In Q1 the financial focus was a look back at FY 2018. The audit confirmed that the Town remains in excellent financial condition. The Town has capital resources, revenue capacity and an expense management culture to provide Council with choices on how best to fulfill the vision and highest priorities in the Imagine Cary Community Plan.
However, the choices won’t be easy. While the community matures and revenue growth slows, Cary strives to be the Local Government That Doesn’t Exist. The vision and desire to provide higher service levels continues upward on an exponential path. Focused capital planning and the quest for operational efficiencies have become essential discipline.
The core building blocks of AAA rated financial management are in place. Town finances are based on a solid foundation of fund balance, cash reserves and manageable debt. Well-maintained infrastructure and revenue capacity exists in the tax base and in model citizens who are here by choice. These assets provide the Town’s elected officials the ways and the means to protect the Town’s position and move forward.
Consistent with the past, the first quarter of FY 2019 experienced progress on capital and operational projects as well as solid service delivery.
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General Fund results are in. The final FY 2018 budget authorized a $30.1 million investment of fund balance primarily to provide resources for capital projects; however, fund balance decreased only $12.9 million. As in the past, revenues exceeded budget, and expenditures came in under budget for a net positive budget variance of $17.8 million or 10.7%.
Utility operations exceeded budget expectations by $7.3 million. The FY 2018 financial plan for the utility included a $33.1 million net contribution from operations to capital projects. This purposeful undertaking helped avoid additional debt and limited utility rate increases. Given the positive FY 2018 results, operating equity decreased only $25.8 million and has capacity to support additional capital needs in the future.
The FY 2018 audit resulted in a “clean” audit opinion. 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 traditionally is scheduled for the December Council meeting.
The CAFR contains many more insights into the Town’s operations, values and trends than basic financial statements. One section of the report contains statistical data and ten-year trends. These details provide context and history about Cary’s financial position and direction. For example, Cary’s tax base has increased 34% in ten years to $26.4 billion. A list of the Town’s top 15 taxpayers in FY 2018 reflects the strength in the diversity of the Cary tax base. Because the top 15 taxpayers constitute less than seven percent of the total base of taxpayers, the financial distress of any one taxpayer would not impair the stability of the Town’s tax revenues.
Revenues and expenses are relatively consistent when comparing the first quarter of 2019 to prior year’s first quarter. Historically, expenses outpace revenues in the first quarter because General Fund revenues do not flow in evenly over the year. Details on notable revenue and expense by category follow.
Overall, revenues increased one percent and are consistent with the prior year.
Revenues often fluctuate year to year due to the timing of revenue allocations from state or federal sources. The timing of revenue receipts accounts for a $338,000 increase in Other Taxes and Licenses because the Town received ABC revenues earlier in FY 2019 than in FY 2018. Additional resources of $205,000 were recorded in Police Department Federal Forfeiture Funds compared to the prior year. Non-Operating Revenues include more Investment Earnings as a result of higher interest rates in FY 2019.
The Q1 real property component of the property tax revenue is 14.1% of the FY 2019 real property tax budget. In the prior two years, Q1 real property tax revenue represented approximately 13.7% of the annual actual revenue. The Q1 increase reflects taxes that were prepaid in December 2017 by citizens following a change in federal tax law that limits income tax deductions for state and local taxes.
Sales tax revenue, the largest single component of the Other Taxes and Licenses category, is distributed to municipalities by the NC Department of Revenue approximately two and a half months after the month when taxable sales occurred. Given this schedule, Cary will receive its first distribution in October for July sales. Sales tax receipts are budgeted at $35.1 million in FY 2019 and represent 19% of total General Fund revenues. The Q2 report will provide the first indication of sales tax revenues for FY 2019.
Although there were no receipts for FY 2019 sales tax revenue, the chart at right provides perspective on sales tax revenue increases over the past five years. Economic growth is clearly reflected in the upward trend.
