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Cities, counties missing $90M from state

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The state failed to distribute $90 million owed to cities and counties as part of the Local Government Fund for fiscal year 2017.

City and county leaders say the funding shortfalls impede their ability to hire more employees, repair equipment and save for large-scale projects. The fund is set up so that the state collects tax revenues from municipalities and then sends money back to those communities to help pay for services.

The fund's history,
and how it works

The Local Government Fund began in the 1920s as the State Aid to Subdivisions system, which collected 11 separate taxes from municipalities.

The complicated formulas proved burdensome and revenues did not always keep pace with economic growth. It became an unpredictable source of funding, so to fix those issues, the General Assembly established the Local Government Fund in 1991.

As it stands today, the fund collects revenue from seven tax sources — banks, beer, wine, gasoline, motor transport, alcohol and income. The money goes directly to the state’s general fund rather than to local governments.

The state then calculates how much will go into the Local Government Fund based on 4.5% of the state’s general fund base revenue the previous year. The money is then disbursed back to cities and counties based on their populations.

Source: Municipal Association of South Carolina

State law requires that 4.5% of the state’s general fund revenues from the previous year go into the Local Government Fund. Counties get 83.3% of that pool, and cities get 16.7% — based on their populations. Municipal leaders and council members then decide how to spend the money.

The Legislature allocated $223.2 million for the Local Government Fund in fiscal 2017 — meaning only 71% of the designated money was distributed, according to the Municipal Association of S.C. Counties secured $184 million; cities received $37 million.

“The Legislature chose to cut $90 million from the fund. They’re doing that because of more pressing needs, like roads and education,” said Melissa Carter, the Municipal Association’s research and legislative liaison, who spent 16 years at the S.C. Budget and Control Board.

Since the recession, S.C. municipalities have not received the full money they are owed from the state.

Cities and counties rely on this funding for infrastructure improvements, public safety and equipment purchases, among other needs, Carter said. Many cities compensate by raising taxes or delaying projects.

“It affects all cities, but smaller cities are getting impacted more disproportionately because they don’t have as large of a source to draw from,” Carter said. “It is such an important stream of revenue because cities and counties can use the money where they need it most.”

Cities were shortchanged $15.1 million in fiscal year 2017. North Charleston received around $2.21 million of the $3 million it was owed. Around $889,000 never made it to the city.

North Charleston spokesman Ryan Johnson said that each year the full amount is not funded, some projects or new hires are put on the back burner.

“It has a bigger impact for smaller municipalities that really, really count on it. North Charleston is very fortunate to be economically sound, but it is still disappointing that we don’t have the money that the city is supposed to be receiving from the fund to perform general city services,” Johnson said. “How many police officers are we not able to hire? How many pieces of equipment in public works were we not able to buy because we are not fully funded?”

The Local Government Fund worked fairly well until the Great Recession hit. The Legislature voted to cut the fund at the time as state agencies and budgets took massive hits across the board.

Tim Winslow, general counsel for the S.C. Association of Counties, said most everyone recognized at the time that the state would not be able to fully finance the Local Government Fund during the economic crisis, but he said cuts were made with the expectation that full funding would return within a few years. That has not happened.

The S.C. Legislature has repeatedly voted via a proviso to cut money from the fund, Winslow said.

The state is under pressure to allocate money toward improving schools and fixing the state’s highways, bridges and roads — a top priority for many business leaders and residents around the state. The result is a shrinking pool of money for the Local Government Fund.

Spencer Wetmore, the city administrator for Folly Beach, said the shortfall makes it difficult for the city to save enough to meet long-term capital needs, such as buying new firetrucks or repairing garbage trucks.

Wetmore said the revenue could also fund more bike paths, sidewalks and parking spaces on the tourist-heavy island.

“The biggest thing in loss of funding is not being able to save to meet the capital needs,” Wetmore said.

Bills have been introduced over the years to remedy funding shortfalls or restructure the fund altogether. None has passed.

During the next session, lawmakers could choose to change the percentage formula to determine how much goes into the fund or work to find new revenue streams. The Legislature could also choose to fully fund it, although other funding pressures might take precedent, Winslow said.

“I would argue, disappointingly, that I don’t see it being fully funded any time soon. The Local Government Fund is down $90 million,” Winslow said. “I think it’s unrealistic to assume there are any plans to fully fund it.”

This story originally appeared in the Sept. 19, 2016, print edition of the Charleston Regional Business Journal.

Reach Liz Segrist at 843-849-3119.

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