard. [SPEAKER CHANGES] Which is [SPEAKER CHANGES] I'm sorry, the consumer price index. [SPEAKER CHANGES] I understand what it is. I meant to say approximately right now what is the percentage your looking at that you're using for this inflation adjustment these days because seems to me the inflation is very low compared to previous years so when you're showing spending adjusted by inflation really all that adjustment came some years ago and now we're not faced with those issues today to that extent [SPEAKER CHANGES] That is absolutely true. Typically, in recent memory, I think of inflation in the two to three percent range for many years now and it's true that the inflatoin was much worse. ten, eight, thirteen percent, at times, in the seventies and eighties. That's absolutely right. [SPEAKER CHANGES] The next one I have in the queue is senator Hunt. [SPEAKER CHANGES] Thank you mister chairman. Evan. Regarding debt service, calculations on page seven. Would you clarify the point that even though we have fairly moderate debt service increase because of low interest rates, the principal balance is substantially higher than it was back then. In other words, our debt service is low but the interest rates are very low so we have a very large amount of principal on debt. [SPEAKER CHANGES] I believe that's true. I'm not exactly sure what the number is on the principal for debt service. Mark Bondo might be able to enlighten us. [SPEAKER CHANGES] Members, while he's coming up, there's quite a queue that's lining up so if I don't get to you today we will pick you up first thing tomorrow. So we'll work our way as much as we can today. Mark. [SPEAKER CHANGES] Yes. Mark Bondo, I'm with fiscal research. I believe the question was how much principal has been issued in terms of debt over the last, over that time period, is that correct? [SPEAKER CHANGES] Yes. [SPEAKER CHANGES] Yeah, so in two thousand there was a fairly large general obligation bond authorization. three point one billion dollars for U N C and the community colleges and after that, beginning in two thousand and on, where what was known as certificates of participation and or special ?? and those I believe were about two point eight billion dollars over the course of a number of years

so those issuances combined with the general obligation that issuances in 2000 were one of the large increases in sort of principle in that service cost. [SPEAKER CHANGES] Okay. Rep. Michaux. [SPEAKER CHANGES] Yes, ??, I guess one of the things we've always faced here was the factor of using nonrecurring funds to pay for continuing ??. Are we about to reach a plateau on that right now? Do you know of, or are we still in that bind? [SPEAKER CHANGES] My guess is we're still in that bind. The fiscal research division in the next, in the coming weeks and months is going to be putting together a 5 year budget projection that we typically do around this time of the year. And that will shed more light on it going forward. But my instinct is that it's not going away. [SPEAKER CHANGES] Rep. Wilkins? [SPEAKER CHANGES] Thank you Mr. Chair. [SPEAKER CHANGES] ?? [SPEAKER CHANGES] I'm on your right. Over to your right. [SPEAKER CHANGES] Other right. [SPEAKER CHANGES] How are you doing, Mr. Wilkins. [SPEAKER CHANGES] Page 8. [SPEAKER CHANGES] You look good on the far right, winky. [SPEAKER CHANGES] Thank you sir. [SPEAKER CHANGES] And we look at a drop in prison population, we'd all like to say oh yeah, there's a decrease in crime rates, my question would be is that true or is this somehow also tied to the recession and lower funds availability in state budgets? [SPEAKER CHANGES] I wish I had a good answer for you. There are a lot of theories out there about why crime rates are coming down, and why prison population and enrollment is down. As I said it's a national trend and there are a lot of theories. It doesn't sound like there's any consensus. One of the more bizarre theories I've heard is it has to do with lead, the absence of lead in the environment. That's true. I mean I'm not saying it's true, I'm saying there is that theory. [SPEAKER CHANGES] I'm going to take Rep. Queen, then Representatives Iler, Blackwell, Sen. Robinson, Rep. Faircloth, you'll be first up in the queue tomorrow. But I apologize for that. Rep. Queen? [SPEAKER CHANGES] Yes. My question is just trying to drill down a little deeper to understand what the accuarily appropriate contribution would be for our retiree medical benefit so that that would be solvent and those benefits would be available in the future? [SPEAKER CHANGES] If I understand your question, 2.5 billion. [SPEAKER CHANGES] So in this budget, we would need to put in 2.5 billion? [SPEAKER CHANGES] I believe that is correct. [SPEAKER CHANGES] Follow up. [SPEAKER CHANGES] Follow up. [SPEAKER CHANGES] So just from what Sen. Apodaca's question referred to, we've been putting in 50 to 100 million over what we're spending but to get so- and that the answer to his question, was that not improving the situation and the answer was we would never get it solved just doing that? So in what kind trend line would a solution be ?? We can't do it all at 2.5 million at one time, what kind of trend line would be reasonable to say take care of it in 10 years? [SPEAKER CHANGES] Evan, you want to defer to David? [SPEAKER CHANGES] Please, yes. [SPEAKER CHANGES] Yes. David ?? of fiscal research division. So to clarify a few points, the amount we are currently putting in is the 0.9 billion, that represents about 50 to 100 million more than the amount being paid out in premiums, that was the 50 to 100 million dollar number. The accuarily required contribution is 2.5 billion dollars this year, so in other word 1.6 billion more than we are currently appropriating. That represents a 30 year amortization of the liability itself. So that would pay down the unfunded liability over 30 years if we gradually ramp up to the 2.5 billion dollar number, that would take obviously longer than 30 years to pay down the unfunded liability. [SPEAKER CHANGES] Okay, members, what we're going to do, apologies to those who we weren't able to get to today, Rep. Dollar will be running the meeting tomorrow and he's got your names first up int the queue. We have about 10 minutes of presentations tomorrow, most of the time will be dedicated to your questions. Please remember to bring your documents back with you, they're not going to distribute them

Speaker: Please bring those back with you, with that i appreciate everybody's attendance and we are adjourned,