2008-09 Fearless Forecast
Updated with revisions, April 30

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Introduction

Every year at this time, we develop forecasts of major county revenues and assemble other information to help county officials put together their proposed budgets for the upcoming fiscal year.

Please find here a spreadsheet of all local state-shared revenues from 2006-07. 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.

New Revenue Calculator for “What If” Budget Scenarios

NCACC is proud to offer to counties a new, interactive online tool to show the long-range budget impacts of revenue decision-making. By using the tool to increase and decrease a number of revenue options, counties can, for example, see:

• the impact on any particular county of an expansion of the sales tax base;
• total revenue generated or lost with incremental adjustments to the property tax rate; and/or
• the yield from a local option sales tax, land transfer tax, or impact fee.

We invite you to visit our Web site to access the interactive tool and its instruction guide for your county.

State Economy Year to Date

A slowing state economy will continue to dampen sales tax collections, but fiscal analysts remain hopeful that North Carolina will avoid a recession. North Carolina’s economy is clearly lagging behind past performance – year-to-date sales taxes are growing at 2.9 percent as compared with a 5.8 percent average growth, corporate taxes are off 30 percent although much of that decline is due to large, one-time payments last year, and deed stamp revenues are down nearly 12 percent. Luckily for the state, and indirectly for counties, withholding receipts for personal income taxes continue above their historical average.

National economic numbers indicate a growing possibility, if not reality, of a national recession – two or more quarters of GDP decline. Economic pundits point to the collapse of the housing appreciation bubble, increasing energy prices, tightening consumer spending and credit availability. While North Carolina largely avoided rapid housing escalation over the past five years, a protracted national recession with attendant job losses would curtail economy-dependent state revenues and accelerate state expenditures such as Medicaid.

The State Budget

The General Assembly will convene May 13 for a “short” session designed primarily to tweak the second year of the state’s biennial budget. As of this writing, state fiscal analysts show a slight revenue surplus of $125 million for the first 8 months of the fiscal year, or 1 percent above expectations. We anticipate the state’s over-collections at year’s end to be much less than that experienced recently, where over-collections alone exceeded one billion annually. Generally, if education enrollment and Medicaid spending are on target in the second year’s continuation budget, the major expansion budget decisions include the level of employee salary increases – each 1 percent increase in teachers’ pay requires roughly $52 million while each 1 percent increase for all state employees requires $125 million. Additional educational demands include teacher performance bonuses, set last year at $70 million. Eliminating the highway trust fund transfer to the general fund lessens general fund availability by $172.5 million.

State budget and fiscal analysts set a consensual general fund growth estimate of 5.4 percent for the state’s 2008-09 budget, including 4.4 percent sales tax growth and 4.6 percent revenue growth. These estimates will be revisited in May, in light of the state’s economic performance and the level of corporate and non-withholding personal tax collections in April.

We understand that Governor Easley will release his 2008-09 budget request May 12, to adjust the continuation spending plan in place for the second year of the biennium, as well as offer up expansion items for legislative consideration. At that time, we will conduct and distribute a comprehensive analysis of his proposal and its impacts on county budgets.

2007 State Budget Impacts to Counties

Special provisions in the 2007-08 state budget could potentially impact county expenditures for the 2008-09 fiscal year. Beginning July 1, 2008, counties will be required to fund courthouse telephone systems meeting AOC specifications (H1473, Sec. 14.16). Traditionally, state appropriations funded telephone systems – both capital and operating expenses – and state coordination and funding grow increasingly important as telephone systems merge with computer networking infrastructure. The Administrative Office of the Courts is calculating what fiscal impacts counties might expect if this provision is allowed to stand.

Revision: The Administrative Office of the Courts has calculated what fiscal impacts counties might expect if this provision is allowed to stand.

To free up recurring dollars and to ensure greater program oversight, the 2007 state budget substitutes non-recurring dollars for recurring in a number of programs, and requires a “continuation review,” to be led by the Appropriations Committee meeting off-session (Sec. 6.21). Of concern to counties are the Criminal Justice Partnership and Juvenile Crime Prevention Programs.

Medicaid Relief Swap

After years of intensive county lobbying, the General Assembly enacted a Medicaid relief swap package in its 2007-08 budget (House Bill 1473) to phase out the county share of Medicaid over three years. In exchange, counties will cede ½ cent of local sales tax to the state over a two-year period, and the Article 42 sales tax, currently distributed on a per capita basis, will be distributed on a point of delivery basis beginning with the October 2009 distribution.

