During a disaster, local governments often face significant short- and long-term costs while experiencing short- and potentially long-term losses in revenues. Local governments can quickly find themselves in a cash crunch. Many disaster-related expenses may be reimbursable through the Federal Emergency Management Agency (FEMA) and the State may provide supplemental funding, but a local government must understand the mechanics of those reimbursements and alternative funding mechanisms to properly budget for them and manage cash flow. This post walks through budgeting and preaudit processes during a declared disaster. It then identifies a few ways local governments can manage their cash through the crisis.

FEMA Reimbursements

Through its Public Assistance Program (PA), FEMA provides Federal grant assistance for debris removal, emergency protective measures, and the restoration of disaster-damaged, publicly owned facilities. It’s a complex program. FEMA typically covers 75% of the eligible costs, with the remaining 25% usually shared by the state and local government, but President Biden has increased the cost share in North Carolina for the Helene disaster to 100% for the first 180 days of the incident period.

Most funding under the PA Program is structured as reimbursement payments for eligible expenses incurred during disaster response and recovery. This means that local governments must first spend their own funds on eligible projects, after which they can request reimbursement from FEMA.

FEMA categorizes reimbursement under the Public Assistance (PA) Program using specific designations. Here’s a breakdown of the categories based on the FEMA system:

Emergency Work

Category A: Debris Removal — Expenses related to clearing debris from public property, including roads, parks, and other infrastructure.
Category B: Emergency Protective Measures — Costs for actions taken to protect public health and safety, such as: search and rescue operations; sheltering and evacuation; and medical care and emergency response.

Permanent Work

Category C: Roads and Bridges — Repairs and restoration of transportation infrastructure, including highways, streets, and bridges.
Category D: Water Control Facilities — Restoration and repair of drainage systems, levees, and other flood control measures.
Category E: Public Utilities — Restoration of water, wastewater, electrical systems, and other essential public utilities.
Category F: Parks, Recreational Facilities, and Other — Repair or replacement of parks, recreational areas, and public spaces.
Category G: Buildings and Equipment — Repairs or replacements of public buildings, such as schools, community centers, and related equipment.

Administrative Work

Category Z: Management Costs — Administrative costs related to the overall management of disaster response and recovery efforts, which are capped at a certain percentage of eligible project costs.

A local government will work with its FEMA coordinators, FEMA public assistance specialists, and county and State emergency management personnel to request Public Assistance. A unit will submit reimbursement requests and required documentation through the FEMA grant portal.

The timing of receiving reimbursements varies based on several different factors. Some reimbursements, including final close-out for the grant can take years to process. Category B expenses are generally eligible for quicker reimbursement due to their urgent nature, streamlined documentation requirements, and potential for advance funding. Local units have reported receiving reimbursements for at least some of these eligible expenses in past disasters (with proper documentation) within 30-45 days of submittal. Finance staff will need to work with their FEMA coordinators to figure out what expenses are eligible for each Category and how to minimize reimbursement lags to the extent possible.

Budgeting for Disaster Response Costs

The combination of unexpected expenditures and unpredictable reimbursements make budgeting and cash management challenging. As detailed here, with limited exceptions, all funds must be budgeted before they can be expended. There are a few different ways to budget for expenses that will be reimbursed (or are expected to be reimbursed) and a few different budgeting vehicles.

Budgeting Methods

Appropriations for disaster-related expenditures may be made in the annual budget ordinance, but it is much easier to budget these expenses in a grant project ordinance or a combination of grant and capital project ordinances. The benefit of the grant and capital project ordinances, both authorized by G.S. 159-13.2, is that they are valid for the life of the grant or project. They are not limited to a single fiscal year, as is the annual budget ordinance. They also allow for a more detailed level of appropriation than the annual budget ordinance, which helps a local government with grant compliance requirements. A grant project ordinance may be used for all FEMA-reimbursable expenditures, including both operating and capital costs. A capital project ordinance may only be used for capital projects. It may be a more appropriate budgeting vehicle if a local government is going to use a mix of revenue sources to pay for the project, including FEMA funds.

