N.C. county's board only once OK'd spending of reserves

By Connie Sage

EDENTON, N.C.

After searching through a decade of meeting reports, the clerk of the Chowan County Board of Commissioners said Sunday she has found only one instance where money was authorized to be taken out of the county's reserve accounts. Those accounts were initially valued at more than $20 million and now are nearly depleted.

The state's Local Government Commission told the county in a letter last week that its cash reserves are all but gone and that the county was in violation of state law because its revenue estimates for the new fiscal year were overstated by about $4 million.

Newly appointed County Manager Peter Rascoe called the situation a "fiscal crisis."

After learning on his first day on the job in June that the county had so little cash on hand that it would be unable to continue to pay its bills, Rascoe said he contacted the Local Government Commission.

The agency stepped in and analyzed the county's audits, budget performance over eight years and current cash flow.

"The issues of cash flow for Chowan County are serious and must be addressed by the Board," said a letter from the Local Government Commission, the state's fiscal watchdog.

The commission said the county must rework its budget and recommended that it raise taxes. The state could take over operation of the county government if the budget problems are not resolved.

Rascoe said Sunday that most of his time is spent "on more cuts to lessen the effect of a possible tax increase."

"If you go too deep, it will affect the actual services being provided to the citizens," he said. "The alternative, unfortunately, is the possibility of a tax increase to make up the difference. No one wants a tax increase, and no one wants a cut in services. We did go through and have departments propose 10 percent cuts to see how far we can get."

For at least five years, the county has been tapping cash reserves to balance its annual operating budgets. Board of Commission members said they were blindsided by the news and asked clerk Susanne Stallings to search through monthly and special minutes of the board since 1998 to see if the cash withdrawals had been approved.

Board Chairman Ralph Cole on Sunday called an executive or closed session for 6:30 p.m. Wednesday at commission offices to discuss personnel matters.

Former County Manager Cliff Copeland, who retired in May after 29 years, could not be reached for comment Sunday.

In an interview last week, he said that if the county had "gotten the kind of growth we hoped, we wouldn't be in this position."

"This is not the outcome I had hoped," he said. "I had tried to be frugal and responsible and tried not to overtax people."

Copeland said he knew the situation "had deteriorated in the last couple of months," when he said budget reserves were from $2 million to $2.6 million.

"I hadn't seen the projections since the end of May," he said. "The revenue just didn't come in as anticipated."

Finance Manager Lisa Jones concurred that the county did have at least $2 million in reserves in May but that nearly all of it was tapped for payroll and accounts payable.

The county manager is responsible for preparing the annual budget and setting the tax rate, Jones said. "I did what Cliff directed me to do."

Copeland "was well aware" of the fiscal problems, she said. "I think it was a serious issue and has been a serious issue; he always assured me everything was going to be all right."

Jones said she informed Rascoe of her concerns the day he took over as county manager because "we were having issues of cash flow" and said Copeland worked with them in an attempt to resolve the problem.

"Over the last five years, the County has expended more than it has received in revenues by large amounts, ranging from $1.3 million to $3.3 million per year," wrote Sharon Edmundson, director of the commission's Fiscal Management Section.

In June 2003, the county had about $19.5 million in total cash and investments, which included money remaining from the 1998 transfer of Chowan Hospital to University Health Systems.

In 2004- 07, "expenditures have exceeded revenues in the County's General Fund alone by approximately $11.6 million," said the commission.

"Another $6.95 million was loaned from the General Fund to other County funds, primarily capital project funds, the Emergency Management Fund and the Sanitation Fund."

By June 2007, the reserve fund had dropped to $3.4 million from $19.5 million four years earlier, and to $723,335 by last month.

In addition, about $4 million was overestimated for the 2008- 09 fiscal year in projected "property taxes, sales tax, land transfer tax, transfers from healthcare funds and investment earnings," the commission said.

"The County must make changes to its budget" to be compliant with the Local Budget and Fiscal Control Act, the letter said.

County commissioners said they did not know the reserve fund money had been tapped to balance operating budgets for years.

"To know that $20 million was spent and we didn't realize it was shocking," Vice Chairman Jimmy Alligood said Sunday. "I always thought the money was still there."

After five hours of research on Sunday, Stallings said minutes from the county's Nov. 2, 1998, meeting showed at least $29 million was in two health care funds from a lump-sum payment for the long-term lease of Chowan Hospital to University Health Systems.

In August of that year, commissioners had approved a resolution stipulating that proceeds from the hospital lease be deposited in a health care fund.

"Unless specifically authorized by a resolution of the County Board of Commissioners, the principal amount of monies initially deposited should never be expended," the resolution stated.

"In no event shall more than 75 percent of the interest monies generated from this fund be expended, thus allowing the Healthcare Reserve Fund to increase."

In August 1999, commissioners approved an unspecified amount of cash to be borrowed from the reserve funds to finance a new agricultural center, Stallings said.

From 1999 on, the county budgeted 75 percent of the reserve interests. Those amounts varied depending on interest rates at the time, she said.

For example, for the 2007- 08 budget, $1,284,556 in interest was tapped from the first fund and $230,346 from the second, according to Stallings.

Local residents reacted Sunday with anger to news of the near-empty coffers.

"I am mad as hell about the budget crisis; it's fiscally irresponsible," said Elaine Schneider, who owns an interior design store in Edenton.

Retired Episcopal priest Mike Hartwell said he is angry.

"It makes me think of Enron when the CEO said he had no knowledge. Copeland was the head of the ship. I can't believe somebody's been in this as long without knowing what's going on."

Vice Chairman Alligood conceded that "obviously I haven't done as good a job as I should have done; I took Cliff Copeland at his word. I had no reason not to. Now that it's done, I have to make decisions to keep as few people from getting hurt as I can.

Copeland "didn't do anything to feather his pocket," he said. "I think Cliff did in his heart what he thought was right."

Alligood said he "can't praise" Copeland but can't condemn him either. "Right now I want to kick his butt, but we need to study the issue. My main concern is getting the county back in financial shape."

Commissioner Bill Gardner, who with Cole also requested a special session of commissioners this week, said Sunday: "These questions deserve answers, and the sooner the better. People want to know who to blame, and they deserve answers. The more important issue now is how do we get out of this mess?"

"I accept whatever part I played," Gardner said. "I have searched and have yet to find in the minutes where we authorized these transfers from the reserves."

Harry Lee Winslow, who has been a county commissioner for 14 years, said Sunday he believes Copeland was "trying to look out for the county and not trying to raise taxes."

"I wish we had raised them a little bit as we went along rather than face what we're looking at now," he said.

The state mandates that local governments retain at least 8 percent of their budgets in reserve, or about $1.4 million for the current Chowan County budget, according to Rascoe.

If the county can balance its budget before a $1 million debt service payment is due Sept. 29, the Local Government Commission will consider its request to refinance the payment, Rascoe said.

Otherwise, the county will be in default.

The scheduled payment is part of an installment purchase agreement entered into by the county to build the D.F. Walker Elementary School.

In a worst-case scenario, if the county does not balance its budget, the Local Government Commission "could come in and take over day-to-day operations and require us to raise taxes," Rascoe said.