When financial times are tough, municipal officials look for ways to cut expenses. Sometimes, there aren’t any expenses left to cut, and officials must look for new revenue sources or ways to creatively use existing revenue.
When done properly, the effort can produce positive results. If done improperly, the city could face serious and potentially long-lasting financial consequences. Understanding and complying with state and federal revenue restrictions are extremely important to a municipality’s financial health.
Property tax revenue
Property tax revenue is the largest source of revenue for most South Carolina municipalities. "The most important point to understand is that state law caps how much a city can increase its property tax millage each year," cautioned Eric Budds, the Association’s deputy executive director.
A municipality may increase its millage for general operating purposes in one year by the prior calendar year’s average Consumer Price Index increase plus the percentage increase in the city’s previous year population. The city can also add the increase allowed in millage for each of the three previous years if it was not previously imposed by council.
Each year by late spring, the state Department of Revenue and Fiscal Affairs provides each city with the CPI and population growth percentages.
State law also requires municipalities to "roll back" their millage rate after reassessment of property values to ensure local governments receive the same amount of revenue from property taxes after reassessment as they did before.
In reassessment years, municipalities must adjust the millage rate to account for the change in the assessed value after reassessment, excluding the increase in value associated with new construction, the renovation of existing structures and the property resales. This is referred to as the rollback millage calculation.
Additionally, municipalities with the local option sales tax must reconcile the prior year’s LOST collections with the revenue estimate used to calculate the tax credit factor. The city must roll over any shortage in credit given in the current budget year into the calculation of the credit factor for the next year.
The municipality should calculate a new local option sales tax credit factor every year as part of the budget process. Failure to properly calculate the millage rate or tax credit factor could result in the municipality being ordered to refund the unauthorized revenue collected.
Fees
Another potentially problematic issue involves adopting new fees.
A municipality can only impose "uniform service charges and fees" if a positive majority of council approves them. If the revenue generated from the fee exceeds five percent of the municipality’s total revenue, the city must segregate the fee revenue into a separate fund.
An important issue concerning new fees is ensuring that the fee is truly a fee and not a tax in disguise.
The fee must be specifically tied to a measurable benefit derived by the payer of the fee which is different from the benefits to the general public not paying the fee. Municipalities considering new fees should consult their city attorney to ensure the fee is legally defensible. Collecting an improper fee could expose the municipality to an unintended financial liability.
Restricted revenue
Local governments collect several types of revenues that have strict limitations on how the money may be spent. Restricted revenues include locally retained state victim’s rights funds, state accommodations tax proceeds, and local accommodations and hospitality tax revenue. The city may spend money from these revenue sources only for the specific purposes authorized by state law. The state can audit the city’s use of the money. The city would have to repay any money improperly spent.
For some revenue types, the city must hold the proceeds in trust for payment to another entity. Examples include state assessments, surcharges and pullouts applied to municipal court fines; employee-withheld payroll taxes; and employee retirement and insurance contributions.
This money does not belong to the municipality and should never be used for municipal purposes. Unauthorized use of this money is not only illegal, but it is also a quick way to dig the municipality into a deep financial hole because the money held in trust is usually a substantial amount.
Reporting requirements
Failing to meet state reporting requirements is another way officials can put their municipality in fiscal distress. The state may withhold 25 percent of the city’s state-shared revenue if the city fails to submit an annual audit to the State Treasurer’s Office by the 13th month after the end of the city’s fiscal year or if it fails to submit the Local Government Finance Report to the state Revenue and Fiscal Affairs Office each year by January 15.
"Understanding and complying with revenue restrictions are imperative to avoid serious financial consequences," said Budds. "When in doubt, city officials should seek guidance from the appropriate federal or state agency or the Municipal Association’s technical assistance staff."
Budds presented a session on this topic at the Association’s 2015 Annual Meeting.