Every year, the Local Government Commission (LGC) reviews the audited financial information of North Carolina local governments and public authorities. That review goes beyond whether the auditor issued an unmodified (clean) audit opinion. The LGC also looks for signs of financial problems and weaknesses in the systems used to manage public money.
One of the LGC’s main tools is its Financial Performance Indicators (FPIs). Some FPIs measure financial condition: Does the General Fund have sufficient fund balance? Does a water or sewer fund have enough cash to pay its bills? Are utility revenues covering operating costs and debt payments? Other FPIs focus on financial management and compliance: Was the audit submitted on time? Did the unit stay within its budget? Was a finance officer in place and properly bonded? Were debt payments made on time? FPIs also measure internal controls: Where there any significant weaknesses in internal controls? The LGC calculates the indicators from information reported through the annual audit process.
When an FPI falls outside the LGC’s established threshold, it becomes a Financial Performance Indicator of Concern (FPIC). An FPIC requires a formal response from the governing board. But an FPIC does not automatically mean that a unit is in financial distress. It does not automatically place a unit on the LGC’s Unit Assistance List (UAL). And placement on the UAL does not mean that the State will take over the unit’s finances. These are different parts of the LGC’s fiscal oversight system.
The reverse is important too. A unit can meet every LGC threshold and still have financial issues that deserve attention. The thresholds identify when a particular result triggers the FPIC process. They are not necessarily the financial levels a unit should aim for, and they do not capture every negative trend. The LGC has made this distinction particularly clear with fund balance: the FPI threshold is not a State- or LGC-mandated minimum fund balance.
That distinction also points to a broader use for the FPIs. Units do not have to treat them only as numbers the LGC reviews after the annual audit. Many of the indicators can also be useful local financial-management tools. They can help a unit identify trends, set its own financial targets, make budget decisions, diagnose developing problems, and measure whether corrective actions are working.
This post first explains what the FPIs measure and how the FPIC thresholds work. It then looks at how units can use these measures themselves. Finally, it explains what happens when an indicator becomes an FPIC and how FPICs fit into the LGC’s broader fiscal oversight system.
FPI, FPIC, and Why the Difference Matters
The LGC’s administrative rules define FPIs as values derived from audited financial statements that help evaluate and compare a unit’s financial condition and performance. The rules identify measures such as fund balance, liquidity, solvency, debt-service coverage, and leverage and allow the Secretary of the LGC to establish additional indicators. An FPIC is an FPI with a value that may indicate inadequate financial condition or a fiscal-management concern. See 20 NCAC 03 .0502.
For example, the quick ratio is one of the FPIs used for water and sewer funds. The quick ratio measures a utility’s ability to meet its short-term obligations using its most liquid assets. If a utility has a quick ratio of 1.4, its FPI result is 1.4. If the ratio falls to 0.8, that same measure becomes an FPIC because it is below the LGC’s current 1.0 threshold. The distinction matters. An FPIC tells us that a result warrants attention and requires a response. It does not, by itself, tell us why the result occurred, whether the problem is temporary or ongoing, or what the unit needs to do about it.
The LGC explains the FPIC process and provides response materials on its Financial Performance Indicators and Responses to the LGC webpage.
The Current Indicators at a Glance
The LGC currently uses FPIs for the General Fund, water and sewer funds, and several other aspects of financial management and compliance. (The Financial Performance Indicators report provided by the LGC’s LOGOS system shows the fail condition for each FPI.)
