MINUTES OF A SPECIAL MEETING

OF THE CHAPEL HILL TOWN COUNCIL WITH

THE TOWN’S LEGISLATIVE DELEGATION

MONDAY, FEBRUARY 25, 2002, AT 5:00 P.M.

 

Mayor Kevin Foy called the meeting to order at 5:00 p.m.

 

Council members present were Flicka Bateman, Pat Evans, Ed Harrison, Mark Kleinschmidt, Bill Strom, Dorothy Verkerk, Jim Ward, and Edith Wiggins.

 

Staff members present were Town Manager Cal Horton, Assistant Town Managers Sonna Loewenthal and Florentine Miller, Town Attorney Ralph Karpinos, Assistant to the Manager Bill Stockard, Finance Director Jim Baker, and Town Clerk Joyce Smith.

 

Members of the Legislative delegation present were Representatives Joe Hackney and Verla Insko, and Senators Eleanor Kinnaird and Howard Lee.

 

Mayor Foy expressed the Council’s thanks to the delegation for attending today’s meeting.  He stated the Council wanted to discuss the State’s budget crisis and the Town’s reactions to that.  Mayor Foy said the Council wanted the delegation to understand clearly what the effects and the Town’s perceptions are, as well as what alternatives there may be and what assistance the Town may be to the State.  Mayor Foy said the Town wanted to be part of solving the crisis.

 

Mayor Foy called attention to the letter he had sent to Governor Easley, which stated that the Town anticipated around a $1.3 million deficit.  In addition to the State withholding reimbursements, he said, the Town was dealing with its own economic slowdown.  Mayor Foy said that while the State was suffering a slowdown, so was the Town.  He said the Council was attempting to plan for the coming year, and it was important to reiterate that from the Town’s point of view, the funds being withheld by the State was not the State’s money.

 

Mayor Foy noted that according to the League of Municipalities, this type of tax money had never before been withheld by the State.  He said the Town wanted the funds it was due, and wanted assurances of what to expect for next year.

 

Representative Hackney thanked Mayor Foy for inviting the delegation to this meeting, noting he wanted to learn about the impacts on municipalities.  He referred the Council to his handout which gave a picture of where the State is now.  Representative Hackney noted the following:

 

·        The State has a balanced budget amendment in its Constitution, and we forecast revenues just as the Town does.

·        We then base the State’s budget on that forecast.  That forecast is a consensus estimate and was done prior to September 11, 2001.

·        When revenues don’t meet the forecast, it is the Governor’s job to balance the budget.  The Governor has that authority.

 

Representative Hackney said there was some discussion about taking funds last year, but it did not happen.  And, he added, those funds have not been taken as yet, but have been placed in a holding fund.  Representative Hackney directed the Council to line 6 and 10 on the first page of the handout, which referred to the Repair and Renovation Reserve and the Savings Reserve Account.  He said those funds were the first line of defense, or a rainy day fund.  Representative Hackney also identified line 5, Agency Reversions, which in any normal year would be significant, in the 3% or 4% range.  He noted that fund is the second line of defense.  Representative Hackney added that there were smaller funds that were used as a defense line before the State used the funds the Town was concerned about, which were lines 11 and 14, the Local Government Reimbursement and the Local Revenue Sharing, which total about $208 million.

 

Mayor Foy said that during his recent meeting with the Governor, he noted that the local governments were first in line to have funds released, but Mayor Foy stated he did not know how firm a commitment that is.

 

Representative Hackney, referring to the memo from Dave Crotts included in the handout, said the memo details what happened that caused the Governor to withhold the funds.  Since September 11, he said, the State has been running about $80 million a month behind the forecast; by the end of January, the total was $438 million behind.  Representative Hackney said the State expected the 2001-02 shortfall would exceed $900 million.  He said that the point is that after April 15, when income tax returns are filed and processed, the State would have a clearer picture of where it stands, hopefully no later than June.

 

Representative Hackney said the State had done a number of things in the last session to close the gap in the shortfall that was expected.  He noted that some taxes were raised, and they had closed $61.3 million in tax loopholes.  Representative Hackney said that they accelerated some collections that would bring in $112 million for a one-time gain.  He said the State aggressively went after deadbeat taxpayers, which brought in another $75 to $100 million.  Representative Hackney said a strong effort was made to add to the State’s availability of funds.

 

Senator Lee said that Representative Hackney had covered well how the State got to this point.  He noted that the State is expecting a $580 million deficit, and they would have to make some adjustments for next year’s budget as well.  Senator Lee said the Appropriations Committee decided it would make sense to start holding meetings now to deal with the crisis, and that subcommittees would be called back to begin work to try to determine what actions might be taken to assist the Governor to get through this year.  He added that the Governor had requested this help.  Senator Lee said we all know the Governor does not want to take this money, but the Constitution declares that we must have a balanced budget.

