The Economic Impact of the North Carolina Court System on the North Carolina Economy

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2 The Economic Impact of the North Carolina Court System on the North Carolina Economy Foreword In the fall of 2013, the North Carolina Bar Association (NCBA) began a process of enhancing its advocacy efforts to support the North Carolina justice system. To that end, the NCBA determined that there was a need to collect and analyze information about the vital role the courts play in North Carolina s economy and in maintaining all citizens access to justice. Initially, the leadership directed the Office of Governmental Affairs (OGA) to complete an intensive review of the data available from the Administrative Office of the Courts (AOC) and the National Center for State Courts (NCSC) to see if the facts supported the notion that lack of funding for the courts was impacting the state s economy. The OGA also interviewed AOC staff to gather their assessment of the current situation facing the courts as well as the data available. Several facts came to light as a result of this research, the most significant of which was that data did not exist to show the correlation between the justice system and its economic impact. AOC has not traditionally collected data on ways the courts impact the economy and in fact did not have the ability to make such a correlation based on its current data collection methods or staffing structure. The AOC tracks data that impact its budget requests staffing numbers, caseload clearance rates, and judicial salaries. While that data is useful in this effort, we concluded that expertise from an economic analyst was required. Therefore, in the fall of 2014, the NCBA obtained a grant from the North Carolina Bar Association Foundation in order to engage a consultant to conduct a study to quantify the economic impact of inadequate court funding. The NCBA then selected Micronomics and Dr. John Connaughton to conduct the study. Micronomics is an economic research and consulting firm nationally renowned for its work on the economic impact of court systems in states and cities. Dr. Connaughton is a professor of economics at the University of North Carolina at Charlotte and the director of the Babson Capital/UNC Charlotte Economic Forecast, a leading source of economic information for North Carolina. Over the last several months, they have worked with the NCBA and the AOC to develop the study which is presented here. Most notably, the study shows that cuts in funding over the past four years have totaled $35 million. This reduction in direct spending has had a cumulative four-year total impact on the North Carolina economy just over $67 million in reduced spending. This study has highlighted for all of us the great need for updated court technology and sound business management software to collect data that can better inform our decisions about court funding. We hope that this study will positively contribute to the court funding dialogue. A properly funded judicial branch is good for our citizens, good for business and good for our economy. Catharine B. Arrowood President, North Carolina Bar Association May

3 The Economic Impact of the North Carolina Court System on the North Carolina Economy Introduction The purpose of this report is to quantify the economic impact of the North Carolina Court System on the state economy over the fiscal year. This report consists of four parts. The first part provides a background of the North Carolina Court System including its history, size, and structure. The next section provides an understanding of regional economic impact methodology in general and the specific methodology used in this paper. The third section presents an analysis of the impact of the North Carolina Court System on the state economy. The final part outlines the major findings of the impact study. 2

4 Background Under the North Carolina Constitution, the Judicial Branch serves as an equal to the state Executive and Legislative branches. The North Carolina General Assembly funds the North Carolina Court System, known as the General Court of Justice, which operates the Judicial Branch at a statewide level. Prior to 1966, cities and counties ran the lower courts, but legislation passed in 1965 reorganized the court system into the statewide model in existence today. 1 The current structure consists of three divisions: the Appellate Division located in Raleigh (the state Supreme Court and the state Court of Appeals), the Superior Court Division with courtrooms located throughout the state, and the District Court Division with courtrooms also located throughout the state. Both the Superior and District Courts handle criminal and civil trials with the District Court Division also conducting functions like determining probable cause for warrants, performing marriage ceremonies, and hearing small claims cases through Magistrate s Courts. During the fiscal year, the North Carolina General Court of Justice employed 6,019 people including 404 judges and justices. Employment declined by 8.4 percent from 6,569 total workers just four years prior (see Table 1). Table 1: Judicial Department Personnel, Fiscal Years Fiscal Year Judges and Justices Authorized Personnel Total ,166 6, ,016 6, ,685 6, ,640 6, ,615 6,019 The General Fund Budget expenditure for fiscal year was $462,077,515 and was down over $7 million from four years prior (see Table 2). Table 2 presents the General Fund Expenditure by budget area for fiscal years through The largest items in the budget for fiscal year are the allocated salaries for the Clerks of Superior Court and the District Attorney Office at $143,067,312 and $92,959,743, respectively (see Table 3). Thirty percent of the total budget funds are for constitutionally mandated positions. 3 As a result, funding cutbacks cannot be implemented in a proportional fashion and have a disproportionate effect on the other portions of the budget. Table 3 presents the changes in the General Fund Expenditures by area between fiscal years and The largest category of absolute decline is in the Technology Services Division, which decreased from $23,993,967 to $16,538,902. That is a reduction of $7,455,065 or percent. The other two large declines occurred in the areas of Statewide Infrastructure and Technology, which was reduced by $5,148,303 or percent, and Magistrates which was reduced by $2,304,044 or 5.58 percent. 1 The North Carolina Judicial System, 2008 Edition, North Carolina Court System website ( publications/documents/judicialsystem.pdf) 2 Source: North Carolina Administrative Office of the Courts 3 Judicial Branch Fact Sheet, North Carolina Court System website ( carolina_overview_judicial_branch_fact_sheet.pdf) 3

