HomeMy WebLinkAboutAgenda - 02-21-2017-13-5 - Information Item - Memorandum - Second Quarter FY2016-17 Financial Report - Period Ending December 31, 2016 INFORMATION ITEM 1
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FINANCE and ADMINISTRATIVE SERVICES
Gary Donaldson,CTP,Chief Financial Officer gonaldson@orangecountync.gov 200 S.Cameron Street,Hillsborough,NC 27278 919.245.2151
MEMORANDUM
To: Board of County Commissioners
From: Gary Donaldson, Chief Financial Officer
Date: February 21, 2017
Re: Second Quarter FY2016-17 Financial Report-Period Ending December 31, 2016
The Second Quarter FY2016-17 report represents the Department of Finance and Administrative Services commitment to
providing important financial reporting to you,the County Manager,and our Residents.
The Major Orange County Operating funds in this financial report are:
• General Fund
• Enterprise Funds (Solid Waste Fund and Sportsplex Fund)
The quarterly financial report is presented with a detailed comparison of FY2016-17 Budget versus Actual and FY2015-
16 Budget versus Actual indicating year to date revenues and expenditures performance. The primary goal of this
quarterly report is to communicate a concise financial status of the County's major operating funds.
A 2017 Economic Outlook Report by Dr. Michael Walden of NC State University is included as a complement to this
quarterly financial report.
General Fund Performance
The FY2016-17 General Fund performance is consistent with historical performance. Unlike the first three months of the
County's fiscal year,where expenditures normally exceed revenues due to the timing of Property Tax revenues which are
due September 1,the second quarter revenues normally exceed expenditures due to the collection of a large majority of
Property Tax revenues by December 31, 2016.
General Fund Revenues
Second quarter FY2016-17 General Fund revenues total $134.8 million or 61.2%of budgeted revenues,which is down by
$3.7 million from 2Q FY2015-16 total of$138.5 million or 65.7%of budgeted revenues. This decrease is not a
performance variance; it represents a timing variance in the receipt of property tax collections, drawdown of Lottery
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Proceeds, and Emergency Services backlog billings. These variances are expected to be corrected by the third quarter of
the fiscal year.
Summary of Major General Fund Revenues
FY2016-17 FY2016-17 YTD% FY2015-16 FY2015-16 YTD%
Category Original Budget Revised Budget YTD Actual Collected Category Original Budget Revised Budget YTD Actual Collected
Property Tax $ 149,498,811 $ 149,498,811 $118,412,891 79.2% Property Tax 147,551,332 $ 147,551,332 $121,175,552 82.1%
Local Option Sales Tax 22,066,641 22,066,641 4,581,981 20.8% Local Option Sales Tax 20,652,132 20,652,132 4,321,358 20.9%
Licenses and Permits 328,000 328,000 77,742 23.7% Licenses and Permits 313,000 313,000 77,552 24.8%
Charges for Services 11,681,503 11,891,529 4,424,226 37.2% Charges for Services 10,766,030 10,807,314 4,607,067 42.6%
Intergovemnnmtal 15,787,579 18,669,438 6,917,852 37.1% hrtergovemnrntal 15,000,278 18,524,600 7,604,906 41.1%
Transfers from Other Funds 2,712,600 2,712,600 0 0.0% Transfers from Other Funds 1,052,600 1,052,600 - 0.0%
Investment Earnings 155,000 155,000 29,718 19.2% Investn ntEarninggs 52,500 52,500 26,494 50.5%
Miscellaneous 886,734 1,032,923 359,277 34.8% Miscellaneous 737,468 940,734 711,802 75.7%
Fund Balance Appropriation 12,726,944 13,887,964 0 0.0% Fund Balance Appropriation 10,650,770 10,826,066 - 0.0%
General Fund Revenues 215,843,812 220,242,906 134,803,687 61.2% General Fund Revenues 206,776,111 210,720,278 138,524,730 65.7%
Property Tax Revenues
2Q FY2016-17 Property Tax revenues total $118.4 million or 79.2%of budgeted revenues,which is $2.3 million lower
than the 2Q FY2015-16 total of$121.1 million or 82.1%of budgeted revenues. This is a timing variance which is
expected to be corrected following the assessment of late penalties and interest charges which accrue January 2017. The
billing versus collection rate is projected to be in the high 90 percentile by January 31. The tax office annual billing versus
collection rate has historically been at 99%,and that remains the projected rate for this fiscal year.
