Chapel Hill's budget problem

Paying more later

May 19, 2025

It’s budget season in Chapel Hill, when the Dorset Horn ram emerges from the barn during the Strawberry Moon and prophecies the next fiscal year’s property tax rate.

While we townsfolk await the results, I thought it might be useful to explain the nature and origins of the Town’s budget problem, what the options are, and to offer a modest plea.

Over the past decade or more, Chapel Hill has managed to balance its burgeoning budget in part by indefinitely delaying maintenance and replacement of physical assets like facilities, streets, and vehicles — thereby freeing up cash for new spending. The Town is now struggling to catch up on those cost deferrals, the legacy of which increasingly prevents the Town from growing valued services and programs.

At this point, four choices (and limitless combinations of them) exist:

Raise property taxes
Revise the 2024 bond referendum
Cut spending
Procrastinate

The first three choices are unpleasant. The fourth, while tempting, is ultimately self-defeating; my plea is for the Town Council to reject it.

I gathered information for this post by watching over five hours of Town Council discussions, reviewing numerous staff presentations and materials, and conducting my own independent research. The scope of this post is limited to the Chapel Hill town budget. It does not cover the budgets for Orange County or Chapel Hill-Carrboro City Schools, which have their own budgets, (county-set) property tax rates, and problems. Usually Chapel Hill town taxes constitute about a third of residents’ total property tax bills.

The Town Council will finalize the budget in June. Residents can make public comments during the Wednesday, May 21, 6 p.m. Council meeting or via email at mayorandcouncil@townofchapelhill.org.

Growth in local government

Since 2015, cumulative growth in Chapel Hill’s budget has outstripped inflation by about 29%. Looking more closely at the annual numbers below, the Town's budget growth has usually outstripped inflation and by large amounts, except during COVID. Budget growth returned and accelerated in 2023-2024.

There are a couple ways to explain this growth. In presentations to the Town Council, Town staff sometimes explains the Town’s budget dilemma as a consequence of escalating costs, citing the cost of specific objects like bus tires and oil filters, or intangible assets like office software licenses. It’s not clear whether that’s meant to imply that price inflation across the basket of things the Town happens to buy is a major driver of the overall budget gap.

But given that the Town’s costs have risen at approximately double the rate of general inflation — a measure that includes auto parts and office software — I think a second, potentially more powerful explanation is worth considering. Specifically, it seems to be the case that the size and scope of Town government has increased. Indeed, over the past 10-15 years, the Town has built nice new facilities like the public library and East Rosemary parking deck; expanded programs for affordable housing and social services; and increased the size of its staff from 697 full-time equivalents in the fiscal year 2012-13 budget to 784 in the 2024-25 budget.

The Town has nevertheless managed to maintain a balanced budget and stay within its state-mandated debt limit thanks in part to growth in property tax revenue and especially sales tax revenue — which have grown a cumulative 9% and 53% above inflation,1 respectively, since 2015.

Cost deferrals

Another strategy that helped the Town balance its budget was to let nature take its course on the Town’s physical assets. Staff’s presentation at the March 26, 2025 Council work session described the following backlogs:

$13 million for vehicle replacements
$14 million for facility maintenance
$15 million for street resurfacing
$13 million for fire apparatus

These items add up to $55 million, which is about one-third the size of the Town’s entire annual budget and 16 times the combined annual budget for these particular items.

The problem with running up operational backlogs is that when you delay, you often increase the long term cost. The backlogs become a budgetary tapeworm, silently growing and feeding off the Town’s resources. Regarding the facilities backlog, the same March 26 staff presentation notes that “[d]eferred maintenance results in higher costs, building deterioration, employee morale, and potentially operational interruptions for facility users.” My previous post documents how deferred street maintenance increases long term costs considerably.2

The draft budget

This brings us to the Interim Town Manager’s recommended budget for fiscal year 2025-26. It’s looking like residential property owners will face a historically large effective tax increase this year. The recommended budget includes a 5.8 cent increase over the revenue neutral rate of 44.2, for a total of 50.0 cents. Orange County just underwent a property revaluation, which it does every 4 years, and the revenue neutral rate is the hypothetical rate that exactly offsets the revaluation, such that total property tax collections would stay flat compared to last year, when the rate was 59.2 cents. Staff’s proposed post-revaluation rate of 50.0 cents would result in Town (not county or school) property tax bills 13% higher on average than last year.

