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Beginning in the third quarter of each fiscal year, budget requests and analysis are reviewed and discussed, and budget recommendations for the next fiscal year are formed. The process begins with the development of the Department Director Recommended Budget, which is presented to the Town Manager for consideration. Department Directors balanced their recommended FY 2020 budget by working together to understand estimated revenues and budget requests. The group challenged themselves to ask “why” in their decision-making:
- Why do we need this?
- Why do we do this?
- Why does this matter?
While early conversations began as a technical evaluation of specific accounts for reduction opportunities, conversations quickly elevated to service level discussions, affordability and financial sustainability. The group sought to understand connections between requests and services at a deeper level, but the tight development schedule left little time for in-depth study. Demonstrating their commitment to the future, the team developed plans to explore service levels and affordability year-round.
The Department Director team presented their recommendations to the Town Manager on April 15, 2019. The Town Manager will review the materials and incorporate adjustments to form the Town Manager’s Recommended FY 2020 budget, which is scheduled to be presented to Council on May 9. Council work sessions on the budget are scheduled in May and June with budget adoption slated for June 27, 2019. North Carolina state law requires local governments to adopt the next fiscal year’s budget by June 30 of each year.
FY 2019 third quarter net results increased from the prior year by more than 100 percent due largely to the timing of a $17 million bond sale that occurred during the prior year. Excluding timing differences, routine operating revenues and expenditures are consistent when comparing the Q3 FY 2019 year-to-date results to prior year’s results. Details on notable revenue and expenditures by category are provided below.
Overall, the net results for operating or non-operating revenues are comparable to the third quarter in the prior year. The 92 percent decrease in non-operating revenue resulted from the $17 million bond sale. There is a significant variance in non-operating revenues in FY 2019 compared to budget because the budget includes an $11.5 million appropriation from Fund Balance that may not be needed if total annual revenues exceed total annual expenditures and transfers at year end. Additional details on key operating revenues follow.
Property tax revenue is 51 percent of total budgeted revenue and 55 percent of operating revenue. It is the largest revenue source for the General Fund. Taxes are based on an ad valorem tax levy on real and personal property. Real property is primarily land and buildings; personal property includes items such as vehicles. Real property taxes were billed in July 2018 and were due no later than January 7, 2019. Personal property tax revenue is collected throughout the year as part of the State of North Carolina’s Tax and Tag program, which combines the vehicle ad valorem tax collection with the State’s vehicle license renewal process.
As of Q3, 98.6 percent of the $93.3 million of budgeted current year property tax revenue (real and personal property) was collected. Property tax revenue increased two percent compared to the same time period in 2018 and is expected to exceed budget by year end. More specifically, personal property tax revenues are $4.3 million, an increase of five percent compared to Q3 FY 2018, and three percent compared to Q3 FY 2017. Although FY 2018 was an anomaly with personal property tax revenues decreasing by 0.3 percent despite a population increase and a strong economy, revenues in FY 2019 appear to be rebounding. We will continue to provide updates on personal property tax revenue as significant changes occur and revenue studies progress.
Sales tax revenue, the largest single component of the Other Taxes and Licenses category, represents 19 percent of total General Fund budgeted revenue and 21 percent of operating revenue. Sales taxes are 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, by the end of Q3, Cary received its sales tax distributions for July through December sales.
Sales tax revenue at Q3 totaled $18.1 million, an increase of 5 percent from the same time in FY 2018. Sales tax revenue for the current year is expected to meet or exceed budget by year-end.
Miscellaneous revenues are budgeted at $2.7 million. As of Q3, these revenues have exceeded the prior year Q3 revenues by 21 percent. This is partly due to the sale of surplus assets. The Town regularly sells used surplus property through online auction sites. Q3 included the Council-authorized sale of seven surplus garbage trucks and a tractor. As of Q3, Cary earned almost $500,000 in sales from surplus assets compared to $300,000 from FY 2018. Online auction surplus sales have generated approximately $3.5 million in miscellaneous revenue for Cary in the past 11 years.
As with revenues, quarterly expenditure variances are often due to timing. The 14 percent change in the General Government function primarily reflects renewals of software, radio maintenance and other contracted services. The 62 percent decrease in non-operating expenditures is largely a result of the $17 million bond sale in FY 2018 that resulted in a payment to an escrow account to repay refinanced debt.
In compliance with North Carolina State Statutes regarding the use of procurement cards, the Town must expand reporting. In addition to reporting budget-to-actual information, staff will also report funds committed through encumbrances and the available remaining balance considering those commitments. Encumbrances represent funds that have been reserved in the financial system to satisfy a commitment to make a purchase. The table to the right shows the total outstanding encumbrances that may be spent in the General Fund for FY 2019. When including these encumbrance amounts with year-to-date spending amounts, the General Fund has nearly $40.1 million remaining in the operations budget for the remainder of the year.
