Introduction to Local Government Finance

Getting your book ready.

Chapter 13

Financing Public Enterprises

by Kara A. Millonzi

Introduction

North Carolina counties and municipalities (collectively, local units) are authorized to engage in certain public enterprise activities.1 A public enterprise is an activity of a commercial nature. When a local unit owns or operates a public enterprise, it acts in a proprietary capacity and has more flexibility to treat the enterprise like a private business venture than a traditional government function. Many public enterprises are funded with user charges and are self-supporting (or predominantly self-supporting). That means that each year the local government generates enough income from the user charges to support the operating and capital expenses of the enterprise.

A local unit is not required to provide any public enterprise services. Further, if a local government chooses to provide one or more of the authorized public enterprises, it need not make them available to all citizens or property owners within the unit. There is no duty of equal service.2 Generally, as long as it is not unlawfully discriminating against a protected class of citizens, a local government can choose where, and under what circumstances, it will provide the services. If, however, a municipality involuntarily annexes property into its jurisdiction, the annexation triggers special statutory requirements regarding the provision of water and sewer services. Under certain circumstances, a municipality may be required to provide these services to newly annexed properties.3

Authorized Types of Public Enterprise Services

The most common types of public enterprises are water and sewer utility services, but the North Carolina General Statutes (hereinafter G.S.) authorize both counties and municipalities to operate public enterprises for all of the following purposes:

  • water supply and distribution,

  • sewage collection and treatment,

  • solid waste collection and disposal,

  • airports,

  • public transportation,

  • off-street parking,

  • stormwater-management programs and structural and natural stormwater and drainage systems.4

Municipalities are authorized also to operate enterprises for the following purposes:

  • cable television (and broadband),5

  • electric power generation and distribution,

  • gas production and distribution.6

Scope of Authority

Local government authority to operate public enterprises is broad—the statutes allow a county or municipality to “acquire, lease as lessor or lessee, construct, establish, enlarge, improve, extend, maintain, own, operate, and contract for the operation of” the above-listed functions.7 A county and municipality may provide the enterprise services both inside and outside its territorial boundaries. A county may provide the services in its unincorporated and incorporated areas.8

The authority is not absolute, though. State law often imposes limitations on enterprise activities. For example, a unit of local government may not “displace” a private company that is providing collection services for solid waste or recycled materials without providing appropriate notice and waiting at least fifteen months or providing due compensation to the displaced company.9 Displacement of a private provider occurs when a local government either (1) takes any formal action to prohibit a private company from providing all or a portion of the collection services that the company is providing in the affected area or (2) uses availability fee or tax revenue to fund competing collection services. Similarly, the General Assembly has significantly limited the authority of municipalities to provide cable television and broadband services in competition with the private sector.10 And, as detailed below, state law limits the authority of local units to charge certain fees for enterprise activities.

Governments also must be careful not to exceed the scope of an authorized enterprise function. In Smith Chapel Baptist Church v. City of Durham,11 the City of Durham had established a stormwater enterprise and assessed a fee on all properties within the unit. The fee revenue funded, among other things, educational programs and other outreach efforts associated with the city’s comprehensive stormwater-management program. The city established the program to satisfy state and federal regulatory requirements. The North Carolina Supreme Court held that the city had exceeded its public enterprise authority when it used revenue generated from the stormwater fee to fund the stormwater-quality management program because the relevant statute at the time specified that a unit could establish a public enterprise only for structural and natural stormwater and drainage systems. Note that the General Assembly subsequently amended the statute to allow a unit to establish an enterprise to fund a comprehensive stormwater-quality management program.12

Interlocal Cooperation to Provide Enterprise Services

Counties and municipalities have largely coextensive authority to provide most public enterprise services. And, as discussed below, there are a handful of other local government entities authorized to provide certain public enterprise services, often on a regional basis. Two or more of these local governments may enter into interlocal agreements authorizing one unit to provide services to citizens in the other unit or authorizing the units to jointly engage in the provision of services.13 An interlocal agreement is a contract that sets forth the terms or conditions of service and payment and, as long as it does not conflict with state or federal law, governs the parties’ relationship. State law limits a municipality to a forty-year contract for the supply of water and a thirty-year contract for the supply of other public enterprise services.14 A county is not subject to the same term limits. Use of interlocal agreements to contract for water and sewer services between and among local governments is common practice. The Environmental Finance Center at the University of North Carolina has documented numerous interlocal agreements related to the provision of water and wastewater across the state.15 The agreements represent a variety of interlocal structures, including joint provision of services, bulk water purchases, and backup resources for emergency purposes only.

The authority to enter into interlocal agreements, however, applies only to the services that all parties to an agreement are allowed to provide. For example, a county could execute an interlocal agreement to provide solid waste services to one or more other counties or municipalities, but it could not contract through an interlocal agreement to provide cable television (broadband) services.

