Starting June 3rd, the Analysis Roundup will be normally posted on Monday mornings.
How are we doing? We want to know if this regular update provides value to you as budget practitioners and members of NCLGBA, as well as ways we can improve it.
State Senate Passes Budget
The State Senate introduced their 14-15 biennial budget proposal this past Sunday and passed it on consecutive reading votes Wednesday and Thursday. The bill now goes to the House.
The League of Municipalities prepared an analysis of key budget provisions, which you can view by clicking here. Additional analysis was prepared by the Association of County Commissioners, which you can click here to view.
What does it mean for local governments?
No Transitional Hold Harmless Included (via NCLM)
“The budget passed by the Senate this week does not include any extension of the transitional hold harmless payments for cities and counties. If these payments are to continue this year and beyond, it is imperative that they are extended in the budget the House passes and sends back to the Senate… If the transitional hold harmless payments are not included in the House budget, they will likely expire permanently.”
Potential Unfunded Mandates (via NCLM)
“The Senate budget contains two provisions that would place unfunded mandates on local governments. The first provision would require that if a State transfer of insurance tax revenue to the Worker’s Compensation Fund for Volunteer Safety Workers is not sufficient to meet the actuarial needs of the Fund, the remainder of the cost would be provided through an assessment of funds from those local governments served by volunteer fire departments and/or rescue squads. We have been told that the elimination of the transfer is planned, which would result in the full costs being placed on local governments. The second provision would take over $10 million per year from the Separate Insurance Benefit Trust, which pays for a modest death benefit and accident insurance for local and state law enforcement officers, and use the funds to pay State Health Plan premiums for State law enforcement officers. Local governments would receive none of the diverted funds, but could be required to replenish the Trust.”
Defunding Current Rural Economic Development Initiatives (via NCLM)
“The budget passed by the Senate this week would make significant changes to how the state supports economic development efforts. The bill would eliminate all State funding for the Center for Rural Economic Development ($16,619,194), Regional Economic Development Partnerships($2,151,517), and Councils of Governments ($328,105). It would transfer the economic development responsibilities of these groups to a new Rural Economic Development Division within the Departmentof Commerce and a new Rural Infrastructure Authority. Senate leaders said that the change is intended to remove an ineffective layer of bureaucracy from business recruitment and force Commerce Department officials to work outside of Raleigh.”
Transportation Funding Changes (via NCLM)
“In addition to the transportation reform provisions discussed in a separate article below, the Senate budget includes several additional transportation provisions affecting cities and towns. The budget would reduce public transportation operating support funding by two percent, following a cut of 9 percent over the last two years. It also would eliminate the Small Urban Construction program, which provides $7 million each year for urban projects on the State system. The allocation of State maintenance funding could change as the result of a provision that would require NCDOT to assess the level of congestion on primary highways and use the assessment as one of the criteria for developing its highway maintenance plan. The budget also would adjust MPO/RPO ethics reporting requirements so that only voting members would be covered. This provision mirrors that in SB 411 Ethics Requirements for MPOs/RPOs, which the League has been working on and which passed the Senate prior to crossover.”
Changes to Support for Water Infrastructure (via NCLM)
“Senate budget-writers proposed several policy changes of note in SB 402 Appropriations Act of 2013 that would affect the way the state awards water, wastewater, and stormwater infrastructure funds. First, the budget would consolidate the Clean Water Management Trust Fund and Natural Heritage Trust Fund into a new “Water and Land Conservation Fund.” Second, the proposal would move both the Drinking Water State Revolving Fund and Clean Water State Revolving Fund into a new “State Water Infrastructure Authority.” Both new funds would be overseen by separate nine-member authorities, who would have the ability to set the criteria for awarding grants and loans to local governments for these infrastructure projects. The oversight bodies would also make decisions on those awards. Other provisions in the environment section of the Senate budget proposal would make the same changes to the N.C. Environmental Management Commission that have beendebated in other bills this session, and would allow the state to direct taxpayer dollars to private recycling enterprises.”
Changes to Public School Capital Support from Lottery Proceeds (via NCACC)
“Of greatest concern to counties is the rewrite of the state’s lottery statutes to eliminate the guarantee of 40 percent of net lottery proceeds to county school construction. Removing the statutory intent to guarantee the 40 percent may result in future Legislatures using the county share of lottery proceeds for expenses other than school capital needs.”
House brings forward Tax Reform Plan
The Senate did not include any specifics on tax reform in the budget bill they passed this week, though they did forecast reducing tax revenue by approximately half a billion dollars as a result of some type of adopted reform. Last week, the House presented their proposal, which gained support from Governor McCrory.
