As his term came to a close last week, Governor Mike Easley was working hard to make sure his replacement, Bev Perdue, doesn’t face the same budget mess he had to deal with when he came into office in 2001. In December, Easley told state agencies to include three-, five- and seven-percent reductions in their budget proposals for the next fiscal year. That comes on the heels of the five-percent cuts he ordered in October in anticipation of a potential year-end revenue shortfall. In recent months he also authorized the state to tap into the rainy day fund and issued $700 million in state debt to help stabilize the stumbling economy.

The scope of the budget shortfall facing the state is large. The gap between the amount of revenue the tax system in its current form will generate and what spending is needed to maintain current services is roughly $3 billion, or 15 percent of the current budget. The federal government may step in and help North Carolina with some Medicaid and transportation expenses, but that will not come near closing the state’s budget gap.

With his cutting orders, Easley has wisely forced North Carolina’s leaders to begin the discussion about how to state government will weather this fiscal storm now, well in advance of the start of the new fiscal year on July 1. The budget cuts leave very little room for certain ballooning costs like community college enrollment and the state employee health plan, but these needs cannot be ignored.

State leaders and the public have some tough decisions ahead. Now is the time to set priorities, decide which programs work and which ones don’t, find efficiencies, and make cuts that may challenge some of the entrenched interests at the General Assembly.

With a difficult year ahead – both for the state budget and for thousands of struggling families around North Carolina – here are a few questions state leaders need to ask themselves in the coming months.

Are there ways to save resources that require confronting moneyed interests? For example, do business subsidies really work to stimulate job creation? While the state has given out hundreds of millions of dollars in subsidies, there has been no credible analysis of whether these subsidies are actually worthwhile investments. With resources so scarce, the state can’t give away money without ensuring that it’s getting good-paying jobs with good benefits in return.

Can North Carolina save on prison space demands by investing in community-based programs and drug and alcohol treatment and by reforming our sentencing laws? Amidst widespread concern about the state’s probation system, Governor Easley recently called for more offenders to be put in prison. But instead of this knee-jerk reaction, the state needs to look at programs that help ex-offenders and those struggling with addiction and invest in and expand them. Violent criminals need to be locked up, but that doesn’t mean prison is the right answer for the thousands of non-violent offenders North Carolina currently keeps behind bars.

Can we save money in health care by letting science and doctors rather than big corporations dictate what prescription drugs make sense and what treatments actually work and are most cost effective? Research has revealed that Americans spend billions on the newest drugs and procedures, even though they don’t perform any better than older, much less expensive treatments. The state can do a lot to require hospitals to take more conservative courses of treatment and ensure that only proven treatments are used.

Do we have programs with similar missions that should be combined to save administrative costs? These are very sticky and often political questions but they must be tackled.

It is only by answering these questions that we can then begin to have a meaningful discussion of how we’re really going to deal with the state’s fiscal crisis and make plans for the long term. If the recession proves to be as long and deep as most economists predict, the state’s budget woes will last two to three years.

Ultimately, North Carolina will need to look at reforming its tax structure to make it fairer and more adequate to meet the needs for investments in people and infrastructure. But we can’t have that discussion until we carefully assess state spending. There’s no time like the present to get started, and we can thank Governor Easley for kicking off the discussion on his way out the door.

Elaine Mejia is the Director of the N.C. Budget and Tax Center