Franchise Agreements

In addition to interlocal agreement authority, a municipality also may enter into one or more franchise agreements with another government entity or a private entity16 to provide any of the authorized public enterprise services (except cable television and broadband).17 A county may enter into franchise agreements only for solid waste collection and disposal.18 The franchise authority includes the ability to prohibit any government or private provider from furnishing a public enterprise service within a unit’s territorial boundaries without a franchise. A municipal or county governing board may use a franchise agreement to impose reasonable terms of service on a provider, and except for solid waste, an agreement may authorize the operation of the franchised activity for up to sixty years.19 (A solid waste franchise agreement may not exceed thirty years.)20

Other Local Government Public Enterprise Service Providers

Counties and municipalities are not the only authorized government providers of public enterprises. There are a number of limited-purpose government entities that can provide one or more of the authorized public enterprise services. These other government entities often are created to serve regional populations that cut across municipal or county boundaries. For example, there are several government entities that are authorized to provide water and sewer services: (1) counties or two or more political subdivisions (such as municipalities or sanitary districts) can organize water and sewer authorities;21 (2) any two or more political subdivisions in a county can petition the board of commissioners to create a metropolitan water or sewer district;22 and (3) the Commission for Health Services can create a sanitary district to operate sewage collection, treatment, and disposal systems and water supply systems for the purpose of preserving and promoting public health and welfare, without regard for county or municipal boundary lines.23 (Sanitary districts also may provide solid waste collection, fire protection, recreation, and rescue services.) There also are parking authorities,24 public transportation authorities,25 regional natural gas districts,26 regional solid waste management authorities,27 and various airport authorities and commissions.28 The authorities, districts, and commissions may serve customers within a county or municipality directly or may contract with the unit of local government to furnish the utilities.

Regulating Public Enterprises

Local Government Regulatory Authority

When public enterprise services are provided by counties and municipalities, or by the other local government entities listed above, they are not subject to regulation by the state’s Public Utilities Commission. The Public Utilities Commission has jurisdiction only over privately owned utility companies (which, confusingly, are referred to as public utilities). The General Assembly has accorded a county or municipal board “full authority to protect and regulate any public enterprise system belonging to or operated by it by adequate and reasonable rules.”29 The rules must be adopted by ordinance and must apply throughout the area in which the public enterprise service is provided. (The limited-purpose government entities discussed in the section immediately above have similar authority with respect to the public enterprise service(s) they are authorized to provide.)

A local governing board may impose reasonable restrictions on who may connect to its public enterprise systems and how those connections are made. Furthermore, a unit may specify terms of continued service and may discontinue service to any customer if those conditions are not met. All regulations must be adopted by ordinance, and because most public enterprise services are provided under contract with a customer, regulations, restrictions, and other terms of service should be memorialized in a written contract as well. In fact, the more detailed the provisions in an enterprise service contract, the more protection afforded to a local government to deal with a customer who fails to live up to the terms of service.

Local Government Commission Oversight

The legislature has bestowed on the state’s Local Government Commission (LGC) some oversight authority over the financial management of a county’s, municipality’s, or other local entity’s water or sewer system. The LGC is a nine-member state body within the Department of State Treasurer that approves most local government borrowing transactions and issues bonds on behalf of local units.30 The LGC monitors the fiscal health of local units in the state. It is empowered to “issue rules and regulations having the force of law governing procedures for the receipt, deposit, investment, transfer, and disbursement of money and other assets by units of local government. . . . ”31 The LGC also “may inquire into and investigate [a local unit’s] internal control procedures” and issue warnings to units of any internal control deficiencies or violations of the Local Government Budget and Fiscal Control Act.32

Under certain circumstances, the LGC is empowered to take more drastic action, including assuming “full control of [a local unit’s] financial affairs. . . . ”33 The LGC becomes “vested with all the powers of the governing board as to the levy of taxes, expenditure of money, adoption of budgets, and all other financial powers conferred upon the governing board by law.”34

The LGC may assume full control of a unit’s water or sewer system and assume all powers of the governing board as to the operation of the public enterprise if the system, for three consecutive fiscal years, experiences negative working capital, has a quick ratio of less than 1.0, or experiences a net loss of revenue.35 Working capital is defined as “current assets, such as cash, inventory, and accounts receivable, less current liabilities. . . . ”36 A quick ratio of less than 1.0 “means that the ratio of liquid assets, cash and receivables, to current liabilities is less than 1.0.”37 Before the LGC assumes full control of a local unit’s public enterprise system, it must find that the financial stability of the unit is threatened and that the unit has failed to make corrective changes in its operation after having received notice and warning from the LGC.38

Mandating Participation in Public Enterprise Services

Water and Sewer Enterprises

Under certain circumstances, a county’s, municipality’s, sanitary district’s, or water and sewer authority’s governing board may mandate that a property owner connect his or her property to the unit’s water and/or sewer system. Specifically, a local unit’s board may adopt an ordinance requiring the owner of any property that is developed or improved, and that is located within a reasonable distance of the unit’s water and/or sewer lines, to connect.39 The local unit may assess the property owner any costs associated with connecting the property to its water and/or sewer system.40

There is a notable exception to this authority for water connections. If a property owner has a permitted, functioning drinking water–well permit, a local unit may not mandate connection to the unit’s water system.41

A local unit must issue a drinking water–well permit if

  1. the property is undeveloped or unimproved, even if the property could be served by a government water system;42

  2. the property is developed or improved and (a) a government water system has not yet installed water lines directly available to the property or (b) the government water system cannot provide water service to the property at the time the property owner desires service.43

Even if a property owner has a drinking water–well permit, there are a few situations in which a local unit still may mandate connection to the unit’s water system.44 Under G.S. 87-97.2, a government utility may still require a property for which a permit has been issued to connect to its water system if one or more of the following apply.

  1. “The private drinking water well serving the property has failed and cannot be repaired.” The statute does not specify who determines whether or not the well can be repaired. It is up to the government utility to establish a process for verifying the functionality of each private drinking well.

  2. “The property is located in an area where the drinking water removed by the private drinking water well is contaminated or likely to become contaminated due to nearby contamination.” This determination is made or confirmed by the local health department.

