Friday Interview: State Asks Local Governments To Examine Savings

As local elected leaders prepared this spring for potential cuts in state funding, some legislators suggested that local governments look at their savings reserve accounts — or fund balances — to find money that would help cushion the blow. The General Assembly voted in June to override a gubernatorial veto and put a new state budget in place. Before that vote, Michael Sanera, John Locke Foundation Director of Research and Local Government Studies, discussed local governments’ fiscal outlooks with Donna Martinez for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

Martinez: So what is a fund balance? To be honest with you, I was a little bit unclear about this cash that, apparently, cities and counties have sitting around.

Sanera: Absolutely. At the end of the year, a county is required to maintain sort of a rainy-day fund in order to keep some cash on hand that has not been designated for any particular purpose. It’s like, as I said, a rainy-day fund. If they have an emergency — if there is, as we saw [in April], a tornado; if there’s extra during the winter, extra snow storms that they have to clear snow — there are all kinds of situations that require a county to prudently have some money on hand. The state requires 8 percent.

Martinez: Eight percent of what?

Sanera: Eight percent of their General Fund budget.

Martinez: OK.

Sanera: Some counties have gone well over that and have socked away 12 percent, 15 percent, 20 percent more than their General Fund [spending level]. And that’s hard to justify sometimes, especially in hard economic times and especially when we saw during these requests for tax increases — either a sales tax or a land transfer tax — we saw counties asking for additional tax money when they had a lot of money that they could be using for some of the things that they said the new tax money was going for.

Martinez: So they have these fund balances, and I suspect that, at least up until now, those fund balances have been just sitting there — not a whole lot of discussion about them. But now there’s a little bit of talk among some legislators who are grappling with the state’s budget hole. They’re saying, “You know what? Why can’t some of these local governments who fear cuts that might come to them from the state, why can’t they use some of that extra cash?” It seems like a legitimate question.

Sanera: Yes, absolutely. And I think there are a couple things in play here. You know, the politics is always preeminent, and all the politicians are pointing their fingers at each other, both at the state and the county level. The fund balance is the basis for that. So the county officials say, “We don’t want the state to cut our money,” and the state says, “Well, it’s reasonable for them to use some of that money to pick up the slack in an emergency.”

I’m sort of sympathetic on both sides, depending on the situation. If the state is coming in and saying, “We’re going to ease our problem, both financially and politically, by transferring these spending cuts to the local level,” then I have some sympathy for the counties. On the other hand, if the counties are using, sort of, the Washington Monument [argument] — “We’re going to cut teachers first and [the] sheriff’s department first” — and not using the fund balance for easing this financial situation, then I’ve got some sympathy with the state side. So it comes down to a lot of the specifics here.

Some counties actually have larger fund balances, so they’re a bigger target. Some counties have used a lot of that fund balance in recent emergencies, or have used it in the financial crisis over the last couple of years in order to ease the cuts and burdens and so forth. So each county has a little bit different situation.

Martinez: Is it common for a local government to have a cash reserve well above the 8 percent requirement from the state?

Sanera: Well, I haven’t looked at all the counties, but when we looked at the counties that we reviewed — and it’s up to 65 counties or so that were asking for tax increases over the last three years — not all of them, but many of those, I would say the vast majority of those, had over 8 percent. And some were only slightly above — you know, 10 percent, 12 percent. But some were up in the 15 percent to 20 percent range. And we pointed out at the time that that was probably excessive. The state requires a minimum of 8 percent. They’re free to have more than 8 percent, but when you have a lot and then you claim that the state is imposing on you revenue cuts, and you’re sitting there on a pretty big bankroll, I think the state legislators have an argument. On the other hand, if you have had an emergency, and you’re below 8 percent, and you’re trying to rebuild that fund balance back up to 8 percent to meet the state requirement, then that county getting a cut from the state level is in real trouble.

Martinez: I think one thing we can all agree on, whether you’re a state official, a local official, or just a regular old taxpayer like I am, is that we’re in the middle of a very tough economic time in this country. So because you watch local governments across the state, Michael, have you seen any indications that local officials are, indeed, actually cutting back on programs and services? Or are you still seeing this push forward to do more and more and more?

Sanera: Well, the pressure from the local bureaucracy and the local people that get the money is always there. Of course, politicians don’t want to say no to anybody. So they continue to try and have their cake and eat it, too, so to speak. They continue to want to spend at current levels.

Martinez: Is anybody doing anything innovative? Selling assets? Privatizing?

Sanera: Well, that’s where we should be, and we’re not. We have a lot of counties that have things that they could privatize; we have published papers on water and wastewater treatment plants, parking garages. Even around the country, parking meter services in the bigger cities are being privatized. So there’s a lot that can be done in terms of privatization, in terms of what we call competitive sourcing, so that you have a competitive bidding process when you provide for government services. Selling assets — Los Angeles is going to sell the L.A. Coliseum, believe it or not.

Martinez: Really? Oh, my goodness.

Sanera: And fairgrounds and so forth. So there are a lot of innovative things that are going on around the country. We see much less of that here in North Carolina. It seems to be business as usual, and we’re sort of insulated from the innovative ideas that are happening in other parts of the country.