Mayor
Weinbrecht and Members of Council:
Submitted
herein, in accordance with the Local Government Budget and Fiscal Control Act,
is the proposed annual budget for fiscal year 2009 for the Town of
The
approach of the FY 2009 Proposed Budget is to continue with a budget structure
and philosophy using basic business principals to guide decisions now and in
the future for the provision of our core municipal services. Our organization has recently refined its
statement of values and mission statement and even developed guiding principles
and a vision statement to help improve and clarify both how we conduct
ourselves and to provide a framework to describe the sense of community we
encourage through our comprehensive goals and initiatives. With these guidelines and the new program
areas of interest as identified at the Council / Staff Retreat in early
MAJOR
ISSUES
Tax Base Growth and the
Revaluation Process
The
fiscal year 2009 ad valorem tax base is being impacted by the real property
revaluation that occurred recently in
"(e) In
each year in which a general reappraisal of real property has been conducted,
the budget officer shall include in the budget, for comparison purposes, a
statement of the revenue neutral property tax rate for the budget. The revenue neutral property tax rate is the
rate that is estimated to produce revenue for the next fiscal year equal to the
revenue that would have been produced for the next fiscal year by the current
tax rate if no reappraisal had occurred.
To calculate the revenue neutral tax rate, the budget officer shall
first determine a rate that would produce revenues equal to those produced for
the current fiscal year and then increase the rate by a growth factor equal to
the average annual percentage increase in the tax base due to improvements
since the last general reappraisal. This
growth factor represents the expected percentage increase in the value of the
tax base due to improvements during the next fiscal year. The budget officer shall further adjust the
rate to account for any annexation, deannexation, merger, or similar event.
(1927, c. 146, s. 6; 1955, cc. 698, 724; 1969, c. 976, s. 1; 1971, c. 780, s.
1; 1975, c. 514, s. 4; 1979, c. 402, s. 2; 2003 264, s. 1.)"
The
general reappraisal of real property for
Because
all new construction during the year of revaluation is done so using “2008
values”, the typical comparison to the prior year ending values to determine
the real amount of growth is not possible.
This is why the state statute utilizes an average of the previous annual
growth rates as a proxy.
Using the Town’s average
annual growth rate in tax base for the Town of Cary since FY 2001 of 5.06% as
stipulated by NC General Statute , the Town’s revenue neutral tax rate would be
32 cents (rounded from 31.79 cents) per $100 of taxable property. However, due to recent development patterns
including the number of new permits issued impacting the amount of tax base
added as of
The
reappraisal of real property produced an estimated tax base of $17.1
billion. When this amount is combined
with anticipated ad valorem values for personal property, public service
property, and vehicles, the Town of
During
the early 2000s, the impacts of the poor economy, coupled with the Town’s
successful growth control measures, combined to slow the rate of revenue growth
compared to that of the mid to late 1990’s. Approximately 70% of the Town’s tax
base is residential, so reductions in the population growth rate had a
significant effect on the level of ad valorem tax revenues. This is the largest revenue source for the
Town and, at $63 million, it comprises 54% of all General Fund revenues. With the recovery of the economy experienced
over the last few years, the Town of
A
historical perspective of the Town’s assessed value (tax base) growth since FY
1995 is provided in the graph below. The
extremely high growth rate in 2001 reflects a property revaluation conducted by
The
Town has experienced an increase in the number of new single family (SF)
permits being issued in the last several years.
During 2002, only 466 new permits were issued compared to an average of
about 1,500 per year in the mid 90s. The
assessed value on which tax receipts are calculated is based on what has been
built by the prior January 1 meaning that FY 2009 revenues are based on
values as of
Sales Taxes
Projected
sales tax revenues totaling $25 million in FY 2009 make up 22% of all general
fund revenues. The historical growth
rate of this major revenue source was greatly impacted by the economic slowdown
of the early 2000s, but the economic recovery of the past few years has helped
this revenue source recover as evidenced by an average annual growth rate of
11.5% for FY 2003 through FY 2007. With
the global and domestic economies slowing, the health of the Triangle regional
economy has started to show signs of slowing as well with only 5% growth in
sales taxes expected in FY 2008.
