In a budget crisis, these entities can lose control of their finances to the state
Janet Gerald, mayor pro tem of Kingstown, knew high sewer costs were a financial strain for the town when she was took office three years ago. Still, the realization that the town needed to relinquish control of its spending hit her hard.
“I was a little disappointed,” she said. “I was sad. I was heartbroken. I was embarrassed. I was crushed.”
Like dozens of towns and a couple of counties in North Carolina, Kingstown landed in financial trouble over problems paying for sewer services. The town, whose 680 residents live in a two-square-mile rectangle in Cleveland County, owes the city of Shelby upward of $200,000 for sewer services, Gerald said.
Nonetheless, Gerald thanked the Local Government Commission , a group of elected officials and appointees that oversees municipal money management and approves government borrowing, when it decided this month to assume responsibility for Kingstown’s finances. “In the end it’s going to work to our favor, once we get everything caught up and reestablished,” Gerald told Policy Watch. “The town is doing well aside from the sewer issues.”
Along with Kingstown, the Local Government Commission controls finances of three other towns — Eureka, Spencer Mountain and Robersonville, as well as the Cliffside Sanitary District, which provides sewer service.
The Cliffside district, Eureka, Bethel and Kingstown were the first entities declared “distressed units” under a new law designed to help towns find lasting solutions to problems caused by water and sewer systems that have become too expensive to maintain. But many more municipalities are on the brink of financial duress. By mid-August, more than 100 towns and counties were on a watch list  maintained by state Treasurer Dale Folwell’s office because they had shaky financial or audit practices, budget issues, problems paying for utilities, or some combination of the three.
State officials fear that finances of more local governments will crumble under the weight of pandemic-related sales tax losses and declines in water and sewer payments from commercial properties.
In September, Cliffside and Eureka received emergency operating grants from the NC Department of Environmental Quality, an agency spokeswoman said in an email, because they were in danger of bankruptcy and needed immediate help paying bills.
And in November, the Local Government Commission passed resolutions to pressure three towns, Castalia, Ronda and Wilkesboro, to file audits that were years overdue. Castalia later submitted its 2017 audit, according to the state Treasurer’s office, one of three for which it missed a deadline. Wilkesboro submitted its 2018 audit, one of two that were overdue.
State Auditor Beth Wood, a member of the Local Government Commission, is fed up with municipalities whose finances
are in disarray, yet seek permission to borrow money. She’s also exasperated with late audits. Only half of the towns, counties and other government entities required to file audits get them in on time, she said. By the time those audits are filed, sometimes months past deadline, the information in the reports is more than a year old.
Annual audits are important because municipalities should use them to evaluate their own financial obligations and solvency.
“Who can live in a household with bank reconciliations a year behind?” Wood said. “Who can be in business?”
When the Local Government Commission decides to seize a town’s books, staff in the state Treasurer’s office take responsibility for paying its bills and approving its purchases. But Wood said the state Treasurer doesn’t have enough people to take on financial responsibilities for all the local governments and water and sewer authorities that can’t do the work. “We’re getting more and more units of government that are not being run well and the Local Government Commission is going in to take them over,” Wood said. “The taxpayers across the state should not be having to run a local government when they’re supposed to be doing it themselves.”
Wood said she plans to hire a CPA to examine 20 local governments on the financial watch list, officially called the Unit Assistance List. She’ll then use the information in the next legislative session when she proposes measures to push towns to take more control of their finances. “Something has to make these towns and counties and water and sewer authorities take responsibility for their financial health, and there needs to be more consequences for those who don’t,” Wood said.
One option could be giving towns “historical charters” — a classification under which they would keep their identities but give up taxing and spending power.
In an interview, state Treasurer Folwell said he likes the idea of historical charters, so much so that he hopes that it’s the first bill filed in the new legislative session. The first bill indicates that the legislature has made an issue a high priority.
Rather than forcing struggling towns to give up their financial powers and accept historical charters, Folwell hopes they will do it voluntarily. “Once somebody does it and sees that the world doesn’t really change too much and citizens can remain confident of receiving their services, more will do it,” Folwell said.
Wood said the state could go a step further by withholding towns’ sales tax revenue until they get their finances in order. When a county or municipality fails to manage its finances, the ramifications can be far-reaching. “What goes on in the county trickles down to the school system,” Wood said. “I’m not willing to wait a year or two to watch those dominoes fall. It’s time to make these local governments take a hard look at themselves.”
Just demanding that towns do better won’t help, said Scott Mooneyham, a spokesman for the NC League of Municipalities . A punitive approach inaccurately assumes that local governments are willfully ignoring financial rules, he said. Rural areas have been losing industries and residents for decades, and some are saddled with maintaining aging water and sewer systems, but without the customers whose monthly bills would cover the costs. That’s the source of most of the problems, Mooneyham said.
