Author: Whitney Afonso (page 1 of 3)

Update: The Impact of the COVID-19 Crisis on Local Government Budgets for FY21

In a previous blog post, The COVID-19 Crisis and How North Carolina Local Governments are Budgeting for It, I laid out the results of a survey that the NCLM and the NCLGBA had conducted to counties and municipalities across the state in April.  In this week’s blog post I am going to provide an overview of an updated survey that was send out in May.  This survey had fewer respondents, but also provides more up-to-date information about the strategies and plans that local governments in North Carolina have, with another full months of information and better understanding of how COVID-19 is impacting their jurisdiction.

First of all, this survey was closed May 15th and had 73 complete or mostly complete responses.  4 were from counties and 69 were from municipalities.  Largely, the survey is the same as the one from April, with one notable difference, questions were added about interim budgets, pushing back the date of the budget adoption, and planning on possibly adjusting the budget with a budget amendment later in the fiscal year.

Let’s start there then.  45 respondents said that they are not planning on adjusting when the budget was adopted.  So, if they normally adopt the budget on June 11th, they are still planning on adopting the budget on June 11th.  8 respondents said they were unsure, and 20 say yes—meaning that they are pushing back the date of the budget adoption.  For example, one respondent said the board’s adoption meeting was on June 11th and it is now scheduled for June 21st.  So while the majority are still on track for the budget adoption to occur as originally planned, quite a few have pushed it back.

However, while some have talked about interim budgets, it seems like it is an uncommon strategy for this fiscal year.  Only 4 said they were considering passing an interim budget and another 4 said they were unsure if it was being considered—otherwise the responses were no.

Once again, the survey asked respondents to share their projections for sales taxes (by quarter), property taxes and occupancy taxes.  Sales taxes, not surprisingly, are expected to be the most impacted.  For most reporting jurisdictions, the impact is expected to be relatively minor by the third quarter of fiscal year 2021.

For Q4FY20 (the current fiscal quarter), 1 reported anticipating growth in sales tax revenue, 5 reported expecting no change in anticipated revenues, 12 reported an anticipated decline of 0-5%, 11 reported an anticipated decline of 6-10%, 30 reported an anticipated decline of 11-20%, and 4 reported an anticipated decline of more than 20%.

For Q1FY21, 1 reported anticipating growth in sales tax revenue, 1 reported expecting no change in anticipated revenues, 18 reported an anticipated decline of 0-5%, 15 reported an anticipated decline of 6-10%, 18 reported an anticipated decline of 11-20%, and 10 reported an anticipated decline of more than 20%.

For Q2FY21, 3 reported expecting no change in anticipated revenues, 24 reported an anticipated decline of 0-5%, 19 reported an anticipated decline of 6-10%, 8 reported an anticipated decline of 11-20%, and only 1 reported an anticipated decline of more than 20%.

For Q3FY21, 9 reported expecting no change in anticipated revenues, 31 reported an anticipated decline of 0-5%, 6 reported an anticipated decline of 6-10%, 8 reported an anticipated decline of 11-20%, and none reported an anticipated decline of more than 20%.

For Q4FY21, 7 reported anticipating growth in sales tax revenue, 9 reported expecting no change in anticipated revenues, 25 reported an anticipated decline of 0-5%, 6 reported an anticipated decline of 6-10%, 6 reported an anticipated decline of 11-20%, and none reported an anticipated decline of more than 20%.

Property taxes are expected to not be as adversely impacted as sales taxes.  19 report no change expected in property tax revenue next fiscal year. 19 are anticipating growth in property taxes next fiscal year.  Twenty-eight are anticipating property tax revenue reductions of between 0-5% and only 1 respondent reported expecting property taxes to go down between 6-10%.

Occupancy taxes are expected to follow a trajectory more like property taxes though.  While 17 responded no expected changes and 1 reported expected growth in occupancy tax revenue, the majority reported significant declines.  Three jurisdictions reported declines of 0-5% and 4 reported declines of 6-10%.  However, 6 reported declines of 11-20% and 4 reported expected declines of greater than 20%.

 

How are jurisdictions planning on balancing their budgets in the face of these declines?  One common tactic is through staffing choices.  Forty-one report no new positions being budgeted for, 18 report a hiring freeze, 7 report lay-offs, 2 report using furloughs, and 6 report reducing employee benefit levels.

Other budget balancing techniques being employed are: 42 are reporting delaying or canceling capital improvements and purchases, 39 report using fund balance, 7 are cutting public services, and 7 are closing facilities.  In terms of generating more revenue, only 14 report increasing fees and 4 report increasing taxes.

The results of this survey are largely in keeping with the April survey suggesting that more information about both the reopening of the economy (Governor Cooper announced his phased plan between the two surveys) and the impact on unemployment and the private sector did not change the early strategies or revenue forecasts significantly.  A more detailed analysis of the results of the first survey is available as a bulletin here, it also discusses best practices and a brief overview of relevant research.