Because the future growth of the economy is not expected to be as
strong, a more modest growth rate of 4% in sales tax revenues is forecast for
FY 2009.
The
graph below depicts the historical amount of sales tax revenues and includes
the one cent (Article 39) which is distributed based on sales delivered in Wake
County, the two half cents (Articles 40 and 42) which are distributed
state-wide based on the population of each county, and the one half cent
(Article 44) which is distributed based on a combination of both approaches
mentioned. Article 44 was approved in
December 2002 to replace the expiring Inventory Tax Reimbursement and
Intangibles Tax Reimbursement revenue sources.
Investment Earnings
Existing
cash balances on hand due to current receipts, fund balances, and project
funding are often invested temporarily to earn the Town income in the form of
investment earnings to help offset total income needed for Town services. While the sagging economy of the early 2000s
drove debt service rates lower in the bond market, it also reduced the amount
of return available for the Town’s investments.
Interest earnings in FY 2001 were $8.7 million across all
governmental funds, while net investment earnings in FY
Debt Service
Historical
financing decisions and the rate of capital investments have been shaped by a
variety of funding philosophies and the health of the economy in general. Beginning in fiscal year 1999, the Town
decided to leverage its debt capacity in the general fund to increase its rate
of investment in Town infrastructure including streets and parks. The flexibility to afford additional capital
improvements with existing resources has changed dramatically over the past
several years. By managing operating
cost increases and adjusting programs and their related cost recovery rates,
the Town has been able to maximize the level of general fund operating margin
(the difference between revenues and operating expenditures that is available
to pay debt service). From fiscal year
2002 through 2008, the Town’s operating margin has averaged 21% per year and
ranged from a high of 27% of revenues in FY 2007 to a low of 16%
anticipated for FY 2008. The FY
2009 budget reflects an operating margin of 15% or about $17 million. Over this same time period, the level of
debt service being paid by the general fund has risen from $1.7 million in
FY 2002 to $14.3 million in FY 2009.
In addition, debt service is expected to increase to $25 million in
FY 2013 as principal and interest payments for debt sales from previously
committed projects and those from the FY 2009 capital budget become
due. Thus far, the level of operating
margin available has been able to absorb the debt service increases. However, because the level of anticipated
debt service is expected to consume all available operating margins by
FY 2010, there will be additional revenues needed as well as incremental
revenues associated with future debt funded capital investments.
Maximizing
Existing Resources to Continue Advancing the Quality of Life
Operating Margin
Ad
valorem tax base growth, after a ten year low of 1.5% in FY 2005, is expected
to rebound to 7% in fiscal year 2009 as a reflection of the resurgence in
single family permit activity during 2006 and 2007. While these increases are a welcome change
from recent years, they are not strong enough to create operating margins like
those of the 1990s. Operating margins
from FY 1992 through FY 2002 averaged nearly $15 million annually. As the graph below illustrates, the rate of
debt service growth (in red) and steadily climbing expense growth (in blue) has
put increasing pressure on the rate of revenue growth (in black). Operating margin after debt service is
demonstrated in the graph by the area where the revenues, shown in black, are
still visible since they exceed debt service and expenses. The proposed budget reflects an operating
margin after debt service of approximately $3 million or about 2.5%. This operating margin is being consumed by
recommended pay-as-you-go funding of capital projects.