| Indicator | Threshold for Avoiding an FPIC | What It Helps Show |
| General Fund | ||
| Fund Balance Available as % of expenditures | Varies by unit type and size. A unit can see its threshold on the FPI report exported from LOGOS. Check the “fail condition” column | Does the unit have a financial cushion? |
| Use of fund balance for operations | Positive change in fund balance or showing fund balance was used for Capital | Is the unit using reserves to cover operating losses? |
| Total fund balance | Positive | Is the General Fund in a deficit position? |
| Water and Sewer Funds | ||
| Quick ratio | ≥ 1.0 | Can the utility meet short-term obligations? |
| Operating net income, excluding depreciation and including debt-service principal and interest | > 0 | Are revenues covering operations and debt service? |
| Unrestricted cash as % of total expenses | > 16% | Does the utility have sufficient cash? |
| Transfers in to support operations | < 3% of expenses | Is the utility relying on subsidies from other funds? |
| Capital asset condition ratio | ≥ 50% remaining useful life | What does the accounting information suggest about the age of utility assets? |
| Other Indicators | ||
| Audit submitted to LGC | By December 31 for June 30 fiscal-year-end units | Was the audit submitted on time? |
| Uncollected budgeted ad valorem taxes, including motor vehicles | < 3% | Is the unit collecting the property taxes it budgeted? |
| Expected change in property value at next revaluation | No estimated decrease | Is a significant revenue loss potentially ahead? |
| Budget violations at adopted ordinance level | None | Did expenditures stay within the legally adopted budget? |
| Material weaknesses, significant deficiencies, statutory violations, and other findings requiring response | None | Are financial controls and compliance systems working? |
| Finance officer or interim finance officer appointed for entire fiscal year | Yes | Was a finance officer in place throughout the year? |
| Finance officer properly bonded | Yes | Was the required bond in place? |
| Late debt-service payments or failure to comply with bond covenants | No | Is the unit meeting its debt obligations? |
| Other issues affecting fiscal health or internal controls identified by the auditor | None | Are there other financial-management concerns? |
Source: LGC, Financial Performance Indicators Guide (as part of the Requests for LGC Approval of Debt by Units with Material Financial Performance Indicators of Concern (FPICs), pages C1-C5, September 2026 LGC meeting materials). Note that the LGC may change its indicators and thresholds, so units should always consult the most recent guidance.
These are FPIC thresholds, not necessarily financial targets. That difference is important throughout the analysis.
Thresholds Are Triggers, but Trends Matter Too
FPIC fail indicators are based on a single year threshold measurement. A unit does not have to experience the same problem for several years before it matters.
But crossing a threshold does not necessarily mean that a unit has a serious or continuing financial problem. A substantial drop in fund balance, for example, may reflect either the planned use of reserves for a capital purchase or an operating shortfall caused by recurring expenditures exceeding recurring revenues. The numbers may look similar, but the causes and appropriate responses are very different.
A threshold also is not a precise dividing line between healthy and unhealthy finances. A utility with a quick ratio of 1.01 clears the current LGC threshold, while a utility with a ratio of 0.99 does not. Their financial positions, however, may be nearly identical.
Conversely, a unit’s financial condition can deteriorate substantially without triggering an FPIC. If Fund Balance Available falls from 45 percent to 37 percent to 31 percent to 27 percent over four years, it remains above a 25 percent threshold each year. But the downward trend shows that the unit has lost a significant part of its financial cushion.
Units therefore need to examine both the current result and the trend. A threshold crossing triggers a formal FPIC response, but a significant one-time change or sustained negative trend also may require attention. Trends also factor into UAL scoring and can contribute to a unit’s placement on the UAL even when the current result does not trigger an FPIC. The FPIC Report provided by the auditor allows the unit to see these multiyear trends.
What the General Fund Indicators Tell Us
Fund Balance Available
Fund Balance Available (FBA) measures available General Fund resources relative to the size of General Fund operations. It provides a financial cushion for cash flow, emergencies, unexpected expenditures, and revenue shortfalls.
The current FPIC thresholds vary by unit type and size:
| Unit | General Fund Expenditures | FBA Threshold |
| Municipality | $0–$100,000 | 100% |
| Municipality | $100,001–$999,999 | 71% |
| Municipality | $1 million–$9.99 million | 34% |
| Municipality | $10 million or more | 25% |
| County | $0–$100 million | 20% |
| County | More than $100 million | 16% |
Source: LGC, Financial Performance Indicators Guide (as part of the Requests for LGC Approval of Debt by Units with Material Financial Performance Indicators of Concern (FPICs), September 2026 LGC meeting materials). Note that the LGC may change its indicators and thresholds, so units should always consult the most recent guidance.
These percentages are not required minimum fund balances. The LGC recommends that units look at their peers and determine an appropriate fund balance for their own circumstances. It also recommends adopting a fund balance policy with corrective actions if fund balance falls below the unit’s intended level.
