Governor Bryant; Speaker McCoy; ladies and gentlemen of the Legislature; and fellow Mississippians:

This is the fifth time you have allowed Marsha and me to join you in this historic chamber to report on the State of our State. We’re honored the people of Mississippi have allowed us this opportunity, and I’m grateful and proud to have the best partner a man could have to help meet this challenge, Marsha.

It is appropriate we are again together for this occasion on Dr. Martin Luther King Day. Our state has the highest percentage African-American population; and the issues, with which we will deal, affect all Mississippians and should receive our best effort to serve the interests of all.

I look out over this chamber and I see many new faces – new Representatives and Senators and new statewide elected officials such as my old friend, Lieutenant Governor Phil Bryant.

And I am glad to see familiar faces – such as our Speaker and my friend, Billy McCoy.

We gather in this chamber, Republicans and Democrats, from different regions, backgrounds and interests, but with a common bond: that we have been sent to Jackson to do the people’s business, to keep our state headed in the right direction, to continue moving forward together.

Each of us is here because we engaged in a political campaign, but those campaigns are over. It is time to govern.

For the thirty-three of you who are newly elected and here for the first time; my advice is, don’t believe everything you hear or read in the paper about partisanship or the Legislature and the Governor fighting. The news media likes to focus on fights, but you’re going to find we can deal with contentious issues without being contentious ourselves. You’ll learn that when I called Billy McCoy my friend, I meant it. And you’ll find a lot can be . . .indeed, has been accomplished by working together.

In these last four years consider the examples of tort reform, reorganizing and emphasizing workforce development and job training, Momentum Mississippi and other economic development projects, upgrading education and replenishing the Rainy Day Fund. Some of those were very tough issues, but working together we got them done.

I will say of you freshmen, you’ve come to the Legislature at a time of great promise but also one that requires caution.

It is said that in the Chinese language the symbol for crisis is the same as the symbol for opportunity. If that’s so, it’s an appropriate symbol for this year. We have the wind at our backs, but there are storm clouds on the horizon.

The State of our State is good; in some ways extremely good.

We have record employment . . . more people working than ever . . . a net gain of more than 50,000 jobs in the last four years . . . and there are thousands more jobs in the pipeline at Toyota, General Electric, PACCAR, SeverCorr, ADP, PSL-North America, CCA and so on.

Nearly twenty billion dollars of capital investment is underway . . . in permitting or on the drawing board in our energy sector alone.

Personal income increased by twenty percent these last four years. We not only have more people working, but we have been replacing lower skilled, lower paying jobs with higher skilled, higher paying jobs.

There is a can-do attitude in Mississippi. As I said last week at the Inauguration, not only did the country and the world see the spirit and character of our people after Katrina; we learned so much about ourselves . . . about our strength and courage . . . about compassion and community.

We have been moving forward together, and people recognize it. Most people are very bullish on our state and our future.

Nevertheless, we have to recognize the national economy has been softening. Serious troubles in the financial markets have not only generated pessimism but also have caused a real credit crunch. Reduced availability of credit will make economic development harder.

Nationally the housing industry, a huge employer and major producer of wealth for average Americans, is in a tailspin after an extremely long boom. Our state is already being affected.

Energy prices, while driving some large economic development projects in the state, are placing a heavy financial burden on our citizens.

Inevitably these problems impact the state’s budget. Last Tuesday the front page of the Wall Street Journal proclaimed, “States prepare to tighten belts as growth in revenue slows.” The same week our State Economist said Mississippi sales tax receipts for July through December, 2007, the first half of this fiscal year, had increased only one-tenth of one percent!

There have been a spate of stories about the severe budget deficits other states are facing. Four years ago our state was in the deepest budget hole in history. It is our responsibility – yours and mine – to make sure we don’t get back in that kind of shape again.

This will require considerable budget discipline. It means we’ll have to tell some people “No;” it means some good things won’t get funded or won’t get as much funding as some people would like. Sometimes it’s our job to say “No,” even to our friends and to our favorite programs.

A review of current spending compared to the budget four years ago should make it easier to maintain that budget discipline, because spending on priority programs has increased dramatically in those four years.
General fund revenue in Fiscal Year 2004 was $3.6 billion. General fund revenue available for the budget you’ll consider this session is estimated at $5.1 billion. That’s a 42% increase. And with other revenue available for General Fund purposes, you will have $5.6 billion to appropriate.

In the current year, FY ’08, appropriated state spending is 31% higher than in FY ’04, and revenue is 38% more.

This year our K-12 schools are receiving more than $4.2 billion from state, federal and local sources . . . more than $8,500 for every child attending our public schools compared to $6,800 per child just four years ago. The state appropriation of more than $2.2 billion has increased $529 million in four years. That is an average increase of more than $130 million per year for K-12 schools alone.