Debt Capacity
Fiscal
Year 2003 marked two significant milestones in
The
general obligation bond referendum authority being recommended for
appropriation in FY 2009 includes $48.6 million for transportation projects and
$15.8 million for park projects. The
current appropriation authority remaining from each of those referendums after
subtracting the authority being allotted to projects in FY 2009 is as follows:
·
2003
$130 million transportation bond: $15.3
million remaining
·
2003
$30 million park bond: $4.3 million
remaining
Debt Affordability
With
$160 million in approved debt authority for streets and parks comes a great
deal of responsibility. The cost of
borrowed money remains relatively low compared to historical levels; however,
the interest rates charged in bond markets can change rapidly. While lower interest rates are a great
incentive to leverage the Town’s remaining debt capacity, being able to repay
the related debt service each and every year is a major factor when deciding
which projects to undertake and how much to borrow. Debt service related to the 1999 bond
authority for streets and parks, costs related to the NC55 widening and an
expansion of Town Hall and the debt issued from the 2003 street and park bonds
have combined to increase debt related costs in the general fund to
$14.3 million in FY 2009 with expected increases of another $11
million by the FY 2013 budget to total $25 million. Following the FY 2006 budget development
process, Council focused a great deal of attention on all previously funded
capital projects including the liquidity of their various funding sources. Several work sessions were held to determine
options related to minimizing the impact of pending debt service on the General
Fund without altering or delaying any projects already approved. The first approach involved using the Town’s
cash balances within existing projects that were not spending right away to
prevent borrowing funding for debt funded projects that were ready to
spend. This approach was used up until
the time that the variable interest rate market provided an opportunity for the
Town to use its borrowing power and triple A credit rating in the spring of
2006. The Town borrowed $47 million with
only interest payments due the first two years (fiscal years 2007 and 2008) and
principal being due for the first time in FY 2009. Increased investment earnings on the bond
proceeds during these two years helped pay the interest costs the first two
years, while general fund debt service will be increasing as principal payments
come due in FY 2009.
Signs
of the economic recovery of the past few years have materialized in Cary in the
form of increased levels of new residential construction, tax base growth, and
sales tax growth for fiscal years 2007, 2008 and 2009. However, the recent economic slowdown and its
impacts on
Fund Balance
The
Town of Cary’s fast growth during the 1990s helped develop one of the highest
levels of general fund fund balance in the state of North Carolina. This major cash reserve created by
historically healthy annual operating margin has helped facilitate a large
number of cash funded projects as well as provide mid-year funding flexibility
regarding special opportunities and emergencies. The Town Council decided during FY 2003
to reserve six months worth of operating expenditures and debt service for
future needs, while designating the remainder for pay-as-you-go capital
projects or for special opportunities versus the funding of on-going
expenditures. Since FY 2003, the size of
the six month reserve has grown by $21 million from $36 million to an expected
$57 million with the FY 2009 recommended budget. This increase, combined with various
appropriations of fund balance for capital projects since that time have combined
to reduce the designated amount available for additional capital from $29
million in FY 2003 to about $5 million by the end of FY 2009. The graph below shows the distinction between
the “six month reserve” level and the amount designated for capital since
fiscal year 1989.
In
the spring of 2008, the Council held a financial planning worksession in which
the concept of adjusting the Town’s definition of fund balance reservations and
amounts was considered. Rather than
total general fund fund balance, the decision was made to consider adjusting the
definition of fund balance set aside for emergencies to four months of
unreserved fund balance (after that reserved by state statute). This definition of the amount set aside for
emergencies is known to be more consistent with the approach and evaluation
criteria utilized by bond rating agencies and leaves approximately $7 million
available for capital by the end of FY 2009 as opposed to $5 million using
the former approach.
While
fund balance levels are a key consideration when bond rating agencies (Moody’s,
Fitch, Standard & Poor’s) evaluate the risk associated with future
borrowings of the Town, there are many other factors considered as well. Items considered heavily when awarding Cary’s
AAA rating include evidence of a strong and proactive administration, effective
debt management with moderate to low debt levels, a vibrant or diverse economy,
and strong finances. As future capital
opportunities arise and various financing options are considered, fund balance
targets and appropriations should be considered as a viable option for a
one-time funding source, realizing that it is extremely difficult to replenish,
especially during tough economic times and periods of slow tax base and
population growth.
