May 12, 2008

Macon County Board of Commissioners

Chairman Charlie Leatherman
Vice-Chair Ronnie Beale
Commissioner Jim Davis
Commissioner Brian McClellan
Commissioner Bob Simpson

In accordance with the North Carolina Local Government Budget and Fiscal Control Act,
I am pleased to present to you the proposed budget for Macon County for fiscal year
2008/2009. To a large degree Macon County finds itself in an enviable position relative
to many counties in North Carolina. The county is in sound financial condition and
enjoys at this time the distinction of having the lowest property tax rate in the state. Our
fund balance is strong and allows the county a high degree of confidence when it comes
to being prepared for unexpected emergencies, and taking advantage of investment
opportunities that generate revenue keeping the property tax rate down. This, along with
a solid and consistent tax collection rate, contributes to an excellent Bond Rating for the
county.

There are many positive accomplishments the county can be proud of while at the same
time being vigilant in its approach to realistic budgeting and financial planning. This is
what being a good steward of public funds is all about. I will take time in this budget
message to emphasize both the highlights and challenges in the proposed spending plan
for the county for next year. On the revenue side, the county continues to grow, but due
to changes in the local regional and national economy, we do not expect the growth to be
so brisk as it has been in recent years.

In terms of the tax base, we expect a growth of about 2.6% or approximately $567,000.
This will help cover some of the increased operational cost for the county and the
agencies and institutions that depend on county funding. To cover the new debt service
required on our school capital improvements projects which includes a new 5th and 6th
grade elementary school, expansion of the East Franklin Elementary school, a new
building for the Early College High School for our 9th and 10th graders, and replacement
of the roof and additional bathrooms for the Highlands School we will have to adjust the
current tax rate by 2.35 cents bringing it to 26.85 cents. This is based on the expectation
that the total cost of these projects will be $25,000,000 with debt service running a little

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over two million a year. We are confident that even with the adjustment Macon will still
boast one of the lowest, if not the lowest, property tax rates in the state.

While sales tax collections will increase this year, we will lose 50% of our Article 44
½ cent sales tax beginning October 1st and the state will withhold a portion of our Article
39- ½ cent sales tax and remit it to our municipalities (Franklin and Highlands) to make
up for their loss of Article 44 sales tax. This is a result of the new Medicaid relief plan
approved by the General Assembly last year. I guess the good news is that the state will
assume 50% of the county’s Medicaid cost beginning July 1st. This year 60% of the
County’s (ADM) average daily membership funds for school capital improvements were
taken by the state to help offset its cost of assuming 25% of the county share of the
Medicaid program last October 1st.

While we expect to see an increase in EMS (ambulance) fees, we also will see a decrease
in inspections fees due to the slowing of the construction market. With the state
mandating a drinking water wells permitting process, we have included revenue (permit
fees) to help offset the expense of this program.

State Foster Care revenues will increase but so will the cost of the program. The most
glaring example of this is the IV-E Foster care program that shows a $500,000 increase in
state funding, but increases the county cost by $100,000.The current county cost of this
program is approximately $47,000 which will increase to $147,000 in 08/09.

We show an increase in revenue in the Macon Transit budget, but this is due to grant
funding for the purchase of new transit vehicles.

Thanks to an efficient and competent finance Department, and having funds to invest, we
project the county will earn $1,000,000 in interest next fiscal year. This is equivalent to
over a penny on the tax rate, and helps reduce the property tax burden for everyone.

The proposed budget includes a fund balance appropriation of $2,399,390 which is

actually less than the fund balance appropriation for each of the previous two years.

Expenditures

Faced with the increased cost of goods and services along with our obligation to fund
essential county services and major capital improvements, we have made decisions and
recommendations that prioritize the county’s spending plan. There are many worthwhile
and commendable projects, programs and services that have merit but have not been
included in this proposal due to the lack of sufficient revenue at this time to fully fund
them.

We often are challenged to fund vital and essential county services with a limited revenue
source. This year in no exception. When we began this budget process, we had
approximately $48,000,000 in requests and only $42,000,000 in available funds. Our goal

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was to live within the available resources and only consider additional taxes to cover our
Public School Construction Program.

Like every year, Macon County and our locally funded educational institutions struggle
to improve services, recruit and retain quality employees and move the county forward as
we strive to maintain a leadership position in Western North Carolina. Macon County
has enjoyed a reputation of being a forward thinking progressive county that seeks to
preserve the environment while carefully balancing the needs of our citizens and the tax
burden they are asked to bear.

There are several key issues we have addressed as we prepared this proposed spending
plan for next year. Here are a few highlights of that plan. A full and complete line item
detail has been prepared as well, that gives a thorough breakdown of each line item
expenditure, appropriation and revenue source.

We have not made any adjustments to the current salary and fringe benefits portions of
each departmental budget with the exception of health insurance cost. We have made
recommendations as to salary market adjustment (COLA) in the non-departmental
section of the proposed budget. Due to our favorable loss experience this year, and the
county’s previous funding of the plan, we feel comfortable in reducing the individual
contribution to the county’s self funded Employee Health Insurance Plan by a noticeable
amount. Based on the best information available and considering the consumer price
index for our area, we recommend a COLA (market adjustment for cost of living) for
employees of 4%.