  3. Operation of the government utility “is being assisted by” the LGC. The statute does not define the circumstances under which the LGC would be deemed to be assisting the government utility. Arguably, all local governments and public authorities are assisted to some extent by the LGC, inasmuch as the LGC monitors the fiscal health of each unit by reviewing its annual audit. But to read “assisted by” this broadly would cause the exception to swallow the rule. It is likely, therefore, that the legislature intended the phrase to mean something more.

It is possible that for purposes of this statute, “assisted by” means that the LGC has issued debt on behalf of the government utility. When a local government or public authority borrows money through general obligation bonds, revenue bonds, special obligation bonds, or project-development bonds, it is the LGC that actually issues the bonds. Even this interpretation of “assisted by” seems broader than what the legislature likely intended, though.

In an extreme case, the LGC has the authority to impound the books and records associated with a government utility, assume full control of all its affairs, or take any other actions deemed necessary by the LGC to deal with a government utility that is in financial trouble.45 Thus, “assisted by” could refer only to situations in which the LGC takes action under this statute or when it compels a government utility to make its debt-service payments pursuant to G.S. Chapter 159, Section 36. That seems too restrictive of an interpretation, though. If the legislature intended this result, it could simply have stated that the exception applies only when the LGC takes action under G.S. 159-181 or 159-36. By instead using the phrase “assisted by,” it appears that the legislature intended for the exception to apply to a broader set of circumstances.

In fact, viewing the exception in the context of the whole statute, it is likely that the legislature intended it to apply when a government utility is in financial trouble, or on the verge of financial trouble, such that prohibiting the utility from mandating connections might affect the utility’s continued viability. Thus, I think the most likely interpretation of “assisted by” is that the LGC has placed the unit on its Unit Assistance List.46

Figure 13.1 illustrates when a local unit may mandate connection to its water system, and Figure 13.2 illustrates when a local unit may mandate connection to its wastewater system.

Figure 13.1 Local Government Authority to Mandate Connection to Its Water System

Mandate Connection to Local Government Water System?

Drinking Well Permit Issued

Drinking Well Permit Not Issued

Property is developed or improved

No*

Yes

Property is undeveloped and unimproved

No*

No*

*Unless one of the exceptions in G.S. 87-97.2(e) applies.

Figure 13.2 Local Government Authority to Mandate Connection to Its Wastewater System

Mandate Connection to Local Government Wastewater System?

Property Has Functioning Septic System

Property Does Not Have Functioning Septic System

Property is developed
(with at least one residential or commercial unit)

Yes

Yes

Property is undeveloped
(without any residential or commercial units)

No

No

Solid Waste Enterprise

A municipality also has authority to compel certain property owners to participate in the municipality’s solid waste collection service. If a property owner has not contracted for solid waste collection services with a private hauler or another government hauler, a municipality may require that the property owner use the municipality’s hauler. (A municipality may collect the solid waste itself or contract with one or more private or government haulers to act on its behalf.) A county does not have analogous authority. And neither a municipality nor a county may require that a property owner participate in the local unit’s collection of recyclables.47

Using Public Enterprise Authority to Enforce Other Laws and Regulations

Questions often arise about whether a local unit may use its relationship with public enterprise customers to enforce other state or local rules or requirements. For example, if a unit provides water services to a customer who has not paid his or her property taxes, may the local government discontinue the water services until the property taxes are satisfied? Or, may a unit refuse to provide sewer services to a business that is operating without a required privilege license or to one that is not in compliance with the fire code? The answer to all of these questions is “no.” That is because when a local government owns, operates, or contracts for the provision of public enterprise services, it is acting in a proprietary capacity (as opposed to a governmental capacity).48 The North Carolina Supreme Court has distinguished between the two functions as follows:

  • Any activity . . . . which is discretionary, political, legislative or public in nature and performed for the public good in behalf of the State, rather than to itself, comes within the class of governmental functions. When, however, the activity is commercial or chiefly for the private advantage of the compact community, it is private or proprietary.49

The North Carolina Supreme Court has held that a local government must not comingle its proprietary and governmental functions. Specifically, in Dale v. City of Morganton,50 the court specified that the municipality’s right to refuse a service it renders in its capacity as a public enterprise utility provider must be determined separately from the functions it performs in its role as a unit of local government. In that case, the municipality had supplied electricity and water to a certain house in a newly annexed area but later inspected the dwelling and found it unfit for human habitation. It subsequently cut off the electrical supply to the house and refused to reconnect the service. In its review of a challenge to the municipality’s actions, the court concluded that a municipality could not deprive an inhabitant “otherwise entitled thereto, of light, water or other utility service as a means of compelling obedience to its police regulations, however valid and otherwise enforceable those regulations may be.”51

There is an apparent exception to this general principle, and that is when a municipality uses its public enterprise authority to compel voluntary annexation. Municipalities generally are authorized to provide utility services outside their territorial boundaries. They are under no obligation to do so, though. A municipality is free to negotiate with utility customers outside municipal borders and to define by contract the conditions under which services will be provided and the terms of those services. Some municipalities agree to provide utility services to “outside” properties only if the property owners contractually agree to voluntarily petition for annexation into the municipality when future criteria are met. The North Carolina Court of Appeals recently held that a municipality had authority to cease providing wastewater services to a customer located outside the municipality’s territorial boundaries because the property owner refused to honor its contractual commitment to voluntarily annex the property into the city limits.52

