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Financial Highlights

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FY 2017 Audit Complete

The Town remains in excellent financial condition, and the available capital resources, revenue capacity and expense management culture provide Council with the ability to make choices on how best to fulfill the vision of the Imagine Cary Community Plan. General Fund results are in, and although the final FY 2017 budget anticipated a $20.9 million decrease in fund balance as a result of appropriations to capital projects, fund balance decreased only $1.4 million. As in the past, revenues exceeded budget and expenditures came in under budget for a total positive budget variance of $19.5 million. The Utility Fund was also successful in exceeding budget expectations resulting  in a net contribution of $6.9 million to future resources. On the dance floor, the FY 2017 audit resulted in a clean audit opinion, and the Comprehensive Annual Financial Report (CAFR) was submitted to the State Treasurer’s Office by the October 31 deadline. More details will be provided during the formal staff and auditor presentation, which  has been traditionally scheduled for the December Town Council meeting.

The CAFR contains more insights into the Town’s operations, values and trends than basic financial statements. For example, one section contains statistical data such as the Town’s top 15 taxpayers in FY 2017 compared to a similar list ten years ago in FY 2008. An excerpt of the taxpayer data follows and reflects the strength in the diversity of the Cary tax base.

An excerpt of the taxpayer data follows:

principal property taxpayers

FY 2017 Operating Budget “Rollovers”

To continue ongoing operating projects authorized in FY 2017 but not completed at fiscal year-end, $6.2 million was carried over from the FY 2017 operating budget to the FY 2018 operating budget. At $3.9 million, the general fund comprised the largest share of the rollover, one third of which was associated with one-time technology initiatives such as the development of a parks, recreation and cultural resources registration system within  Salesforce.

Capital Projects

Additional capital resources were created when $10.2 million of unused financial resources from completed capital projects were  released  to  capital  reserve  funds to finance future projects. As part of the fiscal year-end financial process to “close the books” for FY 2017, 86 capital projects were identified where spending was complete. Like the operating funds, capital expenditures must come in under budget, and when a project is “closed,” the excess project revenues are returned to the capital reserve funds to fund future projects. Of the $10.2 million, $7.3 million returned to utility capital reserve and $2.9 million returned to general capital reserve.

For perspective, after project closure and new FY 2018 project appropriations, the Town has 405 total active capital projects with $879 million in authorized spending. Utility projects comprise 63 percent of the capital spending authorization at $557 million. General capital projects, everything other than water and sewer, total $322 million.

Capital Projec Appropriations

The financial details of capital project spending for the quarter follows the operating budget updates. Updates on the status of a few key projects are included in the Move and Serve sections of this report. A complete list of capital projects will be an integral part of the Project and Services Catalog, currently under development.

FY 2018 Mid-Year Appropriations

To ensure progress on key projects in streets, traffic management and utility resiliency in the first quarter of FY 2018, Council approved three new capital appropriations for a total of $2.6 million.

  • $1.8 million of general obligation bond proceeds were directed to the construction for the Intersection Improvements project.
  • $750,000 of utility capital fund balance was directed to construction of the NC 540/Morrisville Parkway Water Line project.
  • $67,000 of utility capital fund balance was authorized to fund a reimbursement to NCDOT for water line work performed on the Town’s behalf.

Q1 Delegated Authority Financial Actions

Budget Actions

Throughout the fiscal year, new information, challenges and opportunities arise that require or warrant financial resources. Often staff can repurpose existing resources to keep the organization nimble and able to adapt to the highest priorities and initiatives. The budget ordinance has traditionally provided authority to the Town Manager to approve budget adjustments between departments that are in the same functional category such as Public Works, Public Safety, General Operations, General Government and Development and Infrastructure. In the FY 2018 budget ordinance, Council provided additional flexibility to the organization by granting the Manager authority to approve inter-functional budget adjustments with reporting to Council to follow the action. As a result, for the first time, we are reporting two inter-functional budget  adjustments approved  by  the  manager, totaling $1,027,500 in Q1 for FY 2018:

  • $1,020,000 was moved from the General Operations in the Parks, Recreation and Cultural Resources operating budget to General Government in the Information Technology operating budget to address the development of a parks, recreation and cultural resources registration system within Salesforce.
  • $7,500 was moved from Development and Infrastructure in Planning to General Government in Legal to support a cell tower study.

In addition to the budget adjustment authority that allows staff to act more quickly, Council has delegated authority to approve certain types of contracts to the Manager, and he has delegated a portion of his authority to Department Directors. In accordance with reporting requirements in the Council policy delegating authority to the Manager, the following chart includes the number of contracts signed by staff in the first quarter compared to prior quarters.

