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2022-03-17 Budget Work Session NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 35 BUDGET WORK SESSION MEETING, MARCH 17, 2022 PAGE 353 ASSEMBLY The New Hanover County Board of Commissioners held a Budget Work Session on Thursday, March 17, 2022 at 2:10 p.m. in the Harrell Conference Room at the New Hanover County Government Center, 230 Government Center Drive, Wilmington, North Carolina. Members present: Chair Julia Olson-Boseman; Vice-Chair Deb Hays; Commissioner Jonathan Barfield, Jr.; Commissioner Bill Rivenbark; and Commissioner Rob Zapple. Staff present: County Manager Chris Coudriet; County Attorney Wanda Copley; and Clerk to the Board Kymberleigh G. Crowell. Chair Olson-Boseman called the Budget Work Session meeting to order and announced that the purpose of the meeting is to discuss budget priorities for Fiscal Year (FY) 2022-2023. FISCAL YEAR 2022-2023 BUDGET WORK SESSION Chief Financial Officer Lisa Wurtzbacher presented the following information:  Debt: Outstanding, Requirements and Capacity:  Outstanding debt 6/30/2021: In response to Board questions, Ms. Wurtzbacher stated that the $14 million airport expansion is on the County’s books as the County issues the debt for the airport, but it is non-taxpayer money. There is also some remaining outstanding debt for the rental car facility. It is an analogous situation with Cape Fear Public Utility Authority (CFPUA) as it pays the County back for the debt issued for water and sewer projects before CFPUA existed.  Debt service requirements: In response to Board questions, Ms. Wurtzbacher stated that if the Local Government Commission (LGC) determines that the County will have to finance Project Grace itself, the increase will be in the general government debt service line. It would impact the amount of debt left to issue for other things. The cost for Project Grace is $54 million. The most recent calculation for FY23 shows a debt capacity estimate of $112 million, and Project Grace would take away from that capacity. Debt capacity changes every year due to debt service being paid down and will increase unless the County issues new debt. In response to Board questions, Ms. Wurtzbacher stated the two articles of sales tax, school capital and school capital debt service, go directly into the debt service fund. By legislation, the funds must be used for those purposes.  Debt service decrease over next 10 years (assuming no new debt): In response to Board questions, Ms. Wurtzbacher stated that she is sure there was a year that the County did not issue debt but does not know what year. Due to interest rates being low for so long the County has typically NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 35 BUDGET WORK SESSION MEETING, MARCH 17, 2022 PAGE 354 taken advantage of the low rates to borrow for larger projects and if needed, capital. It is unrealistic to expect that the County would continue to see a decrease in debt service over the next ten years.  Debt capacity:  Revenue: FY22 Budget and FY23 Preliminary Projections:  Fund Balance:  21% unassigned fund balance percent  Additional $14.4 million (above 21%) reserved for:  Capital improvement plan  Capital outlay  $4.9 million committed for community violence prevention plan  $9.5 million remaining for future expenses In response to Board questions, Ms. Wurtzbacher stated that the $4.9 million for the community violence prevention plan will be appropriated from fund balance for multiple years through end of FY25, assuming the Board approves it each year with the budget ordinance. She does think it is likely fund balance will improve over the $14.4 million. The $9.5 million can only be used for capital items based on policy and there are enough items to use all of the funds. Budget Officer Michelle Daniels continued the presentation as follows:  FY21-22 Revenues by Category - General Fund Adopted Budget ($382.8 million): County Manager Coudriet noted that an example of an intergovernmental review is the Low-Income Energy Assistance Program (LIEAP). The money comes with a specific charge of how to spend it. In response to Board questions, Ms. Wurtzbacher stated that the American Rescue Plan Act (ARPA) funds fall under intergovernmental revenues but are not included on slide 10 as they are in a separate fund.  Revenue Trends – General Fund:  Revenue Trends - General Fund: Ad Valorem Tax: NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 35 BUDGET WORK SESSION MEETING, MARCH 17, 2022 PAGE 355 In response to Board questions, Ms. Daniels stated that the ad valorem collection projections for next year will start to align more to FY18-19 and FY19-20. The jump is huge due to revaluation. County Manager Coudriet stated that in FY17-18 there was a revaluation and the $0.57 represents less than revenue neutral. The next year the Board made another cut in the rate.  Revenue Trends – General Fund: Sales Taxes (includes collections for schools):  Tax Base Growth:  Property values:  Preliminary estimate – 2.41% increase: In response to Board questions, Ms. Daniels stated that the upcoming tax base growth estimate likely will increase. If it does not go up it would stand within the 2.4% range, but it probably will not reduce. She confirmed it is almost a $5 million increase in ad valorem revenue. County Manager Coudriet stated that is assuming the rate stayed as it is. The amount of increase would be less or even less than the 2.4% depending on the ad valorem rate chosen by the Board. The $209.7 million assumes the 47.5 rate and staff knows the Board has given instruction to look at a lower rate. Ms. Wurtzbacher stated that the $209.7 million is only the general fund rate, it does not include the debt service rate.  