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2016-03-23 Special Meeting NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 33 SPECIAL MEETING, MARCH 23, 2016 PAGE 487 ASSEMBLY The New Hanover County Board of Commissioners held a Special Meeting on Wednesday, March 23, 2016, at 1:03 p.m. at the New Hanover County Executive Development Center, Oleander Room, 1241 Military Cutoff Road, Wilmington, NC. Members present: Chairman Beth Dawson; Vice-Chairman Jonathan Barfield, Jr.; Commissioner Skip Watkins; Commissioner Woody White; and Commissioner Rob Zapple. Staff members present: County Manager Chris Coudriet; County Attorney Wanda M. Copley; and Deputy Clerk to the Board Kymberleigh G. Crowell. Chairman Dawson called the meeting to order, announced that the purpose of the meeting is to determine strategies and priorities for the County in preparation of the FY 16-17 Budget, and requested County Manager Chris Coudriet to begin the presentation. County Manager Coudriet discussed briefly the six items on the meeting agenda. Most of the presentation will be led by Chief Financial Officer Lisa Wurtzbacher and Chief Strategy and Budget Officer Beth Schrader with Human Resources Analyst Bo Dean facilitating a conversation to help the Board identify the strategic and operational priorities for next year. Debt Schedule for FY 16-17 and Debt Capacity, per County Policy Chief Financial Officer Lisa Wurtzbacher presented an overview of the outstanding debt as of June 30, 2015: Outstanding Principal General Fund $ 92,761,454 Debt Service Fund 131,170,000 Public Schools Fund 140,931,197 Fire Service Fund : 3,281,779 Total Governmental Activities 368,144,430 Total Business-Type Activities 1,235,410 Total Outstanding Debt $ 369,379,840 The County issues debt and 70% of the majority of the outstanding debt relates to education. The next large piece of outstanding debt relates to General Government Activities which is issued to fund things such as building the jail, the parking deck, 320 Chestnut renovations, and the Cobb Annex. The remaining debt relates to general obligation bonds for parks and recreation projects; outstanding debt for water and sewer projects; fire services construction and capital assets; and Environmental Management capital assets. The purpose of the outstanding debt covers the following items at the end of FY15:  Public Schools - $140.9M or 38.2%  Cape Fear Community College - $119.6M or 32.4%  General Government - $59.8M or 16.2%  Parks and Recreation - $26.6M or 7.2%  Water and Sewer - $18.0M or 4.9%  Fire Services - $3.3M or 0.9%  Environmental Management - $1.2M or 0.3% Over the next five years several items are planned in terms of debt issuance with the largest being issuing the remaining amount of general obligation bonds for the schools. $52 million was issued in August 2015, $37 million will be issued in FY18 with the remaining $71 million partially in FY19 and FY20. Limited obligation bonds will be issued in FY18 for the Hwy. 421 water/sewer project and split between the General Fund and Fire Services Fund. The amount would change based on available funding opportunities. Debt on a smaller scale includes rebuilding the Ogden fire station and replacing the Myrtle Grove library. It is expected in the future that the schools will ask for another voter authorized general obligation bonds. There are also other items that arise, whether it be capital projects or capital asset needs, throughout the year. In response to questions about the jail expansion, Officer Wurtzbacher stated that the project has been pushed out to the 5 year time horizon due to being able to reduce the jail population and some other efforts. A review of the debt policy limits, in regard to the County’s goals and the projections for fiscal years 2016- 2020, was provided and Officer Wurtzbacher explained that the County does not want to go beyond the goals. While there is a large legal debt margin, the County would never borrow up to that amount. There is an internal policy limit that we try to stay within and there are three metrics that are looked at: debt per capita, debt/assessed value and then have General Fund debt service/operational: Projected NHC Goal20162017201820192020 Governmental Debt 438,957,946 415,658,436 420,471,613 430,304,750 409,719,186 Governmental Debt per Capita ($) 2,200 1,989 1,865 1,868 1,892 1,784 Governmental Debt/Assessed Value (%)1.60%1.47%1.38%1.39%1.42%1.34% General Fund Debt Service/Operational Expense (%)20.00%16.10%17.60%17.50%17.30%18.30% NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 33 SPECIAL MEETING, MARCH 23, 2016 PAGE 488 Another analysis of the debt capacity limits is a projection of how much capacity is left in a given year by taking the existing planned debt and mixing it with the outstanding debt. The projected available capacity per debt policy (show in millions) over the next five years – estimated capacity at a certain time given the assumptions available is: 20162017201820192020 Per Capita Capacity$46.6M$74.7M$74.8M$69.9M$95.5M Assessed Value Capacity$39.4M$65M$62.6M$55.2M$78.2M Debt Service Capacity$11.4M$7.1M$7.3M$7.9M$5.1M Officer Wurtzbacher reported that the anticipated school bond does contribute to the estimated increase in capacity for FY20. There is no per capita capacity in FY17 and FY18. The projected debt service for the next five years is a composite of the Environmental Management Fund, Fire Service Fund, Debt Service Fund, Public School Fund, and General Fund. The projected debt service for 2016 is $52.4 million with a $4.9 million increase in 2017 equating to $57.3 million. This is primarily due to the issuance of $92 million of debt between the community college and public schools. 