Utility Fund net results decreased 88 percent compared to prior year because of the impact of a $117 million bond sale in FY 2018. Timing differences in capital transfers and other non-operating expenditures further account for the differences between the two fiscal years. An analysis of revenues and expenditures follows.
Overall operating revenues are generally in line with expectations except for irrigation revenue, a component of Water Service revenue. Rainy weather decreased irrigation demand in through Q3 of FY 2019. Although irrigation revenue in Q4 is typically more than 25 percent of the annual total, irrigation revenue is still expected to fall short of this component’s budget estimates by $300,000 or 6.7 percent. Total audited water and sewer revenues are expected to meet or exceed budget estimates and off-set the projected irrigation shortfall. Current year-to-date total revenue received is at 69 percent of budget compared to 71 percent at this time last year. The change in Permits and Fees revenue is predominately due to non-payment fees that have been assessed. As mentioned earlier, the significant change in non-operating revenue compared to the prior year is due to the recognition of $117 million in bond proceeds. The significant variance in FY 2019 compared to budget reflects a budget of $6.2 million for an appropriation from fund balance that may not be required if total revenues exceed total expenditures and transfers.
The 13 percent increase in Administration expenditures is related to an increase in indirect costs reimbursed to the General Fund for services necessary to operate the utility. Wastewater expenditures decreased from the prior year due to the timing of purchases to be made in the latter part of FY 2019, while increased expenditures at the Water Treatment Plant are the result of a large routine chemical supply purchase. Non-operating expenditures reflect capital transfers and the transfer to an escrow account as a result of the bond sale discussed in the Utility Fund Summary section.
As discussed above for new reporting requirements, the table below shows total outstanding encumbrances in the financial system for the Utility Fund in FY 2019. Considering year-to-date expenditures and current encumbrances, the Utility Fund has nearly $6.6 million remaining budget for personnel, operations and maintenance and capital outlay to cover expenditures through the remainder of the fiscal year.
As of March 31, 2019, Cary had 400 active capital projects. Utility projects with a total budget of
$525 million comprise 60 percent of the capital spending authorization. General capital projects total $343 million, or 40 percent, of the total $868 million capital authorization.
Capital project spending totaled $58.6 million through Q3. Because the mix of capital projects changes over time, there are no discernable patterns in capital spending.
Capital spending fluctuates as larger projects become active or near completion. The Cary/Apex Water Treatment Facility Expansion accounts for the increased water capital spending that occurred in FY 2016. Cary spent $58.6 million on capital improvements through Q3 of FY 2019. Over 50 percent of the spending supported just ten projects, including $2.6 million for two new aerial ladder fire trucks. Nearly 22 percent, or $12.8 million, was invested in water system improvements, such as pipelines and storage tanks that will improve the quality and reliability of water service for decades to come. The largest single capital expenditure of $7 million funded Cary’s share of the downtown library parking deck, a key element of the downtown park, the Cary Arts Center and future development. Notable projects at or near completion with significant expenditures during Q3 of FY 2019 include:
- Sanitation & Recycle Truck Replacement – Four trucks were purchased to update fleet.
- Cary Parkway & High House Intersection – Project spending is approaching 80 percent
- Street Improvements – Various street resurfacing projects is approaching 70 percent of budget.
- Water Treatment Plant Expansion – Phase Three of this project is winding down with 97 percent of budgeted funds spent as of Q3.
- Raw Water Pipeline – Project spending is at 85 percent of budgeted funds.
Significant projects that began construction in FY 2019 and will result in more spending in future quarters include:
- Carpenter Fire Station Road Realignment and Grade Separation
- Fire Station 9
- Morrisville Parkway/NC540 Interchange
Over $1.8 million was included in the FY 2019 operating budget to support emerging or unforeseen needs arising during the fiscal year. Through Q3, Council has appropriated the total amount for the following initiatives:
Q3 General Government Mid-Year Appropriations
Throughout the fiscal year, challenges and opportunities arise that warrant financial resources that were not included in the original budget. Often, existing resources can be repurposed 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, an inter-functional budget adjustment was approved, totaling $1,420,715 in Q3 for FY 2019:
Citizens are invited to share their budget priorities throughout the year via social media, voicemail and email. There were 12 budget public input comments in Q3.
Experts do not expect notable changes in current short-term interest rates. As investments that were purchased several years ago with lower yields mature and are reinvested at current rates, the average investment yield and corresponding interest earnings are increasing. The average rate of return in FY 2019 for investments is 1.74 percent through Q3 compared to 1.20 percent in FY 2018. This average rate of return exceeds the rates anticipated in the budget. As a result, FY 2019 interest earnings are projected to come in approximately $2.2 million above the $7.1 million budget. The largest component of these revenues over budget will ultimately provide more resources for future capital investments.