Local Option Sales Tax Revenues
2Q FY2016-17 revenues total $4.5 million or 20.8%of budgeted revenues,which is $260,000 above the 2Q FY2015-16
Sales Tax revenues of$4.3 million or 20.9%. This reflects three months of actual collections due to the timing of receipts
from the North Carolina Department of Revenue. The local government sales tax distributions in any given month reflect
actual sales made up to three months prior. For example,August collections reflect July vendor sales,which are
processed and allocated in September,with a local government distribution made on or before October 20. The October
payment was the first month's sales tax distribution allocated to the July-June fiscal year. The December 2016
distribution, as historically is the case,includes a large number of calendar year end refunds,which results in significantly
lower net Sales Tax revenues.
The North Carolina Department of Revenue administers the following monthly disbursement of local option sales taxes
recorded in the County's General Fund:
• Article 39 (one-cent) -authorized in 1971, and is currently allocated on a point of delivery basis.
• Article 40 (half-cent) -authorized in 1983, and is currently allocated on a per capita basis.
• Article 42 (half-cent) -authorized in 1986, and is currently allocated on a point of delivery basis.
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Charges for Services
2Q FY2016-17 Charges for Services total $4.4 million or 37.2%of budgeted revenues, as compared with 2Q FY2015-16
total of$4.6 million or 42.6%of budgeted revenues with actual collections in FY2016-17 below FY2015-16 collections in
the second quarter by$182,841. The Charges for Service category is comprised of various departmental fees for services
including Planning and Inspections, Environment,Agriculture, Parks and Recreation,Aging, Sheriff's Office,Emergency
Services, and Register of Deeds. The lower collections are attributed to Emergency Service receipts being down by
$220,598, as the Tax Office processes backlog billings as part of transitioning from a third party vendor. It is expected
that these billings and collections will be posted by the end of the third quarter of this fiscal year.
Intergovernmental Revenues
2Q FY2016-17 Intergovernmental revenues total $6.9 million or 37.1%of budgeted revenues, as compared to 2Q
FY2015-16 total of revenues of$7.6 million or 41.1%of budgeted revenues. This source of income includes revenue
received from the Federal, State, and other local governments. Examples of revenue from local governments include
contracts with the Towns of Chapel Hill, Carrboro,and Hillsborough for animal control services, and tax collection
services. The second quarter variance is not a performance variance. This variance reflects a timing variance of$713,239
in the drawing down of Lottery Proceeds from the State in 2Q FY2015-16.
General Fund Expenditures
2Q FY2016-17 General Fund expenditures total $98.8 million or 44.9%of budgeted expenditures, as compared with 2Q
FY2015-16 total expenditures of$95.1 million or 44.9%of budgeted expenditures,with actual expenditures in FY2016-
17 more than FY2015-16 expenditures by$3.7 million. The overall General fund dollar increase in 2QFY2016-17 is
attributed to increased expenditures of approximately$2.2 million in the Education expenditures for both the Orange
County Schools and the Chapel Hill-Carrboro City Schools. This increase includes the new Health and Safety contracts
which replaced the Fair Funding allocation.
Summary of Major General Fund Expenditures
FY2016-17 FY2016-17 YTD% FY2015-16 FY2015-16 YTD
Category Original Budget Revised Budget YTD Actual Expended Category Original Budget Revised Budget YTD Actual Expended
Community Services $ 13,654,700 $ 14,024,975 $ 6,497,248 46.3% Community Services 12,701,367 $ 12,908,777 $ 6,080,338 47.1%
General Government 10,094,440 10,215,754 5,605,495 54.9% General Government 10,017,348 10,106,511 5,195,475 51.4%
Public Safety 24,596,946 24,803,375 11,219,270 45.2% Public Safety 23,316,875 23,535,712 11,356,942 48.3%
Human Services 37,249,977 40,406,564 19,083,785 47.2% Human Services 36,377,062 40,044,457 18,397,161 45.9%
Education 84,259,340 84,259,340 41,229,048 48.9% Education 78,837,341 78,837,341 39,046,173 49.5%
Support Services 14,058,009 14,407,497 6,298,616 43.7% Support Services 13,470,911 13,739,626 5,656,064 41.2%
Non-Departmental 31,930,400 32,125,400 8,914,282 27.7% Non-Departmental 32,055,206 32,846,401 9,381,778 28.6%
General Fund Expenditures 215,843,812 220,242,906 98,847,745 44.9% General Fund Expenditures 206,776,110 212,018,826 95,113,930 44.9%
Please note that the reporting of Budget versus Actual expenditures is reflected by the following Functional
Leadership Teams:
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Community Services-Animal Services,NC Cooperative Extension, DEAPR, Economic Development, Planning and
Inspections, and Orange Public Transportation.
