FY 2019 Budget Preparation
Millions of data points come together to create Cary’s budget and capital plan. Details—such as every employee’s hourly pay rate, projected participation for any single park program, projected sales of recycled goods, or the cost of supplies necessary to operate the inductively coupled plasma mass spectrometer equipment at a water reclamation facility—are collected and summarized. Competing priorities are reconciled considering multiple factors such as our citizens’ values and levels of service. Together, it’s all analyzed to arrive at a recommended budget for Council consideration.
This year, the full team of Department Directors worked together to develop a balanced general fund operating budget to recommend to the Town Manager. Teams of directors and capital projects experts also worked on the general fund and utility fund capital budgets to both find resources in current projects and prioritize capital requests. By sharing responsibility for these tasks, each director has a better understanding and a complete picture of budgetary opportunities and challenges. This new duty has emphasized the importance of collaboration to find efficiencies across departmental boundaries through shared expertise and new perspectives. These high-functioning self-directed teams worked to create a recommended budget that will provide resources to continue to meet our citizens’ expectations and to focus on tasks designed to build the community envisioned in Imagine Cary.
As part of our efforts to keep Cary great, we listen to our citizens’ priorities all year long, not just during budget preparation. Citizens are encouraged to share their budget input with us throughout the year using whatever communication channel is most convenient to them.
While no budget input has been received to date, we will continue to utilize social media, BUD, the Town’s website and our “on-hold” messaging to remind citizens of our interest in hearing from them.
FY 2018 Third Quarter Financial Results
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 for the variance in net results from FY 2017. Details on notable revenues and expenses follow.
Real Property Tax
Most property tax revenue for real estate is collected between November and the due date of January 5. As of Q3, real property tax revenue collected exceeds the $84.5 million budget by one percent. An additional key indicator of projected FY 2018 year-end results is the billed tax levy for real estate, which is currently $86.2 million. Current real property tax collections are 99 percent of the billed tax levy. Included in the current year real property tax collections are penalties, interest and prior year taxes paid in the current year; those additional amounts historically are about one percent of the year-end total. Using historical tax collection rates to project, it is expected that by the end of the fiscal year, real property taxes may exceed the budget by $962,000, or one percent, and FY 2017 actual results by $1.8 million, or two percent. This positive projection is tempered by vehicle tax collection concerns, which are discussed next.
Vehicle Property Tax
Through March, Tax and Tag receipts for Wake County vehicle property taxes are down two percent in Cary and are flat county-wide compared to March of the prior year. As discussed in the Q2 report, the Division of Motor Vehicles (DMV) has issued separate reports that indicate vehicle registration counts have increased. Chatham County Tax and Tag receipts account for less than three percent of vehicle property tax revenue in Cary and are down one percent compared to March of the prior year. Considering the DMV reports, growth in population and a positive economy, these revenue results remain a concern since collections as of Q3 typically represent 76 percent of annual results. If this pattern holds true throughout FY 2018, there could be a $960,000 shortfall, which is under budget by two percent. State agencies are now involved in analysis of these trends.
The NC Department of Revenue distributes sales tax revenue to municipalities approximately 2.5 months after sales occur. As expected, Cary has received half of the FY 2018 distributions through Q3. Sales tax receipts are budgeted at $33.6 million in FY 2018 and represent 19 percent of total General Fund budgeted revenues.
The chart above provides a historical perspective on sales tax revenue in FY 2018 through March. In the first six months of FY 2018, sales tax distributions have increased 5.2 percent compared to FY 2017. If the six-month average continues in FY 2018, sales tax revenue would exceed the FY 2018 budget by $287,000, or one percent.
State-shared sales taxes on natural gas, electricity and telecommunication utilities 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 intergovernmental revenues. Distributions are received in December, March, June and September. The Town has received two distributions through March 31, which amount to $4.9 million. Year-to-date revenue is 49.7 percent of the budget and five percent less than the first two FY 2017 distributions. The NC League of Municipalities is projecting that electricity sales tax revenue statewide will decrease by one percent. Since natural gas and electricity sales taxes reflect variances in usage due to weather and energy conservation efforts, any projection about total FY 2018 revenues is difficult to predict with precision. However, if the pattern continues, any shortfall would likely constitute less than $500,000, or 0.4 percent, of the total General Fund operating revenue budget.
