General Fund 

Overall, expenses surpassed revenues this first quarter, as compared to the prior year, by more than 100 percent. Historically, expenses consistently outpace revenues in the first quarter because General Fund revenues are not received evenly during the year. This year’s variance, as detailed below, is directly related to the timing of when transfers are made. Revenues are relatively consistent when comparing results year over year, changing by only two percent. The details on notable revenue and expense variances, by category, follow.

Revenues often fluctuate year-to-year due to the timing of revenue allocations from state or federal sources. The timing of recording revenue receipts accounts for the decrease in Other Taxes and Licenses. The 40 percent decline is due to the first allocation of occupancy tax being recorded in Q1 of FY 2019. In FY 2020, the first allocation was not recorded until Q2. It is important to note that sales tax revenue is included within the Other Taxes and Licenses category. Due to the timing of state distributions, there have been no receipts for sales tax revenues, which is consistent with prior years. Cary will receive its first sales tax distributions for FY 2020 in October 2019, and these revenues, which make up 19 percent of the General Fund revenue budget, will be discussed in more detail in Q2.

Revenues in the Restricted Intergovernmental category decreased 60 percent in Q1 FY 2020 compared to the same period in FY 2019. This variance is due to the Police Department receiving Federal Forfeiture Funds of $300,000 in Q1 of the prior year and only $50,000 to date in FY 2020. 

Non-Operating Revenues doubled in FY 2020 compared to FY 2019. This is due to an increase in bond proceeds and investment earnings. The Town received $200,000 in bond premium revenue from the July 2019 bond issuance. Investment earnings also increased by $200,000 compared to the prior year. See the Cash and Investments section of this report for more details on investment income.

Property Tax

Property tax revenue is 50 percent of total budgeted revenue and is the largest single revenue source for the General Fund. Taxes are based on an ad valorem tax levy on real property and personal property. Real property includes items such as land and buildings; personal property includes items such as vehicles and business equipment. Real property taxes were billed in July 2019 and are due no later than January 6, 2020. Most real property tax revenue is received during Q2. Conversely, most personal property tax revenue is collected throughout the year based on 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. $13.8 million was received in both real and personal property tax revenue in Q1 of FY 2020, a two percent increase over the same period in FY 2019.

As with revenues, first quarter expense variances are often due to timing. The increases in General Government, Public Safety and Operations in FY 2020 include health insurance. In FY 2019, health insurance was originally budgeted as Non-Operating Expenditures during Q1 of FY 2019. The decision 

was made to place these budgets into departments as of Q2 FY 2019 to better represent operating costs. Also, the Non-Operating Expenditures variance reflects the timing of accounting transfers from the General Fund to other funds. Approximately $7.9 million of these transfers, primarily to fund capital expenditures, occurred in Q1 of FY 2020 but did not occur until Q2 of FY 2019.

Encumbrances represent funds that have been reserved in the accounting system to satisfy a commitment to make a purchase. The table to the right shows the total outstanding encumbrances remaining at the end of Q1. When including these encumbrance amounts with year-to-date spending amounts, the General Fund has nearly $150 million remaining in the operations budget for the fiscal year.

Utility Fund net results in FY 2020 have decreased 54 percent from FY 2019. See below for an analysis of revenues and expenditures. 

Utilities revenues decreased in Q1 FY 2020 compared to Q1 FY 2019 due to the timing of billing vs. consumption for FY 2019 water and sewer service. Permits and Fees revenue, which makes up three percent of the utility fund revenues, declined by 29 percent due to a decline in irrigation cross-connection inspections in Q1. Also, after the Cary/Apex Water Treatment Plant expansion, wholesale capacity charges to other governmental units decreased because relative allocated capacity to those units decreased as a share of the expanded plant capacity.

Utility divisions hit the ground running this fiscal year, executing more contracts and purchasing more supplies and chemicals than in the first quarter of FY 2019. Spending trends are within expectations with actual operating expenses as a percentage of budget. Total expenses as a percentage of budget increased four percent compared to FY 2019. Like the changes in budgets in the General Fund, some operating expense variances are due to the change in accounting and budgeting for health insurance from non-operating expenditures into operations, and the non-operating expenses variance reflects the timing of capital transfers that had not yet occurred in FY 2019.

Similar to the General Fund, encumbrances represent funds that have been reserved in the accounting system to satisfy a commitment to make a purchase. The table to the right shows the total outstanding encumbrances remaining at the end of Q1 for the Utility Fund. When including these encumbrance amounts with year-to-date spending amounts, the Utility Fund has nearly $70.2 million remaining in the operations budget for the fiscal year.

