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Tick, Tick, Tick … Tax Hike

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timebombWith Mecklenburg County struggling under crushing loads of debt and facing a massive budget shortfall, Republican commissioners are concerned that their Democrat colleagues may use the county’s threatened triple A bond rating as an excuse to hike property taxes.

Similar to a homeowner’s good credit rating, the county’s premium bond rating allows it to borrow money at lower interest rates, producing significant savings in the long run; and similar to a homeowner’s household budget, the amount of a county’s operating budget that is dedicated to paying down debt is one of the factors agencies consider when setting bond ratings.

In Mecklenburg’s case, rating agencies have been warning county officials for years that their debt load was a ticking time bomb ready to explode. In a wild binge spanning the last decade, the county has approved about $2.5 billion in bonds for capital projects, everything from parks and libraries to schools and parking decks, while more than doubling its annual debt payments to the $234 million budgeted for next year.

In response to the rating agencies’ warnings, the Democrat-controlled board of commissioners in 2008 simply approved a new debt policy that allowed them to borrow and spend at higher levels, without violating their established debt limits. Think of it as a shopaholic who burns through one credit and, instead of cutting spending, upgrades to a card with a higher limit.

Under the policy revision, Mecklenburg’s debt per capita, essentially what every taxpayer forks over annually to help cover the county’s debt service, was increased from $3,600 to $4,2000, while the percentage of the county’s operating budget that could be spent on debt service jumped from 16 to 22 percent, with a self-imposed goal not to exceed 20 percent.

As it stands today, the county is expected to tip past that 20 percent benchmark next year, and with falling revenues has already had to dip into its reserve fund – essentially the county’s rainy-day savings account – to help balance the current-year budget. The county will tap that account to the hefty tune of $60 million: $22.7 million for debt service; $22.7 million for its pay-as-you-go capital account; and $15 million to cover shortfalls in general operating expenses.

The situation doesn’t improve for the upcoming fiscal year, which has County Manager Harry Jones directing county officials to prepare for cuts upwards of $95 million. One of the proposals being considered to help bridge that shortfall is to draw down another $22.7 million from the county’s fund balance for debt service, while replenishing $15 million of the $60 million snagged to balance this year’s budget.

The $15 million would come from cuts to programs and services in next year’s budget. The fiscal hit, however, would also further weaken the ratio of funds dedicated to paying down debt as a percentage of the county’s overall operating budget – one of the key factors that agencies consider when setting a county’s bond rating. And that’s what concerns Republican commissioners.

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