Here is a Sample Grant Project Ordinance for Helene-related expenditures.

Budgeting Revenue Options

A budget must be balanced. The annual budget ordinance is balanced when estimated revenues plus appropriated fund balance equals appropriations in each fund. A project ordinance is balanced when estimated revenues for the life of the project(s) equal appropriations.

How do we budget for estimated revenues with a reimbursement grant? There are a few options. If the board is budgeting for the appropriations in the annual budget ordinance, it can appropriate fund balance to cover the estimated expenditures that will occur during the fiscal year and then replenish fund balance with FEMA reimbursements as they come in. Many units maintain fund balance as an emergency fund for this very purpose. There is a statutory limit on the amount of fund balance that may be appropriated. See G.S. 159-8. But, as detailed below, all unrestricted (and liquid) fund balance is available to use for cash management purposes.

Alternatively, the board can budget estimated FEMA reimbursements as the revenue source. The reason for this option is that North Carolina budgeting laws do not tie budgeted revenues to actual cash. Budgeted amounts are what the local government reasonably expects to bring in during the fiscal year. If a local unit reasonably expects to receive some portion of its FEMA reimbursement during this fiscal year, it may budget that amount as revenues in the annual budget ordinance. The local government must separately ensure it has sufficient cash flow to cover expenditures before reimbursements occur.

If the board is budgeting for the appropriations in a grant or capital project ordinance, it can budget the FEMA reimbursements as the estimated revenues it expects to receive over the duration of the disaster response. This is a more flexible budgeting option that can make meeting the preaudit requirements discussed below easier. The board will have to regularly amend the project ordinance to update the estimated costs and estimated FEMA reimbursements as it proceeds through its recovery effort. Again, though, the local government must separately ensure it has sufficient cash flow to cover expenditures before reimbursements occur.

Budget Amendment Process

A budget ordinance may be amended by action of a simple majority of governing board members present at a board meeting and voting, so long as there is a quorum. G.S. 159-17. There are no notice or public hearing requirements. Under current law, a governing board may hold a remote meeting during a declared emergency, including a conference call if there is not reliable internet, but there is no exception to the quorum requirement. There must be a quorum of board members to hold a valid meeting, even during an emergency event. This may prove difficult for several western North Carolina local governments who still lack reliable communication means. But it is crucial for the board to meet as soon as a sufficient number of members are able. 

Typically, the board must amend the budget ordinance to increase the appropriation before the local unit obligates the funds. It is a budget violation to incur an obligation (e.g., issue a P.O., execute a contract, etc.) if there are not sufficient funds remaining in a budget appropriation, after subtracting all outstanding encumbrances.

If a board cannot currently meet, there are some actions the unit’s budget officer may take. A governing board may delegate to the budget officer the authority to make certain changes to the budget. This authority is limited to:

• transfers of moneys from one appropriation to another within the same fund, and/or
• allocation of contingency appropriations to certain expenditures within the same fund.

If the board made this delegation in the budget ordinance, the budget officer can move money around within the general fund or within other funds to prioritize disaster-response and other necessary expenditures. Even if the board did not make this formal delegation, the budget officer may direct departments to suspend all unnecessary expenditures to preserve unencumbered appropriations for immediate needs. (Note that the Sheriff, Register of Deeds, and Local Board of Elections practically have a bit more control over their budget appropriations and may not respond to a budget officer’s directives unless the authority to move money between departments has been formally delegated to the budget officer by the governing board.)

Other Revenue Adjustments in the Annual Budget Ordinance

Over the coming months, as local governments get a better sense of the mid-term impacts of the disaster, the board may need to amend the annual budget ordinance to reduce estimated revenues from other sources and either appropriate fund balance to make up the difference or reduce appropriations or both.