 

Senator Lee said no definite answers would be available until after April.  He said the State’s economists are telling them that the State is running about six months behind the rest of the nation in recovery, so wherever the rest of the nation is, the State is six months behind.

 

Senator Lee said the State is looking for cuts in its budget, and the chances of raising taxes in an election year is just about nil and he does not believe we will see any raise in taxes.  He said we are about $200 million in the hole for Medicaid, so the only place we have to go is to education.  Senator Lee said the question is, can we do cuts in education and not cut classrooms, or do damage to the universities.  He said he is not optimistic about when these funds might be released.

 

Representative Insko said she agreed that the local governments should be the first to have funds released, but we all must share the pain.  She said the State does not have a large rainy day fund, and the projected shortfall is enormous.  Representative Insko said she hoped that the State could do better long range planning to forecast and prepare for future shortfalls, adding that any fat in the State’s budget would be cut.

 

Representative Insko said some appropriations could be saved in the mental health program, but she would not like to see that happen.  She noted that we are all distressed to have to cut education and early childhood programs, as well as Medicaid, and hoped that there would be some discussion about increasing revenues.  Representative Insko said that tobacco had been very good to the State, but it may be time for that industry to be looked at.

 

Senator Kinnaird said that she had asked for a tobacco tax, and it was not completely out of the question.  She noted that the soft drink tax had not been increased since 1991, and believes it may be time to do that.  Senator Kinnaird said she had asked for a study commission to look into negotiating with pharmaceutical companies for lower costs, and had hopes that something would come of that.  She said we are under pressure by some groups to have a no tax increase year, but believed it had to be considered.

 

Representative Hackney said the current deficit is almost identical to what the State had spent on the flood caused by Hurricane Floyd.  He added that if the tax repeal in the mid-90’s had not taken place, the State would now be bringing in an additional $3 billion each year.

 

Mayor Foy asked the Council for comments.

 

Council Member Kleinschmidt said many are disillusioned over what the Governor has done.  He said that he respects that it is difficult to offer solutions but there should be a search for greater revenue sources now.  Council Member Kleinschmidt said the State cannot sit back and do nothing, that the culture must be changed and the legislators must be willing to step forward and do that.

 

Senator Lee and Representative Hackney said it was not fair to say that they had not been willing to step up.  Senator Lee said they had spent many hours working towards compromise, and we must be realistic about what can and cannot be achieved.  He said his purpose in being here today was to understand the Town’s stand on the budget issues.  Senator Lee said the State is in a financial crisis that it had never known, and it was not going to be easy to solve.  Council Member Kleinschmidt said he wanted to make sure the Town had the delegation’s support.

 

Representative Insko said if the current budget had been passed on schedule, the situation would be worse than it is.  She said that 46 of the 50 states are projecting local revenues less that anticipated.

 

Council Member Bateman said one issue that had been repeatedly discussed in Chapel Hill was an entertainment tax, which the Town would need enabling legislation to enact.  She said this year might be the year to do that.  She asked Jon Howes, a UNC representative, to comment.  Mr. Howes said the University had never favored an entertainment tax, and does not believe that position would change.

 

Senator Kinnaird said such a tax would not affect just the University, but other universities as well.

 

Representative Insko said it is not really a tax savings, since it would cut into the Smith Center’s revenue which the State may have to make up, so it would solve nothing.

 

Representative Hackney said the Entertainment and Sports Arena and the Smith Center are now in competition with other venues, such as Greensboro and Charlotte.  He said if an entertainment tax were levied only locally, it would severely limit the events at the Smith Center.

 

Representative Insko asked how much sales tax the Town would receive if the State released those funds.  Finance Director Jim Baker answered about $900,000.  Mr. Howes added that non-athletic events at the Smith Center have virtually disappeared.

 

Council Member Strom said it is frustrating to have money withheld, and to be repeatedly denied the opportunity to create additional revenue such as with the entertainment tax.   He said the real estate transfer tax needs to be put on the table.  Council Member Strom noted he would like to hear about what the delegation envisions changing structurally in the legislature to solve the crisis.

 

Representative Hackney stated he believed there would be a continual push to enact local option taxes.  Senator Kinnaird said this would be the ideal year to push for those types of taxes.

 

Mayor Foy asked what would be the likelihood of the ½ cent local option tax being put on the table for this year.  Representative Hackney and Senator Lee said it was being discussed.