But the average increase is basically irrelevant this year, because, as shown in the slide below (from Orange County staff), residential assessments increased much more (53.4%) than commercial (30.2%). As a result, staff’s recommended 50.0 cent rate would yield an average increase in property tax bills for residential properties of, wait for it, 29.6%. For a house that was assessed at $500k in 2024 and is now assessed 53.4% higher at $767k, the municipal tax bill would increase from $2,960 to $3,835 — an increase of $875.

The residential average is still just an average. Within the residential segment, results vary by neighborhood and individual property, potentially by a lot. Some households may experience an increase in their bills closer to 50%. This increase would follow a ten-year period when the average Chapel Hill property tax bill generally tracked inflation.3

Meanwhile, the draft budget includes no major service or program expansions. Instead, it includes a staff pay increase of approximately 5% and incremental progress toward reversing the deferred maintenance backlogs. As shown in the slide below, staff is proposing to gradually increase the facilities, streets, fleet, and fire capital budgets to a “sustainable” level, after which the applicable backlogs will begin to decrease over some (unstated) period. Three of the four budgets would reach staff’s sustainable level by 2030. The streets budget, currently about $800k, ostensibly would take until 2032.

During their May 7 meeting, Council members provided mixed feedback on the draft budget. Some were open to the proposed tax rate but wanted to see more analysis. Others suggested they could accept the proposed tax rate, or potentially a higher one, but only if funding for community partners (such as those providing affordable housing and social services) were increased. Still others contended that the Town needs to, or may need to, cut costs, and that an outside audit might be appropriate. At least one Council member suggested the proposed rate was too high.

Four options

Taking a step back, the Town Council has, by my count, four options, which can be pursued in various combinations. It’s worth thinking these through systematically. I’ll discuss them one at a time.

Increase property taxes

This option figures prominently in the draft budget. It almost goes without saying that a precipitous property tax increase works against the Town’s affordability goals. The Council’s email inbox is currently stuffed with strongly worded messages from residents about this.

From a peer competitiveness perspective, Chapel Hill’s current situation can be gleaned from the table below, which contains a sample of 2024 municipal tax rates that I pulled from various NC county websites. Putting aside Greensboro, which is an outlier on the high end, a cluster of cities comprising Chapel Hill, Carrboro, Hillsborough, and Durham occupies the top rate tier. Chapel Hill’s close neighbors Cary and Raleigh have rates 40-45% lower, which presents long-term competitiveness concerns. Future residents may or may not deem Chapel Hill “worth it” in relative terms.

Revise the 2024 bond referendum

This is an option that dare not speak its name, and until now, nobody has.

In November 2024, Chapel Hill voters approved a $44 million Town bond referendum. Discretionary spending items (by any reasonable definition) comprised roughly half of the intended uses.

The state-mandated disclosure about tax implications that the Town provided to voters in connection with the bond referendum was technically correct but misleading. It informed voters that existing projected revenues, without a tax increase, were expected to be sufficient to pay the $44 million principal plus interest on the bonds. That was true in a narrow, legalistic sense.

However, the tax increase being contemplated today was already under discussion at that time, and different choices vis-a-vis the bond referendum — for example, earmarking for operational backlogs a chunk of the $19 million of proceeds that were in fact allocated to affordable housing ($15 million) and greenways ($4 million combined for the Bolin Creek Greenway extension and Fordham sidepath) — would have averted or dramatically reduced the need for a major tax increase now.4 The magnitude of the affordable housing allocation in particular, which was 50% more than staff recommended at the time, stands out.

The decision to move forward with the bond referendum ahead of the revaluation and current budget season, instead of postponing for one year, as some urged at the time (in the spirit of holistic financial decision-making), has aged poorly. But that decision may be largely reversible. The Town is generally not obligated to spend bond money until it is contractually committed. On May 7, the Town Council authorized issuance of the first batch of bonds covered by the 2024 referendum, totaling $13,830,000. I don’t know whether those bonds have actually been issued yet. Even if they have and the proceeds are contractually committed, that leaves tens of millions of unissued bonds. To the extent the future proceeds of those bonds have not been committed, the Town Council could return to the voters this fall with a revised proposal reallocating some of those proceeds. That may be a non-starter with the current Town Council, but it’s among the available options to close the budget gap (and will probably remain so for at least a few years).