Funding Public Enterprises

User Fee Authority

As stated above, public enterprises tend to be funded primarily by the collection of user fees. Both counties and municipalities, as well as most of the other local government utilities, have the same authority to impose “schedules of rents, rates, fees, charges, and penalties for the use of or the services furnished, or to be furnished, by a public enterprise . . . .”53 This authority is very broad. And the fees may be assessed on all users of the enterprise services, regardless of their property status. Unlike with property taxes, there are no statutory exemptions from paying user fees for government property or property used for educational, charitable, or religious purposes.54 The authority is not limitless, though. State law imposes restrictions on the types of upfront charges that may be assessed on new development.55

Units almost always assess periodic (monthly or bimonthly) user charges on public enterprise service customers to fund operational elements of an enterprise system. The periodic charges usually constitute a variable component based on actual usage as well as a fixed component to cover operating and capital overhead costs. Many local governments also have implemented various block-rate fee structures—either charging increased (increasing-block) or decreased (decreasing-block) rates based on additional units of usage of an enterprise service. In addition, local units have targeted revenue-generating options for certain public enterprise capital projects, such as special assessments,56 critical-infrastructure assessments,57 special taxing districts, and system-development fees.58 Finally, most local governments have categorized consumers into various classes for purposes of setting rate schedules that closely track the costs of providing the enterprise services.

User fee schedules are influenced by the policy prerogatives of a local government’s governing board. Consequently, the numbers and types of classifications vary greatly among North Carolina’s counties and municipalities. A local government that wishes to promote conservation may impose a different rate structure from that of a local unit hoping to foster commercial or industrial development. Municipalities also may configure rates so as to encourage or discourage annexation of extraterritorial property.

User-Fee Rate Classifications

A unit may establish service classifications for purposes of charging different rates to different customer groups.59 These classifications are subject to the common law of utilities, though.60 Under the common law, different rate classifications may reflect differences in the costs of providing services to certain customer groups. In addition, rate classifications may be “based upon such factors as . . . the purpose for which the service or the product is received, the quantity or the amount received, the different character of the service furnished, the time of its use or any other matter which presents a substantial ground of distinction.”61 In other words, courts have upheld classifications for purposes of assessing different utility rates when there is a utility-based reason for the differentiation. However, classifications based on the type—or status—​of the customer, or customer group, that do not relate to one of the above-listed purposes are not valid. For example, a local unit may assess a different rate for water used for irrigation purposes than for household or other commercial purposes (classification based on the purpose for which the water is used), but it cannot charge a different rate to all farmers (classification based on status). A unit may vary its sewer rates based on the size of a house or the number of bathrooms (proxies for different costs or capacity demands), but it may not charge a different rate based on customer income levels (classification based on status). A unit may charge all its commercial customers a solid waste collection fee rate that is different from the rate it charges residential customers (proxy for different capacity demands), but it may not charge a different rate to all churches or all nonprofit organizations (classification based on status). Or, a unit may assess a different rate to customers who request service after a certain date (again, proxies for different costs or capacity demands), but it may not set rates based on the age of its customers (classification based on status).

One further statutorily sanctioned rate differentiation is between customers located within a unit’s territorial boundaries and customers residing outside these boundaries. This authority applies to all public enterprise activities, though it is used primarily for water and sewer services. Counties and municipalities typically assess higher fees on extraterritorial customers. For municipalities, the rate differential often serves as an incentive for voluntary incorporation by customers in surrounding unincorporated communities.

Special Limitations on User-Fee Rates

The law imposes a few additional limitations on user-fee rates for certain public enterprise services. For stormwater services, the fees assessed by a local government unit may not exceed the costs of the unit’s stormwater-management program. Fee schedules must apply throughout the unit and may vary only

  • according to whether the property served is residential, commercial, or industrial property, the property’s use, the size of the property, the area of impervious surfaces on the property, the quantity and quality of the runoff from the property, the characteristics of the watershed into which stormwater from the property drains, and other factors that affect the stormwater drainage system.62

Both counties and municipalities have authority to impose three different types of solid waste fees—collection fees, disposal use fees, and availability fees.63 Each fee may be charged only under certain circumstances. And the aggregate revenue from each fee may not exceed the costs of providing the specific solid waste services for which the fee is authorized.64

Process for Adopting Public Enterprise User Fees

Generally, the process for adopting public enterprise fees is simple. The governing board of a local unit sets the fees in its annual budget ordinance or in a separate ordinance. With a few exceptions, there are no notice, public hearing, or other formal public comment requirements. The governing board also is free to change the fees at any time during the fiscal year.

There are additional procedural requirements to adopt a stormwater fee. The governing board must hold a public hearing and provide sufficient notice of that hearing.65 There also are added procedural requirements for water and sewer charges that apply to new subdivision development. Unless the applicable fees are adopted in the unit’s annual budget ordinance, the unit must give notice of the fees and provide an opportunity for public comment.66 Finally, a separate set of procedural requirements applies to the adoption of water and wastewater system-development fees.67

General Fund Subsidies for Certain Utility Customers

Note that there are methods by which a local government may accomplish a purpose similar to discounting public enterprise rates, at least for certain customer groups. First, counties and municipalities are to “undertake programs for the assistance and care of [their] senior citizens” (defined as citizens who are at least 60 years of age).68 Under this authority, a county or municipality may establish a utility rate subsidy program for its senior citizens. The program must be established in the unit’s general fund (not its enterprise fund) but can be structured in a number of different ways. For example, the program may authorize a unit to transfer moneys from the general fund to the enterprise fund to pay all or a portion of a qualifying senior citizen’s utility bill. It also may set up a reimbursement system for utility customers from the general fund. In addition, a county or municipality may apply a rate subsidy program to all its senior citizens, or it may limit the program to senior citizens at or below a certain income level or senior citizens who are disabled.

