Q4 results provide a good indication that the Town remains on track with its financial plans outlined by the FY 2018 budget. However, the majority of year-to-date financial results for Q4 prepared in mid-July will not match the final audited results in the FY 2018 Comprehensive Annual Financial Report (CAFR). The figures reported in Q4 represent routine transactions and are limited by the data available to the Town at this time. Significant work occurs between July 1 and late September to improve the accuracy of revenues, expenditures, assets and liabilities. For example, the Town’s share of revenue for sales taxes collected by merchants in June will not be revealed by the state until mid-September. Complex contractor invoices for construction completed in June may not be received until August. And utility bills for service delivered in June will not be billed until early August. In the first quarter of FY 2019, accountants focus on identifying and reporting transactions that should be attributed to activities in FY 2018. In mid-September, the Town’s auditor, Cherry Bekaert, will be onsite to test our work, and in October, staff will finalize the official results for FY 2018 in the CAFR.
Council managed the most important financial matters in Q4 by preparing the Town for business on July 1, which is the beginning of FY 2019. Council received, considered and approved a $347.6 million budget. Council also approved updated financial policies for procurement to maintain the Town’s eligibility for federal grants. Furthermore, Council updated utility system development fees in accordance with a new fee study to ensure the Town’s ability to levy and collect a critical source of revenue that funds utility capital infrastructure in accordance with state law.
FY 2018 Quarter Four, Unaudited
Revenues 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. Excluding that transaction, total General Fund revenues increased $3.9 million, or 2.6 percent, from FY 2017. Similarly, excluding the debt transaction, operating expenses exceed FY 2017 actuals by $15.1 million, or 9.5 percent, but remain within budget. 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 Q4, real property tax revenue collected exceeds the $84.1 million budget. 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. Historically, real property tax collections were 99 percent of the billed tax levy. Although real property tax revenue, as of Q4, has already exceeded the $84.1 million budget, it is important to note that these revenues include penalties, interest and prior year taxes. These revenues are unaudited and final real property tax revenue reported in the CAFR will be different; however, real property tax revenue should still exceed the budget. The accompanying chart compares FY 2018 to comparable June data in FY 2013 to FY 2017 and reflects a two percent increase in FY 2018 over FY 2017. This positive projection is tempered by vehicle tax collection concerns discussed below.
Vehicle Property Tax
Through June, Tax and Tag receipts for Wake County vehicle property taxes are down one percent in Cary and are flat county- wide compared to June of the prior year. It is important to note that vehicle property tax revenue as of Q4 is unaudited and some minor adjustments due to timing are expected. Therefore, final vehicle property tax revenue reported in the CAFR will be different.
As discussed throughout the year, 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 up three percent compared to June 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 Q4 typically represent almost 100 percent of annual results. Wake County vehicle tax receipts are down one percent at Q4 compared to Q4 of the prior year, and staff expects vehicle property tax revenue to fall short of the $6.6 million budget for this component of total property tax revenue.
The NC Department of Revenue distributes sales tax revenue to municipalities approximately 2.5 months after sales occur. Cary will receive three additional distributions in July, August and September for FY 2018. Sales tax revenues are budgeted at $33.6 million in FY 2018 and represent 18 percent of total General Fund budgeted revenues.
The chart provides a historical perspective on sales tax revenue in FY 2018 through Q4. As of Q4 for FY 2018, sales tax distributions have increased four percent compared to the same period in FY 2017. Comparatively, sales tax for Q4 in FY 2017 was seven percent higher than the same period in FY 2016. If this average continues in FY 2018, sales tax revenue would come in slightly under budget but would exceed FY 2017 receipts. It should be noted that the sales tax revenue as of Q4 is unaudited and does not include all receipts related to FY 2018. Therefore, final sales tax revenue reported in the CAFR will be different.
Intergovernmental RevenuesState-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 three of its four distributions through June 30, which amount to $7.8 million. Year-to-date revenue is 78.9 percent of the budget and one and a half percent more than the first three 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, total FY 2018 revenues are difficult to predict with precision; however, if the pattern continues, utility sales taxes will meet the $9.9 million budget. As noted above utility sales tax revenue as of Q4 is unaudited and does not include all receipts related to FY 2018. Therefore, final utility sales tax revenue reported in the CAFR will be different.