Preauding Disaster-Related Expenditures

The adopted budget ordinance encompasses a unit’s legal authority to make all expenditures during the fiscal year. Before a unit may incur an obligation (order goods, enter into service contracts, or otherwise make legal commitments to expend public funds), the finance officer or a deputy finance officer must ensure that there is an appropriation authorizing the expenditure and that sufficient moneys remain in the appropriation to cover the expenditure. G.S. 159-28(a). The finance officer or deputy finance officer then must affix a signed certificate to any writing evidencing the legal commitment to pay money to the other party. (There are some exceptions to the preaudit certificate requirement, though.) This is known as the preaudit process. If the preaudit process is not followed before executing a contract, PO, or other agreement involving a commitment by the local government to pay money, the agreement is void and cannot be enforced.

The preaudit is a statutory process that is difficult to fully comply with in normal times. In disaster situations it is even tougher. First, it highlights the need for quick action on the budget to identify sufficient appropriations to cover disaster-related contracts. If the board can meet soon, the easiest path is to adopt a grant project ordinance with appropriations based on estimated costs offset by estimated FEMA reimbursements and other revenues. Because this budget is for the duration of the FEMA grant and can include all expected reimbursement funding, it will give the most flexibility to the unit to engage contracts quickly without running afoul of the preaudit requirement. If the board cannot meet immediately, the budget officer will have to do his or her best to identify available appropriations in the existing annual budget ordinance and to structure contracts not to exceed the unencumbered amounts of those appropriations. The unit may have to enter into shorter-term contracts, or set not to exceed caps, until the board is able to meet to take further budget action.

Coordinating the preaudit process also may be challenging. Ideally, everything will run through finance staff who can ensure contracts and POs are preaudited before they are executed. Finance staff also must carefully document every transaction for FEMA reimbursement purposes. But units may have limited staff that are already working over capacity. And some expenses may have to be incurred in the field. In other disasters, units have made use of dedicated procurement (p-cards) that are preaudited based on a maximum amount. (That may not be possible in this situation until internet services are restored across the region.) Another method that may help with local suppliers is blanket Purchase Orders that can be preaudited in advance. If the board is able to meet, it might also consider designating board members or other staff as deputy finance officers who can perform the preaudit, under the oversight of the finance officer.

Authority to Execute Contracts

The preaudit process is a prerequisite to executing contracts, purchase orders, and other agreements. A related issue is determining who may enter into these contracts on behalf of the local government. The local government’s governing board generally must exercise the unit’s contracting powers. G.S. 153A-12 (counties); G.S. 160A-12 (municipalities). Some statutes assign responsibility to execute certain agreements to the manager or other employee or official. But the default for all other legal agreements is that they must be executed by the board. The board may delegate this authority to an employee or official but only if a statute does not specifically state that the “board” must perform the function. For example, G.S. 160A-17.1 states that the “governing body of any city or county is hereby authorized to make contracts for and to accept grants-in-aid and loans from the federal and State governments and their agencies for constructing, expanding, maintaining, and operating any project or facility, or performing any function, which such city or county may be authorized by general law or local act to provide or perfrom.” This is that statute that authorizes a local government to accept FEMA and State grants and loans. But it requires the local government to approve the aid. The board cannot delegate this authority to the manager or another official or employee because the statute specifically states “the governing body….”

Many units delegate authority to the mayor, board chair, or manager to execute contracts that a statute does not specifically require the board to approve. The board usually sets a maximum limit for each contract amount. That limit may not be sufficient in an emergency. If the board has not already done so, it may want to increase the limit of its delegated authority to the mayor, board chair, or manager to execute contracts on behalf of the unit.

Managing Cash Flow

Cash flow is a key concern for local governments navigating the early weeks and months of a disaster response. Even if 100 percent of costs are ultimately covered by external funding, the timing of FEMA reimbursements and other aid is unpredictable. Managing cash properly during this period is critical. Here are some things a local unit can do to help.

Cash Flow Analysis
First, a local government must get a sense of its likely cash flow over the next few months. If a unit does not already regularly track cash in monthly or quarterly increments, it can use this is a rough guide: Start with current cash and subtract outstanding encumbrances that are likely to liquidate within 1-3 months. Calculate mandated disbursements for that same time period (debt service, payroll, contract requirements, etc.). As best as possible, estimate disaster-response disbursements (over-time, contracted services, additional personnel, equipment, etc.). Finally, estimate any potential decreases in inflows (revenues) during the time period. These projections can help a unit determine what additional steps it may need to take to maintain a positive cash position.

