The large variance in net results (89 percent) compared to FY 2018 is due to a bond sale in FY 2018. Routine operating revenues and expenditures and are consistent compared to routine operations in FY 2018. Details on notable revenue and expenditures by category follow.

There was no significant variance noted when reviewing the results for operating or non-operating revenues, when comparing current fourth quarter to the fourth quarter of FY 2018. The total net decrease in revenues can be attributed to the $17 million bond refunding that increased non-operating revenues in the prior year. More details on revenues are provided below.

Property Taxes

Property tax revenue is 51 percent of total budgeted revenue and is the largest revenue source for the General Fund. Taxes are based on an ad valorem tax levy on real property and personal property. Real property are items such as land and buildings, while personal property are items such as vehicles. Real property taxes were billed in July 2018 and were due no later than January 7, 2019. Conversely, 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. In FY 2019, $93.3 million was budgeted for property tax collections (both real and personal property), which was two percent greater than the prior year. As of June 30, the FY 2019 property tax budget was exceeded due to the 99.8 percent collection of the current year tax levy and collection of prior year delinquent taxes.

Sales Tax

Sales tax revenue, the largest single component of the Other Taxes and Licenses category, represents 19 percent of total General Fund budgeted revenue. Sales tax 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, through Q4, Cary has received receipts for July through March sales. Cary will receive its last sales tax distribution for FY 2019 in September.

Sales tax revenue at Q4 totaled $26.4 million, an increase of seven percent from this same time in FY 2018. Current year’s sales tax is expected to exceed budget by at least five percent by audited year-end. 

Unrestricted Intergovernmental Revenues

Sales taxes on electricity, natural gas and wireless communications comprise 91 percent of the budgeted revenue sources in the Intergovernmental category. Utilities sales taxes are budgeted at $10.2 million in FY 2019. The state distributes utility sales tax revenue in December, March, June and September so three distributions have been received through June 30. Cary’s $8.1 million distribution received through Q4 is an increase of three percent from this same time in FY 2018. Utility sales tax revenues are expected to meet budget as of year-end.
Another component of unrestricted intergovernmental revenues is video programming tax. The video programming tax is a seven percent tax applied to services such as cable and satellite. This revenue has not increased since FY 2017 in part due to the increased consumer use of streaming services such as Netflix and Hulu. According to the Motion Picture Association of America, the use of digital home entertainment, such as streaming services, has increased 130 percent from 2014 to 2018. This shift from traditional cable to streaming services can be felt in Cary as well. As of Q4, video programming tax revenue decreased two percent for each of the last two years. Sales tax is collected on streaming services, which has contributed to the increase in sales tax noted above.

Permits & Fees

Overall, this category has remained relatively flat compared to the prior year and is expected to meet budget estimates. These revenues have trended downward over the past few years with the changing development patterns detailed in the LIVE Section. Cary issued permits for 889 new single-family dwellings during FY 2019 which is down 18 percent from the previous five fiscal year average of 1,087 and down 21 percent from 1,128 in FY 2018. Additionally, square footage for new non-residential permits declined 58 percent from the previous five fiscal year average which included large projects.

This category of Permits and Fees also includes vehicle tag fees on all vehicles registered in Cary. In FY 2019, Cary increased the vehicle license fee from $15 to $30 primarily to pay for sidewalk improvements. Of the $15 increase, $5 was budgeted in the General Fund, and $10 of the increase was budgeted in the General Capital Reserve fund. This increase in revenue in the General Fund has offset the overall decrease in Permits and Fees, as referenced above, resulting in the one percent decline recognized year over year.

Overall, there were no significant variances noted in operating expenses when reviewing current Q4 results to the prior year or budget. The 49 percent decrease in Non-Operating Expenditures reflects the $17 million bond sale in FY 2018 for a payment to an escrow account for refinanced debt.

In accordance with North Carolina state statutes regarding the use of procurement cards, Cary must report outstanding encumbrances in the financial system at quarter end. Encumbrances represent funds that have been reserved in the financial system to satisfy a commitment to make a purchase. Considering these encumbrances and year-to-date spending, the General Fund has over $11 million remaining in the operations budget for the remainder of the year before final adjustments for reporting.

Utility Fund net results decreased 83 percent when 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 expenses further account for the differences between the two fiscal years.  An analysis of revenues and expenditures is below.