We are recommending a small number of new positions be added in this year’s budget.
Those consist of one in Finance, one in Maintenance, one in Law Enforcement, and one
in Social Services.

In an effort to better control the purchase of vehicles, equipment and supplies as well as
account for them and exercise better control over purchasing, we have requested the
addition of a purchasing agent for the Finance Department.

With the passage of legislation by last year’s General Assembly we are going to have to
acquire new software to account for tracking those who apply and are granted tax
deferment due to income. We will be beginning the cycle for the next county- wide
property revaluation that goes into effect in 2011. This will require additional contracted
services for developing a new Schedule of Values and revising the computer application
requirements associated with the new schedule.

We are having to shift one employee who is currently paid by the E-911 emergencies
telephone fund to the General Fund. We have been notified that this expense is no longer
acceptable under the new 911 rules and regulations follow a reorganization of this system
by the State.

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We have included a new position within the Building and Grounds Department to service
the custodial and maintenance requirements of the New SCC Facility and the Old Library
building. We have included a transfer of funds to a capital project fund to renovate the
old library to house our senior services programs, our veteran’s service office and related
human services needs.

If approved by the Board, we propose to relocate Senior Services to the old library
facility and renovate the current senior services building to house the Franklin Unit of our
Emergency Medical Services. There are three EMS units currently housed in the
cramped and congested location at the Barrett Building on Main Street. Emergency
Services has some funds from state revenues to renovate the old senior services building
at Wal-Mart as well as the Barrett Building for improved Emergency Dispatch Service
and Emergency Services. The remainder of that cost is included in the fund balance
appropriation of the recommended budget.

Our Sheriffs Department, in an effort to establish around the clock coverage of the
Nantahala section of Macon County, is requesting the addition of one road Deputy this
year. By adding one position a year in two more years the sheriff can provide around the
clock coverage in that area. There is limited coverage there now which needs to be
increased. We are recommending only 4 replacement patrol cars in next year’s budget, as
we had to replace two (2) vehicles recently that were damaged in separate vehicle
accidents. Normally the county replaces six (6) patrol vehicles each year.

We have also added the previously approved contract for Mental Health Services to the
jails operating budget for next year. This program is now in place and is being well
received by inmates in the County Detention Facility. If the program can reduce
recidivism it will be well worth the expense.

We are asking for another EMS ambulance remount for next year. This is an excellent
way to contain the high cost of complete vehicle replacement and provides safe reliable
ambulances that we depend on when responding to calls in the county.

Based on the Boards action and direction we have developed an operations budget for a
County Animal Control Facility. We are currently working on developing and permitting
the site for the building. The operational budget includes four (4) positions, a Director,
two (2) officers, and an office/kennel attendant. As we proceed with development of this
needed service, we will also be working to develop a suitable Animal Control Ordinance.

In the Economic Development budget we have relocated the occupancy tax line items to
a separate section and allocated funds to cover the expense of either staff or contracted
services to handle the daily administrative functions associated with implementing our
strategic economic development plan.

For many years the County has been able to use the services of Doug Johnson of our Soil
and Water Conservation District. In many programs, especially federal programs Mr.
Johnson has been instrumental in working to resolve the issues associated with recent

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floods. It is important that he be able to complete work that has been started. Soil
Conservation is working on additional grant funding to cover Mr. Johnson’s salary and if
successful the county may not have to expend all that is earmarked for this expense for
next year.

We have changed the format for budgets in the Health Department this year. In past
budgets all salaries were confined to the Health Department administrative budget. This
year we have included these in the appropriate program budgets to better reflect the total
cost of each program. The Health Department budget includes the new program required
by the State for well testing. It is anticipated that much of the cost of this program will be
recouped by permit and inspections fees. The Board approved two positions for this
recently.

The Department of Social Services has not filled the Assistant Directors position in hopes
the state would approve a Human Service position that could have been shared with the
Health Department. The state would not approve the needed job description change
request and therefore the DSS Director asks that the position be reinstated as originally
proposed. It should be noted that the State will cover 40% of this salary.

The State has changed its formula for foster care services and there is a statewide
increase in the number of children put into foster care. The net result for the County is an
additional cost to the county of $100,000.

DSS also is in desperate need of one new Eligibility Specialist to work in Medicaid/Food
Stamps. The State pays 50% of the cost of this position which is recommended in this
budget. We do have a reduction in the County share of Medicaid of around $700,000 but
as we said earlier, the State takes 50% of our Article 44 sales tax and withholds a portion
of our Article 39 sales tax.

Education remains a top priority for the County. In addition to the construction of a new
5th and 6th Grade Elementary School, expansion of East Franklin Elementary, a new Early
College High School building and replacement of roof and new bathrooms for the
Highlands School, the budget also includes a 5% increase in current expense, a
continuation of the $700,000 appropriation for current capital outlay, and full funding for
the requested teacher supplement. This funding scenario should keep Macon around the
state average for county appropriations per student, and probably above average in terms
of capital outlay per student.