2017 will be the first year the County has to pay a whole year for payments on the debt. 2018 will have a small increase while 2019 has a small decrease. The year 2020 will have an increase equating to $60 million due to the school bond issue and afterwards debt service will reduce assuming no further issuances of debt. Revenue Trends for Prior Years, Year-End Expectations, and Forecast of Available Revenues in FY16-17 Chief Strategy and Budget Officer Beth Schrader reviewed the New Hanover County Assessed Tax Base noting the following:  Three drivers of property taxes are assessed tax base, tax rate that is chosen and collection rate.  In FY12, the assessed tax base was $34,190,526,948. Post revaluation, the base dropped to $28.9 billion which is more than a $5.3 billion loss of value or 15.6%.  Since that time, the County has seen a slow consistent growth rate of approximately 1.4%.  Projecting approximately 1.8% next year due to some uptick in activity but Tax Administrator Roger Kelley does not anticipate $34 billion will be reached again, even with the current revaluation.  On average, difference between budget and actual base has been 0.35% and is shown as follows: Budgeted Actual % change (Actual to Actual) FY13** 29,200,500,000 28,874,596,604 FY14 29,191,842,800 29,714,634,628 2.9% FY15 29,469,476,000 29,745,736,443 0.1% FY16 30,187,418,000 30,123,466,587 1.27% FY17 30,662,787,000 1.79% (Actual to Budget) Ad Valorem = Tax base /$100*tax rate*collection rate  Sales Tax – Quick Refresher:  There is a four month lag in receiving sales tax information. Purchases made in December are collected by the State in January and distributed to the County in March. Projections are being made with five or six months of data that is four months old.  Not all tax collected is returned to the County. The NC Department of Revenue takes out money for its cost of operations, refunds, and population adjustments. It also pulls out the hold harmless required as part of the Medicaid swap that goes to the cities to hold them harmless.  Modified Sales Tax (effective 3/1/16):  Expanded tax base to include some services  New Hanover County benefit only accrues for Article 46 (1/4 cent). The current value of Article 46 is $8 million.  Additional revenue generated via the expanded base on other articles will be redistributed to other counties and cities:  FY16 impact expected to be approximately $60,000 (in total for this fiscal)  Full year impact $245,000 – $250,000 (over the whole FY year next year)  Sales Tax Breakdown:  Total tax is 7.00% and breaks out as follows:  State tax: 4.75%  Local tax: 2.25% broken down to 0.45 allocated to schools (the statutory requirement that the County must distribute it to them); 1.72% allocated to County in General Fund; and 0.08% allocated to Fire Service District (FSD). In the budgeting sales tax, the schools and County portions are included in the General Fund, then budget a transfer out to the schools. Not all monies received by the County is available to the General Fund to be spent on general operations.  Local option sales tax has 4 components:  A 1 cent Article 39 tax (POS) shared with FSD  A 0.5 cent Article 40 (Per Capita) – 30% to Schools, remainder shared with FSD  A 0.5 cent Article 42 (POS ) – 60% to Schools, remainder shared with FSD  A 0.25 cent Article 46 – 100% goes to the County  Sales Tax – Year to Date Breakdown:  Year to date growth: FY 2013 - 5%; FY 2014 – 1%; FY 2015 – 13%; FY 2016 – 3%  Year-end growth: FY 2013 – 4%; FY 2014 - 3%; FY 2015 – 10%  There has been approximately an average rate of 5.5% growth over FY 2013 to FY 2016 NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 33 SPECIAL MEETING, MARCH 23, 2016 PAGE 489  Sales tax collection by Amazon has a significant effect on FY 2015’s budget that was not anticipated and the County was not aware of ahead of time to incorporate into the projection.  Long-term average of 4% - 4.5% going forward  Expect to see 4.8% growth this year In response to questions Officer Schrader stated that in FY 2015, $56.8 million was budgeted across the FSD, schools and the General Fund. At this time of the year staff assumed the County would have a 13% growth in sales tax at the year-end and it ended up being 10%. It is believed that the year will end with 4.8% growth vs. FY15 Actuals. Officer Schrader reviewed the Sales Tax – 5 Year Budget to Actual slide noting:  FY 2013: Budgeted – $38,464,428; Actual - $41,558,764  FY 2014: Budgeted - $42,266,803; Actual - $42,774,785  FY 2015: Budgeted - $43,622,418; Actual - $46,811,422  FY 2016 Estimated: Budgeted - $50,142,359; Actual Estimate: $49,008,010  FY 2017 Projected: $51,043,408  While total sales tax is important, the County portion of the sales tax in the General Fund (the 1.72%) is particularly relevant, since this most closely relates to the use of fund balance. In discussing the sales tax refunds information, it was noted that the increase of refunds is the total amount of sales and what’s collected. An increase is seen in not only the dollar amount of tax but the percentage. The following was reviewed:  Refunds are taken off the top from the Article 39, pre-distribution to county and municipalities.  