Education is our top priority, but we must recognize we won’t be able to increase K-12 spending nearly that much this session, unless you’re willing to gut other critical programs, which I’m not.

Higher education also received record increases in state funding these last four years. Universities saw state funding go up by nearly one-third, and it was greatly needed after a seven percent cut in funding during the Musgrove administration.

Community colleges got cut even more when Musgrove was governor, and I’m proud that in my first administration state appropriations for community colleges went up fifty-two percent, including a more than doubling of state spending on workforce development and job training . . . a key to our job creation success.

I’m on record as favoring continued, large increases in funding higher education . . . increases similar to my first term; but I’ll tell you right now, we can’t afford that this year. The money won’t be there.

Our duty is to live within our means . . . to pass an honest balanced budget; and particularly this year to protect our strengthening Rainy Day Fund.

When I stood here four years ago for my initial State of the State address, the unallocated balance in the Rainy Day Fund was less than ten million dollars, a tiny fraction of what it was supposed to be.

Today the Rainy Day Fund is nearly $270 million, the highest ever and about three-fourths of its current statutory limit. As the name implies, this fund is to protect our taxpayers and our program beneficiaries if there is a revenue shortfall or economic slowdown.

Later this week I will present you a detailed balanced budget proposal. It will strengthen our Rainy Day Fund because I realize this is essential as we prepare for the possibility of a national economic downturn.

My budget reflects the fact that public education is the number one economic development issue in our state, and it is the number one quality of life issue. My budget fully funds the Mississippi Adequate Education Program.

Just as importantly, my budget funds education reforms so we can get better results for the money we spend. And that is the test in education. What are the results we demand and achieve for our children?

I will continue to support the State Superintendent’s proposal to redesign high school, to make it more rigorous and especially more relevant to kids who are not on a path to college, as a way to attack our unacceptably high dropout rate.

To keep our best teachers, we should increase the salaries of teachers with more than 25 years experience. My budget will.

For our beginning teachers, we need to give them more support as they learn to manage a classroom full of kids. We lose a third of our new teachers within three years. As my Teacher Advisory Council has told me, more young teachers leave teaching because of discipline issues than over teacher pay. Every new teacher in our schools should have an experienced teacher serving as a mentor, and we should pay that mentor an extra $1000 for this valuable service. It is more than worth it.

To help kids at risk of not succeeding, our schools should screen every first grader for dyslexia and other learning disabilities and get them treatment. Children must first learn to read before they can then read to learn, and that is so much harder if they are saddled with obstacles like dyslexia.

To help get our kids ready to learn by age five, we need to better utilize the existing early childhood programs that already serve 80% of our four-year-olds…by providing financial incentives for them to expand and improve their educational content.

The Legislature has already passed, and I have signed into law, these common sense reforms: authorizing mentors, dyslexia screening, and early childhood education. It is past time to put politics aside and fund these programs for our teachers and our children.

So that we can afford to continue making investments in all levels of education, including our universities and community colleges, we must make tough choices and run government smarter and more efficiently.

One part of budget discipline is to get control of bonded indebtedness. State debt exploded from the early 90’s to 2003 – soaring from $500 million to more than $3 billion.

Thanks in large part to State Treasurer Tate Reeves’ leadership, that spike in state indebtedness flattened out these last four years.

As Dave Ramsey says, if we’re to balance our budget in challenging economic times, the first thing we need to do is to cut up our credit cards. That’s why I will oppose authorizing any new state debt during this session of the Legislature unless it’s related to creating jobs.

We also must work to find ways to run government smarter. I have asked Lieutenant Governor Phil Bryant to lead a taskforce to root out waste and inefficiency in state government. I am confident we will not only find savings for the taxpayers but also get better performance for our people.

To that end my budget will propose more flexibility for state officials and department and agency heads to achieve savings and greater efficiencies and effectiveness.

It will be very difficult to have budget discipline and achieve necessary savings unless everybody participates. There is no department or agency that can’t find savings if we allow them to do so.

The biggest budget challenge we face is Medicaid.

In this past four years, we’ve made significant progress in saving Medicaid for the nearly 600,000 Mississippians who rely on it. We have enacted reforms because we know it is wrong for a family to work hard at two or three jobs, to raise their kids and pay for their healthcare, and then have to turn around and pay extra taxes so others who are able to work and take care of themselves choose not to but instead get free healthcare at taxpayers’ expense. That’s not right.

Under this Administration, the Division of Medicaid checks people’s eligibility face-to-face, and the Medicaid rolls have decreased to fewer than 600,000. This drop is what you should expect when the number of people employed has increased by more than 50,000.

We’ve changed our prescription drug program to better utilize generic drugs. That, along with Medicare Part D, is saving taxpayers tens of millions of dollars on pharmaceuticals with no negative effect on beneficiary health.