Contracts Approved By Managers And Staff

Bond Sale

To finance street, parks and fire capital projects with debt authorized by Cary voters in the 2012 referendum, the State Treasurer’s Office conducted a $30 million competitive bond sale on behalf of the Town on September 26. The Town benefited in a low interest rate market from strong competition with high participation, demonstrated by 14 financial institutions that bid on the bonds. The winning bid was for an average interest rate of 2.5% for 20 years. For comparison, similar 2014 bonds bear an average interest rate of almost 3 percent.

At the same time, the Town solicited bids to refinance a portion of  existing  debt. The  interest rate markets  were favorable for the deal, and as a result, the Town will save approximately $1.4 million in interest expense over the next 11 years, split between the utility fund and the general fund.

The bond rating agencies updated and confirmed the Town’s AAA ratings as part of the bond sale process. Their reports used positive and strong phrases. For example, the Fitch report stated, “Strong revenue growth prospects reflect the town’s ability to capture tax base increases. The town has managed its expenditure and long-term liability profiles well, as evidenced by  moderate  carrying  costs and a low debt burden. Fitch Ratings expects that these factors, coupled with conservative financial management, would enable the town to maintain financial stability and solid reserves in a potential economic downturn.”

For perspective on the General Fund annual debt obligations, a chart of the Town’s current and forecasted debt service follows. In addition to the current legal obligations of existing debt, the chart includes committed debt service and planned debt service. Committed debt service represents forecasted payments for debt that has been authorized for capital spending but that the Town has not yet borrowed. Planned debt service represents the payments on new debt that would be required to supplement other capital revenue sources  to  fund  the first five years of the 10-year capital improvement plan. Council has not approved any of the planned debt or the related capital projects in the 10-year  plan.

Debt payments in the General Fund decline over time because the debt is repaid more aggressively than a traditional mortgage structure. Debt incurred for general capital projects typically is repaid within 20 years or less and the payments shrink over time because, instead of level debt payments, the payments are composed of level principal commitments. As the debt is repaid, the interest component of the payments shrink. This repayment structure, which is essentially mandatory under North Carolina statutes, creates debt capacity for future priorities. 

General Fund Total Debt Service

FY 2018 First Quarter Financial Results

General Fund

 general fund summary

Overall FY 2018 Q1 revenue is comparable to FY 2017, but expenditures are outpacing the prior year by $1.5 million to pay for technology initiatives. Historically, expenditures outpace revenue in the first quarter. Details on notable revenues and spending by category  follow.

Significant General Fund Operating Budget Revenue Sources

general fund revenues

The largest positive dollar variance, $426,000, from the prior year is in Sales and Services due in part to the increases in revenues received at the Cary Tennis Park, WakeMed Soccer Park and community centers. The largest negative revenue variance from the prior year, $344,000, is in Permits and Fees; however, Permits and Fees compare favorably to a quarter of the FY 2018 budget. The variance in Permits and Fees revenues reflects the variance in projects that are permitted from year to year. Another negative variance in revenues is in Other Taxes and Licenses because Wake County ABC revenues were not received in Q1 in FY 2018, although there was a distribution in Q1 FY 2017. The Wake ABC revenues have been received since quarter end and are in line with budget  expectations.

Property Tax

Property tax is the largest revenue source for the General Fund, making up about 56 percent of the total revenue. The majority of property tax revenue is collected between November and January each year, and, therefore, it is too early to forecast any changes from the original budget. $13.6 million, or 15 percent of $90.8 million of budgeted current year ad valorem revenue, was collected in the first quarter of FY 2018. These earnings are net of $195,000 that was withheld by Wake County as a refund to Cary Towne Center for taxes paid in FY 2017.

The Cary Towne Center property owners appealed the property’s assessed value for January 1, 2016 established by Wake County as the basis for property taxes levied beginning in FY 2017. Mall management hired an independent appraiser to develop evidence for the appeal to reduce the value 67 percent from $92 million to $30 million. After months of work and negotiation, Wake County settled on a $54.7 million reduction in value from $92 million to $37.3 million, approximately 59 percent less. The adjustment is retroactive to taxes billed for FY 2017. In accordance with our contract with Wake County to administer tax billing and collection, on our  behalf Wake County refunded approximately $195,000 of Cary tax revenue to the mall owners for FY 2017 and reduced the FY 2018 tax bill by about the same amount. The tax reduction for Cary represents about 0.23 percent of our FY 2017 real estate property tax revenue. This revenue loss highlights the critical importance of redevelopment in our strategic vision in the Imagine Cary Community  Plan.