On June 30, 2019, Cary had 410 active capital projects. Utility projects, with a total budget of $525.2 million, comprise 60 percent of the capital spending authorization. General capital projects total $343.8 million, or 40 percent of the total $869 million capital authorization.

After FY 2019 project closure and with new FY 2020 project appropriations, Cary has 442 active capital projects with approximately $870 million committed in resources. Utility projects totaling $521 million comprise 60 percent of the capital spending authorization. General capital projects total $349 million, or 40 percent of the total capital authorization.

Capital project spending totaled $12.9 million in Q1. The three largest investments in capital for the community in the quarter were $2.5 million on streets renovations throughout Cary, $1.5 million on construction related to Fire Station 9 on Walnut Street, and $770,000 for the purchase of body-worn and in-car cameras for police. The mix of capital projects changes over time; as a result, there are no discernable patterns in capital spending. 

Mid-Year Appropriations

Almost $1.2 million was included in the FY 2020 operating budget to support emerging or unforeseen needs arising during the fiscal year. In Q1, $210,717 was appropriated by Council to fund expenses associated with economic development. 

Throughout the fiscal year, challenges and opportunities develop 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. In Q1, there were no inter-functional budget adjustments.

Citizens are invited to share budget priorities throughout the year via social media, voicemail and email. There were eight budget public input comments in Q1.

At the end of Q1, cash and investments totaled $512 million. Approximately $40 million is maintained in bank accounts to ensure 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; and finally, earn the maximum interest income. At any one time, Cary holds approximately 150 different investments that are scheduled to mature every three to seven days over the next three to four years to match projected disbursements for payroll and Town expenses.

The cash and investment program is overseen by a fixed fee independent consultant. Financial advisors compile a weekly cash flow forecast and provide market insights, advice and reporting on a quarterly basis.

During calendar year 2018, the Federal Reserve raised the federal funds rate four times in 0.25 percent increments from 1.25 percent to 2.25 percent. The rate is currently at 1.75 percent after two 0.25 percent decreases in August and September 2019. At the time the FY 2020 budget was developed, interest rates were continuing to climb, and the Town was able to purchase investments at 2.50 percent and higher. Due to the decrease in the federal funds rate, purchases made in Q1 of FY 2020 have averaged a yield to maturity of 1.60 percent compared to 2.13 percent for Q1 in FY 2019. Staff will continue to monitor the interest rate environment and may recommend a decrease in the FY 2020 interest earning revenue budget should rates continue to fall. Because the majority of the Town’s investments are purchased between November and February in concert with large deposits from property tax collections, the impact of rate changes on the FY 2020 budget will be more evident in Q3.

The successful Shaping Cary’s Tomorrow bond referendum on October 8 granted the Town of Cary authority to finance up to $112 million for parks and recreation projects and up to $113 million for transportation projects. The election outcome was certified by the Wake and Chatham Board of Elections on October 14. Legal documents are being prepared for Council action on November 21 to confirm the outcome. In accordance with state statute, after a 30-day public notice of Council certification, the referendum results will be final in late December. Staff will continue planning and implementing the capital projects based on priorities identified in the Imagine Cary Community Plan.

As planned, Cary issued $16.05 million in general obligation bonds on July 16, 2019. The bond sale was based on the final remaining voter authority from the 2012 Community Investment Bond Referendum and will pay for fire, parks and recreation, and transportation projects.

The sale was competitively bid, and participation exceeded expectations with 10 financial institutions submitting bids. Morgan Stanley was awarded the bid with the lowest interest rate of 2.18 percent, which was a lower rate than projected and reflects recent economic changes in market interest rates.

Mid-year economic assessments reported by Wells Fargo Bank, TD Bank and The Federal Reserve all agree that North Carolina’s 2019 economic outlook is favorable. The Raleigh/Cary metropolitan area housing market remains strong with positive indicators such as median home price appreciation, home sales turnover rate and job growth. On September 23, 2019, WalletHub concluded that Cary is the fourth best city in the US to buy a home in for buyers interested in “long-term growth, equity and profit.” In short, the Raleigh/Cary metropolitan area continues to attract businesses, jobs and residents and is expected to do so throughout the remainder of the calendar year.

National economic reports indicate that the Federal Reserve may lower the federal fund rate again in October and/or December. There are some indications that the economy is slowly migrating toward recession; at the same time, other indicators remain strong. As mentioned in the Cash and Investments section above, a decline in rates may impact Cary’s FY 2020 interest earnings budget; however, the decline in rates will benefit the Town’s variable rate debt as the interest rate is reset weekly. The Town’s variable debt interest rate has fallen from a monthly average high of 1.84 percent in April to 1.48 percent in September.