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 $3.4 million received year-to-date for building permits is four percent more than the $3.3 million received year- to-date in FY 2017. Building permits represent 61 percent of the FY 2018 annual budget for this category. The complete category of permits and fees includes all development and construction-related fees. Total permits and fees have increased $83,000 from FY 2017 through Q4. This is primarily due to significant increases in watershed maintenance fees and building permits. As of Q4, total permits and fees have already exceeded the $4.4 million budget. Since these revenues are recognized on the transaction date, the final amounts presented in the CAFR will be similar to what is presented as of Q4.
Operating expenses are outpacing historical spending patterns by six percent but remain in line with budget expectations. Spending in the General Government category continues to lead other categories with a year-to-date 27 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 $16 million of a $16.5 million annual debt service budget in addition to a $17 million expense to pay off refinanced general obligation bonds, which is offset in non-operating revenue for the same amount. Other non-operating expenses of $28.5 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 in 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 $75.9 million compared to $71.8 million at the same time in FY 2017. At the end of Q4, operating revenue is 96 percent of the FY 2018 annual budget. Operating expenses and debt service total $63.9 million at the end of Q4 compared to $62 million in FY 2017. Operating revenues over expenses in FY 2018 is $37 million compared to $34.1 million in FY 2017. More details on operating revenues and expenses follow.
Water and sewer service revenues reflect a three percent rate increase in FY 2018 but are less than the annual budget, even with the $1 million in one-time revenue from Durham for water provided during its plant construction. Utility bills for service delivered in June will not be billed until early August. Revenue reported in the CAFR will vary from billed demand through June 30 as more precise results are calculated. Because rates are set to exceed operating expenses and debt service for bond covenant compliance, total revenues provided adequate resources for the utility’s requirements and met 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 six 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 create pressure to raise rates.
Utility operating expenses remain in line with budget expectations. As discussed in previous quarterly reports, the primary expense increase is in administration. Administrative costs are increasing for contracted services in Water Resources and credit card fees for utility bill collections. Also, the Town implemented new technology for online service applications during FY 2018, which increased contracted services costs. The Water Treatment Plant FY 2018 costs exceed FY 2017 primarily due to the timing of chemical purchases.
Capital Project Spending
Capital project spending fluctuates as large projects become active and then near completion. The Western Wake Regional Water Reclamation Facility accounts 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 2015 and FY 2016. The following five projects account for approximately $24 million, or 36 percent, of all capital spending for FY 2018:
- 2017 Street Improvements Project
- Carpenter Fire Station Road/CSX Rail Grade Separation
- Green Level West Road Widening
- Cary/Apex Water Treatment Facility – Raw Water Pipeline
- Kilmayne Water Storage Tank
In FY 2018, the Town received reimbursements of approximately $7.6 million in federal funds that were used for a cross section of projects that included housing, roads, emergency response and transit.
FY 2018 Capital Project Spending
Q4 Delegated Authority Financial Actions
Council has delegated authority to the Town Manager and Deputy and Assistant Town Managers to award 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 resolution delegating authority to the Town Manager, the following chart compares contracts executed by department directors and the Town Manager’s office in the fourth quarter to prior quarters. On average, department directors execute about 70 percent of all contracts. In this quarter, the Town Manager’s office awarded 43 contracts.
At its June 28, 2018 regular meeting, Town Council approved a $347.6 million budget for FY 2019, which runs from July 1, 2018 through June 30, 2019. The budget allocates $252.4 million for operations and $95.2 million for capital projects. Key budget highlights include:
- The property tax rate was maintained at 35 cents per $100 of property value
- The annual vehicle license fee increased from $15 to $30 for the improvements of streets and sidewalks
- The solid waste fee increased $1 from $16 to $17
- Utility rates increased three percent for a typical household
Funding was allocated for 12 new firefighters to staff a ladder truck for western Cary as well as the following capital projects:
- $8.7 million for completion of the grade separation of CSX Rail at Carpenter Fire Station Road
- $3.2 million for land acquisition associated with the Carpenter Fire Station Road widening
- $2.7 million for stormwater assistance and drainage improvements
- $500,000 for continued downtown revitalization
- $215,000 to renovate portions of two community centers
Citizens provided public input as part of the budget process. Comments were received via social media, telephone, email and during public hearings. Topic areas included: greenways, preservation of open space and the Town’s tree canopy, facility needs in western Cary, continued investment in pickleball courts, installation and maintenance of sidewalks, and opposition to the recommendation to increase the annual vehicle license fee.
