In April, New Hanover County’s budget seemed stuck.
Commissioners from both parties had mostly agreed on several investments, including increased public safety, pre-K, and general school funding, which they were willing to support in addition to spending increases needed to keep up with inflation and the cost of living. That includes a 3% increase for operating funds for New Hanover County Schools and a 6% increase for the New Hanover County Sheriff's Office.
However, commissioners disagreed on how to fund things.
The Board of Commissioners’ three Republicans — Chairwoman LeAnn Pierce, Vice-Chair Dane Scalise, and Bill Rivenbark — had all said they did not want to raise taxes.
Instead, they considered tapping the county’s Revenue Stabilization Fund, a nearly $300-million pot of money created by the sale of New Hanover Regional Medical Center. Historically, Republicans had opposed using the fund. But this year, they argued that using it was preferable to a tax hike, especially given the current economic downturn, which has put economic pressure on residents.
However, using the stabilization fund requires a supermajority of four votes, and the board’s two Democratic commissioners — Rob Zapple and Stephanie Walker — said they were not comfortable using it. Both argued that using the fund ignored the mismatch between revenue and expenses, and only artificially balanced the budget, which would be a problem long-term. But Democrats also lacked the votes for their preferred approach of raising taxes to meet increased expenses.
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Released last Thursday, County Manager Chris Coudriet’s recommended budget presented a workaround.
The solution is weedy, but it essentially uses a little over $11 million from a number of specialized accounts that the county maintains for various reasons, including the fund balance, a separate specialized fund that captures overflow from the fund balance, and other pools of money from capital projects. The budget proposal also includes $13.6 million in borrowing.
Coudriet’s budget notes, ”these are one-time resources that help balance the budget,” adding that ‘one-time tools’ “do not address the longer-term relationship between recurring revenues and expenses.”
One-time tools
The first, and probably most recognizable account, is the county’s fund balance. This is a significant reserve of money, roughly equivalent to two months of operating capital or more. The minimum amount in this fund is guided by both the county’s own policy and the Local Government Commission, part of the State Treasurer’s office that provides oversight for major financial decisions by counties and municipalities.
The county’s policy, which was altered last year to allow spending a little more out of the fund, now sets the floor at 16.67% (of general fund expenses). Beyond the floor, there are concerns that the LGC could take an interest in the county’s finances, and also that the bond agencies like Moody’s and Standard & Poor’s could downgrade the county’s excellent AAA-bond rating. The latter could lead to higher interest rates, making borrowing — like the proposed $320-million school bond slated for the November ballot — more expensive. (To the frustration of commissioners, bond ratings do not factor in the county’s sizable revenue stabilization fund.)
The recommended budget gets very close to the fund balance floor, without requiring another policy shift, and pulls $3.98 million from the general fund.
The fund balance also has a ceiling, currently set at 21% — and anything over that goes into a lesser-known fund, the “committed fund balance,” or “a bucket for future capital outlay,” as Coudriet called it during a recent meeting. The recommended budget pulls $2.2 million from this bucket.
Lastly, there are other revenue streams that, while they’ve been tapped in the past, play a larger role in the current recommended budget, according to the county’s chief financial officer, Eric Credle.
These streams account for $5.1 million and come from two aspects of major capital operations, Credle told WHQR.
First, when the county borrows money for a big project, it doesn’t spend it all at once — so it earns interest on the money while the project progresses. Second, truisms about government projects notwithstanding, there are projects that do come in under budget — including several recent ones. Those ‘project savings’ are also being used.
Credle noted that “in next year's budget, we are using those interest earnings and project savings as a lever [to help balance the budget]. Those types of situations are recurring, but usually in significantly lower amounts than what is being budgeted for next year.”
Borrowing
The recommended budget includes $13.6 million in borrowing, which would have to be repaid with interest. While last year the county didn’t borrow any money to balance the budget, Credle noted that “borrowing for capital outlay is not unusual for the County and has been included in budget recommendations in prior years.”
The borrowing plugs a roughly 1.75-cent hole in the tax rate.
For comparison, earlier this year, county staff offered two budget proposals, one maintaining last year’s 30.6-cent tax rate (per $100 of property value) and one with a two-cent tax increase. Even with a two-cent increase, which provided roughly $16 million in additional revenue, the budget relied on $9.5 million in borrowing.
What’s next
Early signs are that Republicans will support the recommended budget, or something very similar. Last Thursday, Scalise posted on Facebook, reiterating that the majority of commissioners did not intend to raise taxes.
“Long story short: NO COUNTY TAX INCREASE, and we will continue to prioritize investments in our public schools, public safety, and necessary capital improvements,” Scalise wrote. “Providing core services at a low tax rate is my job as your representative and I take my job very seriously!”
In a statement posted on Monday, Zapple took issue with the recommended budget, calling it a “serious financial mistake.” Zapple called attention to the increased borrowing, which has long-term costs, and more generally, the budget’s inability to match growing expenses with revenue.
Zapple again rejected using the revenue stabilization fund, saying it should be for emergencies only, and suggested a tax increase instead. He told WHQR he believed a 1.75-cent tax increase should be used in lieu of borrowing.
Notably, both the recommended budget supported by Scalise and Zapple’s alternate plan would rely on the ‘one-time’ tools or resources used by Coudriet to make this year’s budget math work.
WHQR asked if the county could use these same one-time tools next year or whether it had essentially shaken out the last piggy bank and turned over the last couch cushion. Credle didn’t completely rule out using these measures again, but reiterated that the budget notes “these one-time tools help hold the rate flat this year but do not address the longer-term relationship between recurring revenues and expenses.”
In essence, it seems unlikely that next year the county will have anywhere near the $11.3 million in one-time funds that it was able to scrounge together this year; that represents roughly 1.4 cents of the tax rate. Several commissioners have suggested that the financial landscape could change between now and then, including a rebound in sales tax revenue, which came in under expected levels this year.
Additionally, if the school bond passes in November — and there’s a good chance it will, given it has bipartisan support — that will mean an estimated 1.75-cent increase next year.
Without the supermajority requirement of the revenue stabilization fund, Republicans have the three votes needed to pass the recommended budget. However, there are several more upcoming meetings, including this Thursday, where commissioners can discuss their disagreements. The recommended budget is slated to get a public hearing on Monday, May 18 — but even after that, commissioners technically have until the end of June to pass a final budget.
Disclosure notice: Commissioner Rob Zapple is a member of the WHQR board of directors, which has no say in editorial decisions.