That makes the threshold a starting point, not the end of the analysis. A unit also needs to ask: Why is fund balance at this level? Is it rising or falling? Was a decrease planned? Are recurring revenues covering recurring expenditures? What major expenditures or risks are ahead?
Use of Fund Balance for Operations and Total Fund Balance
The LGC also looks at two other measures involving General Fund fund balance.
The use of fund balance for operations indicator identifies situations in which a unit appropriates fund balance and experiences an actual decline in fund balance that is not attributable to capital-related expenditures. Appropriating fund balance is not itself a concern. A unit may intentionally use accumulated reserves for planned capital expenditures or other one-time purposes. The concern is whether the unit is using reserves to cover an operating shortfall because recurring revenues are insufficient to pay recurring expenditures. A unit avoids an FPIC under this indicator if fund balance increases or if the decline resulted from the use of fund balance for capital-related expenditures.
For example, two units might each appropriate $500,000 of fund balance. One budgets the money for a planned fire truck. This unit would not have an FPIC, even if fund balance decreased, because the fund balance was used for a capital asset purchase. . The other uses $500,000 of reserves because recurring revenues are not sufficient to cover salaries and routine operating expenses, resulting in a decline in fund balance due to operations. The budget may show the same dollar fund balance appropriation, but only the fund balance used for operations would result in an FPIC.
The total fund balance indicator asks the more basic question of whether or not the General Fund has a positive fund balance. A deficit creates an FPIC. The LGC explains that a deficit indicates that the unit’s revenues and other receipts have been inadequate to support its operations.
Together, these indicators provide different information about General Fund financial condition. FBA measures the size of the unit’s available reserves relative to expenditures. The appropriated fund balance indicator identifies situations in which the use of fund balance is accompanied by an actual decline in fund balance. And the total fund balance indicator identifies a General Fund that has fallen into a deficit position.
What the Water and Sewer Indicators Tell Us
The five water and sewer FPIs look at whether the utility can financially support its operations and obligations over time? Each indicator uses information from the unit’s audited financial statements to calculate a particular measure of financial condition. No single indicator answers the larger question by itself. Together, they provide a picture of liquidity, operating performance, financial reserves, reliance on outside support, and the age of the utility’s capital assets.
The quick ratio compares the utility’s most liquid assets (generally cash, investments, and receivables) to its current liabilities. In simple terms, it asks how many dollars of readily available resources the utility has for each dollar of short-term obligations. A quick ratio of 1.5, for example, means the utility has about $1.50 in liquid assets for every $1.00 of current liabilities. The FPIC threshold is 1.0. A ratio below 1.0 means the utility has fewer liquid assets than current liabilities. But a utility at 1.01 may still have very little liquidity cushion. Looking at the ratio over time can also show whether that cushion is growing or shrinking.
The operating-income measure calculates the amount remaining after applicable operating expenses and debt service are subtracted from applicable utility revenues. In other words, it asks whether the revenues generated by the utility are sufficient to cover the costs included in the measure. A positive result means revenues exceeded those expenses; a negative result creates an FPIC. The size and direction of the result also matter. A downward trend, for example from $400,000 to $200,000 to $50,000, may indicate rising costs, stagnant revenues, declining consumption, or other financial pressures well before the measure becomes negative.
The unrestricted-cash measure compares the utility’s unrestricted cash and investments to its applicable annual expenses. The result is expressed as a percentage, showing how large the utility’s available cash cushion is relative to its spending. For example, a result of 25 percent means unrestricted cash equals roughly one-quarter of the expenses included in the calculation. The FPIC threshold is greater than 16 percent. But that threshold is not necessarily an appropriate reserve target for every utility. Infrastructure needs, debt obligations, customer concentration, revenue volatility, exposure to major repairs, and other risks may justify a substantially higher local cash target.
