Annual Revenue Projections for State-Collected, Locally Authorized Revenues

Introduction

Every year at this time, we develop forecasts of major county revenues and assemble other information intended to help county officials put together their proposed budgets for the upcoming fiscal year. After several years of robust growth, North Carolina should experience a more modest expansion next year. While the state’s economy is projected to outpace the nation as a whole, high energy prices and fewer mortgage refinancings are beginning to dampen consumer spending.

Please find here a spreadsheet of all county state-shared revenues from 2005-06. We have also linked all other accompanying materials within this main document for your easy retrieval. If the link cannot be accessed, please see our Web site, www.ncacc.org/links-budget.html.

The State Budget

Governor Easley released his 2007-09 biennial budget request (PDF) Feb. 22, and the General Assembly’s joint appropriation subcommittees have already begun its review. All told, the $20 billion general fund budget would increase state spending by 7.2 percent or $1 billion, excluding capital expenditures. This increase is being fueled in part by over-collections in revenues this year exceeding $825 million and $125 million in expected reversions.

State budget revenue growth of nearly 8 percent experienced in the first seven months of 2006-07 is not anticipated for 2007-08. State budget and legislative analysts have agreed to a baseline revenue growth of 2.2 percent for next year. The state projects its sales tax revenues to increase by 3.6 percent, exclusive of tax changes. The governor’s budget contains a number of recommended tax changes, including retaining the quarter cent sales tax and the upper income personal tax bracket set to expire July 1, providing $300 million in additional revenue.

The governor’s budget recommends a decrease in the statutory set-aside of lottery funds for school construction. Current law dictates that 40 percent of Education Lottery Fund receipts go to school capital needs. The governor’s budget proposes lowering the amount to 30 percent, while increasing the allocation to the state’s early education initiatives. We believe that this proposal would require General Assembly action to implement a change in the existing allocation.

The governor’s budget proposal provides for an average teacher salary increase of five percent, with a step increase plus a flat $1,240, to bring their salaries above the national average by 2008-09. School administrators would receive an average 4.44 percent increase. State employees and university faculty would get 2.5 percent, with an additional 2.5 percent going to full-time community college faculty and professional staff. State employer contributions will see a 12.3 percent increase in health premiums.

The House drafts the first legislative response to the governor’s proposal, although little floor action is expected before late April while budget writers await April income tax receipts. Based on the joint appropriations budget calendar, the House is expected to act on its budget proposal by May 4. The joint appropriations subcommittees have received their general fund spending targets. Collectively, these targets cut $210 million from the governor’s recommended spending levels, exclusive of any salary or benefit adjustments. As the House begins debating its budget priorities, we will keep counties abreast of any changes that may impact county budgets.

ADM Fund and Lottery Proceeds for School Construction

ADM Fund

Governor Easley’s budget proposal retains the county Public School Capital (ADM) Fund monies for school capital needs. Nearly $82 million has been credited to the fund in the first three quarters of this fiscal year from the required corporate income tax set-aside, and state analysts project $109 million in fund receipts through the end of this fiscal year. However, corporate income tax collections overall are expected to decrease nearly 14 percent next fiscal year. For your county’s balance, please see the ADM Fund “Special Summary Report,” (PDF) under the Public School Building Capital (ADM) Fund link at this site.

The Association has emphasized to state leaders that ADM Fund dollars are a critical component to support ever-increasing school facility needs, as documented by the most recent school capital survey (PDF). The survey calls for nearly $10 billion in school capital expenditures over the next five years.

Lottery Proceeds

Lottery sales are not meeting projections for this fiscal year and will likely not meet budget appropriations. Based on conversations with the General Assembly’s fiscal staff, the lottery may only generate $900 million in 2006-07 sales, totaling $126 million for county school construction, or $44 million below projections.

To increase sales, the governor’s budget recommends increasing the amount of revenues set aside for prizes, in order to spur sales of scratch-off tickets, which are way below other states’ sales history. Increased prize monies should generate $1.5 billion in lottery sales according to the governor’s projections. If the General Assembly agrees to the governor’s proposed change in spending allocations, counties would lose $44 million in school construction dollars next year, with more losses in future years.

As a reminder, all lottery proceeds dedicated for educational purposes including those for school construction must be appropriated by the General Assembly. Legislative action will again most likely occur simultaneously with adoption of the state budget, which could be after county budget adoption. When appropriated, lottery proceeds for school capital needs are distributed quarterly to the ADM Fund mentioned above—other lottery proceed dollars for educational purposes remain in the state’s budget. While we await further information, we will project lottery sales at $1 billion—current law directs 35% of these to be set aside for educational purposes and 40 percent of the set aside for school construction or $140 million for 2007-08.

