On the Record: North Carolina Gov. Mike Easley (D)

Q. North Carolina entered this crisis earlier than most states. How come?

EASLEY: What happened here was we had that big flood in 1999 and that cost us just about $1 billion. We got about $400 million from the federal government, but we still had to come up with about $500 million. That's just as I was taking over. And that's when the economy was starting to change. In 2000, the budget deficit was pretty significant, just as I was coming into office. Eight times I had to declare an emergency.

Q. You raised taxes in the summer of 2001 to fight North Carolina's deficit. How important has this been to easing fiscal problems?

EASLEY: It's been extremely important because you get a double hit. One, I did about a $1 billion in cuts. The budget that was given to me was $15 billion [1999-2000]. We are currently operating on a $14.35 billion budget. We were able to reduce about a billion a year and got the benefit of that tax increase in '01 and '02, so that we didn't have to eat up all of our reserves.

Q. Have you done much in the area of government efficiency? Some governors have said they're trying to view this not so much as a crisis but as an opportunity to change the way state government operates, some of the areas it's involved in.

EASLEY: I think that's correct. I think you can do some things now that you couldn't do before. The first thing I did is I started a loophole closing commission. We found several hundred million dollars in loopholes that had developed over the years. For example, you pay taxes on a newspaper if you buy it inside the store but not if you buy it outside. . . .I brought back a former governor, the treasurer who had just retired, people from both parties, and we closed a lot of loopholes, which generated revenue.

Second, I had an efficiency commission composed of people in state government and the business community. Their recommendations were pretty helpful and they centered around three things: personnel costs, information technology (if you're not getting the bang for your buck on IT, and we're still not, then you're losing usually several hundred million dollars every year), and then we went into every agency. I told my cabinet: "I want you to define the core mission. . . .All of these things that had been added on during the surplus politics of '90's we're going to have to stop doing. But the things that people need, the services that people have to have, we need to do well. Across-the-board cuts of 5 percent here and 6 percent there are a very inefficient way to become efficient.

Our investments in education, we've increased them every year. I believe that that reduces reliance on government in the long term. If you invest in education, Medicaid will go down, corrections will be reduced. The old adage: educated workers are employed workers, employed workers are insured workers, so they are off the government rolls.

Q. I'm curious about your proposal to cap the growth of state spending at income growth. Why a cap? Why this level? And why not population growth and inflation, which is a common proposal?

EASLEY: [Population growth and inflation] is a popular proposal but it has nothing to do with revenues. There's no real correlation to anticipated revenues. Any state will most closely track personal income. Personal income growth over the past ten years [in North Carolina] averages 5.9 percent. What I'm trying to is level state spending at that same amount. It doesn't really matter right now. It's not an important tool to have right now. We're way below that, every state is below that, everybody's cutting.

But what you want in place is that cap so that when the economy comes back and states do have money again, they don't go on a spending binge that puts the state back in the hole the next recession. That's commerce, that's economics. You're going to have booms and you're going to have recessions. The overspending of the 1990's has at least as much to do with the deficits as the recession of the past two years.

Q. Do you think it's possible to recession-proof a state?

EASLEY: The formula I'm giving you works as long as you build your reserves. What states tended to do in the 1990's is cut taxes when the money was coming in higher than projected. That's fine if you can pass an increase as easily as you can a cut.

What I'd rather see is a steady flow beneath that 5.9 percent cap and have the excess dollars, if there are any, go into our rainy day fund. . . .Then you can always spend against it.

Basically, states would have to do what families do. Put a little aside, keep it in the bank, for when rough times come, when somebody gets laid-off, somebody gets sick. None of this is rocket science; it's more political science.

Q. Do you discuss this stuff much with other governors?

EASLEY: Not really. But I do have some friends that came on this year, some former attorneys general, and I've told them: Take your lumps early. Rule Number 1 deal with reality. Rule Number 2 Now what? That is, don't look back and play the blame game Who did what wrong? How we got to where we are? We are where we are. Now what do we do? Rule Number 3 We don't have to be governors, but five-year-olds have to go to kindergarten next year and we have to do what it takes to make sure they don't have overcrowded classrooms and underpaid teachers.

We started up pre-K programs. These are pretty good, especially for Hispanic/Latino populations. These kids come in there as four-year-olds and can't speak a word of English, yet two or three months later they are fluent. It's absolutely astounding. We're reducing class size as well, so that will reduce the achievement gap.

That combined with pre-K sends a clear signal to the business community that North Carolina is going to graduate some sharp people. So if I go down here and put $300 or $400 million in a plant, ten years from now I'll have a work force. I won't have to move.

Capital investment will always follow skilled labor. Business has no choice but to make their capital investments where they can find skilled labor. My strategy has been to change the complexion from a low-skilled, low wage state to a knowledge-based, higher wage economy in as little time as possible. And with other states cutting education, it gives us a chance to make rapid improvement in relative terms.