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Financial Highlights

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Utility Revenue Bond Sale

During Q1 Council authorized refinancing utility revenue bonds. Between November 14 and mid-December’s bond sale, ongoing Capitol Hill negotiations about the scope of changes to the federal tax law meant interest rates were volatile. Because new limitations threatened certain refinancing transactions, the normal volume of bonds available for sale across the country tripled. This increased supply of bonds provided market investors an opportunity to raise their expectations for higher interest rates. As a way to capture a beneficial, slight market movement toward lower interest rates, Cary staff and our bankers agreed to sell bonds a day earlier than originally planned. Town bonds are highly rated and relatively rare compared to the total tax exempt bond market, so the bond sale was successful at interest rates that were favorable for the Town. Overall, this $92 million financing action locked in $8.6 million of interest savings for the utility over the next 20 years.

Cary citizen John Yoakum was particularly interested in buying Town bonds. Staff worked to ensure that his “buy” order for the bonds was fulfilled. Mr. Yoakum followed up with a visit and holiday treats for our Deputy Treasurer after the sale to thank her for her work and communication.

As part of the process of the Town’s bond sale, the bond rating agencies updated and confirmed the Town’s AAA ratings. The report from Moody’s stated, ”The AAA rating reflects an extremely strong cash position resulting from very conservative financial management, and a track record of conservative and stable financial performance. The rating assignment also incorporates the growing service area with a strong and diverse local economy and a manageable debt load, despite expected increases given substantial capital plans.” Similarly, Standard and Poors positively noted, “Overall alignment among the system’s operational characteristics and that its management strategies are sufficient and well embedded as well as very comprehensive.” These reports acknowledged the growth in the Town’s utility debt, which resulted from the construction of the Western Wake Regional Water Reclamation Facilities and the expansion of the Cary/Apex Water Treatment Plant.

Utility Projected Debt Service

Utility Debt Outlook

Town staff found a more economical way to fund utility capital needs and reduce nearly $27 million of forecasted utility debt within the FY 2018 capital budget. Approximately $41.6 million of cash reserves were transferred from utility operations for FY 2018 new capital projects and $27 million of existing debt appropriations, which means cash resources will be used to fund existing projects rather than additional debt. Alongside the lower interest expense from refinancing bond sales, this change resulted in decreasing annual utility debt service obligations. Annual debt service is now projected to shrink almost ten percent over the next ten years from the current $25 million annual requirement; then, debt-funded capital projects in the capital improvement plan will increase debt service again. These projections are based on the FY 2018 capital plan and assumptions for slightly higher interest rates than the current market demands.

FY 2018 Second Quarter Financial Results

General Fund

FY2018 General Fund Summary

Revenues and expenses reflect financial operations that are on par with past history, budget and economic news. A $17 million general obligation bond sale, which closed in October, is reflected in both revenues and expenses in FY 2018. This transaction is the primary cause of the variance from FY 2017. In addition, tax revenue in FY 2018 outpaced FY 2017 by almost $5 million, primarily due to timing of tax receipts. Changes in the federal tax law created some momentum for taxpayers who typically paid in January to pay in December. Details on notable revenues and expenses follow.

FY 2018 General Fund Revenues

 

Real Property Tax

The majority of property tax revenue for real estate is collected between November and the due date of January 5. Almost 86 percent of $84 million of budgeted real property tax revenue was collected by the end of Q2, which is generally consistent with prior fiscal years. A more important indicator of the projected FY 2018 year-end results is the billed tax levy, which is currently $86.2 million. Using historical tax collection rates to project, it’s expected that by the end of the fiscal year, real property taxes may exceed budget by $1.8 million, or two percent, and FY 2017 actual results by $2.6 million, or three percent. This positive projection is tempered by vehicle tax collection concerns discussed below.