Impact of Declining
Operating Margin
Fiscal
Year 2009 represents a very interesting mix of several factors that have
affected operating margin over the past several years:
· Revenue growth from new
tax base, although showing signs of growth recently, will likely decline again
in FY 2010 as a result of the current economic slowdown and will likely
never reach double digits again as it did in the 1990s.
· Operating expenditure
growth has been limited to maintaining service levels in most areas with the
exception of staffing, operating, and maintaining several new facilities
(Tennis Park, Skate Park, WakeMed Soccer
Park, USA Baseball)
· Debt service in FY 2009
is projected to grow by $2.8 million to $14.3 million and is expected to reach
$16.3 million by FY 2010 and $25 million by FY 2013. There is typically a delay between the time a
project is approved and when the cash is actually needed to pay for
construction since funds are usually borrowed just before the related cash is
needed so debt service payments don’t become due before the projects are incurring
costs (see the “Debt Affordability” section above).
As
the level of expenditures and debt service have grown and various mid-year
appropriations have taken place, the level of general fund fund balance
available to assist with capital purchases is dwindling. While the targeted amount of fund balance
reserved is available for one-time emergencies, it is not a sound financial
planning practice to pay for long term operational expenditures with fund
balance or other non-recurring sources of revenue.
Options
for Creating Additional Operating Margin
The conversion to
curbside solid waste collection and a fee increase implemented in FY 2006
have helped improve the cost recovery percentage and have helped boost general fund
operating margin available for debt service.
The solid waste fee had been reduced from $11.50 to $7.67 in
FY 2001, which equated to about $1.5 million less in annual revenue until
FY 2006 when the fee was raised to $11.75.
FY 2008 was the first full fiscal year that all routes had been
converted and thus provided a good foundation to analyze the economies of scale
achieved with the new program. It is
recommended that the solid waste fee be increased in FY 2009 to $14 per month
(a $2.25 monthly increase above the FY 2008 rate). As a result of this fee increase and the
comparative cost effectiveness of the curbside service, the cost recovery
percentage for solid waste collection is expected to stay at its FY 2008
cost recovery level of 77.5%. This
represents a dramatic departure from the program’s cost recovery low point of
47% in FY 2004. The cost recovery
level associated with the automated curbside solid waste and dual stream
recycling programs being initiated in FY 2009 will continue to be monitored
for improvement and possible fee adjustments in the future (each $1 on the $14
monthly fee is expected to generate about $468,000 in FY 2009).
The largest cause for
decreased levels of operating margin over the past decade is the growing amount
of debt service that has been absorbed within the general fund with no tax
increases. Over this same time period, a
one cent decrease was approved in FY 2002 changing the rate from 43 cents
to 42 cents. In the FY 2009 budget,
each one cent on the tax rate is expected to yield about $1.9 million in
revenue. Since FY 1994, four bond
referendums have been approved by the voters authorizing $242 million of
general obligation debt for streets and parks with the understanding that the
potential tax increase resulting from all of that debt could be as much as 14
cents on the tax rate once all the debt is issued (all tax rate impacts here
have been adjusted for property revaluation impacts in 2000).
Other initiatives to
help create and/or reduce the impact on operating margin totaling about $9
million for the next couple of years (with $5.8 million recurring annually)
have been initiated recently including:
· raising the business
license fees effective for FY 2007 for the first time since 1990 (expected to
generate an additional $650,000 in FY 2008)
· reducing employee
average raise amounts in FY 2006 (saving about $320,000 annually)
· increasing the monthly
solid waste and recycling fee from $7.67 to $11.75 in FY 2006 (expected to
generate about $1.9 million in additional revenue in FY 2009)
· increasing the monthly
solid waste fee from $11.75 to $14.00 in FY 2009 (expected to generate
about $1 million in additional revenue in FY 2009)
· delayed $47 million debt
sale for already appropriated street and park projects beyond FY 2006;
approved a variable rate financing mechanism delaying principal payments until
FY 2009
· leveraging the buying
power of Blue Cross and Blue Shield as the Town’s third party administrator for
the health and dental self-insurance fund in FY 2006 (created savings versus
budgeted funds of $1.3 million in just the first year)
· updating the parks and
recreation fee system in FY 2006 (expected to generate about $150,000 annually)
· continuing the
conversion to voice over internet protocol (VOIP) phone system begun in
FY 2008; will save at least $171,000 annually upon full and complete
implementation in FY 2011, or 17% of the Town’s existing $1 million in phone
related costs.
