Chowan County in 'fiscal crisis' that violates N.C. law

By Connie Sage, correspondent

EDENTON, N.C.

With its cash reserves nearly depleted and revenue estimates for the new fiscal year overstated by about $4 million, Chowan County is operating in violation of state law, according to a report by the state's Local Government Commission.

Newly appointed County Manager Peter Rascoe said Chowan is in a "fiscal crisis."

The state 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.

"The issues of cash flow for Chowan County are serious and must be addressed by the board," according to a letter sent by the commission on Thursday to the Chowan County Board of Commissioners.

Rascoe said he was alerted June 17, his first day on the job, that the county had so little cash that it would be unable to continue to pay its bills.

"Upon that discovery, I notified our chairman and each of our commissioners and reported it to the Local Government Commission," he said.

Rascoe said the county was able to shift some escrow loan interest that would have been credited to the county in the future in order to pay its bills for June.

"Hopefully we'll make it through July," he said.

This year's operating budget was reduced by about $2 million, with no tax increase, from $19.3 million to $17.2 million. It was approved June 16, the day before Rascoe took over as the county's chief executive from 30-year veteran Cliff Copeland, who retired. It went into effect July 1.

Copeland 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 anywhere 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 for setting the tax rate, Jones said. "I did what Cliff directed me to do," she said.

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 told Rascoe of her concerns the day he took over because "we were having issues of cash flow" and that Copeland tried to resolve the problem.

"We're taking it day by day and trying to make provisions so projected revenues are realistic," Jones said.

A new draft budget will be presented to commissioners at their Aug. 4 meeting. It could include recommendations for a tax increase for Edenton and Chowan County residents, a cut in county personnel, elimination or reduction in county services and programs, or a combination of the three.

The Local Government Commission, which monitors fiscal and accounting practices of North Carolina's local governments, analyzed the county's finances and in its letter summarized the county's cash position and budgetary status, its projected cash needs and actions that it recommended the county take.

"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.

From 2004 to 2007, "expenditures have exceeded revenues in the county's general fund alone by approximately $11.6 million," according to the state 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; by last month, to $723,335.

In addition, about $4 million was overestimated for the 2008-09 fiscal year in projected "property taxes, sales tax, land transfer tax, transfers from health care 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, according to the letter.

The commission suggested that the county raise taxes, which it said is permitted by state law before Jan. 1 following the adoption of a budget if revenues are "substantially more or less" than expected.

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

Copeland said that when he retired, "I suspect we were below it."

"We've been below 8 percent many times, he said, but "not in recent history. You just address it and deal with it."

As for the current budget, Copeland said he takes "full responsibility."

"I presented what I thought was a balanced budget.... It's a cash-flow problem," he said.

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 to build D.F. Walker Elementary School.

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.

In a memo to county commissioners last month, Copeland said he understood "the concerns about the county's reserve funds."

He wrote that in 1998, the decision was made to invest the reserve money "not only in outside investments but internal investments."

"The county financed the Ag building and portions of the northern Chowan Community Center and the Adult Day Care. We also made a decision to finance the EMS system, water fund and solid waste fund until these funds could be placed on a self-sustaining basis.

"Additionally, the county financed the $9.5 million Walker School. And while no internal monies were utilized, the county was obligated for an annual $1 million debt. When the bond market tanked in '05, '06 and '07, our investment gains plummeted, but county finances remained well within accepted parameters."

Three elected county commissioners said they were blindsided by the budget fiasco.

"We can find no evidence to document" that Copeland told commissioners the reserves were being used, said Chairman Ralph Cole, who has been in office for six years.

"People will get the impression we are poor managers; we're not. We've never experienced anything like this," he said. "The accountability process right now doesn't look good."

He and other commissioners insisted there has been no malfeasance on Copeland's part, only a "lack of communication."

Commissioner Kenny Goodwin said he trusted the former manager. "I'm not going to say I was lied to, but I didn't get the whole truth," he said.

Bill Gardner said in his four years as a commissioner he has never seen an audit presentation and was surprised by the budget shortfall.

"It hurts," he said. "How can I vote to raise taxes just to keep our people employed at a time when so many people in the private sector are experiencing layoffs?"

Gardner said this will be a "test of the people of Chowan County, and I hope we will get through this."