Each local government and public authority is required to adopt an annual budget ordinance that recognizes estimated revenues, authorizes expenditures, and levies tax(es) for the forthcoming fiscal year. The Local Government Budget and Fiscal Control Act (LGBFCA), G.S. Ch. 159, Art. 3, requires, among other things, that the budget ordinance be balanced. A budget ordinance is balanced when “the sum of estimated net revenues and appropriated fund balances is equal to appropriations.” The law requires an exact balances; it permits neither a deficit nor a surplus. And G.S. 159-13 mandates that estimated revenues include “only those revenues reasonably expected to be realized in the budget year . . . .”
The LGBFCA further specifies that the budget ordinance be adopted “not later than July 1 . . . .” G.S. 159-13(a). This is because the fiscal year for local governments in North Carolina runs from July 1 through June 30. A perennial issue facing local government officials in adopting their budget ordinances is predicting the impact that the annual State Budget or other new legislation will have on their revenue streams. Typically the General Assembly adopts its budget only a few days before, or in many cases sometime after, July 1. And a legislative session may run into late summer or even early fall. Local officials tend to be particularly concerned about adopting their local budget ordinances before knowing of any changes to either their local revenue-raising authority or the State’s revenue-sharing programs. This year, for example, the General Assembly has introduced several bills that, if enacted, would overhaul the State’s tax system. Among some of the proposed changes are eliminating local privilege license tax authority and reducing or eliminating certain state revenue distributions to local governments. It is not currently known whether any of the bills will be enacted or in what form. And it is not clear whether local governments will be affected by the specific provisions that might be enacted. The purpose of this blog post is not to analyze the proposed bills and their potential impact on local governments. Instead the post details the budgeting options available to local governments in light of the revenue uncertainty.
A local unit has a few options to deal with this uncertainty. It could delay adopting the budget ordinance, it could budget conservatively to insulate against unexpected revenue reductions, or it could make appropriations based on current expectations and then amend the budget if revenue projections change during the fiscal year.
Delay Adopting the Budget Ordinance
If a local governing board is concerned about making accurate revenue estimates in the face of this uncertainty the local board can delay adopting its budget ordinance, at least for a short period of time, until the legislature adopts the State budget, enacts the potentially relevant legislation, or adjourns. Failing to adopt a budget ordinance by July 1 is not without consequences, though. The budget ordinance provides the legal authorization for a unit’s expenditures. A unit has no authority to make expenditures (including paying staff salaries) under the prior year’s budget after June 30.
If a board does not adopt its budget ordinance by July 1 and needs to make expenditures, it must adopt an interim budget, making “interim appropriations for the purpose of paying salaries, debt service payments, and the usual ordinary expenses” of the unit until the budget ordinance is adopted. G.S. 159-16. This is a stop-gap measure. An interim budget may not include appropriations for salary and wage increases, capital items, and program or service expansion. It may not levy property taxes, nor should it change or increase other tax or user fee rates. The purpose of an interim budget is to temporarily keep operations going at current levels.
An interim budget need not include revenues to balance the appropriations. All expenditures made under an interim budget must be charged against the comparable appropriations in the annual budget ordinance once it is adopted. In other words, the interim expenditures eventually are funded with revenues included in the budget ordinance.
Budget for Fewer Expenditures
The second option available to a local governing board is to adopt the budget ordinance by July 1 but estimate revenues very conservatively. As stated above, the budget ordinance must be balanced. Thus if a unit low-balls its revenue estimates it necessarily also must limit its expenditures. Once a local board has a better picture of what its actual revenue streams are likely to be it may amend the budget ordinance to increase revenue estimates and, correspondingly, increase appropriations for expenditures. (Or the board could leave the appropriations at their initial levels and allow the additional revenues to accumulate as fund balance.) In theory this is the simplest option available to a local unit. In reality it often proves politically and practically difficult for a governing board to determine what programs and services to cut due to the “possibility” of reduced revenues.