Tax Rate Reduction: In response to Board questions, Ms. Daniels confirmed that with a three cents tax rate reduction, the County would have to figure out where $9 million is coming from. County Manager Coudriet stated that revenue neutral is only factored at the time of revaluation, and it is based on an average increase in property values year over year. He is not aware of any methodology to do an annual revenue neutral rate unless the revaluation is done annually. The value on a person’s property does not change from year to year unless improvements are made that require a building permit. In those cases, the incremental value is added. The County has only done a full measure and list one time since at least 1990. The last revaluation was not a full measure and list. In response to Board questions, Ms. Daniels confirmed that if the revaluation were done this year instead of last year the revenue neutral rate would be less than $0.42 or different because the tax base is higher. Ms. Wurtzbacher stated that it is difficult to answer how long it would take to reach zero after a five cents reduction, which is an approximately $19 million loss, because it is unknown from year to year how much the tax base and sales tax will increase. Assuming no new debt is issued, it would take approximately five years when only looking at debt service and no increase or decrease in the base and sales tax. Ms. Daniels stated that the natural/organic growth in the tax base has historically increased by approximately 2%. County Manager Coudriet stated the market comes into the equation during revaluation but not in the annual growth of the base. The next revaluation is 2025.  FY22 Sales Tax Growth – General Fund: NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 35 BUDGET WORK SESSION MEETING, MARCH 17, 2022 PAGE 356 In response to Board questions, Ms. Daniels stated that an overcollection can be seen when the costs of goods and services increase, people are spending more money, and when conservative estimates are used. Since July of this fiscal year, 13% more collected than what was budgeted. Ms. Wurtzbacher stated that as of December 2021, the collection was $5.9 million more than projected. There is no specific place the money goes into, it is put into the general fund, fire district, and debt service. At the end of the year, there will likely be an increase in the fund balance because the expenditures will not be as high. A brief discussion ensued about what was seen over the years with the fluctuations in sales tax, the tax base, and the effects on the budget. In response to Board questions, County Manager Coudriet confirmed that in 2007 there was a $5 billion decrease in tax values. Ms. Wurtzbacher stated that as it relates to sales tax and budgeting what happened when covid hit was unprecedented and following historical trends it is not normal anymore because it is hard to pinpoint where the County might land.  FY22-23 Preliminary Revenue Estimates – General Fund: In response to questions, Ms. Wurtzbacher stated that $68 million was budgeted in sales tax and it is projected that the year will end at $77 million. Ms. Daniels stated that the $382.8 million represents the FY21-22 adopted budget (current) and the $336.4 million is the preliminary revenue estimates for FY22-23, not the expense budget. County Manager Coudriet noted that the $336.6 million is what is available in revenue based on direction from the Board for next year and the expense side is greater than $336.4 million.  FY22-23 Other Revenue Considerations - General Fund:  Evaluation of existing revenue categories with consideration to ARPA funds  Debt: Capital and Capital Outlay  Fund Balance: Capital and capital outlay and other one-time expenses  Revenue Stabilization Fund:  Reserve for unexpected spending needs from disasters (natural and man-made), pandemics, and other crises  Minimization of tax and fee increases in future years In response to Board questions, Ms. Daniels stated that a good example of a funding plan for the number of times the County can use the revenue stabilization fund (RSF) to help reduce the tax rate is the community violence plan because the RSF is one-time money that will eventually be depleted. Staff specifically identified the funding sources from ARPA, the general fund, and RSF that could be allocated to each of those priorities in the out years. The general fund would be subsidized with the RSF until it runs out. Ms. Wurtzbacher stated that it also depends on how much is pulled out every year. If the goal is to cover a full five cent tax decrease with just RSF, that may be sustained for 15 years before the $300 million is gone. In response to Board questions, Ms. Wurtzbacher stated that for the community violence plan there is the potential to tap into some amount of the principal. County Manager Coudriet stated that the plan approved by the Board in January for the outer years did have the need to tap into some amount of the principal to fund the community building plan. Ms. Wurtzbacher added what was approved to use for the last quarter of this year at the meeting was just the interest. County Manager Coudriet confirmed that if the County continues to grow at 13% year over year in sales tax, then that is more money which could replace the need in year three to tap into the principal. He reiterated that the plan assumes, based on revenue growth and expenditures that in the outer years, staff will have to bring forward a request to use principal unless there are some alternative revenues or exponential growth in other sources of revenue. He further clarified that the community violence plan and community building plan are the same thing.  