In addition to funding Public Schools, the budget also includes an increase in the current
expense budget for our portion of operating cost of Southwestern Community College.
Capital Outlay remains unchanged.

We have increased our Special Appropriation budget by $20,000, bringing the amount
available for local projects and programs to $70,000. We also recommend an increase in
our senior citizens employment program contribution. This program provides needed

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employment opportunities for low income seniors and has not been fully funded in
several years.

As mentioned earlier our recommended COLA (market adjustment) 4%, is in the non-
departmental budget at this time. We are asking the Board to favorably consider another
benefit that is currently available to some county employees but not to everyone. Several
years ago the General Assembly mandated counties and municipalities make a 5% of
salary contribution to the State 401(K) retirement plan for Law Enforcement Officers.
This benefit is not currently available to others who work in law enforcement like
Detention and administrative Staff, nor is it provided to other valuable employees. Many
counties and municipalities throughout the State have expanded this benefit to include all
employees. In fact 81 of the 100 counties now provide some 401K benefit to all their
employees. Buncombe puts in 8%, Haywood 5.5% and Henderson 2%. We are requesting
consideration by the Board this year to make a 2% contribution to the 401(K) program
for all regular full time employees. This is tax free benefit to our employees and will
provide them with an opportunity to build financial security as they prepare for eventual
retirement. I believe this to be an excellent incentive for recruitment and retention of
quality employees as well as a great morale booster for our current employees. We’ve
estimated that the total cost will be $240,000.

Since we have done so well in holding our insurance reserves, we are recommending the
County fund the Retired Employee Health contribution from the reserve fund this year
instead of the General Fund. Cost will be $235,000 and will not jeopardize our
Employee Health, Fund Balance this year.

The recommended balanced budget for next year FY is $45,974,086, and is hereby
submitted for your consideration.

Respectfully,

C. Jack Horton
County Manager/Budget Officer

The following charts and graphs may prove helpful as we review the Revenues and
Expenditures in the proposed budget.

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 EXPLANATION OF REVENUE AND EXPENDITURE CATEGORIES

Revenues by Source

• Property tax- collections of current year and prior year unit-wide tax levies;
interest on delinquent taxes; late listing penalties; and other costs of collecting
delinquent taxes.

• Other Tax- collections of taxes from special tax districts; animal taxes; deed
stamp excise taxes; real property transfer taxes; scrap tire disposal taxes; local
occupancy taxes; prepared food taxes; 911 charges; white goods disposal tax; and
privilege and other license taxes.

• Sales Tax- collections of the one percent local option Sales Tax (Article 39) and
the one-half of one percent local option Sales Taxes (Articles 40, 42, and 44).

• Sales and Services- parking revenues; rents and royalties; airport revenues; fire
protection charges; solid waste charges; ambulance and rescue squad charges;
cemetery revenues; recreational service revenues; library service revenues; other
cultural and recreational service revenues; client and third party payments for
health, mental health, social services, and nursing home services; mass transit
revenues; and water/sewer charges.

• Intergovernmental- federal, State, and local financial assistance including

payments in lieu of taxes; equitable sharing of federally forfeited property;
categorical grants; controlled substance taxes; distributions of beer and wine
taxes; payments of court costs. Public School Building Capital Fund revenues;
Public School Building bond Fund revenues; and lottery receipts for school
construction.

• Miscellaneous- building permits; Register of Deeds’ fees; building inspection

fees; other permits; investment earnings; special assessments; private
contributions and donations; sales of materials, fixed assets, and real property;
ABC Board bottle taxes; ABC Board profit distributions; proceeds of the sale of
bonds and notes; proceeds of lease purchase agreements; and other Miscellaneous
Revenues.

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EXPENDITURES BY FUNCTION

• Education – appropriations to school administrative units and to community

college systems for current operations and capital outlays.

• Debt Service – principal, interest, and fees paid or accrued on debt.

• Human Services – expenditures for the public health, mental health, and social
services programs; veterans’ service officers; legal aid; appropriations to hospital;
county’s share of Medicaid payments, Work First expenses, and Special
Assistance to Adults; county’s share paid to multi-county health district and an
area mental health authority; and payments of the 5-cent ABC Board bottle tax.

• General Government – expenditures for the governing body, administration,

elections, finance, revaluations, legal services, Register of Deeds, construction
and maintenance of public buildings not related to other functions, court facilities,
and net central services.

• Public Safety – expenditures for the sheriff’s department, jails, emergency

communications, emergency management activities, fire protection, building
inspections, rescue and ambulance services, animal control, and medical
examiners or coroners.

• Other – expenditures for transportation, solid waste, drainage and watershed,

cemeteries, planning and zoning, economic and community development,
agriculture extension programs, special employment programs, culture and
recreation, water and sewer, unallocated fringe benefits, and Miscellaneous
expenditures.