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 three Q4 budget adjustments approved by the Town Manager totaling $312,041:
- $125,000 – Funds for salaries that won’t be spent because of staff vacancies supported the cost of consultant services and employee development within general fund operating departments
- $130,000 – Funds realized from savings in electricity costs for street lighting were transferred to the Town Manager’s Office to support the Town’s branding initiative and related costs
- $57,041 – Funds realized from savings in electricity costs for street lighting, fuel and parts costs were transferred to the Public Information Office for the purchase of a video booth
FY 2018 Mid-Year Appropriations
Q4 mid-year appropriations reflect the receipt of two federal grants to support greenway projects. The $4 million federal award for the Black Creek Greenway project replaced a previous award of $2.625 million and allowed $399,000 of Town cash to return to capital reserve fund balance. The second grant, in the amount of $240,000, was directed to the Swift Creek Greenway project and required a $60,000 Town appropriation to fulfill matching fund requirements. The net effect of these transactions was a $2.074 million Q4 appropriation. No general or utility operating fund appropriations were made in Q4.
In Q4, the Supreme Court decided a case that could result in additional future sales tax revenues from online sales. The impact of this decision will not be clear until we learn more about the following: 1) eligible sales that have not been taxed in the past; 2) the North Carolina legislature’s interest in establishing the tax levy; 3) the NC legislature’s willingness to share any new revenues with local government; and, 4) the technical steps required for internet businesses to collect and submit previously untaxed online sales. It could be at least another year before we know more about potential for new revenue.
Cash and Investments
The Town ended FY 2018 with a cash and investment balance of over $528 million. Cash resources for all funds are pooled to maximize efficiency and interest earning potential. About $40 million is maintained in bank accounts to ensure that the Town has immediate access to funds. The remainder is invested in securities that, first, ensure the safety of the principal; second, provide quick access to additional funds for any unforeseen needs (liquidity); and finally, earn the maximum interest income. By prioritizing safety, the Town’s interest income is limited. Most of the Town’s funds are invested in fixed income securities, such as federal agency obligations. These securities typically provide a slightly higher yield compared to federal treasury bill securities. The Town seeks opportunities to invest in AAA-rated North Carolina local government debt to diversify the Town’s portfolio. At any one time, the Town holds approximately 150 different investments that are scheduled to mature about every three to seven days over the next three years to match projected disbursements for payroll and Town expenses.
The Town’s cash and investment program is overseen by a fixed fee independent consultant. The financial advisors compile the Town’s weekly cash flow forecast and provide market insights, advice and reporting to the Town on a quarterly basis.
For FY 2018, the Town’s annual yield increased from 0.96 percent in FY 2017 to 1.27 percent in FY 2018 thanks to rising interest rates in the market. Interest earnings totaled $6.7 million, which is an increase of over $1.8 million, or 37 percent, compared to FY 2017.
The Town reports the market value of all investments every fiscal year-end to reflect the impact on the financial results in the unlikely case that the Town had to sell all of its investments at fiscal year-end market prices. This acknowledgement of year-end market value is referred to as a ”mark to market” adjustment. The adjustment increases or decreases interest earnings reported depending on market interest rates at June 30. In a rising rate environment, which the market is currently experiencing, as interest rates go up, the price of a fixed income security goes down. The Town’s mark to market adjustment for FY 2018 will reduce interest earnings on the financial statements by $4.5 million. While the Town is required to report this adjustment on the financial statements, the Town will not incur a real loss of interest earnings because the Town generally holds investments until maturity.
The Town issued debt three times in FY 2018. Last fall, the Town sold $31.03 million of general obligation bonds to finance projects approved by voters in the 2012 bond referendum and also refinanced $31.5 million of existing general obligation bonds to save over $1.4 million in interest expense. In addition, the Town refinanced $92.2 million of revenue bonds to save over $8.6 million in interest over time for the utility fund. The Town’s outstanding debt as of June 30, 2018 was $124.5 million for the general fund and $287.2 million for the utility fund. The FY 2019 budget authorizes new debt of $7 million to finance the construction of Fire Station 9.