The Medicaid relief swap includes a “hold harmless” provision that guarantees each county will benefit by at least $500,000 in Medicaid relief every year in perpetuity. Eligible counties will receive 90 percent of the estimated hold harmless payment in mid-March, along with the March sales tax distribution, with a truing up of the actual payment due by Aug. 15. In this and future years, the Medicaid hold harmless payment is based on actual performance – actual ADM receipts, actual Medicaid savings, and actual foregone sales taxes. (You can access the state’s initial five-year state estimates here. General Assembly staff are revising their projections of county impacts based on new sales tax and Medicaid expenditure data – we will share this with counties upon receipt).

For the first four months of county Medicaid relief, beginning with the November 2007 Medicaid warrants showing a 25 percent reduction in the county Medicaid share, counties have enjoyed $44 million in Medicaid savings, or roughly $11 million per month. Fiscal 2007-07 savings are offset in part by a hold-back in the public school building capital fund, or ADM Fund, with counties making up that difference in additional school capital dollars. This “repayment” is included as a part of the basis for the state’s guarantee of the $500,000 benefit for each county. A more detailed explanation of accounting for the ADM loss can be found here.

The 2007-08 Medicaid hold harmless was distributed March 17, 2008, and the accompanying report can be found here. We have requested that this initial hold harmless calculation by the Department of Revenue be revised to include ADM Fund receipts for the entire year, compared against Medicaid savings for 8 months.

Revision: The Department of Revenue did revise their initial hold harmless estimates based on our agreed-upon methodology with the General Assembly and issued an additional $6.8 million to qualifying counties on April 29. The new report can be found here.

On July 1, 2008, the county Medicaid share is further reduced to 7.5 percent of the non-federal share, with an initial savings estimate of $271 million. In the N.C. Department of Health and Human Services Feb. 15 estimates, state Medicaid staff have projected county Medicaid expenditures based on this reduction.

To help the state absorb the additional Medicaid cost, counties will relinquish a quarter cent of their local sales tax – the per capita portion of the Article 44 sales tax – effective with sales made on or after October 1, 2008, and hold their cities harmless for their Article 44 loss. Please remember that sales tax collections and distributions are roughly three months apart – counties will not see a diminished Article 44 until the distribution they receive in January. Because of that, and because the state operates on a cash basis, the state’s spreadsheet depicting the Medicaid relief swap deducts a county’s sales tax receipts for October, November, and December when estimating county-by-county impacts and the need for a state hold harmless. Since counties already receive and budget these revenues on a modified accrual basis, we advise removing this column from the calculation to see the county’s net effect before the state hold harmless is calculated. For example, Alamance County is expected to save $3.934 million in Medicaid costs in 2008-09, and lose $1.883 million in Article 44 sales taxes. Holding their cities harmless would cost the county an additional $752,000, providing a true savings in the Medicaid relief swap of $750,000. The cash basis is that to be used to calculate the need for a county hold harmless.

The Department of Revenue will calculate the city loss, will withhold this amount from the county’s Article 39 monthly distribution and will include it in the city’s monthly distribution. Because both Articles 44 and 39 are affected, counties must project their sales tax revenues accordingly – the county’s actual loss in the per capita portion of Article 44 and the city’s loss of Article 44 being deducted from the county’s Article 39.

The state initially estimated that the sales tax loss will cost counties approximately $184 million in 2008-09, including the amount counties must pay cities for their hold harmless. Counties receiving the Article 44 hold harmless payments from lost reimbursements will continue to receive these funds until the current expiration date of 2012.

It was the intent of the General Assembly to include the city hold harmless as a part of the county hold harmless when calculating whether a state payment is needed to guarantee that each county benefits by at least $500,000. A clarification in the budget language is needed to tie the city hold harmless provision with the county hold harmless provision – the new language has been drafted and will be included in the annual “technical corrections” bill used to clean up bill drafting problems.

As a result of the sales tax changes, the local portion of the sales tax is 2.25 cents from October 1, 2008, through September 30, 2009 (absent adoption of Article 46), while the state sales tax rate would be 4.5 cents (assuming no other change) for this same time frame.

Overall, initial estimates project that counties would see a net gain of $153.3 million, while cities would continue to receive their expected sales tax revenue stream along with any growth therein.

Medicaid Estimates

The N.C. Department of Health and Human Services sent out their 2008-09 estimates for the county share of Medicaid on February 18, 2008. Statewide, county Medicaid costs are projected at $282.6 million, reflecting the 50 percent reduction in the county Medicaid share. Overall, Medicaid expenses are projected to top $10.7 billion or 11.5 percent above projected spending this year.

State Estimates for Other Social Services Programs

Please find here the DHHS budget estimates for the county share in other social services programs.

