If a North Carolina county cuts its mental health funding contribution, does it still get full state expansion funds, and what does the rule against using fee income to replace local tax revenue actually mean?

Plain-English summary

North Carolina's public mental health, developmental disabilities, and substance abuse system in the early 1990s was a joint state-local enterprise. Counties created area mental health authorities under Chapter 122C, the state funded them through the Division of MH/DD/SAS, and the counties also contributed local tax revenue. G.S. § 122C-2 declared the policy that "State and local governments [should] work together to develop and fund a public system" of MH/DD/SAS services.

The Division asked AG Senior Deputy Attorney General Ann Reed and Assistant Attorney General Jane L. Oliver three operational questions about that joint funding model.

Can a county cut its area authority contribution year-over-year and still get full state expansion funds?
Yes to the first half, conditional on the second. Under G.S. § 153A-101 and the Local Government Budget and Fiscal Control Act (Chapter 159), the county board of commissioners has the responsibility for developing and directing county fiscal policy. G.S. § 159-13(a) lets the board make appropriations "in such sums as the board may consider sufficient and proper." G.S. § 153A-149(c) authorizes property taxes "to provide for the county's share of the cost" of maintaining and administering area authority services, but the statute does not prescribe a fixed share or a fixed dollar amount. Counties can therefore reduce their contributions year-over-year. But the General Assembly did not pair that flexibility with a guarantee of state expansion funds. The Secretary has discretion under the same loose statutory framework to reduce the state allocation to an area authority whose county support has dropped. The two contributions move somewhat together; the Secretary is not a backstop for whatever the county shorts.

Can a county retroactively reduce its prior-year appropriations to the area authority?
Yes. G.S. § 159-15 lets the board amend the budget ordinance "at any time after the ordinance's adoption in any manner, so long as the ordinance, as amended, continues to satisfy the requirements of G.S. 159-8 and 159-13." The list of express limitations in G.S. § 159-13 does not include a no-reduction rule for area authority appropriations. So retroactive cuts are within county statutory power, subject only to the general balanced-budget requirement in G.S. § 159-8. The Secretary may, of course, factor that retroactive cut into future state allocation decisions.

What does the G.S. § 122C-146 rule against using fee collections to justify reducing local tax revenue actually mean?
Two sub-parts here. First, the rule applies to amounts already budgeted, not to future-year budget decisions. The statutory text speaks of "the budgeted commitment of local tax revenue," which the opinion reads as committed local funds during the current budget year. A county cannot, mid-year, point to a surge in fee collections and amend the budget downward; that is replacement of already-budgeted tax revenue. But a county can decide that next year's budget will appropriate less, taking expected fee revenue and state funds into account.

Second, when fees build up a large fund balance, the rules push the reduction onto state funds, not local funds. 10 NCAC 14C.1014(a)(1)(C) requires the area program to retain client-earned income that has been received but not expended, to "further the objectives of the legislation establishing the state categorical funding." 10 NCAC 14C.1125(a)(5) gives the Division authority and obligation to "reduce its allocation of division funds in the year subsequent to the year in which the excess occurred" when a program's fund balance exceeds 15 percent of its annual operating budget. The rule applies under 10 NCAC 14C.1125(a)(2) to both multi-county and single-county area programs. So an area authority sitting on excess fee collections does not lose local tax money; it loses state allocation for the following year.

State allocations and increased state funding.
The opinion noted that there is no specific statutory restriction prohibiting counties from reducing their commitments because of increased state funding. The only express restriction is the fee-collections rule in G.S. § 122C-146. Beyond that single limit, the county and the Secretary together work out specific budget allocations, with the General Assembly's only guidance being that counties pay "their share of the cost" of the area program.

Currency note

This opinion was issued in 1994. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The North Carolina mental health system has been reorganized several times since 1994. The 2001-era Mental Health, Developmental Disabilities and Substance Abuse Services Reform Act consolidated many area authorities into Local Management Entities (LMEs) and then later into LME-MCOs that operate as Medicaid managed care entities. The funding flows are now substantially different. G.S. § 122C-146 has been amended and the administrative rules in 10 NCAC have been restructured. Anyone analyzing modern county contributions to LME-MCOs or to a regional behavioral health entity should pull current Chapter 122C, current Chapter 159 budget rules, and current DHHS rules rather than rely on these 1994 cross-references.

Common questions

Q: Can a county zero out its contribution to the area authority?
A: The opinion does not say a county must contribute anything specific; it says the county pays "its share of the cost," with no formula. A zero contribution would be statutorily aggressive given G.S. § 122C-2's joint-funding policy and G.S. § 153A-149(c)'s authorization to tax for area authority services, but the opinion identifies no hard statutory floor. The Secretary's discretion to cut state allocations is the real-world check.