The transfers-in measure looks at transfers of financial resources into the water or sewer fund from another fund. Rather than measuring liquidity or profitability, this indicator identifies whether, and to what extent, the utility is receiving outside financial support. A transfer is not necessarily evidence of financial distress. A one-time transfer may result from unusual circumstances or a deliberate policy choice. Recurring transfers are more significant, particularly when they are needed year after year because utility revenues are not sufficient to support operations and other obligations. Looking at the amount, frequency, and reason for the transfers helps distinguish temporary assistance from an ongoing structural subsidy. (Note that transfers are different from cost allocations or reimbursements that properly charge the utility for services or costs provided by another fund.)
Finally, the capital asset condition ratio compares the remaining book value of depreciable capital assets to their original cost. Because depreciation reduces an asset’s book value over its accounting life, the resulting percentage provides a rough indication of how much of the recorded useful life of the utility’s depreciable assets remains. A higher percentage generally indicates newer assets, while a declining percentage suggests that more of the assets’ recorded useful lives have been consumed. This is an accounting measure, not an engineering assessment. It does not identify which pipes, pumps, treatment facilities, or other assets need replacement or measure their actual physical condition. It is most useful when considered alongside asset-management information, the capital improvement plan, maintenance history, and known replacement needs.Units also need an aging-infrastructure plan and periodic review of useful-life estimates, particularly for fully depreciated assets still in use. An FPIC response can explain how planned projects will affect the ratio, an issue that new GASB infrastructure standards will make more relevant.
Taken together, the indicators are more useful than a simple pass/fail test. An FPIC identifies a result that falls outside the LGC’s established benchmark, but results that remain within the thresholds can still reveal emerging financial pressures. Looking at both the calculated value and its trend over several years can help a utility identify problems earlier and make more deliberate decisions about rates, reserves, operating costs, debt, and capital investment.
And note that although these FPIC thresholds currently apply to water and sewer funds, units can (and should) monitor the same measures for electric, sanitation, and other enterprise funds.
Other Indicators: Are the Financial-Management Systems Working?
The remaining FPIs focus less on financial ratios and more on the systems, processes, and personnel used to manage public money. They look for things such as late audits, budget violations, significant audit findings, and vacancies in key finance positions. These indicators can help identify weaknesses that may not yet show up in fund balance, cash, or other financial measures.
A late audit measures whether the unit submitted its annual audit by the required deadline. A single late audit may have a specific explanation, such as a change in auditors, an unexpected staffing problem, or difficulty completing a particular part of the financial statements. Repeated late audits are more concerning because they may point to persistent problems with staffing, account reconciliations, recordkeeping, year-end closing procedures, or financial reporting. And the later the audit becomes, the longer the governing board, management, LGC, creditors, and the public are operating without current audited financial information.
A budget violation identifies expenditures that exceed the amount legally authorized by the applicable budget or project ordinance. The existence of a violation matters, but understanding how it happened matters too. A relatively isolated violation might result from a coding error or an expenditure charged to the wrong line item. Other violations may reveal weaknesses in budget monitoring, purchasing, contracting, preaudit procedures, or communication between departments and the finance office. Multiple violations, or the same type of violation from year to year, may indicate that the problem is more systemic.
Internal Control findings provide another window into the unit’s financial-management systems. Auditors evaluate internal controls and compliance as part of the annual audit and report certain identified deficiencies. A material weakness is significant even when it appears for the first time because it indicates a serious weakness in internal control over financial reporting. Repeat findings add another dimension. If the same problem appears in successive audits, the question is no longer only “What went wrong?” It is also “Why didn’t last year’s corrective action work?” The answer may involve staffing or resource constraints, but it may also indicate that the corrective action did not address the underlying cause or was not fully implemented. Under current LGC guidance an FPIC response is not required if the only internal control findings are a lack of segregation of duties and/or a lack of skills, knowledge, and expertise (SKE). If there are no other FPICs, no response is required.
Vacancies in key finance positions can be especially important because financial management depends on having qualified people performing critical functions on an ongoing basis. A finance-officer vacancy does not necessarily mean that a unit is experiencing financial problems; units may have turnover even when their financial systems are strong. But a prolonged vacancy can make it harder to keep accounts reconciled, monitor the budget, prepare financial reports, maintain internal controls, and complete the annual audit on time. The risk may be greater in a small unit where relatively few employees perform most financial functions and there is limited capacity to redistribute the work.