Second, counties and municipalities may undertake community-development programs “concerned with . . . welfare needs of persons of low and moderate income.”69 Under this authority, a local unit likely may establish a utility rate subsidy program similar to the one described above but for low- or moderate-income citizens. Again, the unit must use general fund moneys, not enterprise fund proceeds, to fund the subsidy program. Although the authorizing statute does not expressly define “low or moderate income,” it does reference the Housing Authorities Law (G.S. Chapter 157, Article 1) and, by extension, local officials can reasonably employ the definitions of “persons of low income” and “persons of moderate income” found in that law (G.S. 157-3) when interpreting the statute’s scope. Local officials might also consult the Section 8 income limits established by the federal Department of Housing and Urban Development for guidance in determining qualifying income limits.

Third, G.S. 158-7.1 provides broad authority for counties and municipalities “to make appropriations for economic development purposes.” Under this authority, as part of a properly structured economic-development incentive, a local government may provide a cash grant to a prospective commercial or industrial entity that reimburses the entity for all, or for a portion, of its utility fees over a period of time.70 A unit also may fund the extension of utility lines or facilities to serve the entity. Again, appropriations for such incentive programs should derive from the general fund, not an enterprise fund.

Additional Financing Sources

In addition to imposing user fees, a local government is authorized to finance the cost of any public enterprise “by levying taxes, borrowing money, and appropriating any other revenues therefor, and by accepting and administering gifts and grants from any source on behalf thereof.”71 For accounting purposes, enterprise services often are budgeted and accounted for in an enterprise fund, whereas general government activities and revenues are accounted for in the general fund.72 Local governments are free to transfer any property tax proceeds or unrestricted revenues from the general fund to an enterprise fund to finance the capital or operating costs of an enterprise activity.

Transferring Moneys from an Enterprise Fund to the General Fund

What about transferring moneys the other way? May a unit transfer funds from an enterprise fund to the general fund? The answer is a little more complicated. There are two types of transfers. The first is a transfer of funds from the enterprise fund to the general fund to reimburse the general fund for administrative overhead expenses to support a public enterprise activity, such as covering a portion of the unit’s manager’s and finance officer’s salaries (which are paid out of the general fund). A reimbursement is allowed to the extent that it represents actual expenses incurred (or reasonable approximations thereof) on behalf of the public enterprise. (Note that for accounting and financial reporting purposes a local unit should refer to these appropriations as “reimbursements,” not “transfers.”)

The second type of transfer involves using revenue generated by a public enterprise activity to support other general government programs and functions. As to this type of transfer, G.S. 159-13 specifies that

  • [n]o appropriation may be made from a utility or public service enterprise fund to any other fund than the appropriate debt service fund unless the total of all other appropriations in the fund equal or exceed the amount that will be required during the fiscal year, as shown by the budget ordinance, to meet operating expenses, capital outlay, and debt service on outstanding utility or enterprise bonds or notes.73

Although the statute is written as a prohibition, it actually allows a local government to transfer moneys from an enterprise fund to the general fund to support general government functions as long as all of the enterprise activity expenses that will come due during the fiscal year are covered. In essence, it allows a unit to transfer profits generated by the enterprise activity to the general fund to supplement other general fund revenue sources.

There are some limits to the authority to transfer money from an enterprise fund. The authority to transfer must be read in conjunction with the authority to set rates for the particular enterprise service. There are a few enterprise activities for which the ratemaking authority of a local unit’s governing board is much more constrained. And those constraints affect the unit’s ability to appropriate or loan money from an enterprise fund. For example, solid waste fees must be used only to fund solid waste activities.74 In Manning v. County of Halifax,75 the North Carolina Court of Appeals held that the county’s practice of setting solid waste availability fees such that the aggregate revenue generated exceeded the aggregate costs of operating the county’s disposal facilities was unlawful. And the reason the court knew that the fee revenue exceeded the costs of the solid waste program was that the county had transferred the “profit” from the solid waste fund to the general fund and used the money to support general government activities.

In determining whether or not a transfer from an enterprise fund is lawful, a unit must first examine any earmarks on the money being transferred. If the money itself may be spent only to support the enterprise activity, it may not be appropriated or loaned to another fund to pay for an unrelated expenditure. Thus solid waste–fee revenue may be transferred to the general fund or to the debt-service fund to make debt-service payments on a borrowing incurred for a solid waste project. It may be moved to the general fund to cover legitimate reimbursements for services provided to the solid waste enterprise but financed in the general fund. The revenue, however, may not be appropriated to the transportation fund to purchase a new bus. It may not be appropriated to the general fund to pay for parks improvements. And it may not be loaned to the general fund to help balance the current year’s budget.76

In addition to the statutory earmark on solid waste fees, state law requires stormwater-fee revenue to be used only to support stormwater management.77 And transfers from electric funds of certain ElectriCities may not exceed the greater of (1) 3 percent of the gross capital assets of the electric system or (2) 5 percent of the gross annual revenues of the preceding fiscal year.78 There may also be restrictions imposed on other enterprise revenue by contract, bond covenants, local acts, or grant agreements. None of these restrictions prohibits a local unit from using the enterprise revenue to compensate the general fund for any reasonable overhead expenses allocated to the enterprise activity. But they do constrain a unit’s ability to transfer the money from the enterprise fund.