Q: When does the G.S. § 122C-146 rule actually trigger?
A: When a county tries to use fee collections (current or projected) as the reason for reducing local tax revenue that has already been committed in the budget. The trigger is a within-year amendment that lowers the locally-funded commitment based on fee performance. A clean future-year budget decision that incorporates expected fee revenue is not the same thing.

Q: What happens when an area program's fund balance exceeds 15 percent?
A: The Division has both authority and obligation under 10 NCAC 14C.1125(a)(5) to reduce its state allocation to the area program in the year following the one in which the excess accumulated. The rule applies to multi-county and single-county area programs alike. The reduction comes from state funds, not local funds.

Q: Why is retroactive budget reduction allowed even after the year is in progress?
A: Because Chapter 159's budget amendment provisions in G.S. § 159-15 are extremely broad. The board can amend "at any time" and "in any manner" as long as the budget stays balanced under G.S. § 159-8 and complies with G.S. § 159-13's enumerated limits. The General Assembly did not list area authority appropriations among the limits, so they are subject to the general amendment rule.

Q: Does this opinion let a county walk away from the area authority entirely?
A: No. The county must still maintain the area authority and bear "its share of the cost." The opinion only addresses budget flexibility within the cooperative funding model, not exit from it. A county wanting to withdraw from an area authority would need to follow the consolidation/withdrawal procedures elsewhere in Chapter 122C.

Q: Does a multi-county area program get treated differently than a single-county one?
A: Not for the fund-balance rule. 10 NCAC 14C.1125(a)(2) makes the Division's authority to reduce state allocations applicable to both. The funding mechanics get more complex in multi-county programs because each member county's contribution is its own line, but the rule about state allocations responding to excess fund balances applies the same way.

Background and statutory framework

NC built its public MH/DD/SAS system in the late 1960s and 1970s as a joint state-local enterprise to replace the older state-hospital-centric model. The basic structure: area authorities provide community services, counties pay a share of the cost, the state provides the rest through the Division of MH/DD/SAS, and fees from clients and third-party payers (Medicaid, Medicare, private insurance) supplement both.

The legislature never wrote a precise funding formula. G.S. § 153A-149(c) lets counties tax for their share without saying what the share must be. G.S. § 122C-2 declares the cooperative-funding policy without binding the dollar amounts. The Division had broad discretion to set state allocations, and counties had broad discretion to set their contributions.

Two countervailing pressures led to G.S. § 122C-146 and the related administrative rules. The first was that counties might use rising fee revenue as a reason to cut local tax support, leaving the state and clients to make up the difference. G.S. § 122C-146 stops that move for already-budgeted amounts. The second was that fund balances might accumulate without producing additional services. The 10 NCAC 14C.1125 framework requires the Division to reduce state allocations when fund balances exceed 15 percent, pushing the area authority either to spend its accumulated funds or to lose state money.

The opinion's analysis is unusually deferential to county fiscal autonomy. Counties get to set their year-to-year contributions. Counties get to amend the budget mid-year. The only statutory backstops are G.S. § 122C-146's narrow fee-collections rule, the Division's discretion to reduce state allocations, and the general policy of joint funding. That framework places most of the negotiation between county boards and the Division, with the AG declining to read additional constraints into the statutes.

Citations

• G.S. § 122C-2 (declared policy of public MH/DD/SAS system; joint state-local funding)
• G.S. § 122C-146 (fee collections may not justify reduction of budgeted local tax revenue)
• G.S. § 153A-101 (board of commissioners' responsibility for fiscal policy)
• G.S. § 153A-149(c) (county property tax authority for area authority cost share)
• G.S. § 159-8 (annual balanced budget requirement)
• G.S. § 159-13 (budget adoption; specific limitations)
• G.S. § 159-13(a) (appropriations in sums the board considers sufficient and proper)
• G.S. § 159-15 (amendment of budget ordinance)
• 10 NCAC 14C.1014(a)(1)(C) (retention of client-earned income)
• 10 NCAC 14C.1125(a)(2) (state allocation reductions apply to multi- and single-county programs)
• 10 NCAC 14C.1125(a)(5) (state allocation reduction when fund balance exceeds 15%)
• Chapter 159 (Local Government Budget and Fiscal Control Act)

Source

• Landing page: https://ncdoj.gov/opinions/contributions-to-area-authority-and-state-allocations-of-expansion-funds/

Original opinion text

• (1)
• May an area program receive the full amount of State expansion funds if a county reduces the amount budgeted for the area program from the amount budgeted in the prior fiscal year?
• (2)
• May an area program receive the full amount of State expansion funds if a county retroactively reduces the amount budgeted in the preceding fiscal year?
• (3)
• Is the restriction on reducing a county's commitment of local budgeted tax revenue based on increased fee collections and/or increased State funding to be determined based on the amount a county budgets for the current year or on the amount budgeted for the previous fiscal year?