These indicators can therefore be particularly useful when considered together. Persistent finance-officer vacancies may contribute to delayed reconciliations, which may contribute to audit delays or findings. Weak budget monitoring may show up as budget violations and later appear in an audit finding. A unit might technically have several separate FPICs when, operationally, many of them trace back to the same underlying problem.
The reverse can also be true. One indicator may be an isolated event that does not reflect a broader weakness. That is why the presence of an FPIC is often the beginning of the inquiry rather than the end of it. The useful questions are what caused the result, whether it is recurring, whether other indicators point in the same direction, and what is being done to address the underlying issue.
Looking at these indicators together can help a unit move beyond correcting individual problems after they occur. They can highlight where financial-management capacity, internal controls, or routine processes may need attention before those weaknesses produce more serious financial consequences.
Using the FPIs as Local Financial-Management Tools
The FPIs are part of the LGC’s annual audit review, but units do not have to wait for that review to use the information. Many of the same measures, or closely related measures, can be incorporated into regular financial reporting, budgeting, and longer-term planning.
Used this way, the FPIs can do more than identify results that have already crossed an LGC threshold. They can help units spot changes earlier, understand what is driving them, and evaluate whether corrective actions are working.
Build Selected Measures into Regular Financial Reports
A unit can incorporate selected FPIs or related measures into reports already provided to management and the governing board. A utility, for example, might periodically track liquidity, unrestricted cash, operating results, transfers from other funds, and major capital needs. For the General Fund, management might track projected Fund Balance Available, changes in fund balance, recurring revenues compared with recurring expenditures, and significant budget-to-actual variances.
Units can also track financial-management measures that are not ratios: unresolved audit findings, reconciliation backlogs, budget problems, finance-office vacancies, and progress toward completing the annual audit.
Not every FPI lends itself to monthly or quarterly calculation, and an internal calculation may not exactly match the final audited FPI. The goal is not to recreate the LGC audit review every month. It is to monitor the measures that matter and identify meaningful changes while the unit still has time to respond.
Look at Several Years Together
A single number is a snapshot. Several years of results can reveal the direction in which the unit is moving.
Consider this simplified utility dashboard:
| Measure | FY 2023 | FY 2024 | FY 2025 | FY 2026 | FPIC Threshold |
| Quick ratio | 2.10 | 1.70 | 1.40 | 1.15 | ≥ 1.0 |
| Unrestricted cash | 42% | 35% | 27% | 20% | > 16% |
| Adjusted operating result | $650,000 | $420,000 | $180,000 | $40,000 | > $0 |
There is no FPIC in FY 2026. But the trend is clear. The utility has fewer liquid resources relative to its short-term obligations, its unrestricted cash cushion is shrinking, and the margin between applicable revenues and expenses has nearly disappeared.
Waiting until one of these measures crosses an FPIC threshold would miss several years of useful warning. Tracking the measures over time gives the unit an opportunity to investigate what is changing and consider possible responses earlier.
Trend analysis is also consistent with the LGC’s approach to fund balance. LGC guidance encourages peer comparisons and recognizes that fund balance trending downward over time can matter even apart from a particular FPIC result.
Look at Indicators Together
Trends become even more useful when several indicators are considered together. Declining utility cash, worsening operating results, recurring General Fund transfers, and aging capital assets may collectively point to a utility that is having difficulty generating enough revenue to support both current operations and longer-term infrastructure needs. Any one measure provides only part of that picture.
The same principle applies to financial-management indicators. Late audits, repeat audit findings, budget violations, unreconciled accounts, and finance-office turnover may appear as separate problems. But several occurring together may point to a common underlying issue, such as insufficient financial-management capacity or weak internal processes.
Looking across indicators can reveal patterns that are difficult to see from any one measure. The goal is to understand the financial or management story the indicators tell collectively, rather than treating each FPIC as a separate problem.
Set Internal Targets, Not Just FPIC Thresholds
An FPIC threshold and an internal financial target serve different purposes. The FPIC threshold identifies the point at which a result falls outside the LGC’s established parameters. An internal target identifies the financial position the unit wants to maintain.
