RALEIGH — All six of Richmond County’s municipalities have been on the Local Government Commission’s unit assistance list since May 2020 due to the county switching to an ad valorem sales tax distribution — while the county was put on the list prior to that change due to concerns with their general fund — but what does that mean?

The unit assistance list (UAL) is not a punishment for any local government, but rather a way for the LGC’s staff to track the status of these governments as they work to recover from financial management issues. All of the municipalities were added to the most recent UAL because of the change to ad valorem, but some of them have had issues dating back several years.

For example, Hoffman and Ellerbe have been on the list since at least their 2017 financials were submitted, Dobbins Heights was on the list for 2017 and again for 2019, and Richmond County was on the list for 2018 and 2019. Rockingham, Hamlet and Norman were not on the list until this last year, according to the most recent UAL. Currently, there are 18 counties and 95 municipalities on the UAL. The reasons given for each entity being added are not extensively detailed, but grouped under three different metrics: internal control issues, financial issues-general fund, and financial issues-water/sewer fund.

The most detrimental result of being added to the UAL is that it can affect a local government’s credit rating, and thus make it harder and more costly for them to borrow money to fund large-scale projects such as infrastructure improvements, new buildings or renovations to existing facilities.

Officials with both Rockingham and Hamlet interviewed this week could not say with certainty whether any projects of theirs would be immediately impacted by being added to the UAL, though they are deeply concerned about future projects.

Multiple individuals with knowledge of municipalities’ efforts to borrow money while on the UAL told the Daily Journal this week that there is no general rule for how being on this list will impact their credit rating, and weren’t able to provide specifics on how this is determined, but agreed that the impact is significant and judged on a case-by-case basis.

“It wouldn’t just be because they were put on the UAL [that a local government’s credit rating would suffer], they would look at more detail than that,” said Scott Mooneyham, director of Political Communications for the League of Municipalities, which lobbies state legislators on behalf of municipalities. “There are some entities that are put on the UAL for not filing their audit report.”

Because switching between sales tax distribution methods is so rare, there isn’t any way to determine whether the LGC adding all municipalities affected by a county’s decision to make that change is a “typical” reaction by the LGC, according to Dan Way, communications manager for the North Carolina Department of State Treasurer.

“The staff of the LGC monitors the fiscal health of over 1,300 units of local government, and when a significant issue affecting the financial health or fiscal management of a unit is noted, the unit may be placed on the Unit Assistance List,” Way said in an email. “The change in sales tax distribution method in Richmond County had a significant impact on the revenues of several municipalities and rose to a level of concern that caused staff to place the municipalities on the UAL so that we could more closely monitor and provide support to those units as needed.”

While entities on the UAL can apply to borrow money and be successful, Way added, they are “generally subjected to a higher level of scrutiny in the areas of concern.”

“If the unit can satisfy staff and the members of the LGC that they have addressed the concerns, the debt will be considered for approval,” he said.

Fitch Ratings is one of the global agencies that provides credit ratings to local governments. While it does not rate Richmond County, it recognizes the role of the LGC in monitoring the financial health of local governments throughout the state. Kevin Dolan, director of Public Finance for Fitch Ratings, said that the agency doesn’t have much experience dealing with the UAL because most of its clients have strong credit ratings, but being on the UAL would be reflected in the current rating or rating outlook (stable, negative or positive) they gave to a client entity. The agency would also likely comment on the reason the entity was on the list in their commentary attached to their rating.

“Bond investors rely on the bond ratings to inform their investment decisions and, depending on the reason for an issuer’s inclusion on this list, it could impact that issuer’s rating or rating outlook and ultimately their borrowing costs,” Dolan said.

Michael Rinaldi, head of U.S. Local Government Ratings for Fitch, said the LGC’s level of concern about an entity would be “critical” to the credit rating the agency issues.

“The circumstances that trigger the invocation of the LGC’s authority to intervene in the financial management and operations of a distressed municipality and the actions/mechanisms imposed as a result would be critical to our view of the municipality’s credit quality,” Rinaldi said.

In reaction to being informed earlier this month that Richmond County and its municipalities had been added to the UAL, Board of Commissioners Chair Jeff Smart said it will take a “group effort” to get off the list.

“We must make the necessary changes for the County and all the municipalities to be removed from this list,” Smart said in a text. “This will take a group effort to eliminate expenses and increase revenue without raising property taxes. As Chairman of the Board of Commissioners I will continue to do everything I possibly can to create an environment where all of us can be successful by working together.”

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Reach Gavin Stone at 910-817-2673 or [email protected].