The Balance Between
Revenue Growth and Expenditure Growth
Historically,
the NC General Assembly has given local governments a limited range of
responsibilities for services and capital facilities and a limited set of
revenue sources to meet those responsibilities.
Over an extended period of time, local governments need to develop and
maintain a focus on community priorities within the limits of their
responsibilities. Having this
prioritization structure and focus assists local governments in the struggle to
balance revenues and expenditures while maintaining a strong and stable
financial position.
During
the decade of the 1990s, the Town of Cary benefited financially from the
booming economy and an exceptionally high growth rate in both population and
assessed value. Many of the Town’s major
revenue sources are largely driven by population such as ad valorem taxes,
building permits, solid waste fees, recreation fees, cable television franchise
fees and vehicle license fees. Other
major revenue sources driven by population and distributed through the state or
county on a per capita basis include sales taxes, wine and beer taxes, and
Powell Bill funding for local street improvements. Due to growth management efforts and a
slowing economy, both the Town’s population and revenue growth slowed
dramatically in the early 2000s. One of
the benefits of the high growth levels was large amounts of operating margin
(revenues less expenses) that enabled the Town to self-fund many large projects
and new priorities. For example, from FY
1998 through FY 2002, the Town was able to fund $130 million, or about 52%
of its entire general capital program with cash generated either from operating
margin, grants, or capital reserve revenue sources.
The
revenue reductions discussed have been coupled with significant service level
increases in the form of new appropriations to roads, parks, specialized
facilities, economic development funding for schools, affordable housing, and
the initiation of a transit program. In
addition to the initial capital costs to build many of these facilities, some of
them require additional staffing to maintain and program their use. General fund operating margin before debt
service has actually increased by $5 million from $13 million in FY 2003
to $17 million in FY 2009. However,
over that same time period, debt service has grown from $5 million to $14.3
million, more than canceling out the increase in operating margin. Without significant shifts toward increasing
revenues through further increases in existing fees, or decreasing expenditures
in the very near future, maintaining the excellent financial condition of the
Town may require consideration of an increase in property taxes.
Town
staff has a history of being very frugal in its application of new resources to
accomplish both existing and new tasks by not adding people or new funding
until absolutely necessary in order to achieve the Town’s goals. In addition, there is recognition within the
organization that most often, people are the most expensive solution to any problem. Many of the recent privatization efforts the
Town has undertaken and studies related to operational improvements and
efficiencies were detailed very thoroughly in the series of operation
worksessions held with Council during the Fall of 2004. In response to the dynamics of the past six
years, the staff has taken an even harder look at operations to help reduce and
control costs. Examples of some of these
initiatives are identified below:
·
Began
conversion to automated curbside solid waste collection and dual stream
recycling in FY 2006 with full conversion prior to the end of FY 2007
·
Reduced
eight positions in Inspections & Permits (5 inspectors, 3 permit staff)
when the number of new permits being issued dropped in 2003 – added three
inspectors and one permit staff position back in FY 2007 and increased
another three in FY 2008 given the resurgence in the number of new permits and
resulting inspections – still below the related staffing levels in 2003
·
Discontinued residential plan review program
·
Did
not fill Recycling Coordinator vacant position (reassigned the majority of
duties and increased a 30 hour position to 40 hours to handle the remaining
workload)
·
Began
contracting janitorial services, landscaping, right of way and town facility
mowing
·
Reduced
in the minimum staffing on aerial ladder units in the Fire Department from 4 to
3
·
Changed
approach to rising health and dental insurance costs by encouraging more
consumerism and development of a fitness promotion and health awareness program
·
Initiated
consultant studies on operations and staffing efficiencies at all utility
plants and fleet operations
·
Reallocated
four sworn officer positions from elementary school resource officer positions
to higher priority objectives (two to new 9th grade centers, one to
patrol and one to investigations)
·
Adjusted
classification and pay study approach so as not to have associated automatic
increases with grade changes
·
Required
a 10% reduction across the board in training and travel expenses for FY 2006
after holding amounts flat for the previous two years
·
Required
a 3% reduction across the board in non utility operating and maintenance
expenses for FY 2006
GENERAL FINANCIAL
CONDITION OF THE TOWN
FY
2009 budget recommendations have been made relative to the current overall
financial condition of the Town and to meet the goals set by Council for the
future of the Town. The Town’s
financial condition continues to be above average, according to the rating
agencies, currently providing adequate liquidity in a better economic
environment than that of four years ago.