FY22-23 Other Funds (Enterprise):  Fire Rescue: no change in tax rate (FY22 adopted rate 7.25 cents)  Stormwater Services: fee effective FY23 ($5.65/equivalent residential unit/month)  Environmental Management: tip fee increase  Tip Fee History: NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 35 BUDGET WORK SESSION MEETING, MARCH 17, 2022 PAGE 357 A brief discussion ensued about the tip fee and how the end user has not seen a reduction in what they paid when the tip fee was lowered, how the private haulers did not pass on the savings and refuse to do mandatory recycling and therefore, are providing less services than what is provided by the city and making more money. In response to Board questions, Ms. Daniels confirmed it is anticipated that the tip fee will increase to $50 or $52. County Attorney Copley stated that her office will investigate if a waste hauler can be required to provide recycling service as part of being issued a franchise or renewing a franchise.  Expenditures: FY22 Budget and FY23 Expense Estimates:  FY21-22 Expenditures by Category - General Fund Adopted Budget ($382.8 million):  Expenditure Trends – General Fund: In response to Board questions, Ms. Daniels stated in looking at the adopted FY21-22 budget, the amount that would be seen in the revised (actual) version is a bit higher. The community building plan and grants received during the year are examples of what would cause the revised budget to be higher than what was originally adopted.  Expenditure Trends – General Fund: Education: A brief discussion ensued about student enrollment. Ms. Daniels stated that she has not seen a reduction of student enrollment by 1,500 in the NC Department of Public Instruction (DPI) data or in the information provided by the school district. There was a significant drop in December due to things such as mid-year graduations, dropouts, and changing schools. DPI posts enrollment numbers on its website monthly and there is about a two- month lag in the data. Staff compares the DPI information to the school district information. County Manager Coudriet stated that staff is assuming the average daily membership (ADM) to be $3,434 for next year, not $3,473, and then multiply it by whatever number of students are agreed to. In response to Board questions, County Manager Coudriet stated that the teacher raises are included in the $3,434. If the Board went below the $3,434 the teacher raises would not have to be out of the supplement, but that may be the choice the Board of Education makes. As discussed last year, it was on the honor system when the Board said it wanted it to be a supplement but there was no obligation on the part of the Board of Education to appropriate it there. If the decision is made to give less than $3,434 or even give that amount, the Board of Education could decide to offer a supplement that is higher or lower based on how it chooses to use the County funds as compared thth to state and federal. This school system was 24 or 27 in teacher supplement but was seventh in ADM. It all comes down to how the Board of Education historically has chosen to use the current expense made available by the County. The County has control by purpose and function, not line-item control, but anything beyond that is the prerogative of the Board of Education. A brief discussion ensued about other counties using a tiered system to pay teachers a large supplement, even when the ADM is low. The Board also briefly discussed the hiring of local school district teachers, and concerns that have been expressed to some Commissioners about how the increases were applied by the school district. In response to Board questions, County Manager Coudriet stated that the school district has historically hired more teachers than the state model says is necessary. Since the state is not paying for those teachers, the school district does so out of the County’s supplement. A school system may decide not to hire more than what the state system says it needs but instead provide those teachers a supplement. In that case it would work out being a NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 35 BUDGET WORK SESSION MEETING, MARCH 17, 2022 PAGE 358 higher supplement for the teachers rather than taking the funds to hire another 500 or 1,000 teachers. He thinks there are around 900 school district employees paid out of the County supplement that otherwise would not be on the payroll based on the state model. The ADM is what the Board chooses to give to the school district. There are counties in the state that give no current expense, meaning there is no money other than capital that is going in. Approximately 98 out of 100 counties do give some level of current expense funding. Supplements vary around the th state but there are counties that had higher supplements than here when this school district was rated 24 in the state for supplement but seventh for ADM. The County’s appropriation has been used to bring in more personnel which is less supplement than the school district has been historically able to offer. A brief discussion ensued about what occurred when the County requested a local bill in 2011 to have more authority over the school district’s budget. County Manager Coudriet stated that request uncovered that the Board could appropriate by purpose and function when there is over 10% movement. While the statute reads 25%, more information was learned which is how the County found out about that control. The bill itself never really got drafted because he thinks a majority of the Board at that time lost interest, but it did open the door to knowing it could manage it down to 10% if that is the chosen way to appropriate and this Board does appropriate by that method. In response to Board questions, County Manager Coudriet stated that unless something has changed since the last conversation, the school superintendent knows the ADM baseline is $3,434. It is understood that the County’s planning is not $3,473. Ms. Daniels stated that the total budget the school district receives could go down based on the number of students, but the $3,434 per student would remain the same. If the student count is lower the school district’s total operating budget would be lower.  