Budget Adjustments & Cost-Saving Measures
As stated above, the budget officer can immediately require all staff to cease any unnecessary expenditures. If authority has been delegated, the budget officer can also move monies between appropriations within a fund. Based on the cash flow analysis, when it meets the board may need to further amend the budget ordinance to reduce estimated revenues, reduce appropriations, or reallocate appropriations within and across funds.

Where possible, staff should also identify if there are any cost-saving measures that can be reasonably implemented during this crucial cash-crunch period.

Reduce or Postpone Upcoming Disbursements
If possible, identify any upcoming disbursements that maybe reduced or postponed. There may be vendors or contractors willing to wait a little longer to get paid to assist the local government in managing this crisis period.

Mutual Aid & Interlocal Agreements
Many local governments need assistance from other governments or private entities with disaster response. The State has established a state-wide mutual aid program. All counties and a significant number of municipalities have signed the State mutual aid agreement. Local governments can also enter into their own mutual aid agreements with assisting units. Under the State system, requesting local governments work through their county’s Emergency Manager to submit requests for personnel, services, supplies, equipment to the State. The State Emergency Management team then matches those requests with available resources. The State reimburses the assisting governments for qualifying expenses (assuming everything is properly documented) and seeks reimbursement from FEMA. This takes the burden off the requesting local governments from having to front the costs of paying for this assistance. For more information on the State mutual aid system, including required information for requesting and assisting local governments, click here.

Similarly, municipalities may enter an interlocal agreement with their county to have the county contract for debris removal on their behalf. This can help smaller municipalities with lower cash reserves. (Here is a Sample ILA.)

Federal & State Assistance
As stated above, because of their nature Category B expenses often get reimbursed more quickly than other categories by FEMA. Local units should work with their FEMA Coordinator to understand what expenses are eligible under this category and process these requests as quickly as possible. Each local government must create an account in the FEMA Grant Portal. (If a unit already has an account, it may need to work with the State and FEMA personnel to get access to their account for current personnel.)  Learning how to properly navigate the portal can be very helpful in ensuring timely reimbursements. (It may be worth the investment of time to participate in this tutorial.)

Here are some strategies identified by other local government officials who have been through recent disasters to facilitate the reimbursement process:

• Document! Document! Document!: Start documenting expenses and activities immediately and keep doing so as you go along. It is very hard to recreate documentation later. Maintain detailed logs and other records of all costs, including receipts, invoices, and time spent on recovery efforts. Label all invoices with the specifics of who and what.
• Stay Organized: Keep all documentation in a centralized, easily accessible location. Use checklists to ensure that nothing is overlooked when preparing reimbursement claims. Make sure all staff know where and how to submit information.
• Understand FEMA Guidelines: Familiarize yourself with FEMA’s Public Assistance (PA) program and eligibility requirements. This includes knowing what costs are reimbursable and how to categorize them properly. Here is a list of resources for local governments on the PA program. If anyone on your staff has capacity, attend FEMA workshops or webinars to stay updated on best practices, deadlines, and any changes in policy.
• Engage FEMA Early and Often: Communicate with FEMA representatives as soon as possible. Early engagement can help clarify the requirements and streamline the process for reimbursement. Identify all the documentation requirements, including specific forms that need to be completed. Push for specific examples of documentation to be sure you are providing sufficient detail. Get any interpretations in writing. Maintain communication with FEMA to check the status of your claims. Regular follow-ups can help expedite the review and approval process. Also respond as quickly as possible to any FEMA requests.
• Set Up a Tracking System: Implement a tracking system for all disaster-related expenses. This can be done within your accounting system, in a separate Excel spreadsheet, or, for those with limited connectivity, even in detailed handwritten charts. Set up a new fund and account code(s) to make identifying disaster-related expenditures easier. Make sure everyone is aware of how to properly document required information.
• Submit Requests Promptly: Once you have gathered all necessary documentation, submit reimbursement requests promptly. Ensure that all required forms are filled out correctly to avoid delays.
• Utilize Advance Payments: If eligible, request advance payments from FEMA to cover immediate expenses, which can help alleviate cash flow issues while waiting for full reimbursement.
• Utilize FEMA Tools and Resources: Here is a list of resources for local governments. If anyone on your staff has capacity, attend FEMA workshops or webinars to stay updated on best practices, deadlines, and any changes in policy.
• Engage Experts: Consider hiring consultants or financial experts who specialize in disaster recovery to assist with the reimbursement process and ensure compliance with all requirements. At least some of these costs may be reimbursable by FEMA.