Your first question concerns whether a county can unilaterally reduce its allocation to an area authority. The General Assembly has given to the various boards of county commissioners the authority, subject to statutory constraints, to develop county fiscal policy. G.S. 153A-101 provides:

The board of commissioners has and shall exercise the responsibility of developing and directing the fiscal policy of the county government under the provisions and procedures of the Local Government Budget and Fiscal Control Act.

G.S. 159-13 specifically grants the board of commissioners the authority and responsibility to adopt a budget for the county and to make appropriations "in such sums as the board may consider sufficient and proper . . . ." G.S. 159-13(a). Notwithstanding this general budgetary authority, it is our opinion, as stated in our advisory opinion dated June 8, 1993, that the General Assembly intends for State and local governments to work together to develop and fund a public system for the delivery of services to persons with mental illness, developmental disabilities and substance abuse services. See G.S. 122C-2. In G.S. 153A-149(c), the General Assembly specifically authorizes the counties to levy property taxes to raise funds:

. . . to provide for the county's share of the cost of maintaining and administering services offered by or through the area mental health authority, developmental disabilities, and substance abuse authority.

Thus, while there is no statutory formula for determining "a county's share of the cost" of an area authority, it is clear that the General Assembly intended for some portion of the cost to be paid by the county. Specific allocations are left for the Division of MH/DD/SAS and the counties to determine. The General Assembly neither prohibits a county from reducing its budgeted contribution to an area authority nor the Secretary from reducing the amount of expansion funds allocated to the area authority.

Your second question concerns whether a county may retroactively reduce its prior fiscal year appropriations to an area authority when the amount budgeted in the new fiscal year is greater than the amount of county funds that the area authority actually expended during the prior fiscal year.

Chapter 159 of the North Carolina General Statutes gives the board of county commissioners the authority to amend the county budget ordinance after its enactment. However, any such amendment is subject to specific statutory limitations, including a requirement that the county continue to operate under an annual balanced budget. G.S. 159-8. Specifically, G.S. 159-15 provides, in pertinent part:

Except as otherwise restricted by law, the governing board may amend the budget ordinance at any time after the ordinance's adoption in any manner, so long as the ordinance, as amended, continues to satisfy the requirements of G.S. 159-8 and 159-13 . . . .

G.S. 159-13 contains a list of specific limitations which bind the board of commissioners in adopting or amending the budget. The list does not include a limitation regarding reductions to an area authority after the budget ordinance is adopted. Again, we note that the General Assembly has not precisely prescribed the relationship between a county's contributions and the State allocations to an area authority. Therefore, a county has the authority to retroactively reduce the level of appropriations to the area authority by amending the budget ordinance. Of course, the Secretary has the authority to consider this reduction in determining future allocations to the area authority.

Your final question has two parts, which we will address separately.

We first address whether the restriction against reducing a county's commitment of local budgeted tax revenue as a result of increased fee collections is to be determined based on the amount a county budgets for the current year or the amount budgeted in the previous fiscal year. The restriction to which you refer is set forth in G.S. 122C-146. Because the General Assembly has not directly addressed your specific question, we look for guidance at the wording of the statute and at the interpretation of the statute contained in rules adopted by the Commission of Mental Health, Developmental Disabilities and Substance Abuse Services.

G.S. 122C-146 provides in pertinent part:

The collection of fees by an area authority may not be used as justification for reduction or replacement of the budgeted commitment of local tax revenue.

Because the provision speaks in terms of "the budgeted commitment of local tax revenue," it is our opinion that it is intended to prohibit reduction or replacement of amounts already budgeted.

In addition, the rules adopted by the Commission for Mental Health, Developmental Disabilities and Substance Abuse Services provide as follows:

Client-earned income, such as payments received from patients or third parties (insurance, Medicare, Medicaid), which is received but not expended shall be retained by the area program or the contract program and be used to further the objectives of the legislation establishing the state categorical funding. 10 NCAC 14C.1014(a)(1)(C). (Copy attached.)

The rules further provide that when client-earned income results in an area program's fund balance being in excess of 15 percent of its annual operating budget, the Division has the authority and an obligation to "reduce its allocation of division funds in the year subsequent to the year in which the excess occurred." 10 NCAC 14C.1125(a)(5). (A copy of the rule is attached.) Thus, the rules provide that State funds rather than local funds are to be reduced as a result of unexpended fees. The authority of the Division to reduce State allocations applies to both multi-county and single county area programs. 10 NCAC 14C.1125(a)(2).

The second part of your question concerns a restriction on reducing a county's commitment of local budgeted tax revenue based on increased State funding. The only specific restriction against a county reducing the budget to the area authority is that the county may not use the collection of fees by the area authority as justification for the reduction. Beyond this, it is up to the county and the Secretary to determine specific budget allocations to the area authority. As is stated above, the only guidance given by the General Assembly is that the county is to pay "its share of the cost" of the area program.

Ann Reed Senior Deputy Attorney General

*Jane L. Oliver *

Assistant Attorney General