Even if legally allowed, a local unit should carefully consider whether a transfer from an enterprise fund (by means of an appropriation or loan) is appropriate. Transfers that occur frequently, or that involve a large amount of money, might be masking a problem with the unit’s financial condition. Relying on enterprise ratepayers to fund general government expenditures also may raise issues of equity, fairness, and accountability. This argument resonates particularly in jurisdictions where ratepayers compose only a subset of taxpayers of the unit or where ratepayers come from outside the unit’s territorial boundaries. Moreover, this practice could have negative financial implications for the unit, particularly related to issuing debt. Credit-rating agencies are likely to look unfavorably upon any effort that destabilizes an enterprise fund.

In recent years the General Assembly has indicated that it strongly disfavors transfers from an enterprise fund. In 2014, it enacted G.S. 159G-37(b), which prohibits a local government from receiving loans or grants for water or wastewater purposes from the Clean Water State Revolving Fund (CWSRF), Wastewater Reserve, Drinking Water State Revolving Fund (DWSRF), or Drinking Water Reserve if the unit has transferred money from its water or sewer enterprise fund to the general fund to supplement the resources of the general fund. The prohibition applies only to transfers. It does not apply to legitimate reimbursements of the general fund for “expenses paid from that fund that are reasonably allocable to the regular and ongoing operating of the utility, including, but not limited to, rent and shared facility costs, engineering and design work, plan review, and shared personnel costs.”79

The statutory language, however, does not contain a specific time period limitation on transfers. The Department of Environmental Quality requires that a local unit certify that it has not transferred funds from an enterprise fund since the law’s effective date, July 1, 2014.80

Collection Methods for Public Enterprise Revenues

Because most public enterprise services are voluntary, they often are governed by an express or implied contract between the government and each enterprise customer. And it is the contracting party that the government must look to for payment for enterprise services. Sometimes payment is collected before services are rendered. In many cases, however, and particularly for utility services, customers are billed after the services are received. What happens when a customer fails to pay? The following collection remedies are at a local unit’s disposal.

Disconnecting Services

A local unit generally may disconnect public enterprise services at the property or premises where the delinquency occurred.81 A county- or municipal-owned or -operated enterprise must wait ten days from the date the account becomes delinquent to suspend service. If a government operates more than one public enterprise and includes the fees for multiple public enterprises on the same bill, its governing board may adopt an ordinance ordering partial payments. That means that if a customer does not satisfy the bill in full for all enterprise services, the governing board determines what fees are paid first, and a unit may disconnect any services that remain unpaid (after the ten-day waiting period). Typically, a unit organizes payments such that water service is paid for last because it is more essential than other public enterprise services.

Civil Suit

A local unit may institute a civil suit against the contracting party to recover the amounts owed. The statute of limitations for collecting delinquent water, electric, and natural gas payments is four years.82 The statute of limitations for collecting delinquent sewer, cable television, stormwater, and solid waste payments is three years.83 The statute of limitations is the time period during which the unit must institute suit in order to collect on the debt.

Debt Set-Off

Another option for a local unit seeking to collect on a delinquent public enterprise service account is to submit the claim to the state’s debt set-off program for recovery against the contracting party’s state income tax return or state lottery winnings, if any.84 The amount owed must exceed $50 to be eligible for debt set-off, and the unit must follow the detailed statutory procedural requirements to participate in the program.

Prohibited Collection Methods

A local utility provider is legally prohibited from taking some collection actions. A local government may not place a lien on the property where enterprise services are provided. It also may not hold anyone other than the contracting party liable for the enterprise debts.85 If, for example, a tenant establishes an account for water service with the local government, the tenant is the contracting party. That means that if the tenant defaults on his or her water payments, the local government may enforce collection only against the tenant. It may not proceed against the property owner. The unit also may not refuse service to a new tenant at the property where the delinquency occurred. This action would be akin to holding the new tenant liable for the former occupant’s debt.

Finally, a local government generally may not refuse service to a delinquent former customer at a new property or premises. Although there is very little case law addressing this issue, a unit may be able to refuse future service if it has adopted a detailed written policy stating that the public enterprise service is conditioned on satisfaction of all previously owed (and still legally collectible) debts to the government.

Discontinuing a Public Enterprise Service Altogether

As stated above, a local government is not required to provide any public enterprise services. If, however, a municipality chooses to furnish one or more of these services, it is restricted from discontinuing the services altogether. State law prohibits a municipality from selling, leasing, or discontinuing an electric power generation, transmission, or distribution system; a gas production, storage, transmission, or distribution system; or a public transportation system, unless the proposed transaction is first approved in a voter referendum.86 A municipality may, but is not required, to hold a referendum on a sale, lease, or discontinuance of a water treatment or distribution system or a wastewater collection or treatment system.87 A voter referendum is not required (or authorized) before the sale, lease, or discontinuation of airports, off-street parking systems, solid waste collection or disposal systems, or cable television services.88 A county is free to sell, lease, or discontinue any of its public enterprise functions without voter approval.89

Chapter Endnotes

    This chapter reflects the law as of June 1, 2023.

  1. As used in this book, the term “municipality” is synonymous with “city,” “town,” and “village.” Note that, as discussed below, in addition to counties and municipalities, a handful of special-purpose local government entities also are authorized to provide certain public enterprise services.

  2. See Ramsey v. Rollins, 246 N.C. 647 (1957).

  3. See Frayda Bluestein, “Water and Sewer Extensions ‘At No Cost’—Analyzing the New Annexation Law,” Coates’ Canons: NC Local Government Law blog (Aug. 2, 2011).

