Christensen: 13 challenges confront McCrory

Gov. Pat McCrory, who was sworn into office Saturday as the state’s 74th governor, will enjoy a week of celebration with balls and a parade. But soon he and the legislature will face a raft of difficult issues. Here are 13 challenges the state face

rchristensen@newsobserver.comJanuary 5, 2013 

1. HIGH UNEMPLOYMENT North Carolina has the fifth-highest unemployment rate in the country, a product of the deep recession and the long-term decline of such traditional industries as textiles and furniture. Still, the picture is improving, with unemployment having dropped from a high of 11.4 percent in January 2010 to 9.1 percent in November.

McCrory ran for governor promising a “Carolina comeback.”

But Michael Walden, an economist at N.C. State University, cautioned against expecting too much too soon because no governor or legislature can turn an economy around on a dime.

He said the major cause of the high unemployment was the state’s heavy reliance on manufacturing – 23 percent of North Carolina’s GDP is manufacturing compared with the national average of 13 percent. The shuttering of manufacturing plants surely contributed to North Carolina slipping from 29th in per capita income in 1999 to 37th in 2011.

But as people become more confident, they should begin buying more consumer goods, which should help the state economy. “A large part of what is going to happen in the state is going to happen regardless of what happens (in state government),” Walden said.

2. RISING MEDICAID COSTS The state-run health insurance program for the poor costs the state $3.1 billion annually, serving 1.8 million North Carolinians. It is among the fastest-growing programs in state government.

Past efforts to curtail costs have met with mixed results, and there is likely to be a renewed effort that could mean reduced services or more stringent eligibility requirements.

There is also a companion question: The governor and the legislature have to decide whether North Carolina should expand Medicaid under the Affordable Care Act. The U.S. Supreme Court ruling that upheld the health care law last year also allowed states to opt out of expanding Medicaid.

If North Carolina did expand Medicaid under the new law, it would allow 500,000 additional North Carolinians who earn less than $15,000 per year – and who do not now qualify for Medicaid – to obtain health insurance. That would cost an average of $2.5 billion a year; the state’s share of that would be about $175 million a year.

3. AFFORDABLE CARE ACT The new health care law requires that each state have an online health insurance exchange, where people and small businesses can purchase insurance if they can’t find a policy on the private market.

A consultant estimates that 700,000 North Carolinians will find coverage through the exchange when it becomes available in 2014.

The law allows states the options of setting up the exchange, creating a hybrid state-federal exchange or leaving it to the federal government to set up. In most cases, Republican governors who opposed the health care act are leaving it up to the federal government, while Democratic governors have tended to set up state exchanges.

Before she left office, Democratic Gov. Bev Perdue laid the groundwork for a state-federal exchange, but ultimately the decision rests with McCrory, who campaigned against passage of the law.

McCrory has said he wants to discuss the issue with his fellow Republican governors before deciding whether to continue with the state-federal exchange or to just leave it up to the feds.

4. UNEMPLOYMENT INSURANCE The state owes the federal government $2.8 billion, money it borrowed from the federal government to cover workers’ first 26 weeks of unemployment benefits.

The insurance program got into debt because so many people lost their jobs during the deep recession and because unemployment taxes were cut when times were flush.

A Republican-backed plan would sharply reduce benefits to jobless workers, while also increasing taxes on some employers. Business also wants the state to issue bonds to pay the debt, an idea the legislature so far has rejected. McCrory has expressed concern about the issue but has not yet backed a plan.

“It’s the most immediate challenge to job creation,” said Lew Ebert, president of the N.C. Chamber, a major business lobby.

5. POVERTY Although nobody seems to be talking about it directly, North Carolina’s poverty rate continues to climb. In 1989-90, the state had the 26th-highest poverty rate in the country, 12.2 percent. But by 2011, the state poverty rate had climbed to 17.4 percent, the country’s 12th-highest.

“I would think that no matter what your political party is, this would be a matter of potent concern for the next governor,” said Gene Nichol, director of the UNC Center on Poverty, Work and Opportunity. “I would think that Republicans would have different ways of dealing with it, hoping to push back against it. But I can’t imagine being governor of the state of North Carolina and thinking that this is not a crucial concern. We have hundreds of thousands of children living in poverty, and it’s getting worse.’’

6. MENTAL ILLNESS North Carolina’s decade-long mental health reform effort has, by most assessments, failed, with mentally ill people crowded into adult care centers, local hospitals and county jails, or put on the streets because there are not enough community facilities.

“We have a broken mental health system in our nation and in our state,” McCrory has said. He has not yet given any hints on what he will do.

Although it did not cause the problem, the legislature’s decision in 2011 to cut $20 million for mental health treatment did not help the situation.

On a short-term basis, Perdue found $1 million to keep 1,400 mentally disabled people – which includes the mentally ill – from being evicted from group homes because their Medicaid reimbursement money ran out. But that money is gone this month . McCrory and the legislature face an immediate deadline.

McCrory and the legislature also will have to come up with the first installment of an eight-year, $287 million settlement of a federal lawsuit. The state agreed in August to help thousands of mentally ill people leave adult care homes and hospitals and live independently by providing housing, job training and mental health treatment.

