State budget sinking amid rising unemployment

North Carolina's growing jobless numbers spell trouble for state lawmakers as well as for the people filling Employment Security Commission offices.

ESC officials said Wednesday the state's unemployment rate jumped to 9.7 percent in January from 8.1 percent in December. The number of people out of work – 443,000 – is a state record, and the January rate is the highest in 26 years, officials said.

"As unemployment goes up and less people are working, we're seeing reduced revenue collections in our major tax categories of income, sales and corporate (taxes)," said Charlie Perusse, state budget director.

State revenues are more than $1 billion below projections for the year, and the shortfall keeps growing, Perusse said.

Gov. Beverly Perdue said Wednesday she had taken control of the state's $787 million "rainy day" reserve fund to stabilize the budget. She said she would use $250 million to shore up the troubled State Health Plan and would use the rest to manage daily cash flow.

"Securing the rainy day fund is necessary for the continuance of day-to-day government operations. Put simply, this move makes sure we will have the cash to pay the bills,” Perdue said in a statement.

Because of declining revenues, Perusse predicted a $3.4 billion deficit in the 2009-10 fiscal year, which starts in July.

The state is counting on $1.7 billion in federal stimulus money to cut the projected deficit in half, and Perusse suggested several scenarios to fill much of the remaining gap.

One plan would cut spending by most state agencies by 10 percent. The University of North Carolina and North Carolina Community College systems and the Department of Health and Human Services would take 7 percent cuts, and public schools would have to reduce spending by 4.5 percent.

Those moves would save $1.3 billion, Perusse said, leaving lawmakers to make up the final $400 million.

"It is unlike anything we've seen before. It is truly significant pain," Senate Majority Leader Tony Rand said.

Other scenarios called for 15 percent cuts for some state agencies. Perdue has hinted that some programs could be eliminated altogether, but she has refused to provide details of possible cuts or tax increases until she releases her proposed budget next Tuesday.

Perusse's scenarios are based on existing spending levels – no new programs and allowances only for increased school and Medicaid enrollments – and on flat revenues.

The rising unemployment numbers and Perdue's push to increase per-student spending cast doubt on both of Perusse's budget assumptions, however.

"I'm probably more discouraged than I was," North Carolina State University economist Mike Walden said about the state's employment picture.

Walden said unemployment could climb to 13 or 14 percent by next year before the economy turns around, and he thinks the state might be too optimistic in its revenue forecast.

"I would probably plan for worse than that and hope that it is stagnant or better than stagnant," he said. "But I would have a contingency plan."

Rand, D-Cumberland, was one of several legislative leaders who met with Perdue on Wednesday on budget matters. Many of them back her push for more school spending amid the tough economy, but Rand said no one has a clear idea of how to pay for it.

"It's going to take massive cuts, and we may raise revenue some around the edges. I don't know," he said.