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State officials warn that local governments in shrinking towns may not survive

Towns with shrinking populations and tax bases often don't hire competent finance officers

State Auditor Beth Wood, speaking at the John Locke Foundation in 2017.
State Auditor Beth Wood, speaking at the John Locke Foundation in 2017.

State Revenue Secretary Ronald Penny warns that some small municipalities in rural counties shedding residents and tax base might not survive. State Auditor Beth Wood says state officials should crack down on towns and counties with slipshod finances.

Both are members of the N.C. Local Government Commission. It is responsible for approving local bonds and debt, and ensuring proper financial accounting standards are in place. In extreme circumstances, the commission can assume control of struggling municipalities.

Penny and Wood raised concerns at a July 10 meeting after hearing another monthly round of public project financing requests. Six of the 26 approvals involved towns and counties that overspent budgets, lacked appropriate fiscal controls, or failed to reconcile books and record transactions.

“The statute is on the books that cities and counties and school boards will not spend [money] they have not budgeted for. That’s a law,” Wood told Carolina Journal after the meeting. Yet some violate the law, and their accountants writes them up.

Wood has been a commission member for 10 years. She said towns often seek funding without correct documentation even after the commission has formally warned them of poor bookkeeping practices.

A town may overspend without running debt. Revenues might exceed projections. But if that doesn’t happen, a municipality would need to raid its state-mandated reserve funds, shelve authorized expenditures, or raise tax and service fees.

“It’s time for these repetitive issues to stop. What’s the use of having a law if you’re not going to hold anybody accountable for breaking the law, and people have blown you off for so many years?” Wood said.

“You [must] hold commissioners and council members accountable for allowing a finance officer, or you [must] hold the finance officer accountable, for constantly writing checks, paying bills that have not been budgeted for, and then the budget’s not adjusted before year’s end,” Wood said.

Enforcing existing law is not enough, she said, and the commission’s small staff can’t continue fixing problems among 1,300 units of local government which annually submit audit reports.

She wants the commission to push for a new law prohibiting a municipality from going more than three months without a finance officer or other entity reconciling its books. And it should seek legislation letting a certified public accounting firm serve as a municipality’s accountant. The U.S. Government Accountability Office is preparing revisions to the Generally Accepted Government Auditing Standards authorizing CPA firms to conduct audits, Wood said.

Sloppy bookkeeping is more likely in rural areas, but not exclusive to them. Their budgets are smaller and tighter. There are fewer — if any — qualified individuals or firms in depopulating counties that understand government reporting rules and statutes, Wood said.

“We have actually been working on all of those things,” said Greg Gaskins, commission secretary. In one part of the state a circuit-riding finance director works for several governments. Councils of government have been contacted to work on solutions. The commission developed a government finance training pilot course with the N.C. Community College System.

But Gaskins agreed struggling municipalities need help. “When the next [economic] downturn comes, some of these people will not be able to survive.”

Penny said bright and talented young people move away from rural areas and don’t come back. Some counties and municipalities might not have enough money to hire a new finance director when an opening occurs because they’re paying wage and benefit obligations for the previous person.

He said Wood’s push for tough love on lawbreaking municipalities might not be enough.

“Some of them are just too small to be financially feasible,” Penny said. As residents leave, so do businesses vital to the tax base. “And so once we go down that road, recognize there’s probably going to have to be some — more than tough love, I’d say — harsh love.”

The commission recently threatened the Cherokee County town of Andrews, population 1,700, with state takeover because of its financial woes. The commission sent an intervention assistance team which provided guidelines to move the town toward solvency and independence.

“[Some] citizens actually cheered to adopt a budget that increased both their water and sewer rate by a substantial amount — from $16 to $28 — and their [property] tax rate by not by the 8 cents we recommended, but by 10 cents,” Gaskins said.

Last November, residents replaced the mayor and all four aldermen.

“When we came in we ran into a lot of problems where there was some excessive spending,” said Mayor James Reid. “The town had kind of been kicking the can down the road and not doing what we truly needed to do.”

The Water and Sewer Department had run $500,000 deficits over two years, Reid said. The Police Department was among the highest paid in the region, and compiled significant overtime. About $220,000 in questionable remodeling was done at Town Hall.

NFocus, a Kannapolis consulting firm, billed the town about $400,000 over two and a half years. NFocus provided a town administrator, drafted budgets, and rented a house from a former alderman, Reid said. It created a 400-page book of regulations that discouraged economic development.

“If we would have kept on at the current rate that we were going in December, I think we could have easily been out of money by March or April of this year,” Reid said.

NFocus is suing the town, claiming unpaid expenses. Reid said the firm knew the town could not afford its services this year, but budgeted for them anyhow.