5 Table 2: General Fund Expenditures Judicial Department, Fiscal Years Expenditures Budget areas Supreme Court 5,041,351 5,087,847 5,065,615 5,190,175 5,130,927 Court of Appeals 7,942,008 7,976,734 8,182,929 8,365,152 8,647,277 Superior Courts 31,294,909 30,818,198 33,134,941 33,503,578 33,669,002 District Courts 47,986,724 48,312,542 51,394,650 53,006,136 53,430,192 Business Courts 998, ,645 1,087,564 1,236,855 1,604,852 Clerks of Superior Court 143,704, ,363, ,724, ,888, ,067,312 Magistrates 41,301,654 41,580,742 39,925,408 38,687,855 38,997,610 Interpreter Services 2,116,751 2,012,622 1,918,068 2,071,544 2,432,965 Court Reporters 7,389,855 7,497,888 7,405,132 7,662,890 7,499,453 Office District Attorney 88,277,061 89,156,391 89,100,534 91,352,282 92,959,743 District Attorney s Conference 503, , , , ,614 Worthless Check Program 1,312, , , , ,540 Technology Services Division 23,993,967 19,997,196 18,803,215 17,181,013 16,538,902 Administration and Field Support 16,046,484 15,033,530 14,044,629 14,063,439 14,352,122 Statewide Infrastructure and Supplies 25,903,988 21,220,892 25,138,167 23,898,134 20,755,685 Custody and Visitation Mediation Program 2,679,809 2,846,497 2,923,963 3,080,198 3,226,044 Permanency Mediation 54,309 70,842 54,250 62,163 61,308 Guardian ad Litem 12,846,849 13,256,481 11,923,229 12,434,884 12,911,025 Drug Treatment Court 1,938,567 1,973, , Family Court Program 2,865,693 2,958,470 2,724,073 2,793,122 2,884,977 Juvenile Court Improvement 87,064 51, Arbitration 294, , , , ,904 North Carolina State Bar 825, , , , ,250 Judicial Standards Commission 330, , , , ,797 North Carolina Innocence Inquiry Commission 392, , , , ,021 Sentencing and Policy Advisory Commission 902, , , , ,550 Dispute Resolution Commission/Programs 273, , , , ,443 Dispute Settlement Centers 1,199,487 1,139, Grant Match Transfer 1,228, Subtotal Judicial Branch General Fund Expenditures 469,730, ,391, ,494, ,903, ,077,515 Less General Fund Receipts Supported Programs 3,110,263 2,285,155 1,722,148 1,579,493 1,643,519 Net General Fund Appropriations 466,620, ,106, ,772, ,324, ,433,996 Grant Supported Projects 13,882,861 15,003,642 14,521,860 14,093,096 14,092,962 Safe Roads Reserve 1,949,749 1,944,148 1,749,642 1,732,371 1,688,628 Receipt Supported Special Funds 5,839,865 9,609,124 11,555,471 10,763,919 11,522,497 Total Expenditures All Funding Sources 491,403, ,948, ,321, ,493, ,381,602 4 Source: North Carolina Administrative Office of the Courts 4