It should be noted that with refunds to the schools on capital projects and other items, we expect to continue to see an increase in the percentage of refunds.  Refunds as a percentage of gross collections:  FY 2013: 5.02%; FY 2014: 5.325%; FY 2015: 5.48%; FY 2016 Estimated: 6.04%  Refund in dollars:  FY 2013: $4,204,739; FY 2014: $4,668,076; FY 2015: $5,280,678; FY 2016 Estimated: $6,128,158  For FY 2016 there is a refund rate of 6.04%, compared to 5.48% in the prior year, which will decrease the net collections by about $568,000. In response to questions about potentially seeing a leveling in the percentage of sales tax collected, Officer Schrader stated the County has seen a consistent increase in percentage of refunds being requested over time. She doesn’t anticipate it leveling off going forward but rather would expect to see it increase. Fund Balance Position and Potential Available For FY 16-17, per County Policy, and a Fund Balance Sensitivity Analysis for the Future Officer Wurtzbacher reviewed the General Fund Balance as of June 30, 2015: Designation 2015 Balance Unspendable $ 130,094 Restricted 27,556,288 Assigned 11,738,867 Unassigned* 55,123,865 Total 94,549,114 She then provided an explanation of the General Fund balance categories:  Unspendable represents inventory for the County (furniture, etc).  Restricted category is a large portion of the General Fund Balance and represents a large restriction for the County. It is for items restricted from external not internal sources. Large part of it is stabilization by state statute which is the amount required to restrict by state statute. The total restricted amount is what is shown here.  Assigned and committed funds (not shown here) have internal restrictions. Anytime you appropriate monies for another year’s budget the money is considered internally restricted.  Unassigned represents everything else and is considered unrestricted for the County. Important to note that the 2015 unassigned fund balance represents approximately 19.2% of general fund expenditures and transfers to other funds.  The debt policy is 21% which equals approximately seventy days’ worth of expenditures. A review was provided of the historical Fund Balance:  FY 2013: Unassigned - $62.3 million; Restricted - $34.5 million; Total - $96.8 million  FY 2014: Unassigned - $63.7 million; Restricted - $36 million; Total - $99.7 million  FY 2015: Unassigned - $55.1 million; Restricted - $39.4 million; Total - $94.5 million. The County used about $5.2 million of Fund Balance in FY15 but in addition to that a higher amount of Fund Balance was considered restricted. Between those two factors that is what put the County at the 19.2% which is below the 21% policy. NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 33 SPECIAL MEETING, MARCH 23, 2016 PAGE 490  FY 2016 Estimated: Unassigned - $56.8 million; Restricted - $30.6 million; Total - $87.4 million. Early estimates show that between $6 million and $7 million of Fund Balance will possibly be used which will end FY16 around $87.4 million and have around a 19.6% unassigned Fund Balance percentage. However, several factors have to be taken into consideration and this could change since it’s very early. In response to questions, Officer Wurtzbacher stated she would not recommend using Fund Balance because it is thought the County will not achieve the 21%. The policy states that the County has two years to attain the 21%. If it is not reached at the end of FY16 the policy will not be violated. Staff hopes to show the rating agencies and Local Government Commission that progress is being made to reach the 21% and growth is anticipated. She provided a brief overview of a county comparison of AAA rated counties across the state:  There are six counties in the state AAA rated who have unassigned fund balance and are rated by Moody’s and Standard & Poors.  Based on unassigned fund balance to operational expenditures - Mecklenburg is at 31.1%, New Hanover is at 19.2%, Orange at 17.8%, Guilford is at 15.4%, Forsyth is at 15.1%, and Durham is at 14.2%.  