North Carolina local governments rarely have cash flow problems. Fund balances, on-going sales tax receipts and the predictability of property tax collections in January allow localities to manage their cash with predictability and a healthy safety margin. We all hope that will continue in the 2020-21 fiscal year, but at the same time we’re facing more uncertainty than we have in a long time.
What’s going to happen to sales tax receipts? The payments early in the fiscal year will reflect the extreme downturn in local economic activity that we’re in the middle of, and so those receipts will likely be lower than might have been expected just a month ago. Occupancy tax receipts and even utility revenues will also be affected. The League of Municipalities has a detailed analysis of the revenue outlook for cities and towns.
How will job loss affect the ability of people to pay their property taxes on time? Will the slowdown in real estate transactions have a meaningful effect on property taxes received before January? And if small business can’t pay rent, what does that mean for property tax collections from landlords?
To help with cash-flow issues, North Carolina law allows counties, cities and towns to take out loans against future tax collections. The League of Municipalities has asked the General Assembly to consider funding $50 million of these loans on a zero-interest basis.
Here are some of the highlights of how these loans work:
* You can borrow up to 50% of the taxes you anticipate collecting in the rest of the fiscal year. The finance officer, by statute, is the person who makes that calculation. 50% is a ceiling, not a floor, and it’s calculated based on “taxes.” There are similar statutes for borrowing in anticipation of revenues other than taxes.
* The loan must mature by the following July 30. That is, within 30 days after the end of the fiscal year. Your maturity can be earlier but not later.
* You need LGC approval. By law the LGC must be able to find that the loan is “necessary and expedient” for the locality, and generally this type of borrowing in the past has not been “necessary.” But we’re in a different time, and if local governments conclude that cash-flow borrowing is necessary, then that’s likely to be apparent to the LGC staff as well.
* The loan is a general obligation of the locality, but no vote of the people is required. We only need resolutions of the governing board; the law doesn’t even require a public hearing (although you may determine that’s a good idea anyway).
* You can sell your “tax anticipation notes” at a private sale. That means you can take bids from banks or even work with a single bank if you prefer. You can have as much or as little competition in the process as you choose.
* Under the federal tax law, your loan is limited to the amount you’ll need to smooth over your expected cash flow deficit. In practice this is not a particularly restrictive amount, and we can talk about the specifics if the time comes. This is not a State law so you can go over that amount if you need to but you’ll pay a higher interest rate.
We certainly hope that few local governments find it necessary to borrow against tax collections, whether through a State-sponsored facility or from conventional lenders. But this is a strange time and we should be ready for anything.