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North Carolina’s local governments face a grim financial future

State Auditor Beth Wood at a 2019 Local Government Commission meeting. (CJ file photo)
State Auditor Beth Wood at a 2019 Local Government Commission meeting. (CJ file photo)

North Carolina’s local governments face a grim financial future. Tyrrell County may offer a sobering preview.

The inland northeastern county, bordered by the Albemarle Sound and the Alligator River, has the state’s fewest residents — around 4,100. It’s preparing for a 35% drop in its sales tax revenue. The county plans dramatic budget cuts, and capital projects are “dead in the water,” County Manager David Clegg told Carolina Journal.

“You’ve got a unique, noxious cocktail of events,” Clegg said. “There’s no fat to cut. You’re basically lopping off appendages. It’s not an issue of what to cut, it’s what service don’t you want to provide.”

Tyrrell County ranks among North Carolina’s poorest. Almost 30% of its residents live below the poverty line. The county recently lost its state prison, costing the county its largest consumer of water and sewer utilities. The county can’t pay its utility bills and lost more than $300,000 in state money when the prison moved, Clegg says.

Tyrrell County’s woes may be visible. But it’s not alone. With the COVID-19 pandemic and safer-at-home orders halting the economy statewide, local governments’ tax revenue is evaporating. State leaders fear the pandemic could drive local governments into financial crises and cripple rural areas’ long-term viability. 

Cities and counties are finalizing their budgets for the fiscal year amid growing uncertainty around economic recovery and tax collections. The fiscal damage will take months to become clear, but local governments are bracing for a sustained hit to property taxes, income taxes, sales taxes, and other fees. 

More than 150 local governments in North Carolina were on a watch list for risk of insolvency before the pandemic. With tax revenues plummeting, state Auditor Beth Wood worries the state will have to intervene in more local governments’ financial management. But she says the Local Government Commission — which provides financial oversight for some 1,300 units of local government in the state — lacks the staff to do so. 

“They were having trouble meeting their bills before the pandemic set in,” Wood said. “It’s a domino effect. We’re going to see more and more local governments get into financial stability issues. … Less revenues at the state and county level can only trickle down to everything they fund.”

As local governments struggle, the state could face a $4 billion budget shortfall. Spending is rising to combat the pandemic and cover growing demands for social programs. Federal relief funds can’t be used to backfill tax collections that dried up when the economy shut down. 

Without help, local governments plan to ax spending, beginning with capital projects and school construction. While the state pays most of the costs of operating K-12 schools, counties still pick up roughly one-fourth of the tab.

“We’re going to be in a situation where local governments will take more than 10 years to recover from this,” Kevin Leonard, executive director of the N.C. Association of County Commissioners, told CJ. “If county governments reel from significant budget problems, the only places to cut after capital projects is personnel — and discretionary services that have to do with social services, mental health issues, substance abuse programs.”

Critical infrastructure is at risk. Counties that can’t cover their electric bills will trigger a ripple effect, as nearby power customers must make up the difference, said state Treasurer Dale Folwell. 

“When people have been locked down, they’re not mobile, they can’t consume, they can’t generate the gas tax, sales tax, property tax to keep their current level of services,” Folwell said. “This is a major deal. … This has the potential to create economic inequality that will take years to recover from.”

The pandemic-induced recession will worsen existing problems in rural counties. They’ve lost people and businesses. They’ve still not recovered from the Great Recession of 2008. 

“Tyrrell County couldn’t take a 2008 scenario again,” Clegg said. “You can only raise taxes so much. People just can’t pay them after a while. You look at Tyrrell County, and the numbers are bleak.”