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 $2.6 million received year-to-date for building permits is five percent more than the $2.5 million received year-to- date in FY 2017 and represents 96 percent of the FY 2018 annual budget for this revenue source. The complete category of permits and fees includes all development and construction related fees. The total permits and fees revenue increased $158,000 from FY 2017 through Q3. This is primarily due to significant increases in receipts from watershed maintenance and building permits. Because building permit revenues are already at 96 percent of budget, it is safe to project that the total FY 2018 revenues will exceed the $4.4 million annual budget for the entire permits and fees category.
Operating expenses are outpacing historical spending patterns by four percent and they remain in line with budget expectations. Spending in the General Government category continues to lead other categories with a year-to-date 18 percent increase over the prior year. Town-wide technology initiatives impact the General Government category more than others as the Town has focused heavily on technological efficiencies and citizen service enhancement.
Non-Operating expenses year-to-date include $6.4 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 $28.4 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 health care.
The technical reporting for the Utility Fund summary does not portray informative results for the utility operations because accounting for non-operating transactions such as the debt refinancing and capital transfers overshadow the operating results. Excluding unusual transactions, utility operating revenues are $56 million compared to $52 million at the same time in FY 2017. At the end of Q3, operating revenue is 71 percent of the FY 2018 annual budget. Operating expense and debt service total $41.3 million at the end of Q3 compared to $38.7 million in FY 2017. Operating revenue over expense in FY 2018 is $28.0 million compared to $25.0 million in FY 2017. More details on operating revenues and expenses follow.
Helping Our Neighbors: Durham Water Transfers
The City of Durham Williams Water Treatment Plant is offline through Spring 2018 to accommodate construction to upgrade the plant. Durham has a second operational water treatment plant and purchased water from the Town of Cary to ensure adequate supply. Cary and Durham have a mutual aid agreement for backup water supply, and each has provided water to the other in the past. Both municipalities track how much water is owed or due to the other, but only bill for the value of the water balance when the balance in gallons is above an amount that could reasonably be returned in the next fiscal year for routine maintenance coverage. Given the significant amount of water that has been transferred to Durham while the Williams plant is being upgraded, Cary invoiced Durham for 226 million gallons of water during Q3 at the government rate of $4.70 per 1,000 gallons, totaling $1.06 million. Additional significant transfers are not projected for the remainder of the construction project. The non- recurring revenue from the mutual aid will supplement positive financial results for the Utility Fund and generate a one-time resource that can be used for Cary’s capital projects.
Water and sewer service revenues reflect a three percent rate increase in FY 2018 but are less than 75 percent of the annual budget, even with the $1 million in one-time revenue from Durham. Based on historical averages of billing at March 31 compared to year end totals, FY 2018 year-end billed demand is projected to be one percent under budget. 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 for income to cover debt service.
Despite a population increase of 12 percent in the combined Cary and Morrisville service area since FY 2013 billed utility demand has increased only four percent over the same period. Efficient plumbing fixtures and conservation awareness have significantly impacted utility demand. The variety of influences, including weather patterns and price elasticity, make it difficult to isolate results for any one influential factor. Rising fixed operating costs, paired with minimal demand increases, creates pressure to raise rates.
Utility operating expenses remain in line with budget expectations. As discussed in previous quarterly reports, the primary expense increases are in administration and wastewater functions. Administrative 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 budge
Capital Project Spending
Capital project spending fluctuates as large projects become active and then 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
FY 2018 Capital Project Spending
*General Government includes affordable housing, police, stormwater, information technology and public works projects.
Q3 Delegated Authority Financial Actions
Council has delegated authority to the Town Manager, Deputy and Assistant Town Managers to approve certain types of contracts. For certain contracts with a value of
$90,000 or less, the Town Manager subsequently delegated authority to Department Directors for contract execution. In accordance with reporting requirements outlined in Council’s policy delegating authority to the Town Manager, the chart compares contracts executed by staff and the Town Manager in the third quarter to prior quarters. On average, Department Directors execute about 70 percent of all contracts.
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 $1,075,419 in Q3 for FY 2018:
- $1,016,612 Funds for salaries that won’t be spent due to vacancies supported the purchase of SAS software and services for public safety analysis, Box cloud technology, and services and support of Fest in the West.
- $58,807 Funds for contracted services across the organization were transferred to Information Technology to consolidate management of copiers.
FY 2018 Mid-Year Appropriations
A total of $9.4 million was appropriated from general fund balance in the third quarter for the stormwater vehicle and camera, the downtown library parking structure, an upfit for community recreation in western Cary, and soccer park improvements. An additional $5.1 million from other funding sources was appropriated for a total of $14.5 million to support the above general capital projects.
