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Many local governments dig their own budget holes

JLF report compares government revenues to inflation, population growth

Contact: Dr. Michael Sanera
919-828-3876
msanera@johnlocke.org

March 04, 2009

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RALEIGH -- Nine of North Carolina's 30 largest cities increased government revenues by at least 20 percent more than inflation and population growth rates from 2002 to 2007. Thirty-three counties also compiled growth rates in excess of 20 percent, according to a new John Locke Foundation Policy Report.

Click here to view and here to listen to Dr. Michael Sanera discussing this Regional Brief.

"The current economic recession has left many North Carolina cities and counties strapped for money," said report co-author Joseph Coletti, JLF Fiscal Policy Analyst. "As economic activity declines, sales taxes, fees, and other revenue sources decline."

"Many city councils and county commissions are considering ways to increase taxes, a very bad idea during the recession," added co-author Dr. Michael Sanera, JLF Research Director and Local Government Analyst. "Others are asking the federal government to bail them out. Our report shows that many North Carolina cities and counties have only themselves to blame."

Before the recession, these local governments spent money faster than population growth and inflation would warrant, Sanera said. "Instead of cutting taxes, they started or expanded unnecessary or low-priority projects."

Among the 30 largest cities, Mooresville had the highest revenue growth from 2002 to 2007. After adjusting for inflation and population growth, Mooresville's revenues grew by 41 percent. A family of four would have had to take in an extra $2,435 to cover the additional government costs from 2002 to 2007.

Other cities with inflation- and population-adjusted growth rates of 20 percent or more were Burlington, Thomasville, Jacksonville, Asheville, Chapel Hill, Goldsboro, Raleigh, and Rocky Mount. Charlotte rounded out the state's top 10 with 18 percent revenue growth.

On the other end of the spectrum, Wilmington, Statesville, Hickory, Monroe, and Fayetteville all recorded growth rates smaller than the rate of inflation plus population growth. Fayetteville ranked No. 30 of the 30 largest cities, though Coletti and Sanera caution that Fayetteville's ranking is skewed by the annexation of 42,000 people in 2005.

City governments were not alone in raising revenue at rates substantially higher than inflation and population growth would dictate. A third of the state's counties -- representing all regions -- compiled revenue growth of 20 percent of more, adjusting for inflation. Union had the highest growth rate, 48 percent, while Watauga increased revenues by 43 percent from 2002 to 2007, adjusting for inflation and population growth. Clay, McDowell, and Onslow counties rounded out the top five.

In contrast, Davidson and Martin counties both compiled growth rates 2 percent smaller than the rate of inflation plus population growth. The state's two largest counties also ranked low on the list: Mecklenburg at No. 88 with 5 percent revenue growth, and Wake at No. 91 (4 percent).

Coletti and Sanera illustrate growth in local government spending by comparing revenue in the 2002 and 2007 budget years. For the state's 30 largest cities and for all 98 counties that had data available, the analysts adjusted the data for inflation rates and population growth. The result is a graph for each city and county with lines representing both real government growth and growth consistent with the limits of inflation and population increases.

"We label the second line the 'growth pays for itself' line because even in fast-growing counties, government, if maintained at this level, would be receiving revenues with the same purchasing power per capita in 2007 as in 2002," Coletti said. "We found that 96 of 98 counties and 24 of the 30 largest cities collected more revenue than would have been necessary to keep up with increases in inflation and population."

Looking at the growth of local government revenues adjusted for inflation and population informs citizens and allows them to hold government officials accountable for their taxing and spending decisions, Sanera said. "Some might ask, 'Why should county revenues grow faster than population and inflation?' What do citizens get for the extra money they pay?'"

The report could generate other questions, Sanera said. "Do those revenues pay for essential services such as public safety or for services for mostly upper-income residents, such as golf courses and equestrian centers?" he asked. "Are new schools being built in the most cost-effective manner, or do new buildings contain frills unrelated to providing quality education? Are tax increases necessary, or should counties and cities spend the money they have more efficiently and effectively?"

At a fundamental level, democracy means that citizens control their governments, Coletti said. "Control is impossible without access to information on what local governments are doing," he said. "This report provides some of that information. Cities and counties must do a better job at making their operations, budgets, contracts, and programs more transparent. Citizens should not have to be CPAs to understand their government's financial records."

Joseph Coletti and Michael Sanera's Policy Report, "City and County Budget Crises: When in a hole, first stop digging," is available at the JLF Web site. For more information, please contact Sanera at (919) 828-3876 or msanera@johnlocke.org. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or mkokai@johnlocke.org.

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