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Financial Highlights - Q1 FY 2021

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FY 2021 began July 1 with an approved budget of $427.6 million supporting both operating and capital spending. Property taxes were based upon the recent property tax revaluation conducted by Wake County as of January 1, 2020. Cary’s tax rate remained unchanged at $0.35 per $100 of assessed valuation. Maintaining the tax rate enables Cary to continue to implement the strategic goals and initiatives outlined in the Imagine Cary Community Plan and positions Cary to keep the Shaping Cary’s Tomorrow parks and transportation bond projects on track. Capital spending represents the largest increase in the budget as $41.8 million of voter-approved Shaping Cary’s Tomorrow general obligation bond debt is budgeted in FY 2021.

In contrast, the utility rate decreased by 4%, and the solid waste and recycling fees remained $19.50 per month. Cary is committed to providing the highest quality, safest drinking water and utility services while keeping the financial impacts to its consumers in mind. This commitment is evident in Cary’s strategy to avoid large utility rate increases by implementing smaller, more frequent rate adjustments in accordance with Cary’s 10-year financial forecasting model. More information on the budget can be found in the operating and capital budget documents or in the budget in brief summary brochure located at www.carync.gov in the Plans, Publications, and Reports section.

The effects of COVID-19 continue to impact citizens and financial results as illustrated below. During Q1, 2,058 payment plans were initiated for utility customers with past due balances on their utility account. These plans provide rate payers 12 months to pay without penalty or interest. Disconnections for non-payment, late fees, and other fees will continue to be suspended through the end of this calendar year and are scheduled to restart in January 2021. Cary will continue to work with citizens facing financial hardships during this time.

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2021 First Quarter Financial Results

General Fund

General Fund Summary

Overall, expenditures surpassed revenues by 73% when compared to the prior year. First quarter results are consistent with historical results as expenditures outpace revenues in the first quarter because revenues are not received evenly throughout the year. Expenditures are significantly higher in Q1 of FY 2021 compared to prior year’s Q1 due to an increase in transfers to capital projects.

Overall, FY 2021 General Fund revenues are up $2.4 million, or 11%, over the same period in FY 2020 primarily due to an increase in property tax revenues.

Operating Revenues

Property tax revenue is 53% 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 and personal property. Real property are items such as land and buildings, while personal property are items such as vehicles and commercial business equipment. Real property taxes were billed in July 2020 and are due no later than January 6, 2021. Therefore, most real property tax revenue is received during Q2. 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. About $17.7 million was received in both real and personal property tax revenue in Q1 of FY 2021, which is a 28% increase over the same period last year. The Wake County property tax revaluation that took effect January 1, 2020, in combination with Cary maintaining its $0.35 tax rate for the current fiscal year, account for the year-over-year increase.

The 33% increase in the Other Taxes and Licenses category is due to the timing of the receipt of occupancy tax revenues. In FY 2021, Cary received the occupancy tax in Q1, while in FY 2020, the first distribution was received in Q2.

Restricted Intergovernmental revenues decreased 50% compared to the prior year due to the decline in school resource officer revenue. Due to the pandemic’s impact on Wake County Public Schools, virtual learning replaced the need to have resource officers working at the schools. Therefore, Wake County has not been billed for these services.

The 15% decrease in Permits and Fees is due to a variance in the composition of construction types and permits rather than the pandemic. While permits for all types of construction increased by 1%, lower construction value associated with those permits caused revenues to decrease. Although permit and fee revenues have declined, this was anticipated during the FY 2021 budget process. As a result, these revenues are in line with budget.

Sales and Services decreased by 27% in Q1 of FY 2021 compared to Q1 of FY 2020. About $1.7 million of this decline is due to the closure of facilities, rentals, and camps related to Parks, Recreation, and Cultural Resources (PRCR) activities to limit the spread of COVID-19. The FY 2021 Adopted Budget anticipated a 20% decline in PRCR revenues compared to FY 2020.

The variance regarding the Miscellaneous Revenues category is related to the timing of the receipt of revenue.

Non-Operating Revenues

Non-operating revenues declined by 63% in Q1 of FY 2021 compared to Q1 of FY 2020 primarily due to decreased bond proceeds and investment earnings. Quarterly investment earnings decreased by $135,000 in FY 2021.

General Fund Expenditures

First quarter expenditure variances are primarily due to the impact of the pandemic on operations. Decreases in operations, as well as development and infrastructure expenditures, are the result of operational precautions to prevent the spread of COVID-19. Due to the temporary closure of facilities and a temporary hold on in-person camp/sports programming, costs associated with PRCR programming, such as temporary salaries, expenditures associated with camps, and maintenance on facilities, are down compared to the prior fiscal year. Cary continues to adapt to these limitations and adjust operations as the fiscal year progresses. The variance in General Government is due to the timing of payments for software maintenance and renewals in Marketing and Information Technology. The increase in non-operating expenditures reflects increased transfers to various capital projects in FY 2021.

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

Utility Fund

* The above table is in millions. Revenues, authorized expenditures, and transfers between funds are classified and summarized differently for the council budget ordinance and for accounting and reporting purposes. Individual line items are consistent. The annual budgets referred to throughout this report reflect the budget as of the quarter end as adjusted (ADJ) by council action or staff action where authorized.