Cash and Investments
Interest earnings continue to improve following interest rate increases by the Federal Reserve. Rates have increased twice during FY 2018 and a third rate hike is expected in June 2018. As a result, interest earnings are expected to exceed budget for all funds by about $1.5 million. In Q3, the Town purchased about $55 million of fixed income securities with an average annual yield of 2.36 percent, which is well above the 1.49 percent average yield for investment purchases made within the third quarter of FY 2017. The average earnings for all investments is projected to exceed 1.20 percent for FY 2018 compared to
0.96 percent for FY 2017.
Construction Cost Trends
In the past few years, the Town of Cary and other Triangle municipalities have experienced a gradual increase in construction costs for transportation and utility infrastructure projects. However, in the past three months, the increase has been more dramatic. This unexpected increase follows several years of stable or even declining costs following the economic downturn. The largest increases have been on smaller projects, ranging from $500,000 to $3 million. We have received fewer bids with a greater variance in pricing and many of the low bids have exceeded our construction estimates. For example, in November 2017, the Cary Parkway and High House Road Project, estimated at $2.7 million, received only three bids. The Morrisville Parkway Extension Project, which was bid in December 2017 with an estimate over $15 million, generated more interest and received nine bids. Recently, several local municipalities, including the Town, have not received any bids on some smaller projects. Local municipalities have seen some of the largest price increases on vertical building projects. Wake County awarded contracts for three libraries in the past six months. The award value for each of these projects was more than 20 percent over the estimated cost, with the greatest percentage increases being on the smaller projects.
Several factors have contributed to the current situation. During the recession, many less productive contractors found themselves unable to compete with well- established companies and left the business, leading to less competition. Sustained low interest rates, along with a growing economy, lower unemployment and rising wages have led to a considerable increase in all forms of construction. With the combination of an increasing number of infrastructure projects being bid and many contractors being fully employed for the next one to two years, contractors are being more selective about the projects they pursue and the municipalities for which they want to work. According to the 2018 Outlook Survey North Carolina from the Associated General Contractors of America, higher construction costs can also be attributed to the following: increased labor costs as contractors raise wages to retain existing employees and hire new ones, uncertainty over immigration laws and enforcement and the overall shortage of skilled workers and equipment operators.
Several forces have led to the present labor shortages. During the recession, many skilled employees left the construction industry for more stable jobs. As the economy improved, many of these workers have been reticent to leave the stability of their present employment and re- enter the boom-bust, cyclical swings of the construction industry. The percentage of young people entering construction related fields is at its lowest rate ever, and the Associated Builders and Contractors projects the construction industry will face a shortage of two million workers by 2020. These factors are referenced by numerous agencies, including the Associated General Contractors of America and the US Chamber of Commerce. The item most responsible for the increases in the Construction Cost Index/Building Cost Index over the past year is the shortage of skilled labor.
Research shows that the large number of NCDOT projects that have recently been bid do impact the cost of smaller municipal transportation projects but have little effect on municipal utility projects. The effect of the cost for the transportation projects is evidenced by the increase in asphalt prices over the last few years. Municipal utility project costs are more affected by an increase in new home starts. While Wake and Durham Counties have seen steady increases in housing starts over the past few years, Chatham County has one new development exceeding 7,000 acres, which could notably affect the capacity of utility contractors. All things considered, the Town should anticipate this trend of higher construction costs to continue for the foreseeable future and adjust estimated costs accordingly.
Three regulatory mandates will impact Q4. First, the Town has conducted a utility development fee study in compliance with NC House Bill 436. The draft study on the Town’s website reflects changes since its last study in 2012 including:
- Elimination of a reclaimed water development fee
- A new commercial use type to address the growing industry in alcoholic beverage production
- Lower demand for service per average residential account
The house bill requires a public comment period and a Town Council public hearing, scheduled for May 3, 2018. Council will adopt development fee rates for July 1 implementation as part of the FY 2019 budget.
Next, new Federal Office of Budget and Management rules—known as uniform guidance for the purchase of both goods and services, as well as construction and repair projects supported by any federal assistance—go into effect July 1, 2018. These rules will impact Cary for programs specifically involving CDBG, FEMA or transportation funding. Compliance with the new rules, which are more stringent in some cases than North Carolina state law, will require Council to update policy regarding procurement. Staff will present recommendations to Council in Q4.
Finally, the North Carolina legislature made changes in administrative law regarding the use of procurement cards and directed the NC State Treasurer’s office to establish NC Administrative Code to implement the new law. Like the new federal uniform guidance, the state code will also require policy action by Council, and staff will present recommendations to Council in Q4.