TO: Mayor and Members of City Council
THRU: Douglas J. Hewett, City Manager ICMA-CM
Telly C. Whitfield, Ph.D., Assistant City Manager
FROM: Tracey Broyles, Budget and Evaluation Director
DATE: January 9, 2019
RE:
Title
Consideration of Cumberland County's Proposed Sales Tax Distribution Interlocal Agreement
end
COUNCIL DISTRICT(S):
Council District(s)
All
b
Relationship To Strategic Plan:
Goal V: Sustainable Organizational Capacity
Objective A: To ensure strong financial management with fiduciary accountability and plan for future resource sustainability by aligning resources with City priorities
Executive Summary:
In February, 2016, City Council authorized a three-year extension of the Sales Tax Distribution Interlocal Agreement with the County and other local municipalities which will conclude at June 30, 2019.
At a meeting of the Mayor’s Coalition on December 18, 2018, Cumberland County shared a proposal for an amendment and extension of the agreement. The County has imposed a deadline of January 31, 2019 for all jurisdictions to execute the proposed agreement.
The Sales Tax Committee met on January 9, 2019 to review the proposal and supported bringing the proposal forward for action by the City Council.
Background:
State statute authorizes the County to choose the distribution method for sales tax revenues among the County and municipalities using either the per capita (population based) method or the ad valorem (tax levy based) method. The County must decide in April of each year which method will be used for distribution for the next fiscal year.
Historically, sales taxes within Cumberland County have been distributed on a per capita basis. As municipal populations grew through annexation, the County’s relative share of per capita distributions declined. In October, 2003, the County and each of the local municipalities reached an interlocal agreement under which municipalities reimburse the County and other municipalities for 50% of lost sales tax revenues due to annexations in exchange for the County maintaining the per capita basis of distribution.
Modifications to the agreement have included a provision to reimburse the County 100% for sales tax distribution impacts of the annexed population on Fort Bragg, and the addition of Eastover at its initial incorporation and its subsequent release from required reimbursements due to its population at the time of incorporation.
The original agreement was effective for a three-year term, and has been renewed four times. The current extension was approved in February, 2016 for fiscal years 2017 through 2019, and it is set to expire on June 30, 2019.
On January 19, 2018 and again on October 5, 2018, the County forwarded an initial proposal to extend the sales tax agreement in its current form for four years. Mayor Colvin initiated the Council’s Sales Tax Committee to discuss the proposed agreement and prepare a recommendation for further action to the Council.
The Sales Tax Committee consisting of Mayor Colvin (chair), Mayor Pro Tem Mohn and Councilmembers Waddell and Culliton met on October 9, 2018 and developed an alternative proposal. At a special meeting on October 10, 2018, the full Council endorsed the proposal (see attachment) and it was subsequently shared with the County. The proposal was reviewed with County Manager Amy Cannon and Assistant County Manager Melissa Cardinali at a meeting with the City Manager and me on October 19, 2018.
At a called meeting of the Mayor’s Coalition on December 18, 2018, the County presented a PowerPoint and an updated proposal to amend and extend the agreement (see attachments). The County’s announced a deadline for action in response to the proposal of January 31, 2019.
On January 9, 2019, the Sales Tax Committee met to review the County’s proposal with staff and unanimously voted to recommend the County’s proposal for action by the full Council.
Issues/Analysis:
The County’s proposal would continue the terms of the current agreement for the first year, FY2020, and then FY2020 will serve as the base year for calculation of future year reimbursements.
Following discussions with County staff and receipt of mathematical illustrations of the County’s proposed calculation methodology for determination of reimbursement amount for FY2021 to FY2023 (attached), staff understands the following to be the key changes between the current agreement and the proposed agreement:
• Reimbursement percentages for FY2021 to FY2023 will be locked-in at FY2020 levels
• Initial reimbursement amounts will be calculated using the set percentages and the total revenues distributed during the fiscal year.
• Any calculated reimbursements amounts due to the County in excess of the FY2020 base year level will be reduced by 60% and any reimbursement amounts due to other municipalities will be reduced by 50%.
• Similar adjustments apply should sales tax revenues decline.
It is expected that the amendment to the agreement will result in the City retaining a greater share of sales tax revenues. There are risks inherent in the change to lock-in the reimbursement percentages, particularly with respect to annual population adjustments for Fort Bragg group quarters, however it was the consensus of the Sales Tax Committee that the level of risk is acceptable given the potential to retain an increased share of the sales tax revenues and to receive a commitment to continue the per capita method of sales tax distribution for four years.
Budget Impact:
Staff prepared a comparison of estimated net revenues for Fiscal Year 2018 under the per capita and ad valorem distribution methods (attached). Using this data (which is the most recent complete fiscal year for which data is available), it is estimated that the City would lose a minimum of $5 M should the County elect to transition to the ad valorem method of distribution. In fiscal year 2018, 1 cent on the City’s ad valorem property tax rate generated approximately $1.37 M in revenue. On that basis, it would require a tax rate increase between 3.5 and 4.0 cents to make up for lost sales tax revenues should the County elect the ad valorem method of distribution.
It is difficult to project the impact of the County’s proposed amendment as sales tax growth is uncertain; however, it would certainly be beneficial to the City to reduce growth in the amount of future reimbursements to the County by 60% and to other municipalities by 50%.
Options:
• Accept the proposal as put forth by Cumberland County
• Accept the proposal put forth by Cumberland County with negotiation for additional considerations
• Reject the County’s proposal
• Other direction from Council
Recommended Action:
On the basis of the recommendation of the Sales Tax Committee, staff recommends that Council move to accept the County’s proposed interlocal agreement and request City and County staff to jointly document agreed upon processes for calculation of future reimbursements.
Attachments:
• Cumberland County’s Proposed Sales Tax Distribution Interlocal Agreement
• County PowerPoint Presentation for the Mayor’s Coalition on December 18, 2018
• Illustration of Reimbursement Calculation Methodology for FY21-23 Provided by Cumberland County
• City’s October 10, 2018 Proposal for Amendment of the Interlocal Agreement
• Comparison of Per Capita and Ad Valorem Sales Tax Distribution Methods based upon FY2018