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EDENTON (AP) — A cash-strapped county has spent more than $20 million in reserve funds but can't account for virtually any of that money, and the state has notified the county it has violated the law, a newspaper reported Monday.

Susanne Stallings, the clerk of the Chowan County Board of Commissioners, told the Virginian-Pilot of Norfolk, Va., that she had searched a decade of meeting reports and found just one instance in which the board approved a payout from the reserve fund.

The state Local Government Commission told the county last week that it must rework its budget and that it had overstated its revenue estimates. The state panel also recommended a tax increase.

County Manager Peter Rascoe said the county has a "fiscal crisis" and he is trying to make cuts to reduce a possible tax hike.

"If you go too deep, it will affect the actual services being provided to the citizens," he said.

"The alternative, unfortunately, is the possibility of a tax increase to make up the difference. No one wants a tax increase, and no one wants a cut in services. We did go through and have departments propose 10 percent cuts to see how far we can get."

Rascoe said he learned on his first day of work after being appointed to the job in June that the county couldn't pay its bills because of low cash on hand. He called the Local Government Commission.

The newspaper said the county has used reserve funds to balance its budget for at least five years. The board told its clerk to see if the expenditures had been approved.

Rascoe took the job after Cliff Copeland retired in May after 29 years as county manager. Copeland said last week that the county hadn't grown as officials hoped and that led to reduced reserves.

"The revenue just didn't come in as anticipated," Copeland said.

Lisa Jones, county finance manager, said the reserve was at least $2 million in May but nearly all of it was used to pay salaries and bills.

"To know that $20 million was spent and we didn't realize it was shocking," said board vice chairman Jimmy Alligood. "I always thought the money was still there."

If the county can't balance its budget by the end of September, the state could take over the county's daily operations and require a tax increase, Rascoe said.

Chowan County, the state's smallest, has about 14,500 and sits on Albemarle Sound about 100 miles east of Raleigh.