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Some Sandhills governments can blame themselves for budget woes

JLF report shows government growth outpacing inflation, population over five years

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

March 04, 2009

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RALEIGH -- Local governments across North Carolina tended to grow faster than inflation plus population growth would have predicted from 2002 to 2007. But Fayetteville's major 2005 annexation skews its ranking in a new John Locke Foundation Policy Report.

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

The annexation of more than 40,000 people at one time helps explain why revenue growth in Fayetteville was 19 percent slower than inflation plus population growth during that five-year period, according to the report. The revenue "growth" rate of minus-19 percent ranked Fayetteville No. 30 among the state's 30 largest cities.

In contrast, Sanford ranked No. 16 with a 10 percent revenue growth rate, adjusting for inflation and population. Sanford's rate matched the average of the 30 largest cities.

Among county governments in the Sandhills region, Hoke ranked No. 9 in the state for largest revenue growth rate from 2002 to 2007, adjusting for inflation and population growth. Hoke's revenues grew by 31 percent, and a family of four needed an extra $911 to cover those costs.

In contrast, Cumberland's 6 percent revenue growth rate ranked No. 85 out of 98 counties included in the report. A family of four needed an additional $548 in 2007 to cover growing costs of Cumberland County government since 2002.

The average county across North Carolina increased revenues by 13 percent beyond the rate of inflation and population growth from 2002 to 2007. For other Sandhills counties, Sampson ranked No. 13 (29 percent revenue growth beyond inflation plus population); Harnett, No. 23 (23 percent); Richmond, No. 41 (18 percent); Moore, No. 42 (17 percent); Bladen, No. 60 (13 percent); Robeson, No. 64 (13 percent); and Lee, No. 65 (12 percent). Scotland County was not ranked because of incomplete data.

"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."

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."

Nine of the 30 largest cities saw their revenues grow at least 20 percent beyond the "growth pays for itself" line. Mooresville, Burlington, Thomasville, Jacksonville, and Asheville ranked highest on the list. On the other hand, five cities compiled growth rates smaller than inflation plus population growth: Wilmington, Statesville, Hickory, Monroe, and Fayetteville. Coletti and Sanera cautioned that Fayetteville's revenue growth rate is affected substantially by its annexation of 42,000 people in September 2005.

Thirty-three counties also compiled revenue growth rates of at least 20 percent, after adjusting for inflation and population growth. Union, Watauga, Clay, McDowell, and Onslow topped the list. In contrast, Durham and Randolph counties had growth rates of just 1 percent beyond the inflation plus population threshold. Davidson and Martin had growth rates smaller than inflation plus 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 Regional Brief, "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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