The 40 percent for school capital needs are further divided into two allocations, unless the General Assembly changes the school construction allocation formula. The first allocation, available to all counties, sets aside 65 percent of the 40 percent based on the school district’s average daily membership. The second allocation sets aside the remaining 35 percent for those counties whose effective tax rates exceed the statewide average based on current year’s data. A county’s effective tax rate is based on where a county is in its revaluation cycle. For those counties in the first year of revaluation, the effective rate equals the tax rate multiplied by the sales/assessment ratio for that year (generally the ratio is at or is very close to 1). For those counties in the second year of revaluation, the effective rate equals the tax rate multiplied by a weighted average of the sales/assessment ratio for the two most recent years. For counties in the third or later year of revaluation, the effective rate equals the tax rate multiplied by a three-year weighted average of the sales/assessment ratio. The average daily membership of those school districts in qualifying counties will then be used to allocate this second pot of money to individual counties.

Effective tax rates are recalculated each year to determine allocations for the following fiscal year. While we await the official lottery allocations from the N.C. Department of Public Instruction, we have provided an estimate of what counties might expect. Changes in individual county effective tax rates vis a vis the statewide average effective tax rate drastically impact anticipated lottery proceeds per county. The Association’s comparison of eligible counties based on 2006-07 data versus the estimate based on 2005-06 data show three counties becoming eligible for these additional monies, and five becoming ineligible. Either change roughly doubles, or halves, a county’s estimated allocation.

Once the school capital lottery appropriations are made to the ADM Fund, county access to those funds will mirror the process for accessing current ADM Fund dollars in terms of project approval and uses with two major exceptions—lottery dollars do not require a local match and cannot be used for technology projects.

When considering budgeting lottery proceeds for school construction or debt service, a county should look to its current budgeting practices for ADM Fund dollars. Again, the intent of the General Assembly is to treat these new dollars like current ADM Fund dollars. We understand that some counties budget ADM Fund dollars, while others do not.

Video Programming Revenues

Under House Bill 2047, passed last year and effective January 1, 2007, county and city governments are no longer authorized to award or renew local franchise agreements (LFAs) for cable services (G.S. 66-351). Also effective January 1, 2007, G.S. 66-355 provides that gross revenues used to calculate local cable franchise taxes will no longer include the gross receipts from cable service that are now subject to state sales tax on video programming. However, local cable franchise fees on those components of a county or city’s LFA's definition of "gross revenues" that are not subject to the state sales tax on video programming can continue to be collected.

To replace lost local cable franchise fee revenues, G.S. 105-164.44I requires the NCDoR to distribute part of the state sales tax collected on video programming and telecommunications services to counties and cities on a quarterly basis. The amount that each municipality or county receives will be based upon whether it imposed a cable franchise tax before July 1, 2006. For municipalities and counties that did impose a cable franchise tax, the amount is based on the cable franchise tax and PEG channel subscriber fee revenue imposed from July 1 through December 31, 2006. For those that did not impose a cable franchise tax before July 1, 2006, the amount is based upon population. Under G.S. 105-164.44I, a county or municipality had to certify to the NCDoR by March 15, 2007 the total amount of cable franchise tax and the total amount of PEG channel subscriber fees that it imposed during the first six months of the 2006-07 fiscal year, or certify that it did not impose such fees. All counties submitted this form by the March 15th deadline.

The legislative intent of the change from the local franchise tax to a share of state special sales taxes was to be at least “revenue neutral” for local governments. Preliminary receipts from the telecommunications and satellite sales taxes indicate that they are doing better than initial state forecasts in 2006 when the change was made. Revenues from the new video programming sales tax on cable are unclear and there might be transition issues in the early months of collection. For these reasons, we urge caution in estimating your cable franchise replacement revenues from this source next year. The first quarterly distribution is due on or before June 15. It should provide a better indication of the accuracy of state assumptions. A conservative approach for 2007-08 would be to budget at or a little below your cable franchise tax estimates for 2006-07.

Counties with qualifying public, educational and governmental (PEG) channels are entitled to as much as $25,000 per channel (for up to three channels) in supplemental PEG operating funds. However, the total amount of money distributed for PEG channel support may not exceed $2 million in a fiscal year; if it does, the amount per channel is proportionately reduced. Since more than 300 qualifying PEG channels have recently been certified to the Department of Revenue, the amount per channel distributed next year will likely be less than $7,000.

Local Option Sales Taxes

Sales Taxes Changes

It’s important to define the sequencing of sales, collections, allocation and distribution to help in projecting sales tax receipts. For example, July “collections” reflect June vendor “sales,” which are processed and “allocated” in August, with a local government “distribution” made on or before September 15. Put another way, local government sales tax distributions in any given month reflect the actual sales made three months prior.

One change that has raised many questions is the administration and accounting of the 2 percent local sales tax on food as if it were a state sales tax beginning with the October 1, 2003 collections (January 12, 2004 payment report). For allocation purposes, one-half of the food sales tax is distributed on a per capita basis while the other half is distributed proportional to the 1997-98 Article 39 tax on food.

