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Advocacy Angle: Municipal financial culture a strong selling point 

by Scott Mooneyham, League Advocacy Communications Strategist

In the lead up to Town Hall Day back in March, I set up a sit-down between the League’s officers and a handful of the journalists who regularly cover the North Carolina General Assembly. Not long into the interview, which included plenty of talk about the state repeal of local business privilege license taxes, a reporter brought up municipal reserves. His implication, likely one being repeated around the Legislative Building, was that cities and towns could take the revenue hit of the
Privilege License Tax repeal because of their strong fund reserves. The League’s
1st Vice President, Elkin Mayor Lestine Hutchens, quickly responded by pointing out that municipalities must carry strong reserves if they wish to borrow money for capital construction projects.

Mayor Hutchens’ comments prompted some reflection about something that we may not talk enough about and something that legislators need to hear more about: the Local Government Commission and how a system of strong local
government financial oversight has benefitted North Carolina. It is the
Local Government Commission that strongly recommends municipalities
carry reserves of at least 8 percent of their annual budget. Those recommendations carry a lot of weight. The Commission approves local government sales of bonds and other borrowing. It also is given statutory authority to assume control over local
government budgets if a municipality or county is at risk of failing to meet its
debt obligations.

Created in 1931 because of the fallout from the Great Depression and the municipal bond defaults that accompanied it, the Local Government Commission is fairly
unique among the 50 states. Besides the aforementioned controls, the commission, which is staffed by the State Treasurer’s office, also reviews audited financial statements from local governments. The decades-long result has been what Standard & Poors rating agency, in 2012, called “a culture of good financial management” among North Carolina municipalities. While municipalities in other states experienced credit downgrades and even bankruptcy in the wake of the Great Recession, North Carolina local governments maintained some of the highest credit ratings of local governments in any state in the nation, meaning that capital borrowing for local taxpayers continued to be
cheaper.

What made municipalities’ financial position more remarkable was that North Carolina, at a low point of the recession, had one of the highest unemployment rates in the country. Other states with similar high unemployment rates – California, Nevada and Rhode Island – all saw municipal bankruptcies or, in the case of North Las Vegas, Nev., what would have been a bankruptcy filing had state
law allowed it. In other states, state governments bailed out municipalities to keep them from facing a similar fate. And while the fallout from those municipal bankruptcies and bailouts continues to affect residents and government pensioners, North Carolina’s Local Governmental Employees’ Retirement System is the envy of the country, with its funding ratio right at 100 percent.

What all of this points to is that North Carolina municipalities are among the most financially sound governmental entities to be found anywhere in the country, at any level of government. The structure that the General Assembly put in place in 1931 has certainly played a big part, but so too has that culture of good financial management. So the next time someone asks about municipal reserves or suggests steps undermining the relative financial position of municipalities, perhaps they ought to be reminded of the alternative. Would you prefer we be Detroit?