If you’ve ever served as a local elected official, you’re probably familiar with the “pillow effect.” It might be called something different. You may even have your own name for it, but essentially, in the city-county manager form of government it has long been used as a tool to protect or enhance the position of your local manager.
So what is it? Essentially it works like this: The county tax manager prepares a forecast as to what the coming year will bring with respect to revenues. The tax manager prepares the report for the county manager. If they’re smart, the pillow effect has already begun. Thus the tax manager essentially underestimates revenue slightly so that actual revenues will run above his projections and make everybody happy.
The city-county manager then looks at the forecast from the finance director and tax manager so they can grasp what’s going on, not only with property taxes, but also with sales taxes and other fees or grants. In this budget picture there is again an incentive to build in a pillow as well.
So, by the time local elected boards begin their budget debates (ultimately it’s all about the tax rate) both the manager and the tax man have built in some degree of assurance that actual revenues will be better than predicted. This system seems to keep everybody happy and protect the longevity of the manager.
But there’s another pillow effect that often occurs at the county level that has to do with education. The K-12 system also builds into the budget picture some cushion based on the mixture of federal, state, and local funding. Most have a permanent cushion called a “fund balance” that they are typically trying to build up as a result of unspent money from the previous year.
Briefly, the fund balance is that wonderful area of the county budget whence revenues that have been deposited flow back to pay for county government. The state sets a guideline for counties to have 8.5 percent of their overall annual budget in their undesignated fund balance. This was primarily done when property taxes were collected once a year. It ensures that when a rough time hit, a county would have enough to cover debt and expenses to stay solvent.
Many counties keep more than the minimum required, and in the coming years, because of changes in tax collections, the 8.5 percent minimum may be lowered. When counties go below that amount they receive a curt letter from the Local Government Commission telling them to get their financial house in order because they may be jeopardizing their bond ratings.
Schools aren’t required to keep a fund balance, but do so anyway despite the fact that they have no bond-selling capacity or debt. When looking to save money, ask your local school board members how much they have in their fund balance. The public deserves to know.
When counties enjoy good financial times you might think that the pillow effect is somewhat unethical and ultimately leads to wasteful spending and an arbitrarily high tax rate. While there may be a hint of truth to that, I would also caution you that in the past four years when counties and cities have had some of their worst budgetary pictures, the pillow was lean beyond comfort. In some instances, had the pillow not been there, the budget would actually have forced the fund balances to drop far below 8.5 percent and caused substantial property tax increases.
So, as our economy continues to transition and improve in North Carolina, it might be worthwhile to take into account the truth about your local pillow effect and ask about the local school board’s fund balance. It might make some folks uncomfortable, but it is important to recall that it isn’t their money.
Chad Adams is the director of the Center for Local Innovation.