But even with these common-sense, successful savings efforts, the Medicaid budget faces a large shortfall. This is primarily because the federal government has forced us to stop using certain funds to cover the state Medicaid match requirement.

For example, we have to replace the $90 million of state match that was previously provided solely by public hospitals to generate $275 million of federal Medicaid funds.

Sixteen years ago, the Legislature approved that plan, proposed by the Mississippi Hospital Association, to use funds provided by public hospitals to match both federal Disproportionate Share Hospital (DSH) payments and other standard Medicaid claims payments. As far back as the Clinton administration, the federal government had warned Mississippi and almost every other state that it was closely examining these types of financing schemes.

Finally, in the summer of 2005, the federal government disallowed this part of Mississippi’s system. Since then, we have gotten through two and a half years by using $225 million of one-time federal money, made available through Katrina supplemental funds to pay this state match . . . with the understanding that Medicaid would implement a new financing program.

That federal money is gone. So now we have no choice but to put in place a long-term solution.

For the last year and a half, I’ve proposed a plan to fill this gap by conforming the program we used for 14 years to the new federal rules. This would restore the payments by hospitals but would involve all hospitals – not just public hospitals. This Gross Revenue Assessment will again cover the state matching requirement so we will not lose $275 million of federal funds from which all hospitals benefit.

That’s not an easy decision, but it’s time for the Legislature to act on this issue.

To fill the rest of the Medicaid hole, we will have to make some savings, and my budget will reflect that.

We should also take action to improve the health care situation for the tens of thousands of working Mississippians who aren’t eligible for Medicaid but don’t have private health insurance.

Compared to the rest of the country, fewer Mississippi small businesses offer health insurance to their employees. According to the Robert Wood Johnson Foundation, only 24% of Mississippi’s businesses with fewer than 50 employees offer health insurance to their workers. The Census Bureau says 134,000 Mississippians work for small businesses that don’t offer employer-sponsored health insurance.

This is mostly because of the high cost of health insurance to small businesses. I propose helping people get health insurance through a voluntary Mississippi Health Insurance Exchange, and legislation will be offered this session to create this exchange and fund its small, initial operational cost. Let’s help more Mississippians who work for small businesses have private health insurance.

Beyond the issues to come before this legislative session, we’ll continue to focus on two main goals: To continue and expand the surge of job creation that has taken place these last couple of years; and to complete the recovery from Katrina and get every area on the Coast well into rebuilding and renewal.

With the legitimate concerns about the national economy, it is far from certain our job creation surge will continue. At best, we have our work cut out for us, but I’m an optimist when it comes to Mississippi.

MDA is doing a great job, and the energy sector, as I mentioned earlier, is expanding in the state at a terrific pace. Gulf LNG’s $1 billion terminal and Chevron’s newest $500 million upgrade at Pascagoula, Rentech’s $3.4 billion coal-to-liquids project at Natchez and Mississippi Power’s proposed coal-gasification plant in Kemper County at $1.8 billion; the $3 billion Strategic Petroleum Reserve facility at Richton and Entergy’s second Grand Gulf nuclear station at more than $5 billion; all these are announced and either underway or in permitting. The Ergon-Bunge ethanol plant at Vicksburg is under construction, and Scott’s bio-diesel plant in Greenville is operating. Denbury Resources is increasing oil production through sophisticated tertiary recovery in these areas of the state.

These and other energy projects will help our country become more energy independent. They also will give our state a significant advantage years from now, when industries will ask not what does the energy cost but instead will ask, “Can we get it?” Being known as an energy reliable state will be a major economic development advantage in the future.

Another economic bright spot is our defense industry. Navistar’s new IMG facility at West Point employs some 800, building mine-resistant, ambush-protected vehicles for the military. Northrup Grumman’s shipyards at Pascagoula and Gulfport have just won new multi-billion dollar ship contracts from the Navy. General Dynamics, Lockheed Martin, Rolls Royce: our traditional defense contractors are strong. And we’ve added some new defense industries, such as EAD’s American Eurocopter at Columbus, which received a $3.3 billion contract to build light utility helicopters for the Army, and RTI International Metals, which will make titanium sponges for the aerospace industry at Amory. Then there are Aurora Flight Systems and Stark Aviation, both affiliated with the Raspet Flight Center at Mississippi State and General Electric’s new composite jet engine fan blade and assembly plant being built in Batesville.

The defense industry, like energy, is not subject to the same economic variables as most other sectors.

In other industries caution will prevail and make job creation more difficult. Generally there will be fewer new plants and fewer expansions.

This fact requires us to put special emphasis and effort on the best opportunities for success, and, of course, the best example is recruiting Toyota suppliers to locate facilities in Mississippi now. The state and numerous communities are deeply involved in bringing more such suppliers, and more will be announced this year.