All three major national bond rating agencies have awarded the Town of
Cary their highest possible rankings, a move that reaffirms Cary’s financial
strength. These AAA ratings allow the town to save tax dollars when borrowing
by gaining lower interest rates on bond issuances.
The
Town has maintained a strong cash position, and property tax revenues
consistently increased during the 1990s, allowing the Town to avoid property
tax rate increases since Fiscal Year 1990.
Since then, any adjustments to the tax rate have been for revaluations,
except in FY 2002, when the tax rate was dropped by one cent from 43 to 42
cents per $100 of property valuation.
While revenue growth has continued, an overall slowdown in the growth
rate has been experienced compared with that of the 1990s, with a slight
resurgence from a recent low in tax base growth of 1.5% in FY 2005 to a
projected 7% for FY 2009. Past
strong population and commercial development has resulted in the need for a
sizable and aggressive capital improvements program for both general and
utility needs. Due to these growing
infrastructure needs and a comparatively slower growth rate, the Town can no
longer depend on its financial reserves to the extent it has in the past. Alternative financing options must be sought
to enhance funding flexibility and continue to ensure cost effectiveness. While the Town has traditionally funded major
capital needs with cash, recent plans to leverage the Town’s borrowing power by
increasing the use of debt financing are evident with the resulting increases
in debt service during the past few years and more is expected should the
capital program in FY 2009 be executed.
Financial reserves over and above Council’s six month goal for fund
balance have been leveraged, but their ability to fund significant capital
requirements in the future will be minimal.
These changes will affect future operating budgets with increased debt
service and investment income fluctuations reflecting shifts in cash balances. Acquiring additional debt without existing
margin will require some combination of tax increases, additional revenue
sources, and/or expenditure reductions to create the amount of margin necessary
to service the debt load pending in the next few years (see “Debt
Affordability” section above”).
The
Town’s strong financial reserves have provided significant flexibility in the
past allowing the Town to move quickly to take advantage of economic
opportunities and/or begin new projects in the middle of the year. Plans for the Town’s financial actions should
include consideration for maintaining flexibility for periods of both economic
growth and downturns.
REVIEW OF REVENUES
General Fund
Most
of Cary’s general fund revenue sources are dependent on Cary’s existing
population, and growth from year to year is heavily dependent on the number of
new residents (permit fees, assessed value, sales taxes, etc.). Cary's rate of population growth is expected
to increase to 6% as of July 1, 2008, which is significantly lower than the
double-digit growth experienced during much of the 1990s. While a slowing economy and growth management
practices of the early 2000s combined to encourage a slower growth rate, the
recent economic recovery has coincided with a slight increase in the growth
rate. Council’s target is to have a 3%
to 4% rolling five year average population growth, and that reflected below is
4.1 % from July 1 of FY 2004 through projected population as of July 1 of FY
2008.
Revenue
assumptions have been developed according to the effects of the economy and
estimated population growth levels as they directly impact many of the Town’s
revenues such as ad valorem taxes, permit and inspection fees, solid waste
fees, sales taxes, utility franchise tax, wine and beer tax, inventory
reimbursement tax, cable TV franchise fees, and recycled goods.
