We wrote previously about problems affecting the staffing and operation of local government finance departments across North Carolina. The LGC and its staff have grown increasingly frustrated with local governments that can’t keep their books and records in good order and meet deadlines. Now, we have legislation designed to address some of the key issues.
House Bill 233 (now fully enacted into law) changes how local governments can staff and operate their finance departments, and gives the LGC additional tools for regulation. Under the new legislation,
- Each local government still needs a single individual to be the statutory finance officer.
- But the local government can contract with an outside entity, such as a bookkeeping or accounting firm, a Council of Governments or another local government to carry out the day-to-day finance functions (and this would seem to include approving payroll, preparing budget amendments, and signing preaudit certifications). In some circumstances, the LGC can require a local government to enter into a contract of this type.
- The statutory, individual finance officer still has to be responsible for the investment of idle funds, still has to attend any training mandated by the LGC, and still has the ultimate personal responsibility as under previous law, which presumably includes personal liability for expenditures made without budget authorization (under Section 159-25(e)).
- The LGC can establish minimum qualifications for finance officers.
The legislation does not give the LGC the power to approve the third-party finance contracts, except presumably when the LGC is requiring the third-party contract as authorized by the new statute.
This legislation helps local governments by allowing them to contract out most of the ordinary functions of the finance office. And contracting out will be a better way for many local governments to do their financial work. The statute also helps the LGC by giving it additional tools to get local government finance practices up to the desired standard.
Here are a few issues that we’ll be watching:
- The individual appointed as finance officer maintains the existing statutory responsibilities. Will those people want to contract out some of the authority while retaining the liability?
- If the LGC adopts rules for the qualification of finance officers, will those rules make the problems of recruitment and retention worse for small and rural communities? The LGC may want to have different rules that apply when a locality has a qualifying third-party finance contract.
- Contracting out is still going to cost money. Will local governments be willing to pay for this service if it’s not an LGC requirement?
- How quick will the LGC be – what kinds of problems is it going to have to see – before it imposes this additional “unfunded mandate” on a local government? Is a “segregation of duties” finding on a small town going to require that town to have a third-party contract?
- How will the LGC respond to issues that aren’t bookkeeping problems but which implicate LGC policies, such as interfund transfers or low fund balances? Those don’t seem to be addressed by this legislation, which focuses on audit findings and internal control weaknesses. The remedies in the legislation don’t seem particularly well designed to address those problems, either.
We think the new legislation gives both local governments and the LGC a flexible new tool to address their problems and concerns (here’s an article quoting State Auditor Beth Wood on her frustrations and her hopes for the new law). We especially like the range of services that can be contracted out, and the breadth of entities that can have provide the third-party services. This should be a big help to many governments and to the LGC.
We would still like to see more emphasis on educating local government elected officials on the importance of the finance function. The LGC and its staff mostly interacts with local government staff, and with elected officials only when things really get bad. Elected officials of course have to make the decisions about paying for finance staff, for training and for outside management contracts. We think additional focus on education aimed at elected officials could result in fewer circumstances in which the LGC will have to wield its new sticks.