RALEIGH, N.C. – North Carolina courts weighed in again Tuesday on how far a governor can go to balance the state’s budget, this time ruling then-Gov. Mike Easley was wrong to transfer $80 million from a road-building fund to pay for other government operations.

In a split decision, a three-judge panel of the state Court of Appeals ruled the state constitution doesn’t allow a governor to transfer money appropriated by the General Assembly for one purpose and use it for another purpose without legislative approval.

Easley transferred the money from the Highway Trust to the state’s general fund with a February 2002 executive order to help close a shortfall in that year’s budget that ultimately reached $1.6 billion. Two former state officials sued later that year, arguing trust fund revenues must only be used for purposes outlined in state law.

Judge Robert Hunter of Morehead City, writing the majority opinion, said a governor has many avenues to narrow a budget gap – including escrowing funds, employee furloughs and temporary spending cuts. But transferring funds appropriated by the Legislature crosses the line, Hunter wrote in reversing a ruling by Superior Court Judge Joseph John in March 2008.

“The transfer of these funds, designated by the budget statute for one purpose and transferred by the Governor to another does not fulfill the executive’s duty to administer the budget enacted by the Legislature, nor does it assure that the laws are faithfully executed,” Hunter wrote. Judge Barbara Jackson joined with Hunter in the 2-1 opinion.

Easley and current Gov. Beverly Perdue – who also has withheld money and cut down on expenses to deal with even worse fiscal troubles – have said the constitution gives the state’s chief executive broad powers to scour state government to find money to close a shortfall.

The state constitution says the governor “shall effect the necessary economies in state expenditures” to “insure that the State does not incur a deficit for any fiscal period.”

In the dissenting opinion, Judge Linda McGee said Hunter’s interpretation of the state constitution would hamstring governors from acting quickly to plug a deficit.

“The restrictions on executive action as mandated by the majority are inefficient, impractical, and likely to thwart the governor in the governor’s constitutional duty to prevent a deficit,” McGee wrote.

The divided court means the state Supreme Court must hear the case if the state appeals the ruling. The office of Attorney General Roy Cooper is reviewing the ruling and will consult with Perdue’s office before deciding its next move, spokeswoman Noelle Talley said.

The three judges agreed to uphold a portion of John’s ruling that the Legislature had the authority to take another $125 million from the Highway Trust Fund to balance the 2002-03 budget.

The Highway Trust Fund is primarily used to build urban loops, widen four-lane highways and improve secondary roads. The fund generates revenue largely through a 3 percent use tax on vehicle sales, a gasoline tax and title fees.

The case already has wound its way through the court system once on a procedural question. The state Supreme Court agreed in 2006 that Transportation Secretary Jim Harrington and ex-Sen. Bill
Goldston, who helped created the fund in 1989, had the legal standing to sue as taxpayers.

An attorney for Goldston and Harrington said he would comment on the case later Tuesday.

State courts have heard two similar cases involving how Easley managed the budget crisis earlier this decade – decisions that will affect the options Perdue and future governors have to plug spending holes.

In 2005, the state Court of Appeals unanimously upheld Easley’s decision to withhold $210 million in expected tax reimbursements to local governments to balance the budget.

But another three-judge panel last year ruled it was wrong for Easley to intercept $225 million headed to state employee pension funds because the state and federal constitutions protect them.