The
general fund revenues for Fiscal Year 2009 total $117 million which is a 5%
increase versus estimated revenues for Fiscal Year 2008. This growth rate is bolstered by $5 million
in ad valorem receipts, $1 million in increased solid waste fees, and $973
thousand in sales taxes.
The
Town's major source of revenue for FY 2009, the property tax, is based on
January 1, 2008 assessments, which are projected to increase 40% over the
estimate for FY 2008, mostly as a result of the Wake County property
revaluation that updated tax values to approximate market values from their
2000 valuation levels to 2008 values.
Actual growth due to new construction is estimated at 7% for calendar
year 2007. This growth impacts revenue
billings in FY 2009 and is based on new construction on the ground as of
January 1, 2008.
The
Cary Town Council sets the tax rate, currently 42 cents per $100 of assessed
value, each year as part of the budget process. The tax rate for the year
becomes official when the new budget is adopted annually in June. The tax rate for Fiscal Year 2009 is
recommended to decrease to 33 cents per $100 as a result of the
revaluation. Marginal growth in ad valorem
revenues will help provide funding to continue essential services at current
levels in the Town’s general fund. The
tax base in FY 2009 is estimated at just over $19.5 billion, which
includes real and personal property. The
33 cent rate is expected to provide $62.8 million in revenue. One penny on the tax rate is expected to
generate approximately $1.9 million in revenue for the Town in
FY 2009.
The
chart below provides a breakdown of the major revenue categories in the general
fund, their amounts, and their respective percentages of the total $117 million
in revenues expected in FY 2009.
As
is the case with most units of local government in North Carolina, the Town of
Cary’s controllable sources of revenue are relatively restricted. Included below is a breakdown of both
controllable (property tax, solid waste fees, permits and fees, business
licenses) and uncontrollable revenue sources (sales taxes, state shared
revenues, investment earnings).
For
the Town of Cary, the focus is also on the local issues and the effects of
growth on our ability to maintain our revenue streams. Cary was able to get credit for its fast pace
of growth during the 1990s by having a special census done in 1998 which
increased its official population count relative to other municipalities in the
county. However, the 2000 decennial
census caused a reallocation of the distribution of sales tax revenue from
retail sales. The Town of Cary’s share
of sales tax revenue is dependent on its population as a proportion of Wake
County since sales taxes are distributed within Wake County on a per capita
basis. Since Cary’s population growth
rate has slowed compared to the rest of Wake County, it receives a smaller
portion of the total distribution amount.
Had Cary’s distribution percentage remained constant since its peak of
8.94% in FY 2001, Cary would be receiving about $700,000, or about 2.8%
more, in FY 2009 (percentage distribution currently 8.69%).
Projected
sales tax revenues totaling $25 million in FY 2009 make up 22% of all general
fund revenues. The historical growth
rate of this major revenue source was greatly impacted by the economic slowdown
of the early 2000s, but the economic recovery of the past few years has helped
this source recover with an average annual growth rate of 11.5% for FY 2003
through FY 2007. With the global and
domestic economies slowing, the health of the Triangle regional economy has
started to show signs of slowing as well with only 5% growth in sales taxes
expected in FY 2008. Because the
future growth of the economy is not expected to be as strong, a more modest
growth rate of 4% in sales tax revenues is forecasted for FY 2009.
The
following graph quantifies the effects of the factors discussed above (local,
state, and national) on the Town of Cary’s general fund revenue stream from FY
2001 through budgeted FY 2009.