Q1 Property Tax Revenues Compared To Totals

Through September, Q1 vehicle property tax collections, a component of the property tax revenues noted in the chart above, are down seven percent compared to the prior year. Vehicle property tax collections are down two percent county wide. The Wake County Revenue Director is working with the North Carolina Division of Motor Vehicles and the Department of Revenue to better understand these unusual results given continued population growth and the current economy.

Sales Tax

Sales tax revenue, a major component of Other Taxes and Licenses, is  distributed  to  municipalities  by  the NC Department  of  Revenue  approximately  two  and a half months after the actual month when the sales occurred. Given this schedule, Cary’s $2.8 million sales tax distribution generated in the month of July was not received until October. Sales tax receipts are budgeted at $33.6 million in FY 2018 and represent 21 percent of total general fund revenues. Since the receipts are delayed by the administrative process at the State, the second quarter report to Council will provide a better indication of sales tax expectations for FY 2018.

This sales tax revenue will not reflect the new transit half- cent sales tax levied in April 2017 because those revenues are restricted to transit purposes and flow from the State directly to GoTriangle. Any transit-related revenues that the Town receives as a result of the sales tax increase comes to the Town as a specific project or program revenue to fund part of GoCary expenses.

Although there were no receipts for FY 2018 sales tax revenue, the chart below provides perspective on sales tax revenue increases over the past five years. The improving economy is clearly reflected in the upward trend. Some of the growth in sales tax during FY 2015 was due to tax reform that increased the sales tax base and the decision by Amazon to collect sales tax.

Q1SalesTaxRevenuesComparedToTotals

Intergovernmental Revenues

Utility sales tax on electricity and natural gas and wireless communications sales tax are the major revenue sources within the intergovernmental category. Utility sales taxes are budgeted at $9.9 million in FY 2018 and represent 91 percent of this category of revenues. The state distributes the revenue in December, March, June and September.

As a result, the Town has no utility sales tax receipts to report for Q1. The $314,000 in intergovernmental revenue received in Q1 is primarily federal drug forfeiture  funds.

Building Permit Fees

Fees for construction permits, plan reviews and inspection services are paid at the time of permit issuance. Because construction related revenues vary with the size, volume and type of construction, any one quarter’s receipts may or may not represent a quarter of the year’s activity. The $765,000 recorded in FY 2018 Q1 is 24 percent less than the $1 million received in that same quarter in FY 2017. While the first quarter of FY 2018 is notably less than the prior year, it is not concerning because it compares favorably to the first four years of the five-year history and to a quarter of the FY 2018 budget. The first quarter of FY 2017 included permit fees for three apartment complexes and a five story office building that boosted that quarter’s revenues  beyond  historical averages.

Q1 Building Permit Fee Revenues Compared To Totals

 

Significant General Fund Operating Budget Expenses

 general fund expenses

At the end of the first quarter, it is logical to expect expenses to be 25 percent of budget. However, expenses in the first quarter typically represent 17 percent of the annual actual total and 15 percent of budget. The first quarter of FY 2018 is consistent with this average. First quarter spending is less than a full quarter because of the time it requires to develop plans and manage purchasing processes in accordance with local government procurement regulations and best practices for new operating projects or initiatives. The increase in general government function spending in FY 2018 compared to FY 2017 reflects commitments for the implementation of multiple town-wide technology initiatives. There are no other notable variances in FY 2018 spending compared to prior years.

Utility Fund

Utility operation summary

Overall, FY 2018 Q1 revenues outpaced FY 2017 numbers for the same period by four percent and are in line with budget. Like the General Fund, permits and fee revenues were higher in FY 2017 Q1 compared to FY 2018 due to the variance in  the  types  and  volume  of  permits for construction.

Utility operation revenues

Q1 Billed Utility Demand

 

Significant Utility Fund Operating Budget Expenditures

Utility Expenses

Total utility fund expenses include notable $41 million in capital transfers in non-operating expenses to water and sewer capital projects funds per the FY 2018 budget ordinance. These transfers allowed the Town to postpone additional planned utility debt until FY 2021.

Utility operating expenses are in line with budget expectations and exceed FY 2017 by 8 percent. The primary expense increases are in administration and wastewater functions. Administrative expenses increased compared to FY 2017 as a result of higher processing fees for increased credit card activity and new contracted services in Water Resources. Wastewater spending increases reflect an emphasis on the reclaimed water program, which was implemented with the adoption of the FY 2018  budget.