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. Over $710,000 was recorded in FY 2019 Q1, which is seven percent less than the revenue received in the same quarter in FY 2018. While the first quarter of FY 2019 is less than the prior year, it compares favorably to the first three years of the five-year history and represents 23% of the FY 2019 budget. The first quarter of FY 2017 included permit fees for three apartment complexes and a five-story office building that boosted FY 2017 Q1 revenues beyond historical averages.
As with revenues, first quarter expense variances are often due to timing. The General Government function variance is due to the timing of renewals of software, radio maintenance and other contracted services in the Town Manager and Information Technology departments. Across all departments, expenses decreased due to the movement of telephone, utility, insurance and other expenses to non-departmental accounts. This change is the primary reason non-operating expenses increased compared to FY 2018.
The only variance in FY 2019 compared to FY 2018 is due to the size and timing of the budgeted capital transfers in non-operating expenses. In FY 2018, $41.6 million of budgeted capital transfers were recorded in Q1. In FY 2019, $6.6 million of capital transfers will be recorded in Q2.
Billed water demand is an indicator for revenues. Quarterly reporting billed demand does not match earned revenue precisely because of the 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. Equivalent billed water demand for the first quarter for the prior five years averaged 30% of the annual results. The first quarter billed water demand in FY 2019 is 30% of FY 2019 budgeted billed water demand. Utility account growth is less than two percent, and decreasing usage patterns are offsetting account growth. Budgeted revenue increases are due to rate increases.
Like the largest taxpayers, a list of the largest utility consumers is presented in the FY 2019 CAFR. The top ten FY 2019 utility ratepayers account for less than eight percent of the utility retail revenues. More notable is the fact that only five of the top ten are industrial and office uses that generate less than four percent of the utility revenue. The remaining five ratepayers represent institutional and stable uses for schools, hospital, airport and multifamily residential. This positive characteristic of the utility provides confidence that the consumer base is diverse, and the reduction in demand of any one consumer would not impair the financial position of the utility.
Consistent with the trend noted in the General Fund expense discussion, decreases in functional areas reflect the movement of telephone, utility, insurance and other expenses to non-departmental accounts. The increased expenses at the Water Treatment Plant relate to a large routine chemical supply purchase. Non-operating expenses reflect capital transfers discussed in the Utility Fund Summary section.
Significant Capital Funding Resources
Additional capital resources were created when $17.4 million of unused financial resources from completed capital projects were released to the capital reserve funds to finance future projects. As part of the fiscal year-end financial process to “close the books” for FY 2018, 89 capital projects were identified where spending was complete. Like the operating funds, capital expenditures must come in under budget. When a project is complete, the excess project revenues are returned to the capital reserve funds to finance future projects. Of the $17.4 million, $13.7 million was returned to the utility capital reserve, and $3.7 million was returned to the general capital reserve.
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 2019 payment of $1.9 million in September. The full year’s distribution is expected to be $3.9 million which is 2.1% greater than budget and 1.0% greater than FY 2018. A chart of Powell Bill history is above.
Capital Project Status
After FY 2018 project closure and with new FY 2019 project appropriations, the Town has 398 active capital projects with almost one billion dollars committed in resources. Utility projects totaling $568 million comprise 59 percent of the capital spending authorization. General capital projects total $399 million, 41 percent of the total $967 million capital authorization.
Capital Project Spending
Capital project spending totaled $10 million in Q1. The Town’s largest investment in capital for the community in the quarter was a $4 million payment to Wake County for construction of the downtown parking deck. Because the mix of capital projects changes over time, there are no discernable patterns in capital spending. Updates on the status of key projects are included in the Move and Serve chapters of this report.
FY 2019 Mid-Year Appropriations
A total of $1.8 million was included in the FY 2019 operating budget to support emerging or unforeseen needs arising during the fiscal year. To continue progress on notable entertainment venue, transportation and technology projects, Town Council approved three new capital appropriations totaling $690,000 at the FY 2018 Q4 Council meeting held in August.