“They lose tax base, they lose ratepayer base. In some of these towns, businesses will close and never come back. When you lose that, you lose the property tax base and the value of the properties declines,” he said. “You have all those things happening at the same time. Those are not easy things to deal with. These issues are so complex and are so ingrained. I’m rankled by the idea that this is irresponsible local government officers. This problem would not be as pervasive if that were the issue.”
The League of Municipalities has four consultants who work with towns on management and finances, and it is thinking about hiring more people to help towns with their audits, Mooneyham said.
Folwell has pinned the blame for two towns’ late audits on a Lexington auditing firm, where one of the principals lost his license. He did not name the firm, but it is Rives & Associates, which was working for Ronda and Wilkesboro.
Leon L. Rives II and Rives & Associates were ordered to pay more than $2 million in damages  to a Statesville company and its owner, according to the Triad Business Journal. The state Board of CPA Examiners suspended Rives II’s CPA license.
The company was rebranded, and is now RH CPAs.
“They have been late on audits, I don’t know how many years in a row,” said Victor Varela, who was Ronda’s mayor for 13 years.
The town of about 410 people, which is on one square-mile of Wilkes County, does not have money problems, Varela said. “We have been running things very well over the last few years. We’ve had consultants come in and help us update our accounting system and our budgets. They helped us develop better budgets over time.”
Frequent staff turnover at Rives & Associates was part of the reason Wilkesboro’s audits were behind schedule, said Bob Urness, the town’s finance director. The Wilkes County seat has a population of 3,400 people and 100 full-time employees, Urness said.
A tornado that hit Wilkesboro in the middle of 2017 audit season didn’t help matters, either. The 2017 audit was late, which put the “18 audit behind the 8 ball,” Urness said.
The latest RH CPAs audit engagement manager working with the town has been fantastic, Urness said, but Wilkesboro has decided to switch auditing firms. “I have a high level of confidence in our ability to get caught up and be on time going forward,” Urness said.
In an interview, RH CPAs partner W. Leon Rives said the company was found responsible for only $40,000 of the court judgment. The company is trying to get the judgment thrown out, he said.
Rives said he did not know all the details about the town audits, but that the company auditors had a hard time getting information from the towns.
In an email, company spokesman Monty Hagler said Leon L. Rives II was not involved in any municipal work, so any audit delays cannot be attributed to his CPA status. “Rives & Associates is proud of the work we perform for municipalities throughout North Carolina and we take seriously our obligation to meet deadlines for audit and tax filings,” Hagler wrote. “While there were complications related to audit filings for Ronda and the Town of Wilkesboro, including client factors that were beyond our control, we have now resolved the audit issues for the Town of Wilkesboro and are working on the audit for Ronda. We appreciate the long-standing partnerships we have built with our clients.”
I wish I could get people to understand that this is not a dagger in the coffin of Kingstown
Gerald, the Kingstown mayor pro tem, said her town shows up on the state financial watch list in part because it does not have enough people to handle money matters the way the state requires. In addition to being an elected official, Gerald was also the town’s finance director. When the Local Government Commission took over Kingstown’s finances, she lost that role.
As finance director, Gerald paid the town’s bills. But state law requires a different person to reconcile the bank statements. Kingstown did not have anyone to do that. “Whether you are Kingstown or whether you are Charlotte or Raleigh, we all operate by the same general statutes. No matter how small or big you are, you’re still required to follow the law as written,” Gerald said. “One of the things we have to contend with is separation of duties. One person cannot write the checks, balance the books, and reconcile the bank statements.”
The town’s only employee is a part-time clerk, who is responsible for the water and sewer system documents. In the last two years, the town has gone through four or five clerks, Gerald said.
Gerald is looking forward to a swift resolution to its financial problems, so the town can move on. “I wish I could get people to understand that this is not a dagger in the coffin of Kingstown,” she said. “We have issues. We’re going to work to resolve those issues.”
Folwell is looking at the potential for a heavier workload for the State and Local Government Finance Division  in his office, which monitors local governments’ accounting practices and takes over when they are deficient.
Folwell said he also is considering asking for subpoena power to pry information from municipalities that don’t cooperate. “We don’t have subpoena power to get to the bottom of something very quickly,” he said. “That’s how a lot of these things drag out way too long. I would prefer to have the option and hope it would never need to be used.”
[Editor’s note: This story was updated to clarify references to two different lists of struggling local government entities — the “distressed units” list and the “unit assistance list.”]