LGC flags budget concerns ahead of new fiscal year

Some local governments had no issues, others minor — but Ellerbe had many

Gavin Stone News Editor

RALEIGH — The Local Government Commission completed its review of Richmond County’s local governments’ draft budgets last week as part of its continued oversight of all seven entities due to their placement over the last year on the commission’s unit assistance list.

The LGC’s review was “limited” but checked on various metrics to measure each entity’s financial health going into the new fiscal year and to give them a chance to make adjustments prior to adopting their budget. They found Richmond County’s, Rockingham’s and Hamlet’s draft budgets for the fiscal year ending June 30, 2022 to be in compliance with the Local Government Budget and Fiscal Control Act, though the LGC did note that staff were concerned about Hamlet’s use of fund balance to balance their budget this year, which is meant to be a last resort.

“We also understand the situation you are in with the county and sales tax,” read an email from LGC Program Analyst Mark Baker to Hamlet leadership. “We will continue to monitor the situation.”

Dobbins Heights, Ellerbe, Hoffman and Norman each had areas of concern in their draft budgets, which the LGC flagged and in some cases advised major revisions to their drafts prior to adoption. Of these, Ellerbe’s draft budget had the most glaring concerns.

All six municipalities were added to the unit assistance list (UAL) — which is not a punishment but instead is used to help LGC staff focus their resources on governments in the most need — in 2020 because of the county’s decision to change the sales tax distribution method from per capita to ad valorem. That decision cut large chunks of sales tax revenue out of each of their budgets in the final stretch of preparations for the 2020-21 fiscal year. The LGC added Richmond County to the UAL on April 2, 2020 for the second year in a row citing their concern over the county’s General Fund, though the county had improved its General Fund standing from the prior year and corrected the internal control issues flagged by the LGC.

Hoffman and Ellerbe have been on the list since at least their 2017 financials were submitted, and Dobbins Heights was on the list for 2017 and again for 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.

Ellerbe corrects budget mistakes

Ellerbe’s concerns are “significant,” Baker said, and included several line items that were underbudgeted as well as unsustainable use of fund balance. The LGC recommends that governments should not appropriate funds from their fund balance, which is treated as a reserve fund, in amounts greater than 5% of the government’s total budget. In its draft budget, Ellerbe appropriated $194,241 from its fund balance which represented 23.5% of its overall budget.

Since 2016, Ellerbe has seen a considerable drop in its unreserved fund balance. In 2016 the town had $1,004,557 in fund balance, and as of Feb. 1, 2021 the town had $532,904.

”We get concerned if a unit budgets more than 5% for continuing operations. If you are budgeting almost a quarter of the budget from savings for normal operations that has a high risk for getting the town in fiscal distress,” Baker told town leadership in an email obtained by the Daily Journal. “We want to encourage you to reduce the 2022 fund balance appropriation for the 2022 General Fund budget.”

The town also used a fund balance appropriation of 18% of its total budget for its utility funds. Baker said that the town’s water and sewer funds are “not in a good fiscal position” as of June 30, 2020, and that any use of fund balance for utilities is “ill advised.” He advised that Ellerbe reach out to two nonprofits, the Southeast Rural Community Assistance Project or the North Carolina Rural Water Association, to have a current rate study done to determine what rates will keep their utility system “viable.”

“Once you have good rate information the board can make an informed decision that will keep the utility fiscally sound and meet the town’s bond coverage requirements,” Baker said. “We urge you to seriously look at our suggested revisions in order to have a more realistic budget in place for the next fiscal year.”

The underbudgeting issues involved the town’s revenues from property tax, sales tax, fire protection fees and the Powell Bill. For property tax, Ellerbe budgeted only $180,000 for the upcoming fiscal year but by the LGC’s calculation, the town should expect to take in $272,927. The audited property tax revenue as of June 30, 2020 was $233,937. Fixing this budgeting error would allow for a corresponding decrease in the fund balance appropriation needed to balance the General Fund.

The town has since fixed this underbudgeting concern on its property tax revenue, and after taking the roughly $180,000 expense out of the budget to fund a Sheriff’s deputy being posted in the town 24 hours a day, Ellerbe has improved its position going into the new fiscal year. The Ellerbe Town Council approved its 2021-22 budget on Monday with a 4-1 vote.

LGC highlights other concerns

Baker told the Town of Dobbins Heights that their sales tax and property taxes are budgeted too high. He reminded them that their estimate of their taxes should be based on the calculation of assessed value as of Jan. 1, multiplied by the tax rate and then multiplied by the town’s tax collection percentage.

The LGC found that Hoffman had budgeted their General Fund property tax revenues too high. The Commission showed its work to arrive at the correct revenue of $27,159. More concerning was that the town had included a fund balance appropriation that was the equivalent of 55% of the total budget. The LGC recommends that fund balance appropriations not exceed 5% of the total budget.

Additionally, Baker told Hoffman leaders that the town’s sewer fund should not be receiving transfers from the general fund.

“The sewer operation needs to operate as a business where user fees cover the cost of operations,” Baker said in an email.

At their monthly meeting on Monday, the Hoffman Town Council received the LGC’s recommendation, and will have to have another budget work session to correct the areas flagged.

In Norman, which lost all of its sales tax revenue due to the county’s change to the sales tax distribution method, the LGC found that the town also used a large fund balance appropriation to balance its budget.

“Alternative sources of revenue need to be utilized and/or large expenditure cuts need to be made,” Baker told Norman leadership. “The town is not sustainable with the current budget trend noted for 2021 and 2022.”

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