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After reviewing our financial condition with staff and the Town’s independent auditors, I am pleased to report that the Town is maintaining a healthy outlook. This information is vital to me as Mayor since we have current and future projects to plan for, as well as significant increases in operational costs for services and goods since the pandemic. I wanted to share a few tidbits with the public that I gathered.
We discussed several financial performance indicators, but the two most important for our citizen’s knowledge are Fund Balance and Debt. Let’s dig into some data for our General Fund and the Water Sewer Fund. Remember that the General Fund mainly obtains revenue from property taxes (within Valdese limits) and sales taxes (within Burke County limits) to pay for all Town services. In addition, the Water Sewer Fund solely obtains revenue from water and sewer rates to pay for delivering clean water and disposal of sewage.
FUND BALANCE - You may have heard that fund balance is our “savings” account. Building a healthy fund balance or “savings” serves several purposes, much like your personal finances. When the Town has healthy savings, it helps prevent short-term borrowing, gives us a reserve for emergencies and unexpected opportunities, and increases the pool of idle funds, which increases investment income. Both of the Town funds are healthy. We express our savings as a percentage. This is because it lets us compare what we have saved versus our expenditures. The percentage is a universal measurement, unlike a dollar amount, which will vary widely between small towns and large cities. As a point of reference, an 8% fund balance equals one month’s savings to cover our expenses.
General Fund: Over the past four years, we have significantly increased our reserve funds. Several factors contribute to this increase, including reasonable fiscal control by staff, strategic use of the reserve funds by the Council, and an increase in county sales tax revenue. In fiscal year 2017-2018, our reserve funds were at $1,206,161 (18.56% fund balance). This meant we only had slightly over two months of reserves available to cover our expenditures. Since then, our reserves have gradually increased, showing a healthy financial condition. As of our most recent audit (fiscal year 2021-2022), our reserve funds increased to $4,907,145 (113.50% fund balance), or over 14 months of reserves available to cover our expenditures.
Water/Sewer Fund: Looking back again, four years ago, in fiscal year 2017-2018, this fund had savings of $1,322,495, which was a 27.40% fund balance. There needed to be more than this level of reserves to be considered healthy since any large disaster at our Water Plant or Wastewater Plant would use up these funds very quickly. Town Council prioritized building our savings in this fund for future needs and emergencies, whether at either plant or infrastructure in the ground. Since fiscal year 2017-2018, we have doubled our savings to $2,845,266, which is a 50.29% fund balance. This means we have a half year of cash to cover our expenditures or make significant repairs. This is a much healthier position than where we were just four years ago. This healthy cushion allows the Utility department to provide uninterrupted clean water and proper sanitary disposal of sewage.
ANNUAL DEBT PAYMENTS - The debt-to-income ratio (percentage of the operating budget used to service debt) is essential in determining whether debt payments are reasonable and manageable. Anyone who has applied for a loan will recognize the qualification requirements by comparing their monthly payments of principal and interest to their income. For example, in the mortgage industry, monthly payments should not exceed 28% of the applicant’s gross monthly income.
Before incurring debt, Valdese must receive approval from the State Treasurer’s Office: Local Government Commission. This unit reviews and authorizes most local government borrowing transactions. It also monitors the town’s fiscal health and examines our annual certified audit. If the commission feels the Town is at risk of overextending its debt obligations, it will not approve additional debt.
General Fund. Applying the debt-to-income ratio, in the current fiscal year (2022-23), the Town’s general fund will have principal and interest payments of $260,243. This is 3.84% of the budget.
Water/Sewer Fund. Performing the same debt-to-income ratio in the current fiscal year (2022-2023), this fund’s debt service will be $360,685, which is 6.36% of the budget. As you can see, our annual debt payments are meager compared to our overall budget. A detailed listing of what this debt service is paying for can be found on pages 49-50 of the annual audit, which is available on the Town’s website.
LONG TERM DEBT - In addition to considering annual debt, we also want to look at the big picture of debt in the long term. This category affects not just current citizens but also future generations. Thus, debt is an investment in the Town’s future by spreading payments over several years. Remember, the Local Government Commission examines our long-term debt situation when deciding to approve or deny any new debt issuance for a municipality.
General Fund. It is important to remember that all municipalities across the State are bound by the same rules regarding their debt. NC General Statutes restrict a town’s general fund debt limit to 8% of the assessed value of taxable property. This calculation would allow Valdese to have a maximum debt in our general fund of $25,666,605. Our current (fiscal year 2022-2023) debt of $4,447,224 is 17% of our legal debt capacity in the general fund. The construction of a public safety building would fall under this category of general fund debt. However, since our long-term debt is at a manageable and healthy level, the additional debt incurred for the new building would still be well under the debt capacity outlined by the State.
Water/Sewer Fund. Unlike the general fund, this fund is operated as a business enterprise. Thus, debt related to these utilities must be repaid from utility revenues only. It cannot come from property taxes or other general fund revenue. In Valdese, about half of our utility debt is supported by customers who do not live in Valdese and do not pay Valdese property taxes. This is common for municipal utility systems to serve customers outside town limits. Roughly half our water revenues come from these customers. Our Water/Sewer fund has a long-term debt of $6,903,460. Since this debt is paid for by customers of the utility system, rather than taxpayer dollars, this debt is not factored into the legal debt capacity mentioned earlier. Debt incurred to build and maintain a utility system is repaid by the customers who use it.
Our little “big” Town is in excellent financial condition. I am fortunate to live here and serve its citizens. As we forge the future as a community, I expect to continue maintaining healthy finances in conjunction with the strict regulations and oversight guiding our decisions.
Sincerely, Your Mayor
Charles Watts
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