Unlike the plan introduced a while back at a press conference by Senator Berger, which has not yet been drafted into legislation, the House plan has been submitted as a Committee Substitute to existing tax reform legislation (click here to view). It’s key components are as follows:
- Eliminate tiered personal income tax rates and establish a single rate of 5.9% (rates are currently tiered at 6% to 7.75%)
- Expand sales tax to include many services, leaving state rate at 4.5%
- Reduce corporate income tax rate from 6.9% to 6.75%
- Reduce state corporate franchise tax
- Does not eliminate local business license taxes
- Reduce Article 40 sales tax rate to 0.4%, and expand its base application
- Eliminate franchise tax on electric and natural gas sales, and replace it with application of the local sales tax, with all funds distributed within each County (point-of-sale) to their municipal governments on a per capita basis.
The changes to the income tax would take effect on January 1, 2014, while the change to the sales tax base and Article 40 rate would take effect on October 1, 2013. The changes to taxation and distribution of tax on electric and natural gas sales would not take effect until July 1, 2014.
According to today’s “LINC IN” email, the League will work on analysis to determine the impact of these changes on individual municipalities. No hold harmless provisions are included in the House plan, as well.
Sequestration Hits Asset Forfeitures
The US Department of Justice Criminal Division distributed guidance to local law enforcement earlier this week (click here to view) that included the following announcement:
Having considered all available alternatives while working to ensure the continued financial health of Assets Forfeiture Fund (AFF), the Department determined that effective May 24, 2013, and continuing for the remainder of the federal government’s fiscal year (September 30, 2013), equitable sharing paid through the DOJ AFF will be reduced by 10 percent of the awarded amount. Computation of equitable shares will remain the same and determinations will be made under our pre-existing policies and guidelines.
Summer Gas Price Projections (h/t Karl Knapp)
From Calculated Risk and the EIA Short-Term Outlook…
Falling crude oil prices contributed to a decline in the U.S. regular gasoline retail price from a year-to-date high of $3.78 per gallon on February 25 to $3.52 per gallon on April 29. EIA expects the regular gasoline price will average $3.53 per gallon over the summer (April through September), down $0.10 per gallon from last month’s STEO. The annual average regular gasoline retail price is projected to decline from $3.63 per gallon in 2012 to $3.50 per gallon in 2013 and to $3.39 per gallon in 2014.
Last summer, gasoline prices averaged $3.76 per gallon during the April through September period – so this is a little good news for drivers.
The latest 12-month graph from Gas Buddy suggests prices are improving significantly for North Carolina going into the busy summer driving season. However, they do remain about 6% higher than our neighbors in South Carolina.
Economic Notes (via Wells Fargo & BLS)
- Federal Reserve does not appear to be pulling back on quantitative easing, at least until fall
- Existing home sales moved close to annual pace of 5 million in April
- Durable good orders improved in April, suggesting that manufacturing slowdown may be short-lived
- Overall inflation as measured by CPI is relatively low (1.1% annual rate), though that appears to be driven by significant reductions in energy prices; regional performance in the Southeast and Mid-Atlantic are consistent with the national average
- North Carolina was one of 40 states to see a reduction in the unemployment rate for April, from 9.2% to 8.9% (seasonally adjusted). Overall employment was up 73,300 from last April, while the unadjusted unemployed count managed to drop 20,000 for the month (to 398,000) with 3,000 of those actually dropping out of the labor force.
Click here for their May Outlook Video, including discussion of anticipated slowdown of growth during the second quarter of the year.
Enterprise Utility Bill Changed to Study, Passes House
Last month, NC League of Municipalities reported on H708, which would have dramatically limited the use of funds generated by local government enterprise utilities. The League indicated that the Bill would likely be redrafted to establish a Legislative Study Committee to research this ongoing issue and report back to the General Assembly next year.
A few weeks ago, the House Finance Committee approved this substitute, and the House passed the bill on to the State Senate prior to the “crossover” deadline. The language of the legislation does serve as a rebuke of long-established practices by North Carolina local governments and makes clear the interests and intent of the General Assembly.
SECTION 1.(a) The General Assembly finds that the ability of a city or county to efficiently and effectively provide public enterprise services is imperiled by the use by that local government of those revenues for purposes other than:
(1) Paying the costs of operating the public enterprise.
(2) Making debt service payments.
(3) Investing in improvements to the infrastructure of that public enterprise.
(4) Reimbursing the unit of local government for actual direct services provided to the public enterprise.
SECTION 1.(b) The General Assembly further finds that any excess net revenues should be used to lower rates, advance fund debt service, and fund infrastructure improvements of that public enterprise.
Obviously, this means that the matter, which directly impacts finances and budgeting for many North Carolina municipalities and counties, will be further scrutinized and reconsidered again next year. Last year, the General Assembly did pass limits on Electric Utility enterprise transfers, consistent with guidelines long recommended by the Local Government Commission.
First Quarter GDP Okay, Other Indicators Mixed
- Overall US Gross Domestic Product grew 2.5% (annual rate) during the first quarter of 2013, according to the Bureau of Economic Analysis’ first report.
- Actual Real Final Domestic Sales (End-Use Consumer Activity) grew 1.9% (annual rate) during the first quarter.
- Personal consumption grew 3.2% (annual rate)