WILMINGTON — Despite the current state of affairs across the country, governmental business is moving forward, and as we near the end of the Fiscal Year 2020, local governments are all trying to finalize their budgets for the new year (which typically begins July 1).
The current pandemic of Covid-19 has certainly thrown a wrench into the budgets for the end of the year for local municipalities and counties. With a loss of revenues from sales taxes, room occupancy taxes, and more local governments will have to adapt to the ever-changing situation to remain fiscally sound.
The City of Wilmington’s proposed budget for FY 20–21 was presented to City Council earlier this month. Despite the current situation and loss of revenues, the city is recommending not to raise the current property tax rate of 49.84 cents per $100 valuation. For most (if not all) governmental bodies, property taxes make up the biggest portion of their expected annual revenues.
“It is important to note, this budget comes at a time of unprecedented uncertainties stemming from the rapidly changing impacts of the global Covid-19 pandemic. This event is on the tail-end of our community’s effort to recover from Hurricane Florence that struck the coast September of 2019. Due to the impacts of Covid-19 on the community, staff thought it was imperative and consistent with Council feedback to avoid a property tax increase so that the community can begin to recover from the global pandemic’s economic impacts without further burdens. The recommended budget continues with the current ad valorem tax rate of 49.84 cents per $100 assessed value. Many, but not all, well-meaning services are included in the presented budget,” according to the city’s budget recommendation.
Overall, the City of Wilmington’s recommended budget comes in at roughly $206 million, a nearly $6 million increase from last year’s budget.
“This small increase is mainly due to five components. First, the FY21 Recommended Budget includes the use of General Fund undesignated fund balance for the final payment of a legal obligation totaling $1,000,000, transfers to the CIP totaling $1,008,950 and $1,347,569 for one-time items which is just shy of a 12% increase over the prior year. Secondly, the Stormwater Management Fund’s budget increased by almost 7% in FY21 with an increase of $1.2M as a transfer to the CIP fund primarily to continue funding for the storm drain rehabilitation projects,” according to the proposed budget.
The General Fund
When talking about governmental finances, the term general fund is often mentioned, but don’t think of a general fund balance the same way you would a checking account.
Last year the Town of Carolina Beach’s Finance Director Debbie Hall offered the Town Council a lesson in government economics.
“One of the common misconceptions is that fund balance is a cash account thereby, associated with or correlates with our government bank account balance. But what it truly is is the difference between your assets and your liabilities, which in the public sector would be your equity, but in the governmental funds that is called your fund balance,” Hall said.
Within a general fund, there are two types of balances, assigned and unassigned.
“Fund balance is required to be reported in two components—reserved and unreserved. When fund balance is reserved, it either means that the resources are in a form that cannot be appropriated and spent (such as inventory) or that the resources are legally limited to being used for a particular purpose. For instance, grant monies from the federal government that may be used only for building schools would be reported as reserved fund balance in the general fund or a broad capital projects fund. Governments also tend to report the nonexpendable portion of their permanent funds—the resources that can be invested but not spent—as reserved fund balance,” according to the Governmental Accounting Standards Board (GASB).
For the City of Wilmington, despite the recovery efforts following Hurricane Florence, the city’s unreserved fund balance ‘remains stable.’
“Our Financial Management Policies state that unassigned fund balance should only be appropriated for non-recurring expenditures. The City’s General Fund unassigned fund balance remains stable even after Hurricane Florence’s recovery efforts. This demonstrates the resiliency of the community and the efficiency of our staff who tirelessly worked to recover funding from both the State and Federal governments. It is recommended for the FY21 Recommended Budget that $3,356,519 of the General Fund’s undesignated fund balance be appropriated for expenses related to the final year of a 3-year public safety legal obligation, capital improvement needs and one-time FY20 items,” according to the proposed budget.
Some of these expenditures will go to things such as bomb disposal robots, ballistic vests, and transportation studies. The total for this year’s proposed budget as far as unassigned balances go is $ 3,356,519, an 11.88% increase from the previous year.
The state of the economy
The national economy has been faring well for more than a decade leading economists to predict we are in for a downturn.
“The late half of calendar year 2019 saw several economic indicators fluctuate leaving cause for concern. A few of those indicators follow:
- May 2019: Inverted Yield Curve where the 3-month Treasury was more than the 10-year Treasury
- July 2019: US Federal Reserve cut interest rates in the first time in over a decade
- August 2019: Inverted Yield Curve where short-term bonds are higher than the interest rates paid by longterm bonds
- September 2019: US Federal Reserve cut interest rates for the second time by a quarter percent,” according to the city’s proposed budget.
Then there is the current pandemic we find ourselves in.
“In February of 2020, the Coronavirus pandemic began to emerge. The virus showed an impact not just in China, the originating country, but throughout the world. At the end of February 2020, the United States’ markets fell sharply amid widening concern that the continuing spread of Coronavirus cases could lead to a global pandemic. That month, the DOW responded to new outbreaks in Italy, Iran, and South Korea by dropping more than 1,000 points, the worst performance in more than two years,” according to the budget report.
“By March 11, 2020, the longest period of economic expansion in history ended with the DOW closing at 1,465 points, a nearly 5.9% decrease changing the bull market to a bear market. As the community shutdowns spread, unemployment followed. By April 16, 2020, the unemployment rate was 18% nation-wide with more than 22 million jobless as compared to the 3.7% the quarter before,” according to the report, which pulled data from the NC Department of Commerce.”
It’s not all bad news for the City of Wilmington. Revenues are projected to increase in Fiscal Year 2021. That is largely in part due to the property tax growth in the city, as more and more development takes place.
“The City of Wilmington’s projected FY21 property tax growth over FY20’s adopted budget totals 2.8% and is a continued indication of the positive trend in the real estate market as multi-family, hotel, and office construction projects continue to expand our tax base. The City’s tax base for FY211 is estimated at $15,949,000,000 with the City’s real property totaling $14,871,000,000 and Motor Vehicle property equaling $1,078,000,000. With a $0.4984 tax rate, one penny equates to a value of $1,583,152 using a collection rate of 99.21% for property tax and 100% for motor vehicles. The tax base is expected to provide the City $78,904,291 which is split between two funds. The split is as follows: General Fund ($63,911,843/$0.4037) • Debt Service ($14,992,449/$0.0947),” according to the proposed budget.
The proposed budget also predicts a growth in sales tax rates as the population continues to grow, although, it is admitted that sales tax is generally difficult to predict.
“Sales tax is generally the most difficult to forecast due to its dependency on customer confidence and changes in the economy. The State budgeted 4.6% growth for FY21. The City’s sales tax collection tends to be 1.5-2% more than the State’s average due to the city’s location and tourism industry but given the pandemic and the other rationale provided above, the forecast remains at a 4.6% growth estimate,” according to the budget.
Despite the strong economy pre-Covid, the future remains uncertain.
“We continue to be moderately conservative in our projections due to this uncertainty. The total General Fund revenues equal $115,713,806 which is 1.97% higher than FY20’s Adopted budget of $113,480,412. If the budgets were compared without the use of unassigned fund balance, the FY21 budget ($110,460,412) would be $1.8 million or 1.7% higher than the FY20 Adopted budget ($112,337,287),” according to the budget.
(Author’s note: this is part one of a two-part look at this year’s proposed budget. Part two will look at planned expenses for the City of Wilmington).