A spring full of tough budget decisions across counties, cities and towns may have illustrated common challenges faced by all: The end of temporary federal pandemic stimulus dollars, rising health care costs for employees and uncertainty around what state funding would be absent a new state budget.
But not all of those challenges will pose an issue to local governments long-term, so long as the communities are growing and inflation cools, said Scott Adams, a research economist at the Kenan Institute of Private Enterprise at the University of North Carolina-Chapel Hill. Some uncertainty around property taxes could complicate matters, he noted. A new state budget, approved by lawmakers Thursday but not signed into law, can help with clarity for this year.
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Growth can cause immediate infrastructure needs, but it can also lead to increased revenue longer-term, Adams said. Revenues just didn't rise as much this year, he said.
"It's been really hard for many local governments, particularly in faster-growing areas of the country, to having costs that are outweighing their revenues," Adams said. Bigger communities have an easier time absorbing cost increases and handling uncertainty, Adams said, so the budgeting season has been even tougher for smaller communities that are growing fast.
"In the long run, what will solve these problems are revenue increases in the growing communities," Adams said.
Communities that aren't growing will struggle.
Shrinking public school systems, for example, nearly all made cuts this spring, some closing entire schools.
U.S. Census Bureau estimates show 96 of the state's 549 towns and cities shrunk from 2020 to 2025. For counties, 12 out of 100 shrunk. The vast majority of communities are growing but at different rates.
'Difficult' decisions
Across the Triangle and beyond this spring, local government leaders echoed one another in describing their spring budgeting seasons as "difficult" and, often, the most difficult any of them had ever experienced.
While some local governments experienced budget shortfalls amid accusations of impropriety and fiscal mismanagement, many local governments that struggled this spring did not.
In Wake, in June, Board of Commissioners Chairman Don Mial described the budgeting process as "challenging," in particular because of a growing number of property tax appeals and a growing number of property tax exemptions for apartments that charge rent at lower rates, the so-called "Blue Ridge Loophole," totaling a drop in expected property tax revenue of $35 million.
In Durham, City Manager Bo Ferguon said, "This was a challenging year, and it required difficult choices."
Similar sentiments were heard in Durham County and Orange County.
In Raleigh, City Manager Marchell Adams-David noted in June "fiscal pressures" as the city attempted to maintain its services.
"The proposed budget... reflects difficult decisions, grounded in fiscal stewardship, that position Raleigh to sustain the high standards of service our community deserves," Adams-David said.
In Benson, the town manager resigned after contending town leadership was too resistant toward addressing their money problems. Mayor Max Raynor acknowledged this spring that town had no reserves left but was able to pay its bills.
Cuts to one or more of services, employees, programs and classes were nearly universal across area school systems, which are funded mostly by the state, but also significantly by counties. There, the student populations are mostly shrinking, leaving them vulnerable to cuts. While many counties, cities and towns in the Triangle are growing, which will help them financially, the public school systems aren't. Still, maintaining public school services could require more county funding.
Making it easier to predict future revenue
For now, improved revenue forecasting and a new state budget should help local governments going forward, Adams said. Governments are working on forecasting, and the Kenan Institute has developed tools its sharing with them.
If Gov. Josh Stein signs the budget bill passed this week into law, Adams said, local governments should have more certainty around their state revenues now to help them budget, something they didn't have this spring or last spring.
Local governments have already passed some form of a budget this spring, with the fiscal year beginning July 1, though many of them will revisit those budgets in light of a new state budget and in the event of any federal changes.
Local governments can be affected quite a bit by state and federal changes, especially cuts, because they receive money from both, and because they are less flexible than higher levels of government, which can and do pass down costs, Adams said.
County governments, in particular, are affected by those changes because counties are more robust in North Carolina than in other states, Adams said. Counties here serve as providers of federal programs like Medicaid and the Supplementary Nutrition Assistance Program, as well as other programs like child protective services --- programs that are operated at the state level in most other places. One exception to that is K-12 education, which the state of North Carolina provides more toward than other states do. Here, the state is charged with funding education, while counties are charged with funding education infrastructure.
K-12 education is also one area in which a new state budget could complicate things, despite a general increase in funding.
The new state budget provides hundreds of millions of new dollars toward pay raises, in particular an average 8% increase in teacher pay.
Counties across North Carolina use local dollars to add teachers to schools that they feel they need after running out of state dollars. That means that any increase to teacher pay at the state level, which is only for state-funded teaching positions, must be matched locally to ensure all teachers are paid on the same scale.
In counties like Wake, which locally funds thousands of school employees, an increase in state salaries could trigger millions of dollars in new needs this school year that haven't been budgeted for.
In many places, local governments pulled back some services in an effort to cut costs, though their budgets didn't decline; the increased revenues simply weren't enough to cover the increased costs associated with everyday operations.
That's partly driven by inflation and rising benefit needs, Adams said. Local governments have different factors contributing to cost increases, but Adams said the one they all have in common is the rising cost of employee health care, which is gradually taking up a larger and larger share of local government spending.
That's at the same time that, generally, local governments also added or grew services or chose to pay employees significantly more, sometimes to address inflation and sometimes to address worsening recruitment and retention problems among lower-paid employees. Sometimes the cost of new services were fronted by the temporary stimulus dollars that have since run out.
"We got used to a higher standard of services, and employees got used to the fact that, 'You know, I should be paid more,' and ultimately that kind of filtered into a variety of cost pressures that [built] up," Adams said.
Changes to revenues could be coming
One complicating factor for local governments is the potential for changes to state and local revenues from income and property taxes.
This spring, state lawmakers approved putting two constitutional amendments on the November ballot for voters to decide whether to approve.
One would limit the state's ability to ever have an income tax above 3.49% Lawmakers recently approved dropping the income tax rate from 3.99% to that level in the new state budget, though Gov. Josh Stein hasn't signed the budget into law.
Income taxes in North Carolina are a greater revenue source for the state than for counties, and they don't provide funding for cities or towns.
The other potential constitutional amendment is one that would place a cap on local governments' abilities to increase property tax rates beyond a revenue-neutral level after a property revaluation. That cap is not defined, and lawmakers don't plan to define what that cap would be until after voters approve it, if they plan to.
The property tax limits have worried local government leaders, many of whom have passed resolutions opposing the Republican-led initiative, even in Republican-led communities. Union County commissioners, who are all Republican, passed a resolution in April opposing the property tax proposal.