Short of having a crystal ball, finance and budget officers don’t have a lot to go on to determine the financial impact of COVID-19 on North Carolina local governments. That doesn’t mean, however, that there aren’t steps local finance and budget officials can take to begin to prepare for the inevitable decline in revenue.
Steps for 2019-2020 Budgets
Even though the 2019-2020 fiscal year is almost over, there are steps units can take to preserve cash and reserves.
- Current year budgets should be carefully reviewed to see if there are cuts or deferrals that can be made.
- Typical appropriations considered for cuts are travel, training, and maintenance, and units may implement hiring freezes or furloughs. Each unit will need to make these decisions based on their individual circumstances. The more you can add to reserves this year, the better off you will likely be in the 2020-2021 fiscal year.
- Units need to account for any increases in expenditures that have occurred and may continue to occur in direct response to the pandemic, and make sure those costs are included in the budget. Also, recognize any additional grant or contribution revenues you may have realized during this time.
- Be proactive in managing year end receivables, particularly with grant reimbursements and loan draws.
- Adjust downward any sales tax revenue and property tax revenue shortfalls, especially motor vehicle taxes. Session Law 2020-3 extended the due date for registered motor vehicle taxes originally due from March 1, 2020 through July 31, 2020, for five months. Read more about that here.
- In utility funds, adjust for charges for services revenue shortfalls based on how those collections have been impacted by Executive Order 124. Units should see the impact starting in May.
Most units have sufficient amounts of fund balance available for appropriation to fill the budget gaps left by reduced tax revenues and increased COVID-19 expenditures if they choose to do so. We have always been reluctant to advise use of fund balance since it is an important safety net for unexpected events. However, the current global pandemic fits that description! As always, we caution units to refrain from using fund balance without careful consideration of short- and long-term impacts of its use. We do not know how long or how severely the pandemic will affect local governments. Each unit will need to decide when and how much fund balance to appropriate.
Steps for 2020-2021 Budgets
All units should have completed a substantial amount of work on the 2020-2021 budget; however, you likely have many unanswered revenue questions. No one knows at this point what the local government impact will be or how long it will last. For the revenue side of the budget, governments might consider:
- Developing alternate scenarios, considering both larger and smaller declines in sales tax, motor vehicle taxes, occupancy tax, and other affected revenues.
- Reducing the estimated property tax collection percentages as high unemployment may cause both business and residential property owners to postpone tax payments. [Remember that units cannot budget a higher percentage for property tax collection for 2020-2021 than you collected in the 2019-2020 fiscal year. You will need to estimate that percentage before finalizing your 2020-2021 budgets.]
For appropriations, governments might consider:
- Controlling personnel costs by implementing hiring freezes, foregoing planned salary increases, considering staff furloughs or layoffs.
- Delaying or eliminating planned capital outlay.
- Reducing travel and training.
In summary, we urge you to take a conservative look at both the revenue and appropriation sides of the 2020-2021 budget, assume some amount of reduced revenues, and budget appropriations consistently. If revenues rebound more quickly than assumed in the original budget ordinance, units can restore various expenditures throughout the fiscal year as needed. As always, we urge governments to avoid covering operating costs with fund balance on a recurring basis; however, some use of reserves if present and available may be appropriate now.
Please contact us with questions at (919)814-4300 or at slgfd@nctreasurer.com.