North Carolina Municipal Budgets Rebound From COVID-19 Slump That Could Have Been Worse
Local governments across North Carolina have mostly weathered the economic downturn that came with the coronavirus pandemic. Stimulus programs and a rebounding economy mean property tax collections and sales tax revenues are getting back to normal. But some other areas remain weak, like travel and tourism tax revenues.
Amid stay-at-home orders, business closures and mass layoffs a year ago, the town of Davidson decided to reduce its 2020-21 budget by $200,000. Finance director Piet Swart said Davidson officials worried some people wouldn't be able to pay their property taxes — the town's largest source of revenue. And they predicted sales tax revenues would fall, too.
"We made some what I would call significant adjustments in the FY 20-21 budget in response to the pandemic," Swart said.
Davidson froze hiring and employee raises at the start of the fiscal year in July. Other local governments made similar calculations. Hickory also stopped filling open positions and laid off seven employees. Charlotte projected a 25% decline in sales tax revenues, so officials froze hiring and eliminated vacant positions.
"We look back at the not-so-rosy days," Charlotte Chief Financial Officer Kelly Flannery told City Council in January. "So, for every one of our models, we always model in the Great Recession of 2008, the actual recession experience, to make sure that there's long-term sustainability across all of our models."
Uneven Experience Across N.C.
So, how are North Carolina's local governments doing financially, after a year of COVID-19? The answer depends on what kinds of revenues they get, their geography, and how well prepared they were for the disruption.
"The economic effects and the financial effects on municipal budgets of the pandemic have been very uneven," said Scott Mooneyham with the North Carolina League of Municipalities.
"It's very difficult to draw broad conclusions about how the economic effects during this period have affected municipalities, generally, because of that. And those uneven effects have occurred, both in terms of budget streams and in geography," he said.
WFAE looked at trends in four key municipal budget areas: property taxes, sales taxes, tourism taxes and local enterprises, such as electric utilities.
Let's start with property taxes, typically the largest source of income for local governments. These are the annual taxes you pay based on the value of your home or commercial property. In most places, fears of big losses didn't pan out. Most property owners were able to keep paying.
Huntersville Assistant Town Manager Jackie Huffman said property tax collections are similar to pre-pandemic years. Ditto, said Davidson's Swart.
"Our historical rate is upwards of 99 and a half percent," Swart said. "What we've seen so far is that we are in line with our historical projection. So, really, we've not seen any effect in Davidson on our ad valorem tax revenues."
In Charlotte, property tax collections fell from 99.5% to 98.9% in fiscal 2020, which ended June 30. That meant a more than $2 million decline in revenue. But property tax collections are returning to normal this year, city budget director Ryan Bergman told the city council last month:
"I think it's fair to say that some of the concerns that we had with the property tax collection rate this year did not materialize," Bergman said.
Bergman said lower collections remain a risk for the new fiscal year that starts in July. But in Charlotte and other North Carolina communities, taxes from new residential and commercial developments could pick up the slack. Charlotte expects property tax revenues to grow by more than $7 million next year, which would offset any weakness in the property tax collection rate.
Sales Tax Revenues Were Down, But They Beat Expectations
Sales taxes are another big chunk of local budgets and were another big concern a year ago. As businesses closed and people stayed home at the beginning of the pandemic, collections fell sharply. Charlotte projected a decline of up to 25% a month from last July to December.
But the worst-case scenario didn't come to pass.
"Sales tax overall in North Carolina did not experience the declines that were feared, so this is good news for us with budget planning," Bergman said.
Instead of a 25% decline, Charlotte sales tax revenues were down just over 4% most months in the first half of the year. And they actually beat 2019 levels in September (+5.6%) and November (+2.7%). Now Bergman and other local finance directors are projecting that sales taxes will be on budget for the year and in some cases better than before the pandemic.
Swart says Davidson's monthly sales tax revenues are now 8% higher than before the pandemic. And in Hickory, sales tax income is now up 5%.
Mooneyham said there's a simple reason: federal stimulus payments.
"That helped to ameliorate the loss of wages that people were suffering, and so then they ... spent money on goods and services that then … helped those sales tax revenue streams to recover," Mooneyham said.
But some local governments won't see an increase, especially those in rural areas, said state Treasurer Dale Folwell. He chairs the state's Local Government Commission, which monitors the financial health of local governments.
"This decline in sales tax revenue that occurred between St. Patrick's Day and July 4th of last year had a real negative impact on a lot of these communities even though their sales tax revenues are back up to where they were," Folwell said.
Food And Tourism Taxes Take A Big Hit
The most dire predictions were for prepared food and beverage and hotel occupancy taxes — paid on things like restaurant meals and hotel stays. Restaurants closed and diners were slow to return when they reopened. People stopped traveling. Conventions and business meetings were canceled. Hotel bookings plummeted.
"That was hit extremely hard," said Hickory City Manager Warren Wood.