 

Council Member Strom asked what should the Town push for.  Senator Kinnaird said the Town should put pressure on the legislature, and encourage other local governments to do the same.

 

Senator Lee said he believed that by presenting some of these issues through the Smart Growth program, that it would help to massage them in such a way as to give them a better chance for passage. 

 

Council Member Strom asked if the delegation saw this budget crisis as an opportunity to do some of these things.  Senator Lee said we must get through the crisis before some of these things could be studied.

 

Senator Kinnaird said that if the Democrats win the next election, then there would be more municipal representation and we would have a better chance to enact some of these additional taxes.  She said a meals tax in Chapel Hill would yield a lot of money, but that is not the case in other communities.  Senator Kinnaird added that the menu of local option tax opportunities is very important.

 

Council Member Harrison said the menu is important, so that the option to put these taxes in place is crucial.  Representative Hackney said that when it came time to raise the ½ cent sales tax, it was heavily debated.  He noted that the instructions given to the Appropriations Committee was to not even think about raising taxes this year, adding that was the attitude they are facing.  Representative Hackney said any time you deal with sales tax, you have to negotiate with sales tax centers as well as non-sales tax centers, because people who live in non-sales tax centers shop in other communities.

 

Council Member Wiggins asked if she understood that there was some sentiment that the tobacco tax could be increased.  Senator Kinnaird said it was a possibility.  Representative Insko said that a poll had been taken that showed some support for that.

 

Mayor pro tem Evans asked about an increase on the alcohol tax.  Senator Kinnaird said she did not believe that would be possible.

 

Representative Insko said there was a big difference between the State raising a tax and a local government raising a tax.  She said it would be easier to give that control to the local governments.  Senator Kinnaird added she was in favor of raising the soft drink tax.

 

Representative Hackney said the Governor’s lottery plan would earmark revenues for early childhood development.  Representative Insko said that the funds from a lottery would have to be earmarked to prevent the revenue from going into the General Fund.

 

Senator Lee said he was pushing to privatize the ABC program.

 

Council Member Ward said the Town was solving its crisis by using its rainy day funds, but feels that we have to learn from this revenue shortfall so that it does not happen again.  He asked for advice on how we can get through next year when we have already used those funds.  Mr. Baker said the Town had over $4 million in reserves.

 

Senator Lee asked if Chapel Hill had to use those reserves, would it be possible to reimburse the fund when the Governor releases the withheld funds.  Mr. Horton said the Town was postponing issuance of debt, taking money out of capital reserves, and cutting operations costs by holding positions vacant, as well as by other means.  We can do that for the current year without great harm, he said, but next year is a different matter.  Mr. Horton said debt would already be postponed, positions would already be held vacant, and reserves would already be used.

 

Mr. Horton said we need the delegation’s best counsel on how to plan for next year. He said the Town needed to plan for future taking of local government funds, which would mean curtailing programs and services, and still having to raise taxes.  Representative Hackney said it is still too early to know, adding he hoped that local government funds would be available next year.  He said the Governor had planned for the worst case scenario, and most likely the funds would be coming back to the local governments.

 

Mayor Foy, referring to the highway trust fund and the tobacco trust fund, stated that those funds are not touchable, so is there a way to make the local governments funds untouchable.  Senator Lee said he thought they had done that, but the State Constitution overrides those decisions.  He said all the Governor had to do was declare an emergency in order to hold those funds.  Senator Lee said there is a willingness to look at other reserves, and they would be looked at when the time comes.

 

Council Member Verkerk said she wanted the delegation to acknowledge that the funds being withheld belong to the Town’s money, not the State.  She said the State had not been a good steward, that Chapel Hill had been a good steward, and now the State is bailing itself out with the Town’s funds.  Representative Hackney said the State had been a good steward, and had worked hard to get as many votes as they could to increase the State’s revenues.  He said the State had an AAA bond rating, and fiscal integrity.  Representative Hackney stated he believed the Town would receive most of its revenues when the crisis was over.

 

Senator Lee said when you sit at the local level, you feel like you are being taken advantage of by the State, but that is not the case.  He said he is committed to keeping local governments as strong as possible.  But, he added, it was imperative that the State’s bond rating be kept at its present level in order to keep interest costs down.   Senator Lee said this is the greatest challenge the State had ever faced.  He noted there were no guarantees, but in the final analysis he believed the local governments would receive its funds and the State would come through this crisis.

 

Council Member Wiggins said the delegation operated in a political environment just as the Council does, and she believed the Town was fortunate to have such leadership in the State government.  She thanked the delegation for its help.

 

The meeting was adjourned at 6:32 p.m.