6 Table 3: Changes in General Fund Expenditures Judicial Department, Expenditures Dollar Change Budget areas Supreme Court 5,041,351 5,130,927 89,576 Court of Appeals 7,942,008 8,647, ,269 Superior Courts 31,294,909 33,669,002 2,374,092 District Courts 47,986,724 53,430,192 5,443,468 Business Courts 998,319 1,604, ,533 Clerks of Superior Court 143,704, ,067,312 (637,166) Magistrates 41,301,654 38,997,610 (2,304,044) Interpreter Services 2,116,751 2,432, ,214 Court Reporters 7,389,855 7,499, ,598 Office District Attorney 88,277,061 92,959,743 4,682,682 District Attorney s Conference 503, , ,328 Worthless Check Program 1,312, ,540 (1,198,680) Technology Services Division 23,993,967 16,538,902 (7,455,065) Administration and Field Support 16,046,484 14,352,122 (1,694,362) Statewide Infrastructure and Supplies 25,903,988 20,755,685 (5,148,303) Custody and Visitation Mediation Program 2,679,809 3,226, ,235 Permanency Mediation 54,309 61,308 6,999 Guardian ad Litem 12,846,849 12,911,025 64,176 Drug Treatment Court 1,938,567 (1,938,567) Family Court Program 2,865,693 2,884,977 19,284 Juvenile Court Improvement 87,064 (87,064) Arbitration 294, ,904 (119,697) North Carolina State Bar 825, ,250 (153,750) Judicial Standards Commission 330, ,797 (7,419) North Carolina Innocence Inquiry Commission 392, ,021 97,797 Sentencing and Policy Advisory Commission 902, ,550 10,177 Dispute Resolution Commission/Programs 273, , ,962 Dispute Settlement Centers 1,199,487 - (1,199,487) Grant Match Transfer 1,228,142 - (1,228,142) Judicial Branch General Fund Expenditures 469,730, ,077,515 (7,653,355) All told, these three budget areas received $14 million less in funding for fiscal year than in This is almost double the overall Judicial budget reduction of $7.6 million shown in Table 3. This example shows the disparate impact of funding cuts on the court system and their operations due to constitutionally mandated budget allocations. Over the past four years, spending cuts in the Judicial Branch Fund Expenditures have totaled $35 million based on the fiscal year expenditure level. This reduction in direct spending has had a cumulative four-year total impact on the North Carolina economy (based on the multipliers in Table 4) of just over $67 million in reduced spending. 5

7 Economic Methodology The two most important measures of the economic impact of an industry, firm, or institution are dollar output and jobs. To assess accurately the total economic impact, the first piece of information estimated is direct output. The term direct refers to the dollar output associated with the industry, firm, or institution being evaluated. The multiplier concept then captures the total effect of an entity s direct dollar and employment impact on the overall economy. For instance, a multiplier value of 2.5 would mean that for each job in an industry, 1.5 additional jobs are generated in other parts of the economy (the total benefit to the economy being two and a half jobs). Similarly, a loss of 100 jobs in an industry would translate into a subsequent employment loss of 150 jobs in other sectors, for a total employment loss of 250 jobs (100 x 2.5). For this study, output, employment, and value added multipliers were estimated using a methodology provided by the IMPLAN Group. This methodology uses an input/output table to estimate output, employment, and value added multipliers for each industry within a state or county. These multipliers are industry-specific and provide for a high level of detail. For North Carolina, the IMPLAN multipliers used in this study are presented in Table 4. 5 The IMPLAN multipliers are applied to the direct output and employment figures to estimate the total impact of an industry, firm, or institution on a state s economy. In addition, IMPLAN provides a comprehensive set of disaggregated multipliers that can be used to estimate the indirect impacts and the induced impacts separately from the total impact at the regional level. The indirect effect is the additional economic activity of the supplier chain within the region caused by the economic activity of the direct industry, firm, or institution. The induced effect is the additional economic activity of all other unrelated firms and households within the region caused by the direct effect of the industry, firm, or institution and the indirect effect. Table 4: IMPLAN Multipliers Type Direct Indirect Induced Total Output Employment* Value Added** *Number of jobs per direct job **Value Added per $1.00 of Output In this study, the IMPLAN 418 by 418 industry input/output model for the State of North Carolina was used to obtain the output, employment, and value added estimates. This input/output model provides linkages for 418 detailed three- and four-digit NAICS-code industries. In addition, each of the 418 industries has an industry-specific indirect linkage for each of the other 417 industries. 5 The multipliers are based on 2012 data and have been adjusted to account for inflation between 2012 and Government Institutions in IMPLAN do not have sector designations. Each activity (budget area) was added to IMPLAN as an Institution Spending Pattern for State/Local Government Non-Education. The actual multipliers presented in Table 4 were calculated based on the results of the scenario analysis estimated for the institutional spending patterns of the State/Local Government Non-Education category. The sector coefficients that IMPLAN generated were not changed. 6