"Early on it was probably down 75%. It has bounced back somewhat," Wood said. "They're probably still down about a third of what they were before. But far and away, any sort of travel-related (industry), the restaurants, the leisure industry in Hickory has been hit the worst."
Charlotte officials predicted revenues from the food and beverage tax would fall 30% from pre-pandemic levels. They were down, but not that as bad as that. And they're on track to rebound further, Flannery told City Council March 3.
"Through January, the food and beverage tax revenues are 11% above the year-to-date projections," Flannery said. "... As restrictions continue to be lifted and vaccine rollout has become more aggressive, we are optimistic that the food and beverage revenues for the remainder of the fiscal year will continue to outpace budget projections."
At least in Charlotte, the one area that hasn't bounced back is hotel occupancy tax revenues. Business travel and conventions are still lagging. Even the one big convention the city did host last year — the Republican National Convention — was scaled way back because of COVID-19 and presidential politics. Instead of 19,000 people at the arena, only 336 delegates came and for one day only.
The city's hotel occupancy tax revenues were down 60% or more every month from July to January — the most recent numbers the city has published. The city budget assumed travel would pick up again in November, but that hasn't happened.
The shortfall means less money for tourism promotion, renovations at the Charlotte Convention Center and for the NASCAR Hall of Fame. Flannery said the city will use reserves to make up the difference this year.
In other communities, tourism tax dollars don't go to big projects, but they do pay for community events. The pandemic canceled those events, and shortfalls were avoided. That was the case in Davidson, Swart said.
"Christmas in Davidson and Art on the Green, Town Day, those types of things, are funded by those prepared foods and occupancy (taxes)," he said. "So … those revenues that fell actually funded events that we couldn't hold during the pandemic."
In other words: no income, but no expenses either.
The town of Matthews saw the same situation.
"We have been able to manage around deficits in certain areas," said spokesperson Maureen Keith. "Our tourism fund has taken a significant hit, but we were not able to host our usual special events, so our expenditures have gone down."
Although urban areas like Charlotte and Raleigh saw business travel and hotel occupancy fall off, the opposite happened in other parts of North Carolina, like rural sections of the mountains and the coast. Mooneyham said people used those places as a getaway from the pandemic and spent money.
"The ability to go and stay in a beach cottage, or whatever the case may be, where you had individual family occupancy dwellings of different types so that people weren't clustered together, people felt safer going and doing that over time," he said. "And so what you saw related to that was a recovery in those very traditional tourism areas."
Utility Shutoff Moratorium Hurts Revenues
Utility revenues are another area that suffered. More than 70 local governments in North Carolina operate their own electric companies. Many also run water and sewer systems. From April to the end of July, the state banned shutoffs for people who couldn't pay because of the pandemic.
"There were a lot of those systems that saw large increases in delinquent payments, again back in the spring and summer," Mooneyham said. "A lot of those losses are unrecoverable."
Elizabeth City in eastern North Carolina was the poster child for the problem. At one point, 30% of its utility customers stopped paying their bills. City officials said at the time that the resulting budget shortfall would require a big hike in electric rates — up to 46%.
Because of that, Elizabeth City requested and got a waiver from the state attorney general so it could resume trying to collect past-due bills, including through shutoffs of service. Then local utilities got some breathing room when Gov. Roy Cooper let the ban on utility shutoffs expire at the end of July.
Most local utilities operate as separate "enterprise funds" that are supposed to be self-supporting. While other parts of local government can deal with shortfalls with budget cuts, Mooneyham said, that isn't necessarily the case with utilities.
"There are a lot of fixed expenses associated with operating utilities, where you can't make cuts," Mooneyham said. "Ultimately, as the economy recovered through the summer, that situation got better. But there was a lot of red on a lot of books for that period."
Mooneyham says unlike sales taxes, there's been no stimulus-related rebound in utility payments. Cities and towns are having to work with individual customers to collect what's owed. Many communities have tried to make up for the shortfall by offering people help with utility payments. In October, Cooper announced a $117 million program using federal funding to help people with rent and utility payments.
Federal Aid Helps
Federal relief money has helped most local governments make it through the past year.
In North Carolina's largest city, for example, Charlotte Area Transit System had received about $57 million in CARES Act funding as of January. That made up for lost revenues due to lower transit ridership.
Charlotte Douglas International Airport got $136 million to help with a loss of revenue due to a slowdown in airline traffic.
Another $64 million in CARES money helped pay police and firefighter salaries, improve technology and cover salaries for employees on emergency leave.
Meanwhile, as most revenue streams rebounded, cities and towns were able to restore some cuts. Workers were hired back and hiring resumed.
Now it's budget season again for local governments. As they plan spending for another fiscal year starting July 1, optimism seems to be the rule. They're counting on a rising vaccination rate and an economic rebound to get their budgets back to normal.
"I do think that things are going to come back quicker, at least in North Carolina and our area, than what a lot of people anticipate," said Wood in Hickory. "That's just my theory — that I think people are really anxious to get back to some level of normalcy, and we'll see that quicker than what we may be thinking."