AGENDA #10
MEMORANDUM
TO: Mayor and Town Council
FROM: W. Calvin Horton, Town Manager
SUBJECT: Update on Current Year Revenues and Estimates of Additional Revenue Expected for the Current Year
DATE: October 21, 2002
The N. C. General Assembly has now completed action on a State budget for 2002-03 and adopted other legislation adding more protection to local government revenues withheld in past years.
This memorandum provides information on our estimates of additional revenue we now expect to receive in the current budget year, and provides a brief review of revenue estimates for other major sources based on receipts in the first quarter.
BACKGROUND
Due to a delay in adoption of a State budget for 2002-03, the Council adopted a final budget on July 26, 2002, which did not include revenue from certain State-shared taxes that were partially withheld in the past two years. In September, the N. C. General Assembly completed action on a State budget for 2002-03 which authorizes an additional ½ cent local sales tax, and adopted legislation adding greater protection for the Utility Franchise and Beer and Wine Tax revenue withheld last year by the Governor.
Based on these actions, we estimate that additional revenue will be received in the current year. Attachment I provides an estimate of the additional revenue we would expect to receive this year based on best case and worst case scenarios for both the additional ½ cent sales tax and Utility Franchise and Beer and Wine Tax.
DISCUSSION AND ESTIMATES
Summary
Under a conservative worst case scenario assuming partial withholding of State-shared revenues as in the past year, we estimate the additional revenue would about $1,630,000. Under the best case scenario assuming full receipt of State-shared revenues, we estimate additional revenue of about $2,600,000. Attachment I includes our estimates and footnotes detailing the assumptions about each case. Below is a brief discussion of the estimates and our assumptions for both scenarios.
Additional ½ Cent Sales Tax (effective December 1, 2002)
The final State budget eliminated the reimbursement revenues previously received by the Town (about $730,000), and authorized an additional ½ cent local sales tax to replace the reimbursement effective December 1, 2002. Orange County has taken steps to enact the additional tax and is expected to give notice of adoption of the tax to the N. C. Department of Revenue 30 days before the proposed effective date of December 1.
Based on our review of estimates provided by the League of Municipalities, we estimate the additional tax for the Town would provide about $1.2 million on an annual basis or about $100,000 per month on average. The sales tax is collected by the State and is currently distributed to local governments on a quarterly basis in the months of August, November, February, and May for the prior quarter collections.
With the quarterly distribution, the amount we expect to receive in the current budget year before June 30, 2003 (cash basis) would be about $100,000 to be distributed in February, 2003 (for the December, 2002 collections) and $300,000 to be distributed in May, 2003 (for estimated collections in January, February, and March, 2003). Thus, the total we expect to receive this year would be about $400,000. Collections for April through June of 2003 would be distributed in August, 2003 under the current quarterly distribution system, and counted in the Town’s next fiscal year.
Because the local sales tax is not subject to being withheld by the State under emergency conditions, we would not expect any of the new sales tax revenue to be withheld. Therefore our estimate of revenue from this source would be the same, $400,000, under both the best case and worst case scenarios as shown in Attachment I.
Utility Franchise Tax and Beer and Wine Tax
Near the end of this past legislative session, the General Assembly also passed legislation providing greater assurance that the Utility Franchise Tax and Beer and Wine Tax revenues are distributed to local governments as provided in State law. We estimate the full Utility Franchise Tax revenue in 2002-03 would be about $2,000,000 and the Beer and Wine Tax revenue would be about $200,000. While we hope that this legislation provides adequate protection to prevent any future withholdings, we note that the Governor did not sign the bill. We understand that the Governor previously stated reservations about the constitutionality of such a law. We have, therefore, provided estimates of additional revenue from these two sources under a best case scenario and worst case scenario because we believe it still is possible that the Governor will seize the funds if the State’s budget crisis worsens after the first six months of the fiscal year.
Under the best case scenario, we assume the full Utility Franchise Tax and Beer and Wine Tax revenue would be received as scheduled, and would total $2.2 million in the current year. However, if the Governor were to withhold a portion of two quarters of the electric and natural gas portions of Franchise Tax and the full annual allocation of the Beer and Wine Tax revenue (as occurred last year because of emergency budget conditions), we estimate this worst case scenario could result in revenue of about $1,230,000. Thus, under the worst case scenario, the total additional revenue expected from Utility Franchise, Beer and Wine, and the ½ cent sales tax would total about $1,630,000.
In summary, we estimate the minimum amount we would receive would be about $1,630,000 and the maximum amount would be about $2,600,000.
Review of Other Major General Fund Revenues to Date
We also have reviewed the adopted budget estimates of other major General Fund revenues based on revenue receipts in the first quarter and other information available to date. For the General Fund, our current review indicates that most other major revenues are on target with adopted budget estimates as discussed below, and that expenditures are also within target amounts for the first quarter.
Property Tax Base
The adopted budget is based on an estimated total tax base of $4.115 billion. Initial tax billings indicate that the real property tax portion of the tax base is likely to exceed original estimates by about $30 million and public utility values are slightly higher than original estimates. However, the final property values for vehicles (normally about $250 million) will not be known until March of 2003. To date, monthly vehicle assessments and billings are on target with original estimates.