Real Property Tax Revenue

Vehicle Property Tax

Through December, Tax and Tag receipts for Wake County vehicle property taxes are down five percent in Cary and are flat county-wide compared to the prior year. At the same time, the Division of Motor Vehicles (DMV) separately reports that registration counts are up 23 percent in Wake County. Chatham County Tax and Tag receipts account for less than three percent of vehicle property tax revenue in Cary, and are down two percent compared to the prior year. Considering the DMV reports, growth in population and a positive economy, these revenue results remain a concern since year-to-date Q2 collections typically represent 53 percent of annual final results. If this pattern holds true throughout FY 2018, there could be a $900K shortfall, which is under budget by 13 percent. Staff continues to work with Wake County to address this issue with state agencies. 

Sales Tax

The NC Department of Revenue distributes sales tax revenue to municipalities approximately 2.5 months after sales occur. Therefore, Cary has only received three distributions through Q2 for FY 2018. Sales tax receipts are budgeted at $33.6 million in FY 2018 and represent 21 percent of total general fund budgeted revenues.

The chart below provides perspective on sales tax revenue in FY 2018 compared to the past five years. FY 2013 was the first year that sales tax revenues returned to the prerecession levels that peaked in FY 2008. The FY 2018 sales tax budget is 40 percent higher than FY 2013. Over the last five years, sales tax revenues at December 31 represent, on average, 24.4 percent of final actual results. If the average proves true in FY 2018, sales tax revenue would exceed budget by $700K, or two percent, and the prior year by six percent.

 

Sales Tax

Intergovernmental Revenues

State-shared sales taxes on natural gas, electricity and telecommunication utilities are the major revenue sources within the Intergovernmental category. Utilities sales taxes are budgeted at $9.9 million in FY 2018 and represent 93 percent of intergovernmental revenues. Distributions are received in December, March, June and September so the Town has received only one distribution; $2.7 million through Q2. Year-to-date revenue is 26 percent of budget and five percent less than the first FY 2017 distribution. Natural gas and electricity sales taxes reflect variances in usage due to weather.

Permits and 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 $1.5 million received year-to-date for building permits alone is 13 percent less than $1.7 million received year to date in FY 2017; however it compares favorably as 54 percent of the FY 2018 annual budget. The full category includes all development- and construction-related fees. The total fees have decreased $100K from FY 2017, but the revenues at 61 percent of the $4.4 million annual budget appear to be on track to meet or exceed budget.

Building Permit Fee Revenues

General Fund Expenses

FY 2018 Q2 General Fund Expenses

Expenses remain in line with historical spending patterns and budget expectations. Spending in the General Government category reflects the 24 percent increase in the annual budget, which will fund the implementation of multiple Town-wide technology initiatives to leverage efficiency and enhance citizen service.

Non-operating expenses year-to-date include $4.4 million of a $16.5 million annual debt service budget in addition to a $17 million recorded expense for the refinanced general obligation bonds, which is offset in non-operating revenue for the same amount. Other non-operating expenses of $19 million include transfers to capital project funds, the Transit Fund, and the Economic Development Strategic Fund, as well as a contribution to savings for retiree healthcare.

Utility Fund

FY 2018 Q2 Utility Fund Summary

Summary reporting for the Utility Fund does not portray informative results for utility operations because accounting for non-operating transactions, like debt refinancing and capital transfers, overshadows operating results. Excluding unusual transactions, utility operating revenues are $37.2 million compared to $35.4 million at the same time in FY 2017. At the end of Q2, revenue is 47 percent of the FY 2018 annual budget. Operating expense and debt service total $28.7 million at the end of Q2 compared to $26.2 million in FY 2017. Operating results in FY 2018 are $8.5 million compared to $9.2 million in FY 2017. Because utility demand varies over the seasons and because debt service is not spread evenly across the fiscal year, these Q2 operating results cannot be projected to reflect fiscal year end results. More details on operating revenues and expenses follow.

 

FY 2018 Q2 Utility Fund Revenues

Water and sewer service revenues reflect a three percent rate increase in FY 2018,but are less than 50 percent of the annual budget. Based on historical averages of billing at December 31 compared to year-end totals, FY 2018 year-end billed demand is projected to be two percent under budget, or approximately $1.5 million in revenue. A wet or dry spring and early summer could improve or further degrade the final results. Because rates are set to exceed operating expenses and debt service for bond covenant compliance, total revenues should provide adequate resources for the utility’s requirements and meet contractual obligations.

