Local Governments Brace For COVID-19 Budget Impacts

By Christina Haley O'Neal, posted May 19, 2020
New Hanover County officials are anticipating diminished sales tax revenues and the impacts on next year's budget, used to keep governmental operations running such as those that happen in the county's government center, pictured above. (File photo)
Local government officials are planning for anticipated financial impacts of the COVID-19 pandemic as they start looking at next year's budgets.

The upcoming fiscal year, which begins on July 1, is an unprecedented budget year for local governments across the state, including the city of Wilmington and New Hanover County, which are both proposing conservative budgets without increasing property taxes.

City officials held a presentation and public hearing on their proposed 2020-21 budget at the Wilmington City Council meeting Tuesday night. Next, the city will hold a work session Friday, and officials expect to adopt a budget in June.

City officials have proposed a $206.6 million spending plan for the fiscal year 2020-21, nearly a 3% increase over this fiscal year's budget that includes a general fund of $115.7 million. The recommendation proposes keeping the property tax rate at nearly 50 cents per $100 of assessed valuation. 

That budget, as well as New Hanover County's proposed budget for fiscal year 2020-21, takes into consideration the impacts that COVID-19 will have on sales tax collections, which have yet to be seen due to the three-month lag in local governments receiving distributions from the state.

"I have a lot of faith personally in our budget and finance departments that run a very conservative business model when calculating sales tax and room occupancy tax even in the best of times," Wilmington Mayor Bill Saffo said prior to the meeting Tuesday. "We feel confident in the revenues that are anticipated that we can cover our expenses. We can continue to provide the services that our citizens expect and want."

The shortfalls in sales tax collections are being anticipated and affecting governments across the state, N.C. Treasurer Dale Folwell said.

“These local governments – counties and cities – are going to be facing a budget cycle the likes of which we have never seen. And it’s particularly important for New Hanover County and Wilmington because so much of the revenue is based on people consuming something ... when you aren’t mobile, you can’t consume. And that is what I see the Wilmington and New Hanover County area facing," Folwell said.

The state's stay-at-home order, which was implemented in March has impacted consumers' consumption and many businesses' ability to operate.

Businesses statewide await for the second phase reopening of the state’s economy, which is anticipated for Friday, the of which details could be announced by Gov. Roy Cooper later Wednesday afternoon. In phase two, bars and restaurants along with other businesses that have been ordered to close, will be able to open to the public with limited capacities, among other safety measures.

Many businesses, including restaurants, have been limited since the order took effect. Meanwhile, other businesses, such as gyms and salons, have unable to operate at all. 

“We’re all very concerned. And at this point in time we are all guessing as to what the numbers might look like [coming] from room occupancy tax and sales tax revenue," Saffo said.

The city of Wilmington is making moves in its recommended budget for fiscal year 2020-21 to deal with the impact of declining revenues.

For the city of Wilmington, property tax makes up 56% of general fund revenues, while sales tax makes up 24%, equating to 80% of the city's proposed fiscal year 2020-21 general fund budget.

The area's room occupancy tax, a local lodging tax visitors pay to stay here, dipped nearly 58% in March, and area tourism leaders are anticipating a historic low in April's figures.

That particular tax for the city helps supply beach nourishment funds, about 50% of which coming from hotels built within city limits, and a portion of it also helps the city pay back the debt service on the Wilmington Convention Center, Saffo said.   

"The good news is the city, with the convention center over the last couple of years, was making some pretty good money -- in fact, better than anticipated," Saffo said. "So we put some money away; we were saving up for an event like this."

Estimated total revenues for next year are slightly higher than the estimated totals this fiscal year, said city spokesman Dylan Lee.

"However, the big question mark, of course, is the unprecedented uncertainly," Lee said, adding that the city has adjusted revenue forecasts based on the information available during the pandemic. 

"Our estimates show an optimistic 4.6% growth rate in sales tax over the current fiscal year. However, this is only an estimate, and we can change this as data emerges. We will begin to see COVID-affected sales tax revenues (March receipts) in late June. We won’t see any July (first month of new fiscal) receipts until October," Lee said.

To help with the declining revenues the city anticipates measures to involve deferring one-time purchases in the first half of the next fiscal year, Lee said.

"If necessary to maintain a balanced budget, we can continue to hold off the one-time purchases and look at the option of not filling vacant positions," he added.

The uncertain future of the sales tax revenue has New Hanover County budgeting a lower growth rate for the upcoming fiscal year 2020-21.

"This budget is almost exclusively formed by COVID-19 and what the opportunities may or may not be as a result of COVID-19," New Hanover County Manager Chris Coudriet told commissioners during a recommended budget presentation at their meeting Monday.