2Q FY2016-17 General Fund expenditures total $6.4 million or 46.3%as compared with 2QFY2015-16 Community
Services expenditures of$6 million or 47.1%,with actual expenditures in FY2016-17 exceeding FY2015-16 expenditures
by$400,000. The increase in expenditures is attributed to an increase in expenditures and/or encumbrances in the
Department of Environment,Agriculture, Parks and Recreation(DEAPR)due to increased programming in the
Community Centers, additional seasonal personnel and operational costs in the Parks division, and increased seasonal
personnel in the Recreation division in FY 2016-17.Non-Departmental increased by$143,043 due to an increased General
Fund contribution to Sanitation operations in FY 2016-17.
General Government- Board of Elections, Clerk to the Board, County Attorney, County Manager,Register of Deeds
and Tax Administration
2Q FY2016-17 General Government expenditures total $5.6 million or 54.9%of budgeted expenditures, as compared
with 2Q FY2015-16 total of$5.1 million or 51.4%of budgeted expenditures. The increase in expenditures are mostly
attributed to Board of Elections,Tax Administration, and Non-Departmental. The Board of Elections has spent$470,692
more than the prior fiscal years for costs incurred with the elections season. The Tax Administration office has spent
$110,804 more than the prior fiscal year for costs incurred with preparation for revaluation.Non-Departmental has spent
$97,350 more than the prior fiscal year due to costs associated with the 2016 Bond education campaign, and the timing of
Storm water fee payments to the Town of Chapel Hill.
Public Safety—Courts, Emergency Services, and Sheriff's Office
2Q FY2016-17 Public Safety expenditures total $11.2 million or 45.2%of budgeted expenditures,as compared with 2Q
FY2015-16 total of$11.3 million or 48.3%of budgeted expenditures. The Department of Emergency Services
expenditures are $210,090 lower than the prior fiscal year. This EMS decrease is attributed to an increased number of
vacant positions than during the same period in FY 2015-16, as well as a decrease in non-permanent personnel spending.
EMS remains within budget and assuming a constant spending rate,the department is projected to end within budget. The
Sheriff's Office spending is consistent with the prior fiscal year with $6.3 million expended.
Human Services—Department on Aging, Child Support,Housing,Human Rights, and Community Development,
Library, Public Health and Social Services
2Q FY2016-17 Human Services expenditures total $19 million or 47.2%of budgeted expenditures, as compared with 2Q
FY2015-16 total of$18.3 million or 45.9%of budgeted expenditures. The Department of Social Services comprises more
than 50%of the human services budget,and its expenditures increased$250,000 due mostly to increased Child Day Care
expenditures,by reducing the number of families on the waiting list. The Health Department expenditures increased
$254,923 due to increased spending for the Family Success Alliance,the timing of contract services payments, and
increased encumbrances in operations. The Library Services increased$167,286 due to less vacant positions than during
the same period in FY 2015-16,the timing of contract services payments, and increased encumbrances in both operations
and recurring capital.
Support Services-Asset Management Services, Community Relations, Finance,Human Resources, and Information
Technology
2Q FY2016-17 Support Services expenditures total $6.2 million or 43.7%of budgeted expenditures, as compared with 2Q
FY2015-16 total of$5.6 million or 41.2%of budgeted expenditures. The increase spending is attributed to the Department
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of Asset Management Services (AMS) spending $279,745 more than the prior year primarily due to supporting storms
and inclement weather. AMS has spent 59.6%of expenditures this fiscal year as compared to 54.3%in the prior fiscal
year. The Department of Information Technology has spent$244,922 this fiscal year as compared to the prior fiscal year
primarily due to maintenance support for IT contracted services.
