Although the impact of the COVID-19 pandemic on North Carolina counties is not yet known, we can be sure that there will be one. We can also be sure that the pandemic downturn will negatively impact sales tax revenues for both the final quarter of FY 2020 and part or all of FY 2021. Other revenues may also be impacted, such as recreation fees or building permits; but we can be sure that existing sales taxes assumptions, at least in the immediate short term, will need to be revised downward. For both fiscal years, counties should plan for a significant drop in sales tax collections with the bulk of the revenue shortfalls occurring in FY2021. All local governments should review budgeted expenditures for the remainder of 2020, and for the fiscal year 2021, to determine which expenditures can be reduced to allow for these anticipated shortfalls.
A sales tax issue that counties should consider for both 2020 and 2021 is how to budget and expend the Medicaid Hold Harmless (MHH) funds received from the state per GS 105-523. Eligible counties receive 90% of the projected year end MHH payments they are entitled to from the NC Department of Revenue (DOR) in March of each year. These hold harmless payments are made from the state to counties as a result of counties exchanging a portion of local sales and use tax revenue for the state’s agreement to assume responsibility for certain non-administrative Medicaid costs. Since sales tax revenues have been increasing as a general trend, more counties are receiving a MHH per the March 2020 payout calculations attached. In August of each year, the state then completes the same calculations based on actual amounts. Any counties that received projected MHH payments in March 2020 that were in excess of the final amount calculated in August, will be required to reimburse DOR for that difference. The excess March projections will be a liability that counties may need to report in their 2020 financial statements, depending upon materiality. The State and Local Government Finance Division and the NC Association of County Commissioners are working with the DOR to offer counties an option to payback any significant settlement amounts over fiscal year 2021 if cash flows would be negatively impacted in the county.
The concern is that the MHH sales tax implications for counties during the 2021 fiscal year may be even greater. In addition to the decline in overall sales tax revenues that all local governments can expect during 2021, counties may also anticipate a decline in the MHH sales tax projection and a related reduction or elimination of the 90% initial payment amount in March 2021. Because counties probably report the MHH payment as sales tax revenue, there may be a budget shortfall for the projected payment. The months that DOR uses to calculate projected MHH in March are from April sales tax collections (which are for March sales). Therefore, only one month of reduced sales tax collections will be used in the August 2020 settlement based on when the COVID-19 stay-at-home orders began to be issued. The remaining low sales tax months will be used in the projected calculations for the March 2021 initial payment. Depending on the amount of overall sales tax decreases, counties may see a greatly reduced MHH projected payment in March 2021 or none at all. Based on expectations, counties are urged to be very conservative about how much revenue they budget for the MHH payments in 2021 budgets.
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