Newton County may be in danger of losing its excellent bond Aa2 rating and not being able to meet new state budget compliance requirements if county revenues continue to fall, according to a report by the county’s auditor Wayne Tamplin.

The county’s financial audit for FY2009 was recently completed and presented to the Board of Commissioner at a Tuesday work session. During FY2009, which ended June 30, 2009, the county experienced the beginning of its major budget reductions, and as a result had to dip into its fund balance.

Coming into the fiscal year, the fund balance was $11.9 million, 21 percent of the total $55.5 million budget. However, midway through that year the county recession began to rear its head and county revenues dropped sharply. The county was able to cut some of its budget, but it had to use its reserves to cover other expenses.

A total of $5.5 million was taken from the fund balance, including $1.1 million for public safety, $1.4 million for capital expenditures of vehicles and equipment, $1.1 million to cover adjustments to tax sales revenue, the fire fund and other accounts, $335,000 for restructuring costs associated with a reduction in force and $1.5 million to cover general M&O expenditures.

A fund balance of $6.4 million for the FY2010 budget of $48 million, left a ratio of 13 percent. However, Tamplin told the board he expected the fund balance to decrease further because the water and solid waste fund ran deficits in FY2010, which had to be made up by the general fund. This is also why water rates were increased to balance out the water fund.

Projections show that the fund balance may have dropped to 10.8 percent at the end of FY2010, or this past June 30. All calculations will not be certain until the audited is presented for FY2010, around the beginning of the new year.

The fund balance is important, because the county relies on that money in order to cover it during the first few months of a new fiscal year until property tax collections begin in late September. Around 80 percent of the county’s budget is made up of property and sales taxes.

To add difficulty, new accounting standards release by the Governmental Accounting Standards Board will require governments to officially state where they want their fund balance to fall. This is a problem, because the general rule of thumb released by the Governmental Finance Officers Association is to hold two months of operating reserves in the fund balance, which would be about 17 percent for Newton County.

Whenever the BOC passes a resolution to officially adopt a fund balance floor, they will likely be out of compliance with the new regulations. The floor does not have to be decided until the end of FY2011, giving the board a little bit of time. However, the fund balance can only be replenished by either generating excess revenues or cutting expenditures even further; neither scenario is likely for Newton County.

Tamplin said Tuesday that the digest in Newton County has decreased far more than what he’s seen in some other counties he does audits for. He projects by the end of this year, the digest may have decreased nearly 30 percent during the past three years.

"Of course all the growth was unprecedented. You were one of the fastest growing counties in the country. Unfortunately that rollercoaster that went up is going just as fast and hard in the other direction," Tamplin said Tuesday. "Nobody wants to think of a millage rate increase, but with the digest going down that much, that means less taxes are being paid (for most people)."

Chairman Kathy Morgan said at the meeting she believes the key is for the county to hold its own this year, and possibly find a way to come up with a way to cut an additional $1.6 to $2 million dollars in order to reach at least the 15 percent to 17 percent fund balance range.

Tamplin said there aren’t any specific penalties if the county is out of compliance on its fund balance requirements, but its bond rating could be lowered, which would affect future borrowing interest rates. The county has some time in this area too, because the county is rated once every two years or so, and they were just rated last year, Tamplin said.

Administrative Assistant John Middleton said the county’s bond rating was recently increased from Aa3 to an Aa2 rating. The county will try to find a way to maintain its good standing.