One major change in county responsibility that has come to our attention is the proposed change in county financial participation in foster care placements. A rather byzantine system of payments is being replaced with standardized rates, standardized cost-shares, and a standardized reimbursement system. Basically, counties are being asked to pay the standard or negotiated rate up front to the provider, and will be reimbursed for 50 percent of this payment. DHHS will no longer pay providers but will pay counties directly. These changes are in addition to a proposed increase in the standard board rate for foster care families, an increase raising few objections.

While DHHS believes the payment change to be largely cost-neutral on a statewide basis, individual counties, particularly those with foster children in group homes, could see a large increase in county costs. The DHHS local business liaison assigned to each county has a template to walk counties through the changes and budget impacts. Please ensure that your county DSS has calculated what these changes, absent the increased standard board rate, mean for your county. Make sure that you have the net effect – increased costs less the expected 50 percent reimbursement. We ask that you provide these amounts to us for further investigation.

ADM Fund and Lottery Proceeds for School Construction

ADM Fund
It is important to emphasize that the Medicaid relief swap reduces the county Public School Capital (ADM) Fund for the 2007-08 fiscal year only. Thereafter, the normal corporate tax set aside (5/69s of net collections) should continue and we are hopeful that Governor Easley’s budget proposal retains these monies for school capital outlay needs. Absent the Medicaid swap impact, over $72 million would have been credited to the fund in the first three quarters of this fiscal year, for a total projected allotment of $86 million. This is down substantially from last year’s high of $109 million, a decline resulting in part from large, one-time payments. Next year, the state budget projects an 11 percent increase in corporate income tax collections overall although this too could be revised prior to budget adoption. We suggest that counties expect 2008-09 ADM receipts to be on par with this year’s receipts – $86 million. For your county’s balance, please see the ADM Fund “Special Summary Report,” under the Public School Building Capital (ADM) Fund link at this site.

Please remind your legislators that ADM Fund dollars are a critical component to support ever-increasing school facility needs, as documented by the most recent school capital survey. The survey calls for nearly $10 billion in school capital expenditures over the next five years.

Lottery Proceeds
The 2007-08 state budget appropriated $350 million in lottery receipts for educational purposes, of which $140 million was appropriated for public school capital needs. To date, $89.7 million has been distributed for school capital, reflecting 3 quarters’ payments – the first of which is the 2006-07 fourth quarter distribution from the lottery commission. While earlier sales have not met projections for this fiscal year, new games and higher payouts are now generating higher sales – lottery staff believe that sales will likely meet budget targets of $1 billion. Should recent history persist, sales next year could approach $1.3 to $1.4 billion, thereby increasing school capital funds proportionately. Again, timing of the lottery distribution to the school capital fund provides for the fourth quarter of 2007-08 to be credited as the first quarter of 2008-09.

While we await the governor’s budget proposal, we will project lottery sales at $1 billion – current law directs 35 percent 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 2007-08 data versus the estimate based on 2006-07 data show five counties becoming eligible for these additional monies, and one 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 mirrors 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.

e-911 Fees

House Bill 1755, passed last year and effective January 1, 2008, preempted local authority to set an e-911 landline fee and substituted a statewide rate of 70 cents on all voice communications service connections, including landline, wireless and voice over internet protocol (VoIP). Any funds remaining in a county’s landline portion of its Emergency Telephone System Fund were to be transferred to the county’s general fund prior to January, to be used for any lawful purpose.

It was believed that the 70 cents charge would generate sufficient revenues to hold county and city primary public safety answering point agencies (PSAPs) harmless for any revenue loss associated with eliminating the local landline fee. Per H1755, the 911 Board – the statewide entity charged with overseeing the 911 service charge and its use – must make a monthly distribution to each primary PSAP from the revenues collected via the 70 cent charge. (Only primary PSAPs are eligible to receive a distribution – secondary PSAPs cannot receive these funds directly and may not receive any future funds if they do not serve as official back-up sites to the primary PSAPs.) The monthly distribution includes a base amount that equals the amount the PSAP deposited in its Emergency Telephone System Fund in 2006-07, as reported to the State Treasurer’s Office, Local Government Division, along with a per capita amount if excess funds are collected. The 911 Board has discretion in allocating collections over and above that needed for the base amount – a percentage of funds in excess of the base amount can make up the per capita distribution while a separate percentage can be set aside to establish a PSAP grant account.

While initial legislative projections showed the statewide 70 cents 911 fee generating roughly $6 million a month, with at least $5.5 million needed for the base amount distribution, the 911 Board reported at its March meeting that its first monthly collections were less than $3.5 million. 911 Board staff are contacting all voice communication services providers to ensure compliance with tax remittance – this is increasing monthly collections. In the interim, 911 Board staff will prorate the collections to date to make the first distribution, once they reconcile the PSAP base amount as reported by the Local Government Division with their 2006-07 wireless distribution records. The Board does anticipate that sufficient revenues should be collected to distribute to those eligible PSAPs monies at the 2006-07 level. Counties with eligible PSAPs may wish to budget at the 2006-07 amount.