- $390,000 - Koka Booth Lighting Improvements
- $150,000 - Design of Pedestrian Tunnel under Weston Parkway
- $150,000 - Green Infrastructure and Stormwater IoT Devices
Approximately $1.2 million in mid-year funding remains available for Council appropriation in
Throughout the fiscal year, challenges and opportunities arise that warrant financial resources that were not included in the original budget. Often staff can repurpose existing resources to address the highest priorities and initiatives. The budget ordinance authorizes the Town Manager to approve inter-functional budget adjustments and requires reporting to Council. Accordingly, one inter-functional budget adjustment was approved by the manager, totaling $13,084 in Q1 for FY 2019:
- Transfer funds from Manager’s Office (General Government function) to Sustainability (Development & Infrastructure function) to increase a temporary employee’s hours from 10 hours to 20 hours a week.
Citizens are invited to share their budget priorities throughout the year. Specific resources exist to capture budget public input via social media, voicemail and email. There were 11 budget public input comments in Q1.
At the end of Q1, the Town’s cash and investments totaled $516 million. The Town maintains a minimum of $40 million in bank accounts to ensure that it has immediate access to funds. The remainder of the portfolio is invested in securities that ensure the safety of the principal and earn maximum interest income.
The Federal Reserve raised the federal funds rate three times in 2018 from 1.50% to 2.25%. Most economists anticipate another rate hike in December. The Town’s total rate of return has increased to 1.67% compared to 1.16% a year ago.
Staff compares the Town’s investment income performance in a managed portfolio to a simpler approach of placing investments routinely into two-year US Treasury securities. The managed approach, based on weekly cash flow projections and the purchase of more diverse fixed income securities, has consistently outperformed the benchmark by 10 to 20 basis points until the last two months. There was minimal excess cash to invest in Q1 as the Town committed resources to capital projects. During this quarter alone, the two-year Treasury yield has increased from 2% to 2.8%. In Q2, when most real property taxes are paid, investment activity will increase. The Town will invest in higher yielding securities and again compare more favorably to the benchmark.
Moody’s Investors Service (Moody’s), one of the three renowned credit rating agencies, conducts an annual review of Cary’s financial position compared to its most recent bond rating. Following the review, Moody’s releases a brief report. In Q1, Moody’s annual comment about Cary’s general obligation bonds noted, “The financial position of the town is very healthy and is in line with its Aaa rating.”
In Q1, work began on a process to borrow approximately $8.6 million to finance a portion of the construction of Fire Station No. 9 and the purchase of two replacement aerial ladder fire trucks. The Town plans to pledge Fire Station No. 9 as collateral for a bank loan to be repaid over a maximum of 20 years.
Council has delegated authority to award, approve and execute certain types of contracts to the Manager, Deputy Managers, and Assistant Manager. The Manager has further delegated a portion of his authority to Department Directors. In accordance with reporting requirements in the Council Resolution delegating authority to the Manager, the following chart indicates the number of contracts signed by the Manager’s Office and department directors in the first quarter compared to prior quarters.
The North Carolina League of Municipalities (NCLM) publishes a quarterly revenue report that focuses on statewide revenues affecting municipalities. The September report states that “North Carolina’s economic outlook continues to be positive, though with some signs of slowing.” Multiple factors impact the outlook, but one key factor was strong job growth in the first six months of 2018. The Cary Chamber of Commerce economic update in Q2 will provide a more focused outlook for Cary.
One change ahead regards the collection of online sales taxes in North Carolina beginning November 1, 2018 following the Supreme Court ruling on South Dakota v. Wayfair. The NCLM report addresses the impact of sales taxes from internet retailers in states where they have no physical presence. “Most of the top e-commerce retailers have a physical presence in North Carolina; therefore, the state already receives most of the possible sales tax from e-commerce. A June memo from the NC Department of Revenue states that as a result of South Dakota v. Wayfair Inc., existing statutes should allow DOR to require additional remote sellers to collect and remit. The DOR estimates an annual state revenue increase of $75 million, with a corresponding local increase of $35 million, annually.” Given that the local annual increase of $35 million would be spread to units across the state, the impact on Cary would be minimal.