  4. See Chapter 153A, Section 274 (counties) and Chapter 160A, Section 311 (municipalities) of the North Carolina General Statutes (hereinafter G.S.). Note that counties are authorized also to establish county water and sewer districts to provide water supply and distribution and sewage collection and treatment services. G.S. Chapter 162A, Article 6. A county that establishes a water or sewer district also may use its public enterprise authority under G.S. Chapter 153A, Article 15 to regulate the services and set user fees. See McNeill v. Harnett Cnty., 97 N.C. App. 41 (1990).

  5. In BellSouth Telecommunications, Inc. v. City of Laurinburg, 168 N.C. App. 75 (2005), the North Carolina Court of Appeals held that the authority to provide cable television services included the authority to provide broadband services.

    Counties have limited authority to provide grants to certain unaffiliated or nonprofit Internet providers to expand service in unserved areas. See G.S. 153A-459.

  6. See G.S. 160A-311.

  7. See G.S. 153A-275(a) (counties); 160A-312(a) (municipalities).

  8. Note that a county does not need a municipality’s governing board’s permission to construct utility lines or other infrastructure within the municipal boundaries. The county may negotiate with private property owners to obtain the necessary easements and other property rights. A municipality, however, may use its franchise authority to limit a county’s ability to provide utility services within the municipality or to prohibit it altogether. See G.S. 160A-319.

  9. See G.S. 160A-327.

  10. See G.S. Chapter 160A, Article 16A.

  11. 350 N.C. 805 (1999).

  12. See G.S. 160A-311 (municipalities); 153A-274 (counties); see also G.S. 160D-925; 153A-454.

  13. See G.S. Chapter 160A, Article 20.

  14. G.S. 160A-322.

  15. See Environmental Finance Center, Interactive Map of Community Water System Interconnections in North Carolina (July 2015).

  16. A privately owned public utility corporation may petition the state’s Public Utilities Commission to provide services in a designated area. See G.S. Chapter 62, Article 6.

  17. G.S. 160A-319.

  18. G.S. 153A-136.

  19. Note that if a municipality is providing the services to another municipality under a franchise agreement, it is subject to G.S. 160A-322, which limits the time periods for contracts for the provision of water services to forty years and the provision of other public enterprise utility services to thirty years.

  20. G.S. 160A-319; 153A-136.

  21. See G.S. Chapter 162A, Article 1.

  22. See G.S. Chapter 162A, Articles 4 and 5.

  23. See G.S. Chapter 130A, Article 2, Part 2.

  24. See G.S. Chapter 160A, Article 24.

  25. See G.S. Chapter 160A, Articles 25, 26, and 27.

  26. See G.S. Chapter 160A, Article 28.

  27. See G.S. Chapter 153A, Article 22.

  28. See G.S. 63-4.

  29. G.S. 160A-312(b); see also G.S. 153A-275(b).

  30. G.S. Chapter 159, Article 2.

  31. G.S. 159-25(c).

  32. G.S. 159-25(c).

  33. G.S. 159-181(c).

  34. G.S. 159-181(c).

  35. S.L. 2013-150.

  36. S.L. 2013-150.

  37. S.L. 2013-150.

  38. S.L. 2013-150.

  39. G.S. 153A-284 (counties); 160A-317 (municipalities); 162A-6(a)(14d) (water and sewer authorities); 130A-55(16) (sanitary districts).

  40. G.S. 153A-284; 160A-317; 162A-6(a)(14d); 130A-55(16). The fees are often referred to as connection fees or tap fees.

  41. See G.S. 87-97.2(c). The same limitations apply to water systems owned or operated by water and sewer authorities and sanitary districts.

  42. G.S. 87-97.2(a).

  43. G.S. 87-97.2(b).

  44. See G.S. 87-97.2(e).

  45. See G.S. 159-181(c).

  46. The Unit Assistance List (UAL) is developed by LGC staff to assist in prioritizing the allocation of staff resources, developing guidance and resources for units, and engaging in enhanced fiscal monitoring. The list is published periodically throughout the year based on audited financial statements and associated data submitted to the LGC as required under G.S. 159-34(a). It identifies units (1) with concerns related to units’ general fund, water/sewer quick ratio, income, cash flow, and internal controls or (2) that have not yet submitted their audited financial statements (due four months following the end of the fiscal year).

  47. See G.S. 153A-136(a)(6) (counties); 160A-317(b)(3) (municipalities). Recyclables are defined in G.S. 130A-290(a)(24). Note that a municipality and a county may prohibit a property owner from placing recyclables within solid waste that is disposed of in the local unit’s disposal facilities. See G.S. 153A-136; 160A-317.

  48. This distinction has two significant consequences. The first is that it allows a government more flexibility to operate a public enterprise like a private business entity. A local government must continue to operate within the confines of statutory authority, but often that authority is much broader in the public enterprise context, affording a unit much discretion in setting service terms. The second is that it may raise liability issues. When a local unit acts in a governmental capacity, it generally is immune from civil liability for torts arising out of the negligence of the unit’s employees when acting within the scope of their employment. The state does not grant governmental immunity to a local government when it acts in a proprietary capacity.

  49. Millar v. Town of Wilson, 222 N.C. 340 (1942).

  50. 270 N.C. 567 (1967).

  51. 270 N.C. at 573.

  52. U.S. Cold Storage, Inc. v. Town of Warsaw, 246 N.C. App. 781, 788 (2016) (Hunter, J., dissenting). In a dissenting opinion, Judge Robert Hunter Jr. argued that Dale v. City of Morganton prohibited the town from discontinuing wastewater service “on the basis of a collateral dispute” not related to the provision of utility service.

