Progressive Voices

Over the next several months, pundits will attempt to discern and distill the legacy of two-term Governor Mike Easley. With respect to the state’s finances one thing is certain – he’s leaving them in better condition than he found them.

When Governor Easley took the oath of office in 2001, he walked into a fiscal nightmare. The nightmare had several causes — some of which were out of the government’s control. The technology-driven stock bubble burst and with it the income tax payments of wealthier taxpayers. The state was hemorrhaging manufacturing jobs at an unprecedented rate. And the nation went into recession following the attacks of Nine-Eleven. To add insult to injury, the state had drained the $800 million savings reserve in order to recover from Hurricane Floyd.

The budget shortfalls that faced Governor Easley during those first few years were on the order of $2 billion – or around 15% of the state budget at the time. Many will recall some of the drastic actions the governor was forced to take such as diverting funds that were slated for the state employee retirement fund; telling local governments they would no longer be reimbursed for their lost inventory tax revenues; and telling state employees they would get a few weeks of extra personal leave instead of pay raises. Ultimately Governor Easley had to tell the General Assembly that the state must raise taxes in order to avoid devastating cuts to core services.

There were two unwise decisions that his predecessor’s administration made that Governor Easley, thankfully, is not repeating in his last year in office. First, the budgets of the late nineties witnessed tax cuts that resulted in $1.5 billion of lost revenue annually. The full effects of these tax cuts were masked for a few years by the stock market bubble which crashed just as Mike Easley took office. Second, the budget that greeted him overestimated revenue growth by a wide margin. And tax revenues actually dropped by 6% during the first full fiscal year after he took office. Governor Easley, on the other hand, forced legislative leaders late in the negotiations this year to revise the already conservative revenue forecast down further.

So as not to overstate the case, it is certainly true that the budget passed recently by the General Assembly and signed by the governor is somewhat irresponsible. It includes $155 million in spending for ongoing needs that will be paid for with one-time revenues. It authorizes roughly $1 billion in new debt. It also includes $220 million of spending designated as one-time spending that is really for ongoing costs. These factors combined with the sluggish revenue forecast for the next few years will make life difficult for whoever is elected to be the next governor. 

Hypothetically, let’s assume that tax revenues do not grow at all during the first full fiscal year of the next governor’s administration. Under this scenario the state would be short by approximately $1.2 billion if it wants to maintain current services, keep the commitments made this year and provide for a modest pay raise for state employees and teachers. Even under this worst-case scenario the shortfall would only represent about 6% of the state budget – not even half the size of the shortfalls that Governor Easley inherited when he took office. 

As with any governor, Mike Easley’s full legacy will not be known until the full impacts of his actions (and inactions) can be measured. But his financial legacy, while not without blemishes, is far better than the one that greeted him when he arrived.

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

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This entry was posted on Monday, August 11th, 2008 at 8:40 am and is filed under Progressive Voices. You can follow any responses to this entry through the RSS 2.0 feed.