The spending plan for the recommended budget for the upcoming fiscal year assumes a 4% sales tax growth rate compared to the 10% actual growth for the prior fiscal year, according to the county.

The county's total recommended budget is $399.6 million with a general fund proposed at $350.8 million, a 0.25% increase from this fiscal year's adopted budget. It also proposes keeping its property tax rate at 55.5 cents per $100 of assessed value, the same as this year. 

Ad valorem taxes, such as property tax, make up 57% of the proposed budget while the sales tax makes up 23%, a combined 80% of the county's general fund.

With the sales tax collections, the county is assuming under collecting, officials said.

The county is anticipating a $9 million revenue shortfall in sales tax collections for fiscal year 2019-20, said Jessica Loeper, the county’s chief communications officer.

“While the shortfall is anticipated in our current year’s budget, the real impact that we are going to see is going to be – and we will have to realize that – in this coming year’s fiscal year budget,” Loeper said.

The county is also expecting its unassigned fund balance to be below its policy range of between 18% to 20%, Loeper said. 

"We projected before COVID-19, we were going to be back within our policy limit at June 30, 2020, however, due to COVID-19, we now expect to be at 13.5%," Loeper said in an email.

The county's estimates are reflected in a much more conservative budget this fiscal year that sustains the current level of county services with limited enhancements.

The city of Wilmington does not anticipate tapping into the reserve fund for the city’s general fund for COVID reasons, Lee said.

Saffo said the city is expecting to maintain a fund balance of 22% to 25%, Saffo said. That balance has been recovering with FEMA reimbursements from Hurricane Florence expenditures that came soon after the storm hit in September 2018.

“We want to keep a healthy fund balance because we are also coming into hurricane season,” Saffo said. “We have made the adjustments necessary in our capital improvement projects … but we feel that we can get through this year and provide the basic services and do our job.”

Funding core functions in the next budget year is how many counties and the cities across the state are going to be able to get through the economic crisis, Folwell said.

“What I suspect on the local level that these governing boards are going to be ... watching their pennies even closer than ever before,” Folwell said. “It’s going to be a financial tightrope to do that and absorb the shock of the fact that people aren’t consuming because they can’t be mobile.”

The state has received $4 billion of Coronavirus Aid, Relief and Economic Security (CARES) Act funding, some of which has been allocated out, Folwell said. There is also $1.2 billion in the state’s rainy-day fund and nearly $2.5 billion in the state's unreserved cash balance. And the state has almost $4 billion in unemployment benefits, he said.

“I don’t know of any state that is as large as we are that is in the economic position that we are in and can pull ourselves out of this quicker than anyone else,” Folwell said. “But it has to be based on transparency, data and the right policies.”

CARES Act funding to aid local governments

The $4 billion in aid to North Carolina was part of the overall $2.2 trillion CARES Act. 

The N.C. General Assembly and the governor agreed on a package providing $150 million in immediate aid to counties, according to a county news release. The help with the impact of the COVID-19 crisis, local governments are receiving money through the CARES Act.

But based on guidelines and restrictions on how the funds can be used, the funds can't go towards balancing governmental budget sheets, Folwell said.

"The problem is, in my opinion, there were strings attached to that such that the counties are forced to use that for COVID-related expenses," Folwell said. "But what about just maintaining the level of services that their citizens are accustomed to?"

There is movement to loosen those strings on how the money can be used, Folwell said, adding that there are many communities were the state, county and city governments are the largest employers.

The New Hanover County commissioners approved a budget outline this week for spending the nearly $4.1 million in aid the county was allocated from the CARES Act, including reimbursement for COVID-19 response, continued testing and a $1.3 million small business economic incentive grant program.

The program will be targeted to businesses with fewer than 25 employees in the county and whose owners live in New Hanover County. Other details, including the application process, will be refined and in place to be presented and a public hearing to be held at the commissioners’ June 1 meeting, stated the release.

The funds will also be used to reimburse the city of Wilmington and towns of Carolina Beach, Kure Beach and Wrightsville Beach for eligible costs incurred responding to the virus.

The county is responsible for the distribution of the funds and tracking of how the funds are used, county officials said.

The aid will also fund continued testing, cleaning and disinfecting, resources for the county’s aging adults, enhanced social distancing measures in facilities and additional municipal support, stated the release.

The city of Wilmington has submitted a request to New Hanover County asking for $332,000 in CARES Act funding, Lee said.

Examples of the city’s COVID-related expenditures include personal protective equipment, cleaning and disinfectant and funding related to the city's police department's COVID-19 response task force, as well as contributions to help the area’s homeless population during the crisis and technology upgrades for remote meetings for those city employees working from home.

“That is the amount of our costs associated with COVID-19," Lee said. "That is essentially a reimbursement, and there will be more costs that are ongoing. But at this time those are identified, and that is of last week."
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