Education
2Q FY2016-17 Education expenditures total $41.2 million or 48.9%of budgeted expenditures, as compared with 2Q
FY2015-16 total of$39 million or 49.5%of budgeted expenditures. The FY2016-17 Education budget was increased by
$5.4 million over the prior year's budget to fund the new Health and Safety contracts which replaced the Fair Funding
allocation. The Education expenditures are comprised of Current Expenses to the Chapel Hill-Carrboro City School
District and Orange County School District. Current Expenses of$38.6 million or 50%of budgeted expenditures was
remitted to the school districts through the second quarter;this was $1.5 million more than the same period in FY2015-16.
The remaining Education budget pertains to the Health and Safety Contracts for Nurses and School Resource Officers,
Recurring Capital, and Other Related County Support, specifically support to Durham Technical College (Orange County
campus).
Non-Departmental
2Q FY2016-17 Non-Departmental expenditures total $8.9 million or 27.7%of budgeted expenditures,as compared with
2Q FY2015-16 total of$9.3 million or 28.6%of budgeted expenditures. The Non-Departmental category includes Debt
Service and Transfers to Other Funds. The second quarter expenditures are .9%lower than the same period in 2Q
FY2015-16 due to the timing of debt service payments.
In summary, 2Q FY2016-17 General Fund Revenues and Expenditures are in line with the adopted FY2016-17 General
Fund Budget; and there are no material areas of concern at the mid-year point.
Enterprise Funds Performance
Solid Waste Fund
2Q FY2016-17 Solid Waste Fund performance is in line with the adopted FY2016-17 budget. Second quarter revenues
are $7 million or 43.3%of budgeted revenues and expenses are $6.6 million or 40.7%of budgeted expenses. This
compares with FY2015-16 second quarter revenues of 7.1 million or 62.4%of budgeted revenues and expenses of$6.6
million or 54.3%of budgeted expenses. The difference in the expenditures %is due to a timing issue of posting budgeted
financing proceeds and encumbrance carry forwards. They are included in the 2Q FY 2016-17,but were not a part of the
2Q FY 2015-16.
Sportsplex Fund
2Q FY2016-17 Sportsplex Fund performance is consistent with the adopted FY2016-17 budget. The revenue stream is
comprised of Ice Rink-34%of budgeted revenues, Membership and Fitness-32%of budgeted revenues,with the
remaining revenues comprised primarily of Aquatic and Kidsplex. Second quarter revenues are $1.5 million or 46.6%of
budgeted revenues and expenses are $1.5 million or 33.2%of expenses. This compares with FY2015-16 second quarter
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revenues of$1.6 million or 50.7%of budgeted revenues and expenses of$1.7 million or 49.8%of budgeted expenses.
The difference in the expenditures %is due to a timing issue of posting budgeted financing proceeds and encumbrance
carry forwards.They are included in the 2Q FY 2016-17,but were not a part of the 2Q FY 2015-16.
Enclosures
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DEPARTMENT OF FINANCE AND ADMINISTRATIVE SERVICES
FY2016-17 SECOND QUARTER
FINANCIAL REPORT
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Quarterly Financial Contents
• General Fund Revenues and Expenditures Analysis by Major
Revenue Categories and each Department by Functional
Leadership Team
• 6-Page Narrative explaining Major variances (1St Attachment)
Narrative delineating any material variance by either
Performance or Timing
• Detailed Comparison of FY2016-17 Budget versus Actual and
FY2015-16 Budget versus Actual Table
• Cash Flow Position
• Investment Portfolio Balances
• NC State 2017 Economic Outlook (2nd Attachment)
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General Fund Revenue Overview
• Revenue performance through second quarter is on track to
meet budget projections
• Property tax revenue collections slightly below prior year but this
is a timing variance which is expected to be corrected by third
quarter financial report
• Property tax revenues represent more than 70% of Budgeted
General Fund revenues
• Sales tax revenues accounts for approximately 10% of Budgeted
General Fund revenues; State Department of Revenue
remittances normally lags due to processing and distribution
• Remaining 20% of revenues consists primarily of
Intergovernmental and Charges for Services