Those numbers do not have to be the same. In many cases, a unit may reasonably set an internal target that provides substantially more financial cushion than the FPIC threshold.
For example:
| Measure | Current Result | Internal Target | FPIC Threshold |
| Utility unrestricted cash | 24% | 35% | > 16% |
| Utility quick ratio | 1.25 | 1.75 | ≥ 1.0 |
In both examples, the current result is within the LGC threshold and therefore does not generate an FPIC. But the result is below the unit’s internal target. That gap provides useful information even though there is no FPIC. It may signal a need to examine what is changing before the financial position moves closer to the LGC threshold.
The internal targets shown here are only examples. Each unit can establish targets based on its own circumstances, including revenue stability, expenditure risks, capital needs, debt obligations, infrastructure condition, and other financial risks. Targets can also change as those circumstances change.
Fund balance is a particularly good example. The LGC’s FBA thresholds identify results that may generate concern; they do not establish the appropriate fund balance for every local government. The LGC expressly encourages units to determine an adequate FBA level for their own circumstances, compare themselves with similar units, and adopt a fund balance policy.
Keeping the internal target and FPIC threshold distinct helps prevent the FPIC threshold from becoming the unit’s financial goal by default. It also allows the measures to function as planning and early-warning tools, rather than receiving attention only after an LGC threshold has been crossed.
Use the Measures During the Budget Process
The audited FPIs are necessarily backward-looking. They are calculated from financial statements showing what happened during the fiscal year. The budget process provides an opportunity to take the same information and look forward.
For the General Fund, a unit can project Fund Balance Available under the proposed budget, examine whether recurring revenues are keeping pace with recurring expenditures, and determine the effect of planned fund balance appropriations. If fund balance is being used, the unit can distinguish between a deliberate use of accumulated reserves for a one-time purpose and reliance on reserves to support recurring operations.
For a utility, the budget process can test whether proposed rates are expected to generate sufficient revenues to cover operating costs and debt service, whether cash is expected to increase or decrease, whether another operating transfer will be needed, and how planned capital spending will affect liquidity and reserves. Although not an FPI, the audited change in net position provides a broader measure of whether the enterprise fund's financial position improved or deteriorated.
Consider a utility that can balance next year’s budget without increasing rates, but its forecast shows unrestricted cash falling from 32 percent to 24 percent to 17 percent over the next three years. The utility may not have an FPIC today, and each annual budget may technically balance. But the forecast shows that its financial cushion is steadily disappearing.
Using FPI-type measures in forecasts can therefore extend the early-warning period even further. Instead of waiting for an audited result to show deterioration that has already occurred, the unit can identify potential problems in the proposed budget or multiyear forecast.
Diagnose Before Choosing a Solution
An unfavorable indicator identifies something to investigate. It does not necessarily identify either the cause or the appropriate solution.
If fund balance is falling, for example, the unit first needs to understand why. It may be intentionally spending accumulated reserves on one-time capital needs. Recurring expenditures may be exceeding recurring revenues. An emergency may have generated unusual costs. Revenues may have fallen short of expectations. Those circumstances can produce a similar financial indicator but call for very different responses.
The same is true for utility cash. Declining cash might result from an operating deficit, a major capital project paid with cash, slow collections, increased debt payments, or several factors occurring at the same time.
The response needs to fit the cause. A rate increase will not fix a billing and collection problem. A fund balance policy will not eliminate a structural operating deficit. And additional revenue may do little to correct repeat audit findings caused by inadequate staffing, weak reconciliations, or ineffective procedures. The indicators are therefore most useful as a starting point for diagnosis, not as a substitute for it. Clearly explaining significant or unusual factors in both the FPIC response and the MD&A in the audited financial statements can reduce follow-up questions.
Measure Whether the Fix Is Working
The measures used to identify a problem can also help determine whether corrective action is improving the underlying condition.
Suppose a utility’s quick ratio has fallen to 0.80. The unit determines that recurring revenues are not sufficient to support current costs and adopts a combination of rate and expenditure changes. Rather than stopping there, the unit can establish interim financial goals and periodically recalculate its liquidity measures to track whether its financial position is improving.