Cut costs

In March, one or more Council members asked staff to explain how a hypothetical 8-10% across-the-board budget cut might unfold. Staff dutifully produced a five page response.5 The response says that 55-60 staff “positions” either would or might need to be eliminated; a panoply of specified services and programs would need to be reduced or eliminated; and training, development, technology, and equipment budgets would need to decrease. The response also describes a variety of deleterious effects that would ensue. The response makes clear, and the Interim Town Manager has repeated in recent Council meetings, that any significant cost reductions would necessitate both layoffs and noticeable service or program reductions. Consistent with this, the Interim Town Manager has also reported that departmental budgets are already lean and staff stretched thin.

Overall, staff’s response to the scenario request is consistent with the kind of analysis I personally would deliver if I wanted to dissuade the Town Council from cutting anything besides leaf and yard waste collection services. For example, the response lists the following programs to be reduced or eliminated without elaboration on how they were selected or how much each item costs individually:

Is eliminating the summer reading program, or Employee Appreciation Month, really the best path to budget sustainability? Is the Language Access program breaking the bank? Realistically, the Town Council would need a supplementary analysis to unpack staff’s response and convert it to something actionable. That’s not necessarily staff’s fault. If staff was asked to provide information on “across-the-board” cuts in two weeks’ time, the answer was both responsive and promptly provided, even if it’s unclear how staff arrived at it.

But I’m not sure that across-the-board cuts is the best approach to cost cutting, or that staff should be asked to develop further proposals on its own. The current budget is a product of accretion. I’m not aware that the Town has cut any programs in recent memory or undertaken any kind of performance-budgeting or peer-benchmarking analysis, aside from staff pay benchmarking. It would be surprising if the current budget happened to reflect in all major ways the Town’s priorities as they have evolved over the past 5-10 years. Rather than applying a fixed reduction amount (e.g., 8-10%) in blanket fashion, the Town Council should consider a more methodical approach.

Presumably there are consultants that specialize in this work, and a group of thoughtful residents could perhaps be recruited to participate in a cost cutting advisory task force. In some (not all) ways, either would be better positioned to explore options than Town staff, which is put in the almost untenable position of recommending in public which colleagues should be laid off and which cherished (by some) programs cut. Ideally, the Town would harness staff’s unparalleled knowledge of the Town’s operations without relying wholly on staff to provide frank and independent cost-cutting advice.

Alas, such an approach cannot take place before the Town Council finalizes the budget in June; it would need to happen later. In the meantime, Staff’s recommended budget is 4% higher than last year.

Procrastinate

I’ve tried to be measured in my discussion of the previous three options, not coming down hard for or against any specific outcome, because it’s just very hard to determine the right answer here. The Town faces wicked trade-offs no matter what.

One thing I do feel strongly about — and the main reason I wrote this post — is the need to prioritize the operational backlogs (facilities, streets, fleet, fire apparatus). Fiscal procrastination is a time-honored tradition and almost impossibly tempting for elected officials at all levels of government. Nobody runs for office in Chapel Hill on a platform of increasing taxes or cutting costs (at least not yet), because it’s a thankless job and relatively few voters respond well to this message. Nobody is going to run on eliminating deferred maintenance backlogs, because it’s a boring platform and would make the candidate sound heartless next to someone making the case for affordable housing subsidies. I view this as an inherent structural weakness in the way democratic governance works. I have no solution to it except to draw attention to how self-defeating it is and urge a better path, as I did in my previous post.

The best way to make the point, in a way that gives it appropriate weight in the discussion, is to quantify the consequences of procrastination. I called for that to happen in the streets context and suggested exactly how it could be done. Going forward, it would be useful for Council members to request detailed information about the long-term cost of continuing to defer maintenance and replacement of Town assets. Knowing the size of the backlog, or the gap to reach a “sustainable” budget amount, is not sufficient.

Appeals to “our values” have been frequent in the Town Council’s recent budget discussions, usually in the context of protecting against cuts or, more recently, advocating an increase in funding for community partners that may be experiencing a decrease in federal support. Such appeals, while heartfelt and true in important ways, often seem to overlook the value implications of fiscal stewardship.

Fiscal stewardship is a kind of superordinate value that floats above other values. To the extent the Town squanders money, it forecloses the possibility of spending that money to further its more specific values (equity, affordability, sustainability, livability, etc.) in the future. Whether you attach more value to affordable housing subsidies or transportation greenways doesn’t matter if there’s no more money for either. Thus, mismanaging public resources conflicts with the Town’s values almost by definition. While it may further some values in the short term, the longer the time horizon, the less true this becomes.

It would be helpful for those invoking values — public officials and commenters alike — to specify which combination of the four options discussed above they propose to ultimately pay for the thing valued, and in the case of the fourth option, for how long.

Jon’s Substack

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