State Aid
The General Assembly met today (October 9, 2024) to enact its first Helene aid package. In Part VI of HB 149 (Disaster Recovery Act of 2024), the legislature allocates $250 million to the NC Department of Public Safety to, among other things, establish a “revolving loan program to assist units of local government State agencies with cash flow management while awaiting federal reimbursement.” (I’ll update this post when we get more information on the loan program.)

Borrow from Enterprise Funds
Recall that there is broad authority to transfer unrestricted monies from a local government’s enterprise fund to its general fund or to any other fund. See G.S. 159-13(b)(14). That transfer authority also includes loan authority. If a unit has cash reserves in one or more enterprise funds that the unit will not need in the next few months, it could borrow those funds for immediate expenditures and then repay the monies over time. Of course, a local unit may need its water and wastewater cash reserves to deal with disaster-related costs and revenue shortfalls in those operations. And it is still true that if a local government transfers funds from a water or sewer fund to the general fund, it may be prohibited from receiving state loans or grants for its water or sewer systems. G.S. 159G-37. It’s not clear, though, that this consequence would apply to a short-term loan.

Receive Surplus or Donated Property from Other Local Governments
In addition to providing mutual aid, local governments have broad authority to donate or transfer at $0 or nominal cost any real or personal property that the transferring local government no longer needs. G.S. 160A-274 provides broad authority for a local government to convey real and personal property to other governmental units (defined in the statute), “with or without consideration.” Of course, this should be read to mean “with or without monetary consideration,” since some form of consideration is constitutionally required. It seems reasonable to assume that use by another North Carolina governmental unit constitutes sufficient constitutional consideration for cities and counties. Similarly, G.S. 160A-280 also allows for donations of personal property, including supplies, materials, and equipment, that the governing board deems to be surplus, obsolete, or unused, but the statute imposes certain process requirements that must be met. (Note that there are some additional constitutional constraints that apply to school units. It is likely that a school board can transfer property to another school unit for $0 or nominal consideration but not to another governmental entity.)

Collaborate with Nonprofits and Community Organizations
To the extent possible, identify community partners who can provide specific services on behalf of the local government, with their own resources.

Utility Payment Plans
Many communities are still struggling to get their water and sewer systems back online. A local unit may have pause its utility bill collections for a period of time. The fixed charge continues to accumulate on customer accounts even if there is zero consumption charge. And if a unit paused sending its water and/or sewer bill, it may have also paused billing for other charges typically included on that bill, such as stormwater and solid waste. Those costs accumulate on the account as well. Once billing resumes, it’s possible customers will have larger than normal balances on their accounts. And given the extent of devastation to residential and commercial property, local units should expect a significant increase in delinquencies. Units that do not otherwise have them, should consider establishing payment plans to allow customers to pay off balances over time, while still generating some positive cash flow for the utilities.

Engage in Fundraising
As discussed here, a local government may solicit and accept donations for any purpose for which it has statutory authority to expend funds. Given demands on staff time, if possible utilize more passive fundraising methods such as contracting with third-party processors, or rely on other community partners to manage donation efforts.

Community Loan Programs
In addition to Federal and State assistance, there may be community or other private loan or grant opportunities. Community partners may be able to help identify opportunities for local governments.