This type of monitoring also works for financial-management problems. If a unit has repeated audit findings related to bank reconciliations, for example, it can track whether reconciliations are being completed accurately and on time rather than waiting for the next annual audit to determine whether the problem persists.
The result is a continuing cycle: identify the concern, diagnose the cause, take corrective action, measure the results, and adjust course as needed. This approach also provides a useful framework when an FPIC requires a formal response to the LGC.
Responding to an FPIC
When an FPIC or other specified audit concern requires a response, the governing body must develop a Response to the Auditor’s Findings, Recommendations, and Fiscal Matters.
Under 20 NCAC 03 .0508, the response must be signed by a majority of the governing body and submitted to the Secretary of the LGC within 60 days after the auditor presents the audit. The LGC provides instructions and sample responses on its FPIC webpage. The response needs to do more than explain what happened. The LGC requires an action plan with specific steps to correct the issue and measurable results.
Suppose a utility has a quick ratio of 0.80. Stating that the ratio fell because the utility incurred significant repair costs helps explain the result, but it does not identify what will change. LGC FPIC response guidelines require the unit to identify the corrective actions the unit plans to take, who is responsible for carrying them out, when they will occur, and how the unit will determine whether they are working.
For example, the response might identify a rate increase or expenditure reduction, establish an interim liquidity target, provide a schedule for recalculating the quick ratio, and identify when the unit expects the measure to improve. That turns the response from an explanation of a past result into a plan for changing the future result.
Repeat findings deserve particular attention. If the same problem appeared in the prior year, the unit needs to consider why the previous corrective action did not resolve it and what will be different this time. The LGC’s sample-response materials emphasize specific steps taken or planned, expected implementation dates, and measurable results.
Beyond FPICs: The LGC’s Other Oversight Tools
The FPIC process does more than identify financial concerns and require a response. The information a unit provides in its FPIC response helps LGC staff understand what is behind an indicator, how significant the concern is, and what the unit is doing to address it. That information, in turn, helps the LGC carry out its broader fiscal oversight responsibilities.
This is one reason a complete and meaningful FPIC response matters. An FPIC identifies a condition that warrants attention, but the indicator alone may not provide enough information to evaluate the unit’s overall financial situation. A good response explains the circumstances that produced the FPIC, provides relevant context, identifies any corrective action already taken or planned, and gives LGC staff a better basis for evaluating whether the concern is isolated or part of a broader or continuing financial problem.
That understanding can matter well beyond the FPIC process. LGC staff may use the information provided in FPIC responses when evaluating whether a unit needs additional assistance and monitoring, reviewing a request for debt approval, and carrying out other fiscal oversight responsibilities. The more complete and useful the FPIC response, the better information the LGC has when it needs to evaluate the unit in these other contexts.
The sections below describe several of those other oversight tools and how they connect to the information developed through the FPIC process.
The Unit Assistance List
The UAL identifies units that LGC staff have determined need additional assistance and monitoring. It is not simply a list of units with FPICs.
A broader picture matters. One FPIC caused by an unusual event and followed by credible corrective action is different from several years of declining reserves, late audits, budget violations, staffing problems, and unresolved findings. The connection with trends is particularly important. The LGC has explained, for example, that significantly low fund balance compared with peers and/or a downward fund-balance trend may be considered in developing the UAL.
UAL status also has statutory consequences in some circumstances. Among other things, units on the UAL are subject to lower thresholds for LGC approval of certain financing contracts.
Debt Approval
The LGC’s debt-review process provides another point at which a unit’s financial condition and financial-management practices can matter.
An FPIC does not automatically prevent a unit from borrowing. But financial condition, debt management, and unresolved fiscal concerns can become relevant when the LGC evaluates a proposed financing. In practice, LGC staff review the FPIC responses of units seeking approval and assess whether the FPICs are material. Requests from units whose FPICs are not material can proceed on the consent agenda. Requests from units with material FPICs are presented as separate agenda items, so staff can explain their concerns and LGC members can ask questions, and those units are asked to have representatives at the meeting. Timing also changes. A unit seeking debt approval cannot necessarily rely on the full 60-day response period. It must submit an acceptable FPIC response by the debt application deadline. A complete response provides accurate information for LGC members and allows for more efficient debt review.