Wake County maintains a AAA rating from both Moody’s and Standard & Poors, but is not included in this comparison. It has a policy that maintains a reserve for working capital instead of an unassigned fund balance. The counties are different sizes so percentages represent different numbers to them. For example, Mecklenburg’s 31.1% represents $356 million, New Hanover County’s 19.2% represents $55.1 million and Durham’s 14.2% represents $57 million. A brief discussion was held about how each county is setup slightly different. In reviewing the county comparison of coastal counties using unassigned fund balance to operation expenditures Officer Wurtzbacher noted:  Coastal counties have a unique situation and percentages mean different things to different counties:  Hyde is 37.8%; Carteret is 37.5%; Brunswick is 31.2%; Pender is 20.6%; New Hanover is 19.2%; Dare is 16.2%; Currituck is 9.9%; and Onslow is 7.1%  None of the coastal counties beyond New Hanover is AAA rated; rest of the counties are AA rated Officer Wurtzbacher provided a review of the Fund Balance levels based on a sensitivity analysis:  Actual Fund Balance is 19.2% / $55,123,865  Fund Balance at NHC Policy of 21% is $60,371,177  Fund Balance at 20% is $57,496,359  Fund Balance at 19% is $54,621,541  Fund Balance at 16.67% (previous goal) is $47,923,215  Fund Balance at 8% which is the Local Government Commission recommended minimum is $22,998,544. It was noted this is pretty low for a county of our size. Officer Schrader provided a look ahead showing the top five revenue sources that fund operations for the current year’s amended budget: Top 5 Revenue Sources FY15-16 Amended (3/22) FY16-17 Projected Difference Property Tax $172,375,642 $174,730,336 $ 2,354,694 Sales Tax (incl. schools) 62,267,210 63,323,482 1,056,272 Intergovernmental Revenues 44,605,892 44,623,974 18,082 Appropriated Fund Balance 10,728,223 0 (10,728,223) Charges for Service 10,524,322 9,573,012 (951,310) $300,501,289 $292,250,804 ($ 8,250,485) Top 5 Sources as % of Budget 97.7% 95.0% In looking at the projection for FY16-17, she forecasted a 1.8% increase in the base. The amount shown for property tax collection assumes a consistent no change in the tax rate. Sales tax has a projected increase just over 4%. The intergovernmental revenues based on requests submitted to date, which are primarily health and human services, would suggest that this area will be flat. In regard to appropriated fund balance, based on the existing policy today and the recommendations from the CFO there would not be any fund balance available to be appropriated as a revenue source for the FY16-17 budget. In reviewing the charges for services slight reductions are:  Register of Deeds fees down $200,000 – Several large projects were one-time projects and not anticipated again this year.  Election fees down $100,000 due to no municipal elections / no reimbursement. The Soil and Water Conservation District race is the only one that will have filing fees of approximately $25 per candidate  There is an ongoing effort to look at charges for services. The revenue sources will fund 95% of the FY16-17 budget which reflects 2.7% less on the revenue side than was available in the current budget. If the decision was made to not make additional investments or do one-time items, there is still a gap which does not take into account:  Increased school debt expense  Increased funding for school needs  Increased CFCC request and debt NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 33 SPECIAL MEETING, MARCH 23, 2016 PAGE 491  Capital project needs  Increases to address increased service demands A brief discussion was held concerning the expenditures. It is known going forward from FY15-16 to FY16- 17 there is a large increase in requests. The primary drivers are from external not internal sources such as debt service which will be paid first, the community college requests and the public schools request. There are increases in community college debt and public schools debt. The community college increase requests are for operations and capital; increased request from public schools is with moving to the $2,700 per pupil school funding model; there are capital project needs in the county; and there is increased service demand of needs and requests. The County Manager is in process of the reviewing the requests. Some Board members felt they would need more information on the th expenditures to figure out prioritization of items. Staff will provide the information to the Board prior to the April 28 informal presentation of the budget. Request was also made of the County Manager, if not this year then next year, to explore using the NACo or NCACC models to have public input on the budget process so the citizens can see and learn the impact of the decisions moving forward. Discussion of Board Priorities in Relation to the Enterprise Strategy Map Human Resources Analyst Bo Dean facilitated the discussion of Board priorities as it relates to the enterprise strategy map with the ultimate goal being to give the County Manager the right information from each section in order to help him prioritize while working on the overall budget. For Superior Public Health and Public Safety, the Board is in general agreement about the priorities. A brief discussion was held about the positive impact of youth programs in the area. It was also noted that everyone recognizes that within each strategy there are steps that need to occur to build upon the next priority to achieve the ultimate goal of growth and prosperous communities. It was noted that unless a Commissioner has a new priority facilitated discussion needs to reaffirm the commitment to services that have been done and what is still being done. For Superior Education and Workforce, the Board is in general agreement and supports the Career-Technical