Webinar: Budgeting in the Pandemic

As governments are nearing the end of budget season in these uncertain times we want to make sure you all are aware of some of the resources available from the School of Government and our partners.  There are many COVID-19 resources at the UNC SOG dedicated Microsite.
Budgeting in the Pandemic: A Seminar on Forecasting and Budgeting Strategies for Fiscal Year 2021
The NCLGBA and the UNC School of Government are pleased to announce that we will be hosting a webinar on May 13th at 1 pm on budgeting in the pandemic.  Please join leaders across the state as they discuss how they are approaching these uncertain times within their own budgets.  Presenters will be discussing their revenue streams and forecasts and also their approach to expenditure adjustments.  Our presenters are: Rodney Harris (Cabarrus County), Ken Hunter (Rocky Mount), Tony McDowell (Asheville), Brian Barnett (Pitt County), Teresa Fulk (Newport), and Stephen Hawryluk (Winston-Salem) .  There will be time for questions at the end of the presentation.
While there is no fee associated with the webinar, we would appreciate it if you would register in advance.
If you have any questions please reach out to either Christopher Williams (First Vice President of NCLGBA) at Christopher.Williams@mecklenburgcountync.gov or Whitney Afonso (School of Government) at afonso@sog.unc.edu.

The COVID-19 Crisis and How North Carolina Local Governments are Budgeting for It

Recently the North Carolina League of Municipalities (NCLM) and the North Carolina Local Government Budget Association (NCLGBA) partnered on a survey of county and municipal governments across the state to better understand how local governments are budgeting for FY21.  There are 142  responses.  29 are from counties and 113 are from municipalities.  See the map below to see the number of jurisdictions from each county area (total of the county and municipal responses).

The Impact on Revenues

The results suggest that, not surprisingly, the industries being most impacted are tourism, restaurants, and retail.  Most respondents reported that real estate, construction, and manufacturing sectors were stable if not growing.  However, despite the fact that some sectors have so far been shielded, the majority of jurisdictions report expecting General Fund shortfalls for FY21, 92% in fact.  Almost a fifth of respondents are anticipating a General Fund shortfall of greater than 10%.  The map below shows the distribution of those jurisdictions expecting a general fund shortfall and by how much.  Please note that is a jurisdiction reported “Unsure” it was coded as a “No” for expecting a shortfall and to create the average shortfall the higher end of the range was used.

The county areas that are anticipating the largest shortfalls are Johnston, Dare, Rutherford, Jones, and Forsyth.  With the exception of Forsyth, it is rural county areas.  This may reflect not just the broader economies, but also the dependence on different streams of revenue.  Respondents, as anticipated, are expecting some revenue sources to be more impacted than others.  Sales taxes are expected to be being hit hard.  In fact, while we do not have the numbers yet, it is clear that they are already being hit hard.  Below are two tables, one for county and one for municipalities showing the quarterly expectations of revenue shortfalls from the sales tax.  It shows that while most jurisdictions believe that the last FY20 Q4 and FY21 Q1 will see substantial shortfalls, many are optimistic that by FY21 Q2 the impact of the current COVID-19 pandemic will have only a minor impact on sales taxes.

Occupancy taxes and in some cases, property taxes are expected to be negatively impacted as well.  The majority of municipalities are anticipating shortfalls in occupancy tax revenue for the remainder of FY20 and slightly less dramatic reductions in revenues for FY21.

Most jurisdictions are anticipating stability or even growth in property taxes.  This is expected since the property tax base was finalized in January before the effects of COVID-19 were felt in the United States.  However, there are some still anticipating declines.  The survey provided space for respondents to comment on why and those who chose to, typically suggested that it is because they believed that collection rates may decline.

Other revenues highlighted by comments were typically about reductions in revenues from 1) utilities, 2) investment and interest earnings, and 3) recreation.  There were also questions around intergovernmental transfers (IGTs) from the state and federal government.  Most jurisdictions responding did not have a lot of certainty about how these IGTs may be impacted, but those who were willing to speculate noted that they believed that they would be stable (though more reported expecting declines than increases).

The Impact on Expenditures

The projected revenue shortfalls are creating the need for local governments to consider many strategies to get their budgets into balance.  Overall, the most common strategy reported was appropriating fund balance and the least common one was to increase taxes.

The strategies reported by counties and municipalities did vary though.  Counties also reported relying heavily on reducing capital expenditures and increasing fees.  Municipalities relied most heavily on closing facilities, then appropriating fund balance, and then increasing fees.  Very few municipalities reported an intention to reduce capital expenditures.

Additionally, counties and municipalities both reported the reductions in revenues were going to impact staffing decisions.  The majority of respondents report not budgeting for any new positions and almost half report instituting a hiring freeze.  Counties were more likely to furlough employees and only municipalities reported considering reducing employee benefits.