Those of you who were in the Legislature last year know that recruiting suppliers was a critical goal in our Toyota effort. We included incentives for suppliers in the package you passed, something previously unheard of.

We recognized only one community could host the main assembly plant, but many communities could have supplier facilities . . . and they can be spread over a large area of the state. All of north and east Mississippi can compete for suppliers, and we know suppliers have looked at communities from Interstate 20 to the Tennessee line. Towns in central Mississippi, particularly those near I-55, I-20, I-59 and Highways 45 and 49, can serve Nissan and Toyota as well as Alabama auto assembly plants.

A serious job creation issue is highway infrastructure. Toyota is a “just in time” manufacturer, so logistics are crucial to success. We have some gaps in our highway system that need to be addressed if we are to garner the number of supplier jobs that are available to us.

I will ask you to expand the Economic Development Highway Program not only to provide funding for key links but also to materially expedite the construction process.

Currently this Economic Development Highway Act, which Speaker McCoy authored some years ago, is the only vehicle that considers job creation and private capital investment effects on highway construction or improvement priorities. Thank goodness we have it, but it requires special funding, over and above MDOT’s $1 billion annual budget.

I will ask you to consider other ways we can involve MDA and job creators in setting transportation priorities. In economic times like those approaching our state, we must be able to respond quickly and effectively if we are to keep winning the race to help Mississippians have better, higher paying jobs.

Further and in the future, we need more options for funding key transportation infrastructure. I applaud the Legislature for passing a law last year allowing toll roads to be built when non-toll alternatives are available. We need creative thinking if we are to meet our transportation needs, especially for job creation.

As you know, I have appointed a blue ribbon commission to study Mississippi’s tax code on a comprehensive basis, including how the federal and local tax structures affect our citizens and businesses. Leland Speed, one of our state’s long-time business leaders and a terrifically successful director of the Mississippi Development Authority, has agreed to chair the group. The commission’s work will give you in the Legislature, the public and me a much more accurate and clearer picture of the tax system under which our taxpayers labor than we’ve had in the past. We’ll get this report by the end of August.

I’ve told Leland and his commission members that they are authorized to look at everything. Nothing is off the table; though I hasten to add, my goal is to put a net tax cut in place during my term. Overall, the commission will help us give Mississippi a tax system that insures everyone pays his or her fair share and that is pro-economic growth and pro-job creation, while funding state government at necessary, appropriate levels.

There is no question this is an ambitious agenda, loaded with significant opportunities and formidable challenges. Successfully achieving it is made more difficult because, after 38% revenue growth these last four years, we will have revenue growth of less than 3% for this budget. That’s difficult but hardly impossible.

Everyone in this room knows savings can be achieved in every state government department and agency, except those like Medicaid and Human Services which have large cost increases caused by litigation or federal rule changes. Even education, where we’ll have important new initiatives and 100% funding for MAEP, can find ways to be more efficient and save money.

It won’t be easy, but we’ll work through our budget issues. We’ll maximize our job creation opportunities despite uncertainty about the national economy. We’ll find answers, get results, make progress for our people and for Mississippi.

I believe that because I believe the folks we represent expect it, will demand it, and, most of all, deserve it. Despite any differences we may have, we must work together and get to positive results.

Having watched our people after Katrina, I know they are entitled to no less: those courageous, strong people on the Coast who overcame obliteration and bounced back in the face of the devastation, but also the compassionate people in the rest of the state who opened their pocketbooks, their homes and their hearts to those in South Mississippi and on the Coast who needed help so much.

Make no mistake! Much remains to be done about Katrina rebuilding and getting the Coast back, bigger and better than ever. Insurance problems must be better addressed at both the state and federal levels, and the private sector has a huge role there.

Rebuilding, especially of affordable housing, must be sped up. Extra state resources, paid for with federal funds, are being brought to bear on the reconstruction and workforce housing fronts.

We are making progress. The number of families in travel trailers on the Coast has been reduced eighty percent, and employment on the Gulf Coast is growing faster than any other place in the nation. But as much progress as has been made, it is still way too slow to suit me, and there remains much to do.

I want to say how much I appreciate the way the Legislature has responded when federal assistance needed to be supplemented: like important reforms and the $80 million you appropriated to keep wind pool insurance rates from skyrocketing even more, and the $18 million you provided to keep struggling local governments afloat.

But again, how can you not do whatever it takes for those people…our people…the people who sent us here to get results…to spend their tax dollars wisely…to take as few of their dollars in taxes as possible.

I pledge to you and to all the constituents I share with you, which is every Mississippian, that I will work with you to get the best results for our citizens and to stay focused on the future of Mississippi, and make it the brightest future we’ve ever had. May Mississippi’s next four years, be our best four years.

God Bless you and your work here. And God Bless the state of Mississippi and our country.