  53. See, e.g., G.S. 153A-277 (counties); 160A-314 (municipalities).

  54. Note that a local government may have difficulty collecting stormwater fees from certain state entities. That is because unlike other enterprises, a unit need not have a contractual agreement with a “customer” before imposing a stormwater fee. The fee may be imposed on all real properties within the unit. Several state agencies have argued that they are shielded from paying the stormwater fee under the doctrine of sovereign immunity in the absence of a written contractual agreement with the local government.

  55. See S.L. 2017-138. For more information on these limitations, see the following blog posts by the author (Kara A. Millonzi): “System Development Fees are the New Impact Fees,” Coates’ Canons: NC Local Government Law blog (Aug. 15, 2017); “2018 System Development Fee Law Changes,” Coates’ Canons: NC Local Government Law blog (June 26, 2018); “Assessing and Collecting System Development Fees (SDFs): It’s All About the Timing,” Coates’ Canons: NC Local Government Law blog (Apr. 12, 2021).

  56. See G.S. Chapter 153A, Article 9 (counties); Chapter 160A, Article 10 (municipalities).

  57. See G.S. Chapter 153A, Article 9A (counties); Chapter 160A, Article 10A (municipalities).

  58. See G.S. Chapter 153A, Article 16 (counties); Chapter 160A, Article 23 (municipalities); Chapter 162A, Article 8 (all government utilities).

  59. G.S. 160A-314 (municipalities); 153A-277 (counties).

  60. For more information on utility ratemaking, see the following bulletins by the author (Kara A. Millonzi): “Lawful Discrimination in Utility Ratemaking, Part 2: Classifying Extraterritorial Customers,” Local Finance Bulletin No. 34 (Oct. 1, 2006); “Lawful Discrimination in Utility Ratemaking, Part 1: Classifying Customers within Territorial Boundaries,” Local Finance Bulletin No. 33 (Oct. 1, 2006).

  61. See Wall v. City of Durham, 41 N.C. App. 649 (1979).

  62. G.S. 153A-277; 160A-314.

  63. See G.S. 153A-292; 160A-314.1.

  64. For more information on solid waste fees, see Kara Millonzi, “Funding Solid Waste Services,” Coates’ Canons: NC Local Government Law blog (Oct. 7, 2010; updated 2013).

  65. G.S. 160A-314; 153A-277.

  66. G.S. 160A-4.1; 153A-102.1.

  67. See G.S. Chapter 162A, Article 8.

  68. G.S. 160A-497.

  69. G.S. 160D-1311(a)(2) (formerly contained within G.S. 153A-376 and 160A-456).

  70. For more information on legal economic-development incentive options, see the following blog posts by UNC School of Government faculty member Tyler Mulligan: “Local Government Economic Development Powers ‘Clarified,’ ” Coates’ Canons: NC Local Government Law blog (Oct. 26, 2015); “When May NC Local Governments Pay an Economic Development Incentive?,” Coates’ Canons: NC Local Government Law blog (Dec. 17, 2013).

  71. G.S. 160A-313; see also G.S. 153A-276.

  72. See G.S. 159-26. If a local unit funds an enterprise service exclusively with property tax proceeds, or with other general fund revenues, it may budget for the services in the general fund.

  73. G.S. 159-13(b)(14).

  74. See G.S. 160A-314.1, -317 (municipalities); 153A-292 (counties).

  75. 166 N.C. App. 279 (2004).

  76. A municipality that has a fund balance in its solid waste fund that exceeds the costs of funding a landfill, including closure and post-closure costs, may transfer excess funds accruing due to the imposition of a surcharge imposed on another local government in the state to the municipality’s general fund to support other services. See G.S. 160A-314(a2) (municipalities).

  77. See G.S. 160A-314(a1)(2) (municipalities); 153A-277(a1)(2) (counties).

  78. G.S. 159B-39.

  79. G.S. 159G-37(b).

  80. See N.C. Department of Environmental Quality, Division of Water Infrastructure, Fund Transfer Certification form (rev. June 2019).

  81. G.S. 153A-277(b); 160A-314(b). A water and sewer authority must wait thirty days. G.S. 162A-9. Note that if a customer has filed for bankruptcy, a utility provider may not disconnect service, at least for a period of time. See 11 U.S.C. § 366.

  82. See G.S. 25-2-725.

  83. See G.S. 1-52. State law allows solid waste fees to be billed on the property tax bill. See G.S. 153A-293; 160A-314.1. If a unit chooses this billing method, the unit may use the same collection remedies available to collect delinquent property taxes, and the statute of limitations for civil suits is ten years.

  84. See G.S. Chapter 105A. For more information on the state’s debt set-off program, see Chris McLaughlin, “Suped-Up Set-Off Debt Collection,” Coates’ Canons: NC Local Government Law blog (July 29, 2010).

  85. Under very limited circumstances, a local government may add the amount owed by the delinquent former customer to the bill for services provided at a new property (and disconnect services at the new property for nonpayment) if the former customer resides at the new property receiving the services, even if the former customer is not the contracting party for services at the new property. See G.S. 160A-314; 153A-277.

  86. G.S. 160A-321(a).

  87. G.S. 160A-321(b).

  88. See G.S. 160A-321; 160A-340.1(b).

  89. Cf. G.S. 153A-283 (“In no case may a county be held liable for damages for failure to furnish water or sewer services.”).

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Introduction to Local Government Finance

Introduction to Local Government Finance