Could a local board facing this situation adopt a budget ordinance that is contingent on the revenue decisions that the legislature ultimately makes? For example, could a local unit that adopts its budget ordinance by department, appropriate “X” level of expenditures per department if no changes are made to its revenue streams by the legislature and appropriate “Y” level of expenditures per department if certain revenues are reduced or eliminated by legislative action? The answer is no. As discussed below, generally the LGBFCA allows a governing board to amend its budget ordinance to make changes to estimated revenues or expenditures. It does not allow a board to adopt a contingent budget, though.
Amend Budget if Revenues are Reduced
A third option available to a local board is to adopt its budget ordinance on or before July 1, assuming that there will be no changes to its revenue-raising authority or to its expected state-shared revenue distributions. If revenues are reduced by legislative action after the budget ordinance is adopted, the local board could amend the budget ordinance to reduce expenditures, increase locally-raised revenues, or appropriate fund balance to make up for the revenue shortfall.
There are some limitations on allowable amendments, though. There are certain expenditures that may not be reduced, or may not be reduced except under certain circumstances, once the budget ordinance is adopted. For example, a local board may not decrease (or increase) its own members’ salaries or other compensation. And a county board may not reduce its appropriations to a local school administrative unit (public school) after it adopts the county budget ordinance, unless the local board of education agrees to the reduction or unless it is pursuant to a general reduction in county expenditures because of prevailing economic conditions.
There also are limitations on increasing locally-raised revenue. The most significant restriction relates to changing the property tax levy. A local government may not “increase or reduce a property tax levy or in any manner alter a property taxpayer’s liability,” unless pursuant to one of three statutory exceptions. This means that, unless one of the exceptions applies, a local unit may not raise or lower the property tax rate once the budget ordinance has been adopted. (Note that the limitation only applies to the property tax levy, not other taxes or fees.)
A local unit may alter its property tax levy if ordered to do so by a court or state agency. But these exceptions rarely apply. A third exception, however, potentially provides a local unit with more flexibility to make property tax changes. Specifically, if a local unit “receives revenues that are substantially more or less than the amount anticipated” when it adopted the budget ordinance, the governing board may increase or reduce the property tax levy accordingly. It must adopt the new rate by January 1. This exception was added by the General Assembly during the 2002 Legislative Session, in response to then-Governor Easley’s withholding of certain reimbursements and State-shared revenue distributions to local units during the Spring of 2002.
What though, does it mean for a local unit to “receive revenues?” There is no case law interpreting this provision. Arguably, the exception only applies to revenues a local unit obtains from external sources (grants, shared-revenues, donations); as opposed to revenues it generates itself (property tax, other local taxes and fees). Although there may be some support for this argument based on the fact that the exception was added to give local units recourse to deal with an unexpected loss of revenue from the State, the definition of “receive” is not so limited. Instead, it likely applies to all revenues that a local unit obtains, from whatever source. (Note that it still is probably limited to actual revenues, as opposed to debt proceeds, which are not technically revenues but rather a type of cash advance to be repaid with future revenues.)
Also arguably, the exception only applies if a unit actually has obtained the revenues (i.e. has the cash in hand), as opposed to merely anticipating a significant decrease or increase in revenues over the course of the fiscal year. It strikes me that this interpretation is unduly restrictive, though. I think a better reading of this provision is that the exception is triggered if (after it adopts its budget ordinance, but before January 1) a local unit reasonably expects to receive more or less revenue over the course of the fiscal year.
Finally, if a unit has sufficient fund balance, it may allocate its cash reserves to replace the lost revenue without making any other changes to expenditures or revenues. The board could amend the budget ordinance to appropriate the fund balance. Alternatively, it could simply allow the unit to use fund balance to cover the expenditures without taking any official budgetary action. (A board only is required to amend its budget ordinance if actual expenditures exceed appropriations.)