Utility Fund net results in FY 2021 decreased 400% compared to FY 2020 due to increases in non-operating expenditures. Non-operating expenditures include a $5 million contribution toward the Utility Fund’s Other Post-Employment Benefits obligation and increases in transfers to capital projects.

Utility revenues show an increase of 6% in FY 2021 compared to FY 2020. This variance reflects a timing difference compared to revenues in FY 2020. When adjusted for the timing difference, water and sewer service revenues declined by 7% and 3% respectively. This decline is in line with weather variations that impact demand and the 4% volumetric water and sewer rate decrease approved in the FY 2021 budget.

The COVID-19 pandemic has not impacted utility operations to the same degree as General Fund operations. Utility operations and spending trends are consistent with FY 2020 and within budgetary expectations. Non-operating expenditures reflect a $5 million contribution toward the Utility Fund’s Other Post-Employment Benefits obligation and increases in transfers to capital projects of $5.7 million for sewer projects and $4.9 million for water projects compared to FY 2020 non-operating expenditures.

The following table shows the total outstanding encumbrances at the end of Q1 for the Utility Fund.
About $3.1 million, or 27%, of the encumbrances are for debt service payments. When including these encumbrance amounts with year-to-date spending, the Utility Fund has nearly $61 million in the operations budget for the remainder of the year.

Capital Program

Cary currently has 478 active capital projects with approximately $1.1 billion committed in resources. Utility Projects totaling $538 million comprise 50% of the capital spending authorization. General capital projects total $543 million, or 50%, of the total $1.1 billion capital authorization.

Capital Project Appropriations

Capital project spending totaled $29.4 million in Q1. Capital spending fluctuates based on the composition of projects and the status of activity. The three largest investments in capital for the community in Q1 were $14.4 million for an open space purchase in Chatham County; $1.9 million for construction of a diffused air system at the North Cary Water Reclamation Facility; and $1.8 million for street improvement projects. Because the mix of capital project changes over time, there are no discernable patterns in capital spending.

Budget

Mid-year Appropriations

One million dollars was included in the FY 2021 operating budget to support emerging or unforeseen needs during the fiscal year. In Q1, there were no mid-year appropriations by council.

Q1 Delegated Budget Authority Action

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. There were no inter-functional budget adjustments approved during Q1 FY 2021.

In Q1, there was $1.46 million appropriated from fund balance in Capital Reserve for projects associated with the Johnson Property and greenways.

Budget Public Input and Recommendations

Citizens are invited to share their budget priorities throughout the year specifically via social media, voicemail, and email. There were 10 budget public input comments in Q1.

Cash and Investments

At the end of Q1, Cary’s cash and investments totaled $498 million. About $40 million is maintained in bank accounts to ensure that Cary 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. At any one time, Cary holds about 150 different investments that are scheduled to mature about every three to seven days over the next three to four years to match projected disbursements for payroll and expenditures.

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

The Federal Reserve began decreasing the federal funds rate in 2019. In March 2020, the rate was decreased to zero. The FY 2021 budget anticipated an average earning rate of 0.25% for most investments in the two- to three-year maturity range. Even with a budget for new investments earnings at 0.25%, early projections indicate actual total interest earnings could be $350,000 below budget.

Debt

In Q1, Cary began the process to refinance up to $157 million of outstanding general obligation bonds and revenue bond debt to save up to $15 million in debt service over the next 23 years. Just after quarter end, Cary received AAA ratings from all three credit rating agencies, Moody’s, Fitch, and Standard & Poors, for both general obligation bonds and revenue bonds for a total of six AAA ratings. Market conditions at the time of the sales will determine the size of the refinancing package and ultimate results in debt service savings. As of the date of this report, the taxable general obligation refinancing resulted in a successful sale that will generate $3.9 million in future debt service savings, and the revenue bond refinancing will generate $4.4 million in future debt service savings. Record high bond volume drove interest rates up prior to the sale which limited Cary’s bond refinancing to about $110 million and $8.2 million in total savings.

In Q1, work began to finance a portion of the cost of a replacement aerial ladder truck using installment financing. Nine bids were received in late September, and Key Government Finance was awarded the bid at 1.4% for a 10-year repayment term.

Economic Outlook

COVID-19 continues to dominate the economy at all levels. Recent national forecasts were optimistic but place solid recovery at least a year out. In its September 22, 2020 State Economic Forecast, TD Bank analysts suggest that North Carolina could see its economy pick up steam in the coming months “setting the stage for an above-average growth performance in 2021.” The Wells Fargo economics group agrees with this theory, noting that full national economic recovery is possible by mid-2021 if key medical advances are made in vaccine development, effectiveness, and adoption in the next year. The Federal Reserve Bank held a two-day policy meeting during Q1 where the group voted to keep short-term interest rates near zero and updated a 2020 national unemployment rate forecast to 7.6%, which is significantly less than the previously projected 9.3%. The August 2020 Raleigh-Cary area unemployment rate of 6.1% is markedly less than the Federal Reserve’s updated forecast. Both Cary’s relatively low unemployment rate and sales tax growth at the close of FY 2020 and beginning of FY 2021 are encouraging; however, it is still early in the fiscal year to make a definitive projection. Cary’s staff and council will continue to work together and make judicious choices that protect Cary’s financial position and keep Cary Cary.

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