Chatham County government’s debt, when measured on a per-capita basis, is among the highest in the state — worsened by an almost-year-long pandemic.
But those debt figures unfairly misrepresent the county’s overall fiscal health, according to county officials, who say it’s both manageable and under control.
COVID-19 has strained local governments nationwide. Most county revenue comes from property taxes, an income source that has not substantially changed since the pandemic erupted. But other monies — sales tax and local fees — took a nosedive when in-person shopping dwindled, community programs shuttered and construction slowed.
“How has the pandemic affected the county? It’d be easier to list out the ways that it hasn’t,” says assistant county manager Bryan Thompson. “In most ways, normal things are no longer normal ... The pandemic has forced us to look at how we do business and try different things that we might not have otherwise — different solutions, different applications.”
Coronavirus-related revenue shortages have only compounded what was already a significant debt level for Chatham County. For fiscal year 2021, which will end in June, projections indicate a debt ratio of 2.19% of the county’s assessed value. That would make Chatham the second-most indebted county in North Carolina within its population group — 50,000 to 99,999.
State law permits counties to shoulder a debt load as much as 8%, but none approach that maximum.
“No county in N.C. is anywhere near the legal debt limit,” county manager Dan LaMontagne said. “The highest in the state is 2.606%.”
In Chatham’s population group, the highest is 2.254%.
Other debt indicators cast Chatham higher on the list of N.C.’s most debt-ridden counties.
“The projected high of $2,845 (per capita) in fiscal year 2021,” LaMontagne said, “may give Chatham County the highest per capita debt in its population group.”
Debt as a percent of the county’s operating budget is, ostensibly, its most troubling metric, pushing Chatham toward regulatory trouble with the N.C. Local Government Commission, which monitors debt levels around the state.
“Staff projects that, depending on decisions made in the operating budget, debt service may exceed the 15% maximum recommended by the LGC,” LaMontagne said.
But he warned against making hasty conclusions from debt indicators.
“While this is an issue, please note that the county differs from other counties in that funds for debt service have been set aside in a reserve account,” LaMontagne said. “Therefore, increases in debt service do not decrease Chatham County’s flexibility to manage the operating budget, the primary concern of the LGC’s maximum.”
Proof that debt metrics represent a fraction of cumulative fiscal health is embodied in Chatham’s bond ratings. Despite state-high debt levels, the county is well regarded by credit-rating agencies.
“Chatham’s ratings are exceptional,” LaMontagne said. “Chatham is one of only nine other counties in North Carolina to hold a AAA rating from Standard and Poor’s ...”
Moody’s, another of the world’s most esteemed credit raters, gaves Chatham an Aa1 investment grade — the second-highest option out of 21 levels.
The county’s ratings have increased even with mounting debt. Prior to 2014, Chatham was a AA+ county according to S&P, and Aa2 on Moody’s scale.
Chatham’s creditworthiness is especially impressive given its size. It “is by far the smallest county” in North Carolina to achieve such investment grades, LaMontagne said.
“With a population more than twice as big as Chatham’s, Orange County is the next largest county to hold a AAA,” he said. “Of the surrounding counties, Chatham’s combined rating is higher than Alamance, Lee, Harnett, Moore and Randolph.”
According to county finance specialists, Chatham’s unprecedented investment grades are thanks to a unique modeling tool.
“The only reason that we are so well rated is because we have the debt reserve and the debt model,” said Finance Director Vicki McConnell, who also serves as Chatham County’s deputy town manager. “We follow that religiously.”
In 2006, the county hired financial consultants to develop a long-term management tool for Chatham’s fiscal health. The final product was akin to what individuals might get from a financial adviser, but scaled to accommodate hundreds of millions of dollars in annual funds.
It was a game-changer, county officials agree.
The debt model — a carefully-constructed, data-driven payback plan created for any county project which adds indebtedness — has largely contributed to Chatham’s success in achieving quick and manageable development. Town management consults the model before any debt-incurring projects are submitted for approval to the county’s board of commissioners.
“(It) factors in several assumptions when determining the solvency of the county in issuing new/additional debt,” Thompson said.
Current factors include a 2% annual growth rate in property tax revenue, a 3% annual growth rate in school impact fees, projected investment returns, project inflationary costs per year, lottery proceeds and more. As county circumstances adjust, the model is tweaked and projections are run anew.
If a project satisfies debt model requirements, it moves into the funding process.
“Once approved, funds to cover the payment of future debt are set aside through the county’s debt reserve,” Thompson said.
A project does not commence without total guarantee of fiscal backing.
“Every time we decide to borrow money, we model that out and see exactly how much money it will take to pay the debt,” McConnell said, adding, “it automatically goes into a debt reserve ... We always have the revenue ahead of time for that.”
While county debt represents borrowed money, it is never beyond what the county can afford out-of-pocket.
“In advance of issuing, we ensure that we have the fiscal wherewithal to handle it well in advance ...” Thompson said. “We actually have the money on hand to cover debt.”
Chatham’s debt management system is not unusual for N.C. counties, but it is often associated with Chatham’s bigger neighbors like Wake and Orange.
“It think it is more common with larger counties,” said county budget director Darrell Butts. “... One thing we tell the board a lot is if the big counties are like adults and the small counties are like children, we’re sort of in that awkward teenage phase, where we are rapidly becoming a larger county.”
But it was from Chatham that larger counties learned the value of sophisticated debt modeling.
“If I’m not mistaken,” Butts said, “Chatham was the first to use any sort of debt model like this ... Other, larger counties have since used something similar, and their scale is much, much larger because they’re larger counties. But they use a similar model now, and it all started here in Chatham.”
Reporter D. Lars Dolder can be reached at dldolder@chathamnr.com and on Twitter @dldolder