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Charlotte sees larger budget shortfall than after recession

The Charlotte City Council on Tuesday learned of a $15.6 million budget shortfall due to drops in value in some commercial property due to property revaluation.
The Charlotte City Council on Tuesday learned of a $15.6 million budget shortfall due to drops in value in some commercial property due to property revaluation. sharrison@charlotteobserver.com

The city of Charlotte is facing a $15.6 million shortfall for the upcoming fiscal year, a budget gap that’s larger than what the city faced after the recession in 2008.

The shortfall is primarily because of two factors: The first is the loss of $18.1 million after the General Assembly repealed the Business Privilege License Tax.

The second – which was revealed Tuesday – is a loss of $14 million because of the ongoing countywide property revaluation review.

The city doesn’t have to make up all of that lost money. It has some new income from sales taxes and property taxes from new construction.

The city likely will institute a hiring freeze, possibly next week. City Manager Ron Carlee also has proposed no pay raises for employees for the upcoming fiscal year and a 1 percent cut among all departments. The city also could implement layoffs or a tax increase. Carlee said layoffs would be a last resort.

The grim budget news, discussed Tuesday, comes as the local economy is booming. The budget problems in 2009 and 2010, on the other hand, were due to the severe recession.

This year, the city has been awaiting the results of the county’s property revaluation review by Pearson’s Appraisal Services. The drop is property appraisals is mostly from commercial property, the city said.

The legislature’s decision to scrap the Business Privilege Tax also hurt the budget. Critics said the tax on businesses was cumbersome and too complicated; North Carolina cities have asked for something to replace it, but the legislature hasn’t yet acted.

The $15.6 million shortfall for the upcoming fiscal year, which will begin in July, assumes the city would make a handful of cuts, such as eliminating raises. The shortfall is less than 3 percent of the city’s general fund budget.

The general fund pays for basic services such as police, fire, garbage collection and roads.

At-large council member Michael Barnes, a Democrat who is running for mayor, said in his 10 years on the council, he hasn’t seen a budget gap this large.

The mayor and 11 council members are up for election this fall, which means the City Council will be reluctant to implement any property tax increase.

Carlee did not offer any specifics on how the city will cover the shortfall, except that the city could “eliminate or reduce … services or programs.” The city also could make more cuts across all departments.

It’s likely that City Council members will revisit projects that already are budgeted, such as the second phase of the streetcar, to Johnson C. Smith University and the Elizabeth neighborhood. Republican council member Kenny Smith suggested the council reconsider that project and others.

“We may have to revisit some previous policy decisions,” Smith said.

At-large council member David Howard, a Democrat, said that would be a mistake. He said the city’s efforts should be focused on persuading the General Assembly to replace the business license tax.

“The state is doing this,” Howard said. “This isn’t the local economy. We aren’t the only city dealing with this.”

City leaders are skeptical the legislature will replace the tax this year.

During budget meetings, Howard has been critical of legislators for repealing the business license tax, which is a veiled swipe at current Mayor Dan Clodfelter, a former state senator. Clodfelter, a Democrat, was not in the General Assembly when the tax was repealed, but he was chairman of the Senate Finance Committee and supported changing or repealing the tax.

Clodfelter said during Tuesday’s meeting that the state has been “gutting the city’s revenue system.”

In the past, he has declined to comment to the Observer about the issue. He wasn’t available for comment Tuesday.

One tactic for filling the budget hole would be to shift money from the $800 million capital spending program approved by council members in 2013. That is being paid for with a 7.25 percent property tax increase.

Chief Financial Officer Randy Harrington said the city has new debt capacity under the capital plan. Some or all of that money could be shifted to the operating budget for a short-term fix. Harrington didn’t have that amount available Tuesday.

It’s also possible council members could scrap some projects completely, and shift money back to the operating budget instead of cutting services.

Council members must adopt a budget before July. They will spend the next three months debating how to fill the budget gap.

It’s likely that council members would be wary of any cuts to public safety. But Carlee said that’s a challenge, because police and fire comprise 56 percent of the general fund budget.

The loss of the business tax and the decline in property tax revenue is more than a $32 million hit to the budget. But some of the money is being made up from the strong economy.

For instance, sales tax revenue is up $3 million. And there are $6.6 million in new property taxes, from the construction of new homes and businesses in the city.

The city also is worried about its budget for two years. Legislators are discussing changing how the state’s sales tax dollars are doled out, which could mean less money for urban areas such as Charlotte.

That could cost the city millions of dollars a year.

Harrison: 704-358-5160

A financial hit

For the upcoming fiscal year, the city has been hit with two financial setbacks.

$18.1 million – the loss of the Business Privilege License tax

$14 million – reduction in property tax revenue due to commercial property being appraised lower

Some of those losses are being made up from the booming economy

$6.6 million – new property tax revenue from new construction

$3 million – new sales tax revenue from people spending more

City already has proposed some cuts

$6.9 million – no pay raises for next year

$6 million – 1 percent across the board cut for all departments

That leaves a projected $15.6 million shortfall

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