Utility Fund
Utility
fund revenues are budgeted at $49.1 million for FY 2009. These revenues reflect a full year of
Morrisville customer generated revenues following the April 3, 2006 merger of
the Morrisville water and sewer system with the Town of Cary system. Per the merger agreement, Morrisville
customers will be paying slightly higher rates to help fund costs of the merger
over the anticipated cost recovery period of 15 years. Total revenue from water retail fees is
expected to decrease 4%, while total sewer retail revenues are expected to
increase 6%. These increases reflect a
blended rate increase of 1.2% or 77 cents per month for a residential customer
using an average of
As
was initiated in FY 2002, the utility rates in place are sufficient to generate
$1 million annually for open space acquisition. Due to revenue bond covenants entered into
during Fiscal Year 2002 as a result of debt financing, the $1 million
generated during Fiscal Year 2009 will be allowed to fall into fund balance to
make sure enough revenue is generated to support all operating and debt service
needs. This $1 million has been
appropriated to the open space project as part of the FY 2009 budget.
The
current tiered utility rate structure shifts more of the financial burden to
the high-volume users who require additional capacity to support their peak
demand. The rate structure also
currently includes a monthly base charge for all users. Rate changes in Fiscal Year 2002 included
increasing the first tier from 4,000 to
Other
revenue sources in the utility fund include connection fees, pretreatment fees,
sewer wholesale service, bulk water sales, and interest income. Total revenues in the utility fund are projected
to decrease 3% compared to the FY 2008 estimated revenues. Fund balance levels are higher with
approximately $46 million anticipated at the end of FY 2009 as compared to
$24 million in FY 2003. Council’s
recent direction regarding the level of the utility fund balance target of 100%
of annual operating expenditures and debt service is consistent with ensuring cash flow needs are
met and that sufficient reserves exist to buffer any dramatic weather changes
that may occur (i.e. a very rainy season).
Fund balance amounts higher than this target in the past have been used
for an $11.2 million transfer for open space acquisition in FY 2002 and another
$13.5 million transfer to help offset utility capital costs related to
involuntary annexation areas in FY 2003.
Growing debt service needs related to infrastructure investments are
continuing to increase revenue requirements in the utility fund. The May 3, 2005 general obligation bond
referendum of $110 million was approved by Cary voters to help finance the
Town’s share of a new regional wastewater management facility and another
$10 million general obligation bond referendum was approved on that date
for the acquisition of open space.
Including the FY 2009 budget, $94 million of the wastewater bond
and all $10 million of open space bond funding, which was appropriated in
FY 2007, will have been appropriated.
As
the chart below illustrates, utility fund revenues have been increasing to help
afford related debt service and operational cost increases. The rate of debt service growth (in red) and
steadily climbing and heavily fixed operating expense growth (in blue) has put
increasing pressure on the rate of revenue growth (in black). Operating margin is demonstrated in the graph
by the area where the revenues, shown in black, are still visible since they
exceed debt service and operating expenses.
The recommended budget reflects an operating margin of approximately
$3.4 million or about 7%. This operating
margin is being consumed by Morrisville merger related recovery cost transfers
to the capital program and the generation of $1 million in open space funding.
REVIEW OF EXPENDITURES
General Fund and Utility
Fund Total Expenditures Summary
General fund
expenditures and inter-fund transfers total $119 million for FY 2009. Included in this amount is $4.1 million in
the form of fund balance transfers to support fire, parks, and general capital
projects. This expenditure level
reflects a $4.5 million decrease compared to FY 2008 for capital
transfers. Debt service is budgeted at
$14.3 million in FY 2009 and is expected to increase to $16.3 million in
FY 2010. Utility fund expenses and
transfers total $48.4 million including a $1.1 million transfer to the utility
capital reserve fund for future appropriation to water and sewer infrastructure
needs identified via the merger of Cary and Morrisville’s utility systems. This also includes $12.3 million to cover
utility-related debt service requirements.
Major Personnel Impacts
The
demand for services has continued to grow to keep up with the demand for high
quality services even as the Town has increased service levels with special
facilities (e.g. WakeMed Soccer Park, USA Baseball). In addition, as the number of new permits has
increased, so too have our related development approval demands, the number of
related inspections, and ultimately our number of citizens requiring services
and the related infrastructure maintenance necessary to create the exceptional
environment expected. In order to
maintain current essential service levels and to support upcoming capital
projects coming on-line, 25.25 new positions,