Significant Capital Revenue Sources

Powell Bill funds are a direct allocation from the State of North Carolina for the maintenance of non-state roadways. These revenues are determined annually and distributed in two equal payments. The Town received its first FY 2018 payment of $1.9 million in September. The full year’s distribution is expected to be $3.8 million, which is 2 percent greater than budgeted and 0.7 percent greater than FY 2017. A chart of Powell Hill history follows. The slow growth in Powell Bill revenues will strain the Town’s growing needs for street maintenance capital funding in the future.

Q1 Powell Bill Revenues Compared To Totals

 Capital Project Spending

Charts that depict capital spending follow. Because the mix of capital projects changes over time, there are no discernable patterns in general capital projects. The changes in spending for utility projects reflect large plant projects. The Western Wake Regional Water Reclamation Facility accounts for the notable spending in sewer, and the Cary/Apex Water Treatment Plant Expansion accounts for the spending in water.

Capital Project Spending

FY2018 Q1 Capital Project Spending

 General Capital Project Spending In Q1 - Downtown Fire Gen Gov

General Capital Project Spending In Q1 - Water Sewer

Mid-Year Service Expansion Operating Budget Recommendations

The FY 2018 Adopted Operating Budget revenues exceeded appropriations by $1.3 million, which can be utilized to address service level expansion  needs. In July, staff began discussing a process to set priorities for recommendations to Council, but this work paused due to staffing changes. Discussions will begin again in November, and recommendations will be presented to Council as they are developed.

Billed water demand is an indicator of revenue results; however, billed demand does not match earned revenue precisely because of timing differences between when the utility service was delivered and when the revenue was billed. As a proxy, the first quarter results indicate that demand is on track to meet budget. Billed water demand for the first quarter for the prior five years averaged 30 percent of the annual results, and the first quarter billed water demand in FY 2018 is 30 percent of FY 2018 budgeted billed  water  demand.  While utility demand is similar to prior years, revenue increases reflect rate increases.

Economic News

  • Every five years, Americans for the Arts, the national association of arts councils; municipal  arts  agencies and arts not-for-profits undertake a national study of the economic impact of the not-for-profit arts industry in relationship to overall economic activity. Cary participated in 2012 and again in 2017. The results of the Arts & Economic Prosperity Study demonstrated a marked increase in the economic impact of the arts in Cary over the past five years. The economic impact of cultural arts spending in Cary in 2016 was $16.98 million, a 30 percent increase from 2012. Attendance at cultural arts events was 608,168, with 14.7 percent visitors coming from outside of Wake County.
  • During the natural disasters that threatened fuel supplies, staff topped off Town fuel tanks to retain emergency reserves and relied on retail supply until the threat passed. Fortunately, fuel shortages did not materialize, and we returned to routine operations to use our fuel and tanks at contract prices. The Town incurred moderately higher fuel costs for the interim period. However, no budget adjustments are expected as a result at this time.
  • Federal tax reform could negatively affect the Town’s ability to finance certain types of  infrastructure  and limit our ability to refinance part of our debt for interest savings. Fortunately, the proposed tax reform does not eliminate the municipal bond tax exemption. The proposed limits on tax exempt financing via private activity bonds would not impact any financing plans that the Town has at this time. However,  it would limit future opportunities to consider debt for certain affordable housing projects and public private partnerships. Another limitation is proposed for professional sports stadiums. The proposed legislation also would end the use of tax-exempt bond proceeds for refinanced bonds where the proceeds of the new bond sale are held in trust until the refinanced bonds can be repaid, known as an “advanced refunding.” The Town executes advanced refundings when beneficial, and this restriction would prevent the Town from minimizing  debt  interest expenses.
  • A Duke Energy rate increase is expected in winter 2018. Budget implications will be evaluated as the fiscal year progresses.
  • Most economists expect the Federal Reserve to raise interest rates in December. Since the financial markets typically anticipate these changes in advance, the actual rate hike could be uneventful for the Town’s finances. Increases in shorter term interest rates could provide a modest benefit to the Town in interest income. Charts below reflect the reduction in interest income as a result of the recession. Because the Town invests in fixed income securities with a three to four year maturity, the impact of falling interest rates from the recession was delayed. As interest rates increase, the Town’s investment income increases more slowly. This cash management technique limits the impact of volatile interest rate markets. The Town’s investment strategy continues to outperform a benchmark of a rolling two-year U.S. Treasury note.

Annual Interest Earnings By Fund

FY Average Cash & Investments Vs Total Investment Income

Monthly Portfolio Yield History