A shortfall of approximately $800 million in the upcoming fiscal year continues to be the major issue facing legislators and budget negotiators. Revenues have been significantly short of forecast, and the continuing weakness in the economy is affecting state revenue collections. Governor Perdue’s proposed budget, which was released in April, cut state spending by $957 million in a sweep that would affect, both negatively and positively, Medicaid, teacher’s pay, state jobs and small businesses. Under her plan, most state agencies would experience another 5 to 7 percent cut on top of the 10 percent cut they endured last year.

The Senate budget plan, passed on May 20th, would cut $600 million from the second year of the two-year spending plan approved by the legislature last summer. The Senate proposal allocates $187 million less than Gov. Perdue’s budget proposal. Overall, public schools would experience a $219 million cut in addition to a local requirement that school districts find another $80 million in savings. The Senate did not include a recommendation from the governor to increase teacher pay, and under the Senate plan there would be no pay raises for state employees either.

There are no wide-ranging tax increases, but the Senate chose to keep the higher temporary sales and income taxes approved by the legislature last year. In addition, the Senate seeks several fee increases totaling $22.4 million. These fees are largely applied to justice and public safety programs and civil and criminal court procedures.

On June 4, the House gave its final approval to an $18.9 billion spending plan for the state highlighted by an emphasis on protecting the public school system and limiting cuts in public education. House budget writers were able to save 1,600 more public school jobs over the next year than the Senate plan originally proposed. North Carolina Education Lottery funds of approximately $126 million would be used to offset public school funding cuts proposed in the Senate budget. The University of North Carolina, however, takes a bigger hit in the House budget than in the Senate version. House plans would cost the university system nearly $175 million in cuts and 1,700 lost jobs.

The House budget is similar to the Senate budget with regards to Medicaid funding in that it relies on the continued receipt of $500 million in Medicaid funding from Congress. This funding has not yet been approved, and the state budget will be half a billion dollars out of balance if the federal money does not come down on Jan. 1, 2011. Federal stimulus dollars are also expiring, and some accounts suggest $400 million of additional funding dollars will be needed in future budget years.

House and Senate budget negotiators will spend the weeks remaining in this fiscal year working on a compromise budget that should be sent to the governor by July 1. Cuts to public education and the university system, along with proposed tax and fee increases, are likely to be the major issues of contention during the negotiations. Once the budget is finalized and signed by the governor, it is likely that leaders in both the House and Senate will move to adjourn the short session within a matter of days so that legislators can prepare for their upcoming elections in November.