Prior to the December 12, 2005 local sales tax allocation, all food sales tax receipts were listed and credited under the Article 39 section. With the December 12th allocation, food sales attributed to Articles 40 and 42 were properly credited to these articles. This may help explain why your county’s Article 39 receipts over the last six months of calendar 2006 were decreasing or staying flat in comparison to the last six months of calendar 2005, while Articles 40 and 42 were showing substantial growth.

As a reminder, you may access all local sales tax distribution reports from our “Links” page.

Sales Taxes Refunds

We encourage counties to monitor closely the sales tax refunds debited from their county area distribution, given the growth and expansion of these refunds. Overall, these refunds have more than doubled in the past 10 years.

Furthermore, the change from quarterly to monthly sales tax allocations makes these refunds more pronounced, in that they are no longer averaged over three months. Per G.S. 105-164.14 (f), counties may request in writing to DoR the refund detail for the previous 12 months, and the newly designed sales tax distribution report lists the total refunds month by month.

Articles 40 & 42

Fiscal analysts with the General Assembly project their 2007-08 gross sales tax revenue growth at 3.6 percent above expected 2006-07 receipts, excluding impacts of sales tax rate changes. We recommend that counties project growth in sales tax revenues in the 3 percent range for Articles 40 and 42 (half-cent sales taxes) and one-half of Article 44, all of whose receipts are allocated statewide on a per capita basis. This figure is conservative, but we feel it is appropriate in light of the expected slowing in consumer spending.

Article 44

As a reminder, Article 44 does not apply to sales on food for home consumption and is allocated on a 50 percent point of delivery/50 percent per capita basis.

Article 39

For Article 39, the 1 percent point of delivery sales tax, and the remaining half of Article 44, the 3 percent figure may need to be adjusted upward or downward to reflect your county’s specific economic conditions such as job losses, changes in net migration, and availability of retail options.

Hold Harmless

Legislation authorizing the most recent half-cent sales tax - Article 44 - provided for a hold harmless provision for those local governments whose expected Article 44 receipts do not replace their repealed state reimbursements. Per G.S. 105-521, by May 1 of each year, the Department of Revenue (DoR) and the Fiscal Research Division of the General Assembly must estimate what Article 44 would generate for all local governments, based on their existing allocations for Articles 39, 40 and 42. If a locality’s repealed reimbursements are $100 or more than their anticipated Article 44 receipts, the Secretary of Revenue must submit an annual payment of that difference by August 15, and take the hold harmless funds from the state’s sales tax receipts.

The 2004 Appropriations Act (H. 1414) amended 105-521 by guaranteeing hold harmless payments through 2012.

Conversations with DoR indicate that the hold harmless figures will be released the first week in May, and we will forward them to you upon their publication.

Beer and Wine Taxes

State analysts project a 3.6 percent increase in beer and wine revenues in the state’s 2007-08 budget. Counties may wish to consider increases in the 2 to 2.5 percent range. By law, the distribution must be made within 60 days after March 31. Please also note that the share received by the county government can be affected by changes in population within the county.

Medicaid

The N.C. Department of Health and Human Services sent out their 2007-08 estimates (XLS) for the county share of Medicaid on February 15, 2007. Statewide, county Medicaid costs are projected at $517,161,525 or 14 percent above the 2006-07 state certified Medicaid budget for counties of $453,957,554, of which $27.4 million is covered by a one-time state appropriation. Overall, Medicaid expenses are projected to top $9.6 billion or 9% above spending in 2006-07.

As you know, the General Assembly agreed to a temporary, one-time cap of 2006-07 county Medicaid expenditures at the 2005-06 actual expense level of $426.6 million statewide. An appropriation of $27.4 million was made to offset increased county costs—any expenditures in excess of the $27.4 million were to be shared once again by counties. As of this writing, we anticipate these funds to be insufficient to cover actual county Medicaid expenses for 2006-07—fiscal analysts project this deficit to be at least $5 million and may be as high as $10 million. We are asking that the General Assembly cover this shortfall since its legislative intent was to provide full funding for a temporary cap for this fiscal year.

State Allotments for Public Schools

Please find here the statewide school allotment formula and budget planning allotments for the public school system(s) in your county and related materials.

All major allotments of state funds for the public schools are included in the allotment spreadsheet, except for the Low Wealth Supplemental School Fund and the Small Schools Supplemental Fund. A separate spreadsheet showing the 2006-07 allotments for these funds is provided. Archived fund levels are provided on the planning allotment Web site.

Please find here the local salary supplements paid to teachers and other school employees in 2006-07.

Department of Revenue Contact List

Please find here a sheet listing the responsibilities of a number of divisions within the Department of Revenue that might be of interest to North Carolina counties, with their appropriate contact numbers.