Overall spending for the Utility Fund is in line with budgetary expectations. Increased expenses at the Water Treatment Facility are the result of a large routine chemical supply purchase.
Like the General Fund, the next table shows the total outstanding encumbrances in the financial system at the end of Q4. When including the encumbrance amounts along with the year-to date operating spend amounts, the Utility Fund has nearly $1 million remaining budget for operations at the end of the quarter.

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.

Capital project spending totaled $79.5 million through Q4. Because the mix of capital projects changes over time, there are no discernable patterns in capital spending.

The dollar chart shows where the capital project spending occurred in FY 2019. The Capital Project Appropriations chart (previous page) shows where capital dollars are budgeted, and the table above demonstrates where they have been spent for all active projects.

Capital spending fluctuates as larger projects become active and near completion. The Cary/Apex Water Treatment Facility expansion accounts for the increased water capital spending that occurred in FY 2016. Cary spent $79.5 million on capital improvements through Q4 of FY 2019, with over 50 percent of the spending supporting 13 projects. The largest single capital expenditure of $8.3 million funded Cary’s share of the downtown library parking deck, a key element of the downtown park. Just under 17 percent, or $13.4 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. Notable projects at or near completion with significant expenditures during Q4 of FY 2019 include:

• Street Improvements – Various street resurfacing projects for this fiscal year approaching 86.5 percent of budgeted spending
• Fire Station 9 – Project spending is at 89 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 Railroad Grade Separation
• Fire Station 9
• Morrisville Parkway/NC540 Interchange

A key accomplishment in Q4 was preparation for the new fiscal year beginning July 1. On June 27, 2019, Council approved a $336.5 million budget for Fiscal Year 2020. The budget focuses on maintaining current services and allocates $261.4 million for operations and $75.1 million for capital projects. This budget is 3.2 percent less than the approved budget for FY 2019 and does not include any new positions.

Cary’s property tax rate remained unchanged at 35 cents per $100 of real property value. To address increasing recycling costs and get closer to recovering the full, actual cost of the service, the monthly solid waste fee increased by $2.50, from $17 to $19.50 per month. To offset this increase, utility rates increased by two percent for a typical household, rather than the previously-projected three percent increase.

Town Manager Sean Stegall made several public comments on the budget, “Much like a well-performing mutual fund, Cary has proven decade after decade that it’s one of the best investments you can find. When you give Cary money, it raises everyone’s return on their investment because we turn that money into high quality services and amenities.”

Approximately $484,000 is included in the operating budget for new initiatives, including $200,000 for updates to the Land Development Ordinance (LDO), $75,000 to support network security upgrades for protection against ransomware and other attacks, and other expenditures like the purchase and maintenance costs for five drones to be used in emergency response and surveying. The general capital budget allocates $19.2 million toward maintenance of existing infrastructure. The utility capital budget committed $10 million to water and sewer line maintenance. 

Cary has significant immediate and longer-term capital needs that go well beyond this year’s budget, especially for parks and street maintenance. The Town’s ability to address these needs will be governed by the outcome of a $225 million referendum on October 8, 2019.

For the second year in a row, department directors worked collaboratively to identify the organization’s overall needs and submitted a unified recommendation to the Town Manager. The result is a budget that more closely aligns the organization’s resources with community priorities as outlined in the Imagine Cary Community Plan.

“The Directors’ collaborative achievement this year is evidence that we’re progressing in organizational development,” said Stegall. “We are creating a culture that simply doesn’t exist in most governments – a culture that is essential to implementing Imagine Cary and keeping Cary great.”

Cary’s budget process includes quarterly reviews and updates of the budget with Council which facilitate the organization’s evolution towards increased responsiveness, agility and accountability. To this end, the adopted FY 2020 budget includes a base operating budget that maintains Cary’s high service levels while reserving $1.1 million for Council to appropriate throughout the year as issues and opportunities emerge.

“As Cary continues to transition from a growing community to a maturing community, our historical business model of never increasing taxes while saying ‘yes’ to everything won’t be sustainable. Future tax increases will be required for operations, maintenance and capital projects to keep Cary what it is today,” Stegall added.