Education (CTE) high school. A brief discussion was held about funding alternatives and/or functions for the CTE. For Intelligent Growth and Economic Development, the Board is in general agreement. A brief discussion was held about what items each Commissioner would be willing to cut from the budget in an effort to make up the gap in funds. Chairman Dawson thanked Mr. Dean for facilitating the discussion. General Discussion County Manager Coudriet and Officer Schrader reported that work is ongoing to develop an economic grant development policy. A discussion was held about what levers were available to move the budget up or down in addition to prioritizing the needs. Officer Schrader commented there are six key areas that have the largest changes/increases in requests: DSS, Sheriff, Cape Fear Community College, New Hanover County Schools, CIP, and non-county agency. Staff will continue to review these areas in an effort to provide available options in working through the budget process and deciding whether to increase revenue, decrease expenditures or do some financial engineering. Staff will also prepare the documentation of the requests for the Board ahead of the forthcoming work sessions. Discussion was held about public schools’ requested increase in the average daily membership (ADM) per pupil. The requested increase to $2,700 in real dollars is a 1.7% increase in the public schools’ ADM. It is a two-fold increase in that there is an increase in the number of pupils and an increase from $2,620 to $2,700 per pupil. This is an $80 increase which in total is $3.3 million just based on current expenditures. There is also a requested appropriation of $3 million in capital which comes from a separate fund line. This appropriation can be reviewed in terms of whether it is the right number for the County to appropriate or is there a way the schools can use part of its fund balance to achieve capital funding and what are the statutory limits. In response to questions, County Manger Coudriet stated that the $3.3 million portion does not include the debt. The debt is part of the $4.9 million of additional expense. In total the increase to the public schools, between the debt and the $3.3 million, if it were to be funded, would be a net increase of approximately $6.1 million. In response to questions about the cost of new full-time Sheriff Office employees, Officer Schrader stated the cost is position dependent. Law enforcement positions have one cost and civilian positions have a different cost. County Manager Coudriet commented that on the whole it can be assumed that the total loaded cost of a county employee for salary and benefits is approximately $50,000 - $55,000. A deputy is going to cost more than a civilian because of the statutory mandate for a 401(k) match requirement. A brief discussion was held about the community college’s funding request. It is known that there is an increase in the request due to maintenance. County Manager Coudriet reported that $1.5 million is what they are asking but he is unsure how much is for the Humanities and Fine Arts Building (net increase) and the request is for operating and capital. Officer Schrader will provide line item documentation of the request. In a brief discussion about the property tax, it was noted that a 1 cent increase currently equals approximately $3 million. County Manager Coudriet stated that another meeting would be helpful for staff in developing the budget after more data is provided so that it is known what the will of the Board is going forward. In response to questions about departmental requests, County Manager Coudriet reported that the request for personnel totals to 50 but he does NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 33 SPECIAL MEETING, MARCH 23, 2016 PAGE 492 not intend to ask for the total amount. The DSS personnel request is critical in order to do the job and maintain the 95% work levels and there will be cost sharing between State and Federal dollars. He stated that unless there is a substantive reset of what the Board does the County is not raising enough money to meet the obligations committed to either by this Board or previous Boards. He does not see where he is able to present a budget without a request for some level of increase in property tax. In response to additional questions, County Manager Coudriet stated he has not seen anything unusual, out of the ordinary or out of focus in preparing the budget. Timeline for FY 16-17 Recommended Budget The following was presented as the timeline for the FY16-17 recommended budget:  April 28th – County Manager informally presents recommended budget  May 2nd - County Manager formally presents recommended budget  May 3rd through June 3rd – BOCC Work Sessions  June 6th – Hold Public Hearings  June 20th or 27th – Adopt Budget There was general consensus to have work sessions prior to the next two agenda review meetings. ADJOURNMENT There being no further discussion, Chairman Dawson adjourned the meeting at 3:05 p.m. Respectfully submitted, Kymberleigh G. Crowell Deputy Clerk to the Board Please note that the above minutes are not a verbatim record of the New Hanover County Board of Commissioners meeting.