FY22-23 Preliminary Continuation Budget Estimate - General Fund:  FY22-23 Preliminary Continuation Budget Estimate - General Fund:  Education: NHCS and CFCC:  Pay increases, teacher assistants, and other classified staff  Inflation, general operating expenses  Unfunded mandates, benefit rates  New facilities and maintenance needs  County:  Reinvestments in people  Fuel, vehicle purchases versus maintenance  Other Outside Agencies: Non-County and Economic Development:  More + higher requests In response to Board questions, Ms. Daniels confirmed that the community college’s budget request is $2.5 million. County Manager Coudriet stated that request would be above the $384 million FY22-23 preliminary continuation budget estimate as there is no assumption of anything new in the budget. If the decision is made to fund the community college at $2.5 million, the $384 million will increase. The same holds if the decision is made to take on teacher assistant compensation. Again, those items are not enhancements that have been added into the budget. Ms. Daniels stated that the community college’s request is for $2 million in capital and for $500,000 in operating and pay increases.  FY22-23 Preliminary Expense Estimate - General Fund: County Manager Coudriet provided an overview of the ongoing budget evaluation by staff. He noted that when looking at the enhancement requests across 30 county departments (2,000 employees), they are moderate at $5.2 million as compared to the $2.5 million more the community college is asking for next year on its own. He would argue that basic government is holding while outside influences are pushing up the number. The County’s enhancements are small as compared to most years. From an overview perspective, the information presented today gives the Board a sense of where things stand today, and staff will have to make some tough decisions about what to recommend. The $336 million assumes the Board chooses the five cents reduction. BREAK: Chair Olson-Boseman called for a break from 3:49 p.m. until 4:08 p.m. NEW HANOVER COUNTY BOARD OF COMMISSIONERS BOOK 35 BUDGET WORK SESSION MEETING, MARCH 17, 2022 PAGE 359 County Manager concluded the presentation as follows, noting that Planning and Land Use Director Rebekah Roth would be providing a brief housing update:  Next Steps:  April 2022 Budget Work Session:  Revenue Estimate Update  Enterprise and Special Revenue Funds Update  Expense Estimate Update: Enhancement Budget  Manager’s Recommendation – May 16, 2022:  Includes Non-County Agency Funding Committee Recommendation  Public Hearing: June 6, 2022  Budget Adoption: June 20, 2022 A brief discussion ensued by the Board about the April work sessions. The consensus of the Board was to have a work session before each agenda review meeting on April 14 and 28, 2022. Planning and Land Use Director Rebekah Roth stated that since the Board’s commitment to fund $3 million in housing programs three weeks ago, work started immediately with building the staff capacity. A recruitment plan was developed, and recruitment has started for the first two positions. One is a reclassification of the current workforce housing planner, because now the position will be devoted only to the housing planning program. There will be an additional housing program manager who will handle the new programs that are created moving forward, as well as continuing the ARPA funded Workforce Gap Rental Assistance Program started this past year. There will also be two other positions hired on the programming side, one for program coordination and the other for fiscal support. Staff will be preparing with the assistance of the people placed in those positions, a more in-depth framework of the housing programs. Also, staff will be preparing a fleshed-out framework for the first program that will start in the first quarter of next fiscal year, which will be the RFP-based solicitation program. There has been some input from the Workforce Housing Advisory Committee (WHAC) up to this point, but the conversations will be expanding to include additional stakeholders to make sure that staff can provide the Board with some recommendations in terms of how the RFP should be structured, what types of criteria should be prioritized, then the methodology for how the RFP will be sent out, and how it will be awarded. In response to Board questions, Ms. Roth stated that the current priority that WHAC has indicated would be most beneficial at this point are programs to increase the number of new units. Some of the project types that could be prioritized are ones that are shovel ready. However, there might also be some prioritization in terms of what level of affordability or what period of affordability are most important to meet the gap that currently exists. She confirmed that none of this is going to interfere with the funds and programs that have already been committed into the affordable housing range. The $3 million is only for new programs and based on staff discussions, she believes the understanding is that the $3 million is not intended at this point to cover the staffing positions and administrative costs. It must be dedicated to the programs themselves. The timeline will be impacted by the timeline to build staff capacity. ADJOURNMENT There being no further business, Chair Olson-Boseman thanked staff for the presentation and adjourned the meeting at 4:14 p.m. Respectfully submitted, Kymberleigh G. Crowell Clerk to the Board Please note that the above minutes are not a verbatim of the New Hanover County Board of Commissioners meeting.