The practical lesson is broader than the FPIC process itself: financial weaknesses may matter at exactly the time a unit needs to finance a major capital project.
LGC Intervention
At the more serious end of the oversight system, G.S. 159-181 gives the LGC authority to intervene directly in a unit’s financial affairs under specified circumstances.
Under G.S. 159-181(c), the LGC may impound a unit’s books and records and assume full control of its financial affairs when the unit defaults on a debt-service payment or, in the LGC’s opinion, will default unless its financial policies and practices improve; when the unit persists, after notice and warning, in willfully or negligently failing or refusing to comply with Chapter 159; or when the General Assembly suspends a municipality’s charter.
G.S. 159-181(d) contains a separate provision for water and sewer systems. It applies when audited financial statements show, for three consecutive fiscal years, any one of three conditions: negative working capital, a quick ratio below 1.0, or a net loss of revenue from operations measured on the modified accrual budgetary basis. This authority reaches the water or sewer enterprise system rather than all of the unit’s finances. Before assuming full control of the system, the LGC must find that the condition threatens the unit’s financial stability and that the unit failed to make corrective changes after notice and warning. That notice and warning may come before the three-year period ends.
That three-year statutory test is separate from the annual FPIC process. A water fund with a quick ratio of 0.90 triggers the current FPIC process in the first year. If the ratio remains below 1.0 for three consecutive fiscal years, the unit will likely also meet one of the conditions listed in G.S. 159-181(d), potentially triggering a separate statutory process. The statute defines the quick ratio in its own terms, as cash and receivables relative to current liabilities, so its calculation may not match the FPI exactly.
The Unsustainable Cities Act
Article 32 of Chapter 160A, Transitions for Unsustainable Cities, provides another process for addressing a city in financial distress. The stated purpose of the Article is to provide a process for a city to transition out of financial distress “either on its own initiative or with assistance from or under the direction of the Local Government Commission.” G.S. 160A-825.
The connection to the LGC’s intervention authority under G.S. 159-181 is direct. The LGC must establish criteria for evaluating cities for financial rehabilitation under Article 32 and apply those criteria to every city for which it has exercised its authority under G.S. 159-181(c). The criteria also must be applied when the LGC receives a referral from the State Auditor, the Department of Environmental Quality, or the city’s current or most recent auditor. The LGC then determines whether the city will be subject to the statutory process. G.S. 160A-831.
Once the process begins, the city must cooperate with an assessment of its financial affairs. The assessment includes the city’s revenues and future revenue forecast, real property and associated debt, contractual obligations, internal-control matters identified in prior audits and the city’s responses to them, outstanding debt, public enterprise accounts, and General Fund balance. The city also must prepare a report on the services it provides, including their costs and revenues over the five most recent fiscal years. G.S. 160A-833.
After the financial assessment and service report are completed, if the LGC determines that the city should be subject to the Article but has not already exercised its authority under G.S. 159-181(c), the LGC may impound the city’s books and records and assume full control of its financial affairs. In that event, the LGC assumes the council’s powers over taxation, expenditures, budgets, and other financial matters. Whether or not the LGC takes financial control, a city subject to this process must work with the LGC to identify options for addressing deficiencies, identify potential partners to help continue services, and educate the council and citizens about merger with other local governments. If the LGC does take control, the council keeps its non-financial powers, such as land use regulation, but cannot start any new service without LGC approval. G.S. 160A-841.
The process includes annual reassessment. If the LGC finds the city’s financial affairs sufficiently stable to continue operations for three consecutive fiscal years, it must relinquish authority exercised under G.S. 159-181 or G.S. 160A-841. If, however, the LGC determines that the city’s financial affairs are not sufficiently stable to continue operations, it may begin identifying local government partners for merger or dissolution. G.S. 160A-845.
The statute ultimately authorizes the LGC, upon the required determination, to adopt a resolution transferring the city’s assets, liabilities, and other obligations to a local government partner and dissolving the city. The resolution remains effective unless the General Assembly specifically disapproves it by legislation before its effective date. G.S. 160A-848; G.S. 160A-853.