7. TAX OVERHAUL McCrory, legislative leaders, conservative groups and business leaders are pushing to change a tax code that was put in place in during the Great Depression of the 1930s.

During the campaign, McCrory said a lower rate on corporate income tax and personal income tax would make the state more competitive in attracting industry to the state. He cites the state’s high unemployment rate as a reason for a new approach to the state’s economic problems.

North Carolina’s 6.9 percent corporate tax rate is the fifth-highest in the Southeast. The state’s top bracket for personal income tax , 7.75 percent, is the highest in the region.

Some people advocate repealing corporate and personal income taxes and replacing the revenue with consumption taxes, which are mainly broad-based sales taxes. That would require shifting about $10 billion in taxes, or about half the state budget. But others argue that would shift the tax burden away from corporations and people with higher incomes to people in the middle- and lower-income brackets.

“Our tax system is no longer competitive with the rest of the United States and especially with our neighboring states,” McCrory told business leaders last week. He said tax reform would not be easy and “it’s going to step on everyone’s toes a little bit.”

8. STAGNANT TEACHER SALARIES North Carolina was at the national average in 2006-2007. But that was before salaries were frozen for four years, a bonus program was eliminated and local schools were unable to come up with pay supplements as in the past. As of 2011, North Carolina ranked 44th in the country in what it paid its teachers, with an average annual salary of $46,605, according to the National Education Association. North Carolina trails all of its neighbors when it comes to teacher pay: Georgia (23rd); Virginia (30th); South Carolina (37th); and Tennessee (43rd).

Talented people can find better pay in other jobs, particularly in the Triangle.

“If you are a prospective math and science teacher and we are trying to bring you into the classroom in the Triangle, we are competing with the research-related industries in this area,” said Scott Anderson, executive director of the N.C. Association of Educators.

9. HIGHER EDUCATION The University of North Carolina system is undergoing a major review of its mission – a review that includes some of the biggest players in Republican politics. A committee is scheduled to complete a report this month on ways to make the 17-campus system more nimble, more productive and more responsive to business.

The UNC system has traditionally been the state’s crown jewel – a major draw for research and business. What comes out of the report could have implications not only for the campuses, but also on the business climate and the state budget.

10. TOLL ROADS What will be the future of the state’s toll road program? The Triangle Expressway, the state’s first modern toll road, is open in western Wake County and Research Triangle Park, but regulatory and political issues have stalled an effort to extend it across southern Wake. There are four other pay-per-drive expressways being proposed to speed up road construction. Republican lawmakers have expressed skepticism about three of them – the Garden Parkway in Gaston County, the Mid-Currituck Bridge across Currituck Sound, and the Cape Fear Skyway bridge and road in Wilmington. The proposed Monroe Bypass in Union County is facing legal and environmental challenges.

But Walden also notes there is heavy resistance by citizens to higher gas taxes, and there’s a backlog of requests for new roads and repairs that will cost billions of dollars. So the question is: How do we pay for new roads?

11. IMPROVING K-12 Graduation rates are at an all-time high, but everyone has an idea on how to improve the public schools. Will Democratic-supported preschool programs – backed by court rulings – survive Republican rule, or will there be continued cuts? How far will Republicans push for tax credits or vouchers for private education? There will also likely be a push for more charter schools. McCrory wants to create a two-track system, one academic and one vocational, that will encourage more students who want to learn a trade to stay in school.

12. ENERGY EXPLORATION McCrory, a former Duke Energy executive, wants to the state to move forward on energy exploration – particularly drilling offshore in the Atlantic and using hydraulic fracturing, better known as fracking, to extract natural gas from shale.

McCrory is likely to find strong support in the legislature. But he must get approval for drilling in the Atlantic from the Obama administration. McCrory also wants North Carolina to join with Virginia, South Carolina and Georgia to negotiate a revenue-sharing agreement with the federal government for offshore revenues. All of this likely makes any actual drilling years away.

“The downside right now is we’ve started very, very late, and now the gas price has gone very low,” McCrory told the business leaders. “It’s going to be a tough, competitive market to begin that process.”

13. FINDING AN URBAN POLICY For years, state leaders have worried about how to help rural North Carolina, which has struggled economically. They still do. But the engine for the state’s economic growth has increasingly been its urban areas. Charlotte has more people than Detroit or Boston. Raleigh has more people than Miami or New Orleans. Those two metro areas accounted for one-third of the state’s population growth over the last decade, said Ferrel Guillory, director of the Program on Public Life at the University of North Carolina at Chapel Hill.

McCrory is the first former big-city mayor to become governor of North Carolina.

Among the urban issues McCrory might face is whether to support mass transit in the Triangle, as he did as mayor of Charlotte.

“If we are going grow our way out of this slough we are in, it is our metro areas that are going to lead the way,” Guillory said. “How do we keep these economic engines thriving and keep the quality of life high? That involves environmental issues, that involves tax issues, it involves transportation. He (McCrory) has an opportunity to bring to Raleigh that sensibility of the role of big cities in the state.”

Christensen: 919-829-4532 or rchristensen@newsobserver.com

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