Lastly, some departments are reported to bear a larger portion of any decreases to the budget.  Not surprisingly, law enforcement and fire and EMS are largely spared, whereas general government and parks and recreation are expected to both be moderately or highly impacted.  Interestingly, for counties, education is also expected to be impacted greatly.  Whether this is subsidies to the operating costs or areas of capital delays is unclear.

What does the scholarship say about how to best proceed with budgeting for FY21?

Well, the best practice is to smooth both expenditures and revenue policy, i.e. try and change as little as possible.  Spend the money you had planned to spend and tax and fee at the rates you had planned… So how do you do that?  Well in two primary ways.  First, hope that you get a lot of federal and/or state support and IGTs.  Of course, you have no control over that and it may not happen.  Most of you, according to the survey, do not anticipate that happening.  Second, use reserves.  Many call fund balances “rainy day funds” (at the state level there are actually separate funds for economic downturn and emergencies).  Well, it is raining.  If your reserves are high enough, you can smooth both expenditures and revenues by relying on them more heavily.  Of course, that is not the only function of local government fund balance and we do not know how long the economic downturn brought on by the pandemic is going to last…so you still want to be somewhat cautious about how much you spend it down.

So then, what is next best?  Well, after you have decided how much fund balance is responsible to use, the literature suggests the next best option is to increase revenues temporarily and preferably not regressive ones (like the sales taxes or many fees).

One more recommendation from the literature: avoid cutting back on capital expenditures!  Everyone, okay almost everyone, decreases capital expenditures during recessions and there can be long term negative impacts associated with that strategy.  Additionally, often during times of recession it is much less costly to invest in capital because interest rates are lower and often contracts are for less.

 

Additional Resources:

Theory and Practice for Coping with Economic Downturns at the Local Level: Part I

SOG COVID-19 Resources

Wayfair Windfall?

 

Where is the windfall promised by the South Dakota v. Wayfair, Inc ruling? This is the first blog post in a short series about economic nexus, local sales and use taxes, and your revenue!

Well, first let’s all get on the same page.  What is the South Dakota v. Wayfair, Inc (Wayfair) ruling, and why do we care about it?

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Social Impact Bonds: A Magic Tool for Financing Innovation?

Have you heard about social impact bonds (SIBs) yet?  If not there are a lot of resources and discussion out there regarding this magical fix of financial woes of government.  While many have viewed these as too good of an opportunity to pass up (for example, see here and here), others have been slightly more skeptical.

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Budgeting in Local Government course: Registration now open

Budgeting in Local Government
November 6-9, 2018, School of Government

This four-day course covers the legal and management framework of budget preparation and enactment in North Carolina local government.  Participants will discuss the numerous processes and techniques used to produce an annual operating budget and capital budget.

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Sales Tax Reform: Articles and Virtual Roundtable

In the wake of the Wayfair ruling and our changes happening in North Carolina I am excited to share a virtual issue of Public Budgeting & Finance that I edited.  It compiles articles published in the journal and presents questions and concerns regarding the future of sales tax policy.  It also makes access to the articles open (i.e., FREE!) for the next six months.  So please take a look, there are a mix of studies that examine state and local issues.

 

 

Also, in addition to editing the virtual issue, I will be moderating a virtual roundtable next Thursday (Sept 6th) on the topic.  Please tune in!  The presenters are: Donald Bruce from the University of Tennessee, Cynthia Rogers from the University of Oklahoma, and Barry Boardman is the Chief Economist for the NC General Assembly. The presenters are very knowledgeable and experts on different aspects of sales taxes and are sure to share important insights, suggestions, and considerations.  See the flier for the event!

 

Upcoming Workshop: Implementing Field Experiments for Innovation and Success

Good morning!  I wanted to make people aware that there will be a free workshop on 12/13 from 11-12 as a pre-conference event for the North Carolina Local Government Budget Association’s Winter Conference (NCLGBA).  This year’s NCLGBA conference is in Durham at the Washington Duke Inn.

Implementing Field Experiments for Innovation and Success

Is your service delivery not as effective as it should be? Could your department streamline current processes?   Do you see problems in your organization but lack ideas on how to address it?  If so, this is the pre-conference workshop for you.

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Consulting with Citizens

Consultation is a different beast altogether than information sharing.  Whereas information sharing is a one way relationship, consultation creates a two way relationship based on citizen feedback.  It relies on a fundamental assumption by local leaders that citizen feedback is beneficial to the budget process and decision making (often with regard to expenditures or even tax rate setting).  This method provides for and encourages citizen input while still allowing local leaders to define the agenda.  The key is that practitioners and elected officials solicit input a set of issues and questions that they create and control. 

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Budgeting in Local Government: Registration now open

Budgeting in Local Government
October 31st – November 3rd, 2017, School of Government

This four-day course covers the legal and management framework of budget preparation and enactment in North Carolina local government.  Participants will discuss the numerous processes and techniques used to produce an annual operating budget and capital budget.

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