For your information, the 911 Board has just adopted its initial list of eligible e-911 fee expenditures.

$2 Ton Statewide Tipping Fee

The General Assembly enacted a $2 per-ton statewide “tipping tax” last year via SB 1492 and SB 6, in conjunction with the rewrite of the state’s solid waste landfill disposal laws. The excise tax goes into effect July 1, 2008, and will be charged on municipal solid waste and construction and demolition debris that is deposited in a landfill in the state or transferred at a transfer station for disposal outside the state.

The proceeds of the tax are distributed as follows: 50 percent to the Inactive Hazardous Sites Cleanup Fund to help pay for assessment and remediation of pre-1983 landfills (including abandoned, unlined city or county dumps), 18.75 percent to cities on a per capita basis for solid waste management programs and services, 18.75 percent to counties on a per capita basis for solid waste management programs and services, and 12.5 percent to the Solid Waste Management Trust Fund for grants to local governments and state agencies. County per capita figures exclude those persons residing within a city.

The legislation allows those entities who applied for landfill permits before August 1, 2006, and whose applications would be denied under the new standards of the act, to request reimbursement of their reasonable costs in exchange for executing a covenant not to sue the state. Proceeds of the tax will first be used to pay such costs, so tax revenue will not be available for distribution to local governments or remediation of abandoned landfills for an undetermined period of time after the tax goes into effect.

Video Programming Revenues

Under House Bill 2047, 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. 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 below the initial estimates which may be due in part to transition issues. For these reasons, we urge caution in estimating your cable franchise replacement revenues from this source next year. A conservative approach for 2008-09 would be to budget at or a little below your March 17, 2008, video programming payment.

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

We reference sales taxes by their statutory citations in General Statute Chapter 105:

• Article 39 1 percent point of delivery, authorized 1971, food in base
• Article 40 ½ percent per capita, authorized 1983, 30 percent set aside for school capital, food in base
• Article 42 ½ percent per capita, authorized 1986, 60 percent set aside for school capital, converts to point of delivery October 2009, food in base
• Article 44 ½ percent (¼ per capita, ¼ point of delivery), authorized 2001 to replace repealed reimbursements, per capita ceded to state October 2008, point of delivery ceded to state October 2009, no food
• Article 46 ¼ percent point of delivery, authorized 2007, no food, no municipal share

Please visit the budget Web site for spreadsheets showing the county-wide, and local government, sales tax distributions by Article, including those receipts due to sales tax on food for home consumption.

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.

Please note that the 2 percent local sales tax on food – its administration and accounting – is treated as if it was 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. The summary sales tax distribution report reflects county sales taxes attributable to food for the point of delivery portion of sales taxes. Overall, food accounted for $117 million per penny in 2006-07. 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 – now at $88 million for the local share alone.

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
Articles 40 and 42 are currently distributed on a per capita basis, with 30 percent of Article 40 and 60 percent of Article 42 receipts dedicated to school capital. State fiscal analysts project statewide retails sales increasing 1 to 2 percent, and as high as 3 percent if no widespread recession occurs. We recommend that counties consider a 1 percent sales tax increase for Articles 40 and 42 and one-half of Article 44 (for sales made on or before Sept. 30), all of whose receipts are allocated statewide on a per capita basis. This figure is very conservative, but given the uncertainty in our state’s economy, we believe a conservative approach is warranted.

Article 44
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. Again, one-half of Article 44, the per capita portion, is ceded to the state on sales made on or after October 1, 2008. Counties should see a reduction in their cash-basis distribution in January 2009.

Article 39
For Article 39, and the remaining half of Article 44, counties need to decide whether a 1 percent growth in sales tax collections appropriately reflects their specific economic conditions such as job losses, changes in net migration, and availability of retail options.

Article 46
Article 46 is allocated point of delivery, does not apply to sales on food for home consumption, and is not shared with municipalities.

Hold Harmless

Legislation authorizing 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 (H1414) amended 105-521 by guaranteeing hold harmless payments through 2012. The Medicaid relief swap continues the Article 44 hold harmless through its existing sunset.

Beer and Wine Taxes

State analysts project an increase in beer and wine taxes in the 3 percent to 3.5 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.

State Allotments for Public Schools

Please find here the budget planning allotments for the public school system(s) in your county and related materials. Included you will find the estimated average daily membership for your LEA(s).

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 2007-08 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 2007-08.

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.