Debt payments may trigger 2013-14 county tax increase

Feb. 01, 2013 @ 06:29 PM

With bills coming due for its new courthouse and human-services building, the county is opening its fiscal 2013-14 budget process with roughly a $16 million difference between projected revenue and spending.

County Manager Mike Ruffin on Friday told County Commissioners that “over 90 percent of that” $16 million is related to the need to increase debt payments.

He and other administrators also noted that the county opted to launch construction of its new buildings with short-term financing, which avoided for a time the need to make large debt payments.

It now has to shift to long-term loans, which will carry a higher interest rate.

But that also means “we’ve got a fiscal cliff the other way, one to climb rather than to go over,” Ruffin said, alluding to recent squabbles at the federal level about spending cuts.

A budget gap is normal at this stage of local-government budget work, as decisions on property tax rates and spending levels are still about 5½ months away.

Initial projections of city and county budgets almost always show a deficit, in good times and bad, because of large uncertainties on the revenue side, particularly about the sales-tax money the state shares with local governments.

The state distributes those funds to local governments on a quarterly basis, and also has to account for sales-tax refunds due nonprofits like Duke University. Because that work takes time, there’s always a shortage of data early in the budget process about how receipts are doing.

A year ago, Ruffin and his staff told commissioners they were starting the budget process with about a $9.9 million revenue/spending gap.

But by June, the commissioners were able to pass a fiscal 2012-13 budget that included a slight reduction in the county’s property tax rate. The year before, an opening-stage $5.8 million gap translated into a budget that held the tax rate steady.

The commissioners last raised property taxes in fiscal 2010-11, opting then for a 5.3-percent rate increase largely to insulate the Durham Public Schools from budget cuts the state otherwise would have imposed on it.

“Our board took the position that we’re only going to raise taxes when we absolutely have to,” instead of raising taxes immediately after a bond referendum like some counties do, Ruffin said.

Ruffin hinted strongly that he intends to ask for a tax increase when it comes time in May for him to propose a fiscal 2013-14 budget.

He noted that voters approved bond issues in 2001, 2003 and 2007 that between them implied the need to add 16 cents to the countywide tax rate to offset debt payments. The commissioners to date have imposed only a small fraction of that.

“We have a challenging year ahead of us because the debt wall is here,” Ruffin said.

The strategy of using short-term financing during the construction process of the courthouse was the brainchild of county Finance Director George Quick, who in 2010 said it would save money for sure at the front end and perhaps in the long run, too.

Quick preferred launching the project with a three-year loan because the county would need only to pay about 1 percent interest on it. But his plan always assumed that officials would roll the courthouse’s costs into a 20-year loan once workers completed the building. And longer term loans by definition require higher interest.

The good news, N.C. State University economist Michael Walden told county officials Friday, is that rates for both short- and long-term financing remain low thanks to Federal Reserve policy meant to stimulate the economy.

The time to borrow is “now,” rather than a few years down the line thanks to future inflation risks, Walden said in answer to a question from commissioners Chairman Fred Foster.