8 Economic Impact This section of the report will present the quantifiable economic dollar output, employment, and value-added impacts of the North Carolina Court System on the state economy. Table 5 presents the overall economic impact in terms of output, employment, and value added of the on-going operations of the Judicial System on the state economy in fiscal year The table breaks down the total impact into direct, indirect, and induced values based on the multipliers presented in Table 4. During the fiscal year, the North Carolina Court System had a direct economic impact on the state s economy of $462,077,515 and employed 6,019 persons. The total economic output of the Judicial System s operations including the indirect and induced effects contributed $890,138,571 in output, with an additional $493,896,576 total value added 6 to the state economy. The operation of the court system also supported 9,470 total jobs in the North Carolina economy, including 1,636 indirect (supplier chain) jobs and 1,815 induced jobs. Table 5: Judicial System Economic Impact, Fiscal Year Type Direct Indirect Induced Total Output $462,077,515 $202,666,880 $225,394,176 $890,138,571 Employment 6,019 1,636 1,815 9,470 Value Added $238,252,032 $118,582,144 $137,062,400 $493,896,576 The North Carolina Court System s operations also have an important effect on other industries within the state economy as presented in Tables 6 and 7. In the tables, the top ten impacted sectors for output and employment, based on indirect and induced impacts, are identified by their IMPLAN industry codes and industry descriptions. Table 6 presents the output amounts of the top ten most impacted industries of the on-going operations of the Judicial System in fiscal year The most affected sector is the imputed rental activity for owner-occupied dwellings with $28,559,774 in total output. The second highest sector is in real estate establishments with $24,550,400. Table 6: Ten Most Impacted Industries by Output IMPLAN Code Industry Indirect Induced Total 361 Imputed rental activity for owner-occupied dwellings $0 $28,559,744 $28,559, Real estate establishments $11,883,408 $12,666,976 $24,550, Wholesale trade businesses $10,726,624 $11,996,256 $22,722, Food services and drinking places $9,430,632 $12,691,840 $22,122, Telecommunications $15,296,136 $6,048,544 $21,344, Monetary authorities and depository credit intermediation activities $9,204,192 $11,756,064 $20,960, Maintenance and repair construction of nonresidential structures $18,354,000 $1,352,916 $19,706, Offices of physicians, dentists, and other health practitioners $452,996 $12,811,456 $13,264, Private hospitals $251,322 $11,557,376 $11,808, Employment services $8,545,184 $1,633,956 $10,179,136 6 The difference between an industry s or an establishment s total output and the cost of its intermediate inputs. It is a measure of the contribution to GDP made by an individual producer, industry, or sector. 7

9 Table 7 presents the employment numbers for the top ten most impacted industries of the on-going operations of the Judicial System in fiscal year Food service and drinking places and employment services, the two most affected industries, accounted for 387 and 252 total jobs respectively. Table 7: Ten Most Impacted Industries by Employment IMPLAN Code Industry Indirect Induced Total 413 Food services and drinking places Employment services Maintenance and repair construction of nonresidential structures Real estate establishments Wholesale trade businesses Offices of physicians, dentists, and other health practitioners Private hospitals Services to buildings and dwellings Nursing and residential care facilities Retail Stores - General merchandise Conclusions The major findings of this study are: The total annual direct impact of the on-going operations of the North Carolina Court System was $462,077,515 for fiscal year The total annual direct impact of the on-going operations of the North Carolina Court System supported 6,019 jobs for fiscal year The total annual direct value added impact of the on-going operations of the North Carolina Court System was $238,252,032 for fiscal year The on-going operations of the North Carolina Court System generated $890,138,571 in total economic impact on the North Carolina economy for fiscal year The on-going operations of the North Carolina Court System generated $493,896,576 in total value added on the North Carolina economy for fiscal year The on-going operations of the North Carolina Court System supported 9,470 total jobs in the North Carolina economy for fiscal year Overall the North Carolina Court System experienced a reduction of $7,653,355 in nominal funding between fiscal years and Two sectors, Technology Services Division, with a reduction of $7,455,065, and Statewide Infrastructure and Technology, with a reduction of $5,148,303, were the areas most affected by the budget cut between and

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