The Recommended Budget is available at www.townofcary.org/budget. The adopted budget document will be available for review starting September 27 online and at the Town Clerk’s Office in Cary Town Hall and at both Wake County libraries in Cary: 4000 Louis Stephens Drive and 310 S. Academy Street.

Mid-Year Appropriations

Just over $1.8 million was included in the FY 2019 operating budget to support emerging or unforeseen needs arising during the fiscal year. Council appropriated the total amount for the following initiatives:

In Q4, an additional $250,000 was appropriated to fund expenses associated with the upcoming bond referendum, and sponsorship revenues were recognized to support the greenway celebration. Capital project budgets were adjusted to reflect new revenue sources.

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. Accordingly, reallocated budget adjustments were approved by the manager to address organizational realignments, consulting services and technology investments, totaling $2,190,011 in Q4 for FY 2019:

Citizens are invited to share budget priorities throughout the year through social media, voicemail and email. There were seven budget public input comments in Q4 outside of Council’s budget public hearings in May and June.

The Town ended FY 2019 with a cash and investment balance of over $520 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 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. Although prudent, by prioritizing safety, the Town’s ability to earn investment income is limited. The majority 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. Staff 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 every three to seven days over the next three to four years to match projected disbursements for payroll and other expenses.

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

The Town’s annual yield increased from 1.27 percent in FY 2018 to 1.79 percent in FY 2019 due to rising interest rates in the market. Interest earnings totaled $9.5 million, which is an increase of over $2.8 million, or 55 percent, compared to FY 2018. These investment earnings are allocated to each of the Town’s funds based on average share of the total pool. The General Fund comprises approximately 20 percent of the Town’s cash and investments. Just under $1.9 million of the interest income was attributed to the General Fund, which is about $400,000 over budget. The majority of the Town’s cash and investments, about two-thirds, are attributed to the capital funds for resources committed but unspent for general and utility capital projects.

In accordance with accounting standards, 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 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, as interest rates go up, the price of a fixed income security goes down. Likewise, when interest rates fall, as the market is currently experiencing, the price of a fixed income security goes up. The Town’s mark to market adjustment for FY 2019 will double interest earnings on the financial statements by adding $9.7 million. While the Town is required to report this adjustment on the financial statements, the Town will not realize this gain in interest earnings because the Town generally holds investments until maturity to meet future cash flow needs.

In June, in preparation for a bond sale scheduled for July 16, 2019, the Town received credit ratings on the anticipated new debt and affirmations on existing debt. As expected, the Town received the highest possible credit rating from all three major ratings agencies. Fitch Ratings, Moody’s Investor Service and Standard and Poors each affirmed Cary’s rating of AAA.

Just like personal debt, the better an organization’s credit rating, the lower the interest rate paid. The AAA rating enables significant interest expense savings for citizens. Cary is proud of the AAA ratings because they are one way to demonstrate that we are meeting our goals for prudent financial management, which earns not only the confidence of the bond market, but also of our citizens.

Each agency also rated Cary’s outlook as stable. “The stable outlook reflects our expectation that the town will continue to benefit from RTP as well as ongoing growth in the local economy,” Moody’s said in its news release announcing the rating. “The outlook further reflects the expectation of continued sound financial operations.”

Standard and Poor’s analysis noted Cary’s ”consistent economic growth” over the past several years. “As a result, the town has increased capital expenditures in recent years, but still has maintained very strong performance, due to growing revenues and very strong financial management.” Fitch echoed this rationale in its statement: “…management has proactively maintained spending growth in line with revenue growth, and Fitch expects that approach to continue.”

As planned, the Town 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 ten 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.

The process to hold a General Obligation Bond referendum this fall kicked off this quarter with Council’s consideration of potential projects and adoption of two bond orders. Cary citizens will have the opportunity on October 8, 2019 to vote on two ballot questions, which, if approved, will grant Cary the authority to finance up to $112 million for parks and recreation projects and up to $113 million for transportation projects.

As the process continues to unfold, the marketing team is working to mount a comprehensive voter education campaign that will begin this summer and continue up to Election Day.

Economic reports are mixed. While some indicators remain strong, some economists anticipate a decline. Interest rates have declined and are expected to continue to decrease, so the growth in interest income may be less than anticipated in the FY 2020 budget. The decline in interest rates benefited the Town in the recent bond sale with a low average rate of 2.18 percent for debt that matures over twenty years.