Existing Sales Tax Revenue
As previously reported to the Council, the first quarter sales tax revenue (on a cash basis) received in August, 2002 was about 6.8% more than in the same quarter in the prior year. We note, however, that the quarterly distributions tend to be uneven and are affected by sales tax refunds filed by various eligible entities as well as by economic conditions. The next quarterly distribution will be received around November 15. With only one quarterly distribution to date, we are not able to predict total sales tax receipts for the year at this point in the budget year.
Powell Bill Funds (for local street maintenance)
The current year’s annual allocation of Powell Bill funds received on October 1 totaled $1,490,000, slightly less than our budgeted amount of $1,493,000. During budget discussions in May, we reduced our estimate of Powell Bill revenues by about $60,000 (from $1,553,000 to $1,493,000) based on actions taken by the Governor that reduced the total State distribution.
Other General Fund Revenues
Most other General Fund revenues including building permits and fees, service charges, and miscellaneous revenues appear to be on target with budget estimates for the first quarter. We note that occupancy tax revenues are about 5% less than last year for the first quarter. If this trend continues, annual revenues may be $$30,000 to $40,000 less than budgeted, but this decrease would not be a material amount in the total General Fund budget, and will likely be offset by other revenues that will exceed amounts originally budgeted.
Update on Transportation Fund and Other Funds
A review of revenue to date for the Transportation, Parking and other operating funds to date indicate first quarter revenues are also consistent with budgeted amounts, with no significant shortfalls anticipated.
In the Transportation Fund, we have confirmed that the State grant for operating assistance will be about the same as budgeted, and the anticipated allocation for federal operating assistance will also equal the adopted budget estimate.
Parking operations and Public Housing operations are as expected for the first quarter, with major revenues on target with budgeted amounts.
Law Regarding Change in Tax Rate
We note that the final State budget allows local governments to increase or decrease the tax rate already adopted for the 2002-03 budget year anytime before January 1, 2003. However, as noted above, we will not know until after January whether any of the Utility Franchise Tax and Beer and Wine Tax revenues might be withheld again by the Governor in the second half of the fiscal year as occurred in latter part of last fiscal year. Therefore, we believe it would be premature to assume that the maximum revenue will be realized in 2002-03 that would warrant an adjustment in the tax rate.
In addition, tax bills for the current year have already been issued for all citizens in Orange County and Durham County under joint tax billing and collection agreements currently in effect. Any change in the tax rate would require a rebilling by both counties that would involve renegotiation of the existing contracts and likely significant additional costs. We also believe the administrative costs and confusion to citizens would make such a change and rebilling impractical. Based on conversations with county officials, there are no plans in either county to adjust county tax rates or rebill taxes.
Because of the continuing uncertainty of final revenues to be received in 2002-03 and the administrative costs and impracticality of rebilling property taxes, we do not recommend that the Council consider a change in the tax rate adopted on July 26th.
In the final budget adopted by the Council in July, we believe that the Council was unable to fund many of the needs of the community because of the uncertainty regarding receipt of major revenues in 2002-03. The expectation of additional revenue now offers the Council an opportunity to allocate additional funding to meet some of the most important needs.
CONCLUSION
Based on the final State budget for 2002-03 adopted in late September and the final passage of legislation giving greater protection for State-shared revenues distributed to local governments, we estimate the Town would receive additional revenue in the General Fund for the current budget year. If the Governor were to withhold certain revenues similar to those withheld last year, we believe we still would receive as much as $1,630,000 this year. Assuming full receipt of State-shared revenues, we estimate we could receive about $2,630,000 in additional revenue.
A review of other major revenue estimates for the General Fund for current year including property taxes, Powell Bill funds and sales tax revenue indicate no revenue shortfalls in these categories based on actual receipts during the first quarter.
Based on the overall revenue to date and additional revenue now expected, we believe it would be reasonable for the Council to make additional appropriations to the current budget totaling as much as $1,630,000.
Potential uses of additional funds could include the following:
We will present recommendations for consideration by the Council on use of the additional revenues on November 11.
ATTACHMENTS
1. Summary of Estimated Additional Revenue for 2002-03 (p.
6).
Summary of Estimated Additional Revenue for 2002-03
(Based on Adopted State Budget and Legislation)
Revenue Source Best Case Worst Case
New ½ Cent Sales Tax
(Cash Basis) $ 400,0001 $ 400,0001
Utility Franchise Tax
Electric and Gas 1,540,0002 770,0003
Telecommunications 460,0002 460,0004
Beer & Wine Tax 200,000 -
Totals $ 2,600,000 $ 1,630,000
1 Cash Basis - Assumes payments for December collections in February, 2003, and January – March collections in May, 2003. (Payments for April-June collections fall in next fiscal year.)
2 Assumes four quarterly payments in 2002-03.
3 Assumes only two quarterly payments in 2002-03.
4 Assumes four quarterly payments in 2002-03. (This portion of Utility Franchise Tax not withheld by Governor last year.)