Billed Utility Demand

Despite a population increase of 12 percent in the combined Cary and Morrisville service area from FY 2013 to FY 2017, billed utility demand has increased only 4.3 percent over the same period. Efficient plumbing and irrigation fixtures and conservation awareness have significantly impacted utility demand. The variety of influences, including weather patterns and price elasticity, make it impossible to isolate specific results. Rising fixed operating costs paired with minimal demand increases creates pressure to raise rates. The Town’s decreasing utility debt service will relieve some of the pressure on future revenue requirements.

FY 2018 Q2 Utility Fund Expenses

Utility operating expenses remain in line with budget expectations. As discussed in Q1, the primary expense increases are in administration and wastewater functions. Administration costs are increasing for contracted services in Water Resources and credit card fees for utility bill collections. Wastewater spending continues to reflect an emphasis on the reclaimed water program, which was implemented with the adoption of the FY 2018 budget.

Capital Project Spending

Capital project spending fluctuates as larger projects become active and near completion. The Western Wake Regional Water Reclamation Facilities account for large sewer expenditures in FY 2014 and the Cary/Apex Water Treatment Plant expansion accounts for the increase in water capital projects in FY 2016. Five notable projects account for almost 90 percent of street project spending to date in FY 2018:

  • Morrisville Parkway Extension Phase 3
  • Carpenter Fire Station Road/CSX Rail Grade Separation
  • Green Level West Road Widening
  • Cary Parkway from Evans to North Harrison
  • 2017 Street Improvements Project

Capital Project Spending in q2 (millions)

FY 2018 Project Spending

 

Capital Project Spending History

Q2 Delegated Authority Financial Actions

Contract Approvals

Council has delegated authority to approve certain types of contracts to the Town Manager, Deputy and Assistant Town Managers. For certain contracts with a value of $90K or less, the Town Manager subsequently delegated authority to Department Directors for contract execution. In accordance with reporting requirements in the Council policy, delegating authority to the Town Manager, the following chart compares the 207 contracts executed by staff in the second quarter to prior quarters. On average, Department Directors execute about 70 percent of all contracts.

Contracts Approved by Managers and Staff

 

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 ensure the organization is nimble and adapts to the highest priorities and initiatives. Council has granted the Town Manager authority to approve inter-functional budget adjustments with reporting to Council to follow the action. As a result, we are reporting two budget adjustments approved by the Town Manager totaling $212,748 in Q2 for FY 2018:

 

  • $131,748 in Funds budgeted for software license renewals in various departments and categories were consolidated in General Government (IT)
  • $80,000 in Funds budgeted in Operations (Public Works) were transferred to Development and Infrastructure (Transportation and Facilities) for Town Hall first floor redesign for 311 pilot space

FY 2018 Mid-Year Appropriations

In the first quarter of FY 2018, Council approved three additional capital appropriations for a total of $2.6 million. In the second quarter of FY 2018, Council approved eight appropriations totaling $1.8 million for a combination of General Fund operating and capital needs. A summary of these budget adjustments are as follows:

 

 

 

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 throughout the year. Work is underway to evaluate new approaches to budgeting to create additional resources more quickly. Recommendations will be presented to Council at a quarterly financial review or through a staff report to a regular Council meeting.

 

Economic News

Cash and Investments

 

At quarter-end, staff was managing over $500 million in Town-wide pooled cash and investments as the FY 2018 property tax due date of January 5, 2018 approached. Like debt interest rates, interest rates on our investments have increased as the economy changed during the fiscal year. Interest income for the total portfolio is projected to exceed the total interest income budget for all funds by over $1 million. The additional income will be allocated to all funds, general and utility, operations and capital, based on the funds’ share of the portfolio. General Fund interest income is expected to exceed budget by over $200K for the fiscal year. The largest share of the expected income over budget, approximately $400K, will improve the financial results for the Utility Capital Reserve Fund.