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General Fund Revenues Budget versus Actual
Comparative Analysis
FY2016-17 FY2016-17 YTD% FY2015-16 FY2015-16 YTD%
Category Original Budget Revised Budget YTD Actual Collected Category Original Budget Revised Budget YTD Actual Collected
Property Tax $ 149,498,811 $ 149,498,811 $118,412,891 79.2% Property Tax 147,551,332 $ 147,551,332 $121,175,552 82.1%
Local Option Sales Tax 22,066,641 22,066,641 4,581,981 20.8% Local Option Sales Tax 20,652,132 20,652,132 4,321,358 20.9%
Licenses and Permits 328,000 328,000 77,742 23.7% Licenses and Permits 313,000 313,000 77,552 24.8%
Charges for Services 11,681,503 11,891,529 4,424,226 37.2% Charges for Services 10,766,030 10,807,314 4,607,067 42.6%
Intergovernmental 15,787,579 18,669,438 6,917,852 37.1% Intergovernmental 15,000,278 18,524,600 7,604,906 41.1%
Transfers from Other Funds 2,712,600 2,712,600 0 0.0% Transfers from Other Funds 1,052,600 1,052,600 - 0.0%
Investment Earnings 155,000 155,000 29,718 19.2% Investment Earnings 52,500 52,500 26,494 50.5%
Miscellaneous 886,734 1,032,923 359,277 34.8% Miscellaneous 737,468 940,734 711,802 75.7%
Fund Balance Appropriabo 12,726,944 13,887,964 0 0.0% Fund Balance Appropriabo 10,650,770 10,826,066 - 0.0%
General Fund Revenues 215,843,812 220,242,906 134,803,687 61.2% General Fund Revenues 206,776,111 1 210,720,278 1 138,524,730 65.7%
• FY 2016-17 General Fund revenues are on target with the adopted budget; through the second quarter $134.8
million or 61.2% of budgeted revenues has been collected as compared to $138.5 million or 65.7% in the prior
year
• Property Tax revenues totals $118.4 million or 79.2% of Budgeted Revenues compared to $121.1 million or
82.1% in the prior year; this represents a timing variance which is expected to be corrected by the third quarter
reporting
• Sales Tax revenues reflects three months of activity; the NC Department of Revenue (NCDOR) remittances
to local jurisdictions has normally lagged up to three months throughout the State; attributed to the time to
process and remit distributions to local governments
• Charges for Services revenues collected are $4.4 million or 37.2% of Budgeted Revenues compared to $4.6
million or 42.6% in the prior year; variance due to processing of EMS backlog billings
• Intergovernmental revenues which includes grant remittances are $6.9 million or 37.1% of Budgeted Revenues
compared to $7.6 million or 41.1% in the prior year; due to the timing of draw down of Lottery revenue
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General Fund Expenditure Overview
• Expenditures are indicated by the Functional
Leadership Teams
• Department Expenditures are within Budgeted
appropriations; General Government anomaly reflects
revaluation and election expenditures
• 2Q Spending accounts for 45% of Budgeted
Expenditures consistent with the prior year
• No significant variances attributed to Performance
• Debt Service payments are budgeted in Non-
Departmental
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General Fund Expenditures Budget versus Actual
Comparative Analysis
FY2016-17 FY2016-17 YTD% FY2015-16 FY2015-16 YTD%
Category Original Budget Revised Budget YTD Actual Expended Category Original Budget Revised Budget YTD Actual Expended
Community Services $ 13,654,700 $ 14,024,975 $ 6,497,248 46.3% Community Services 12,701,367 $ 12,908,777 $ 6,080,338 47.1%
General Government 10,094,440 10,215,754 5,605,495 54.9% General Government 10,017,348 10,106,511 5,195,475 51.4%
Public Safety 24,596,946 24,803,375 11,219,270 45.2% Public Safety 23,316,875 23,535,712 11,356,942 48.3%
Human Services 37,249,977 40,406,564 19,083,785 47.2% Human Services 36,377,062 40,044,457 18,397,161 45.9%
Education 84,259,340 84,259,340 41,229,048 48.9% Education 78,837,341 78,837,341 39,046,173 49.5%
Support Services 14,058,009 14,407,497 6,298,616 43.7% Support Services 13,470,911 13,739,626 5,656,064 41.2%
Non-Departmental 31,930,400 32,125,400 8,914,282 27.7% Non-Departmental 32,055,206 32,846,401 9,381,778 28.6%
General Fund Expenditures 215,843,812 220,242,906 98,847,745 44.9% General Fund Expenditures 206,776,110 212,018,826 95,113,930 44.9%
• FY 2015-16 General Fund expenditures in line with historical performance
• 2Q FY2O15-16 expenditures are $98.8 million or 44.9% of Budgeted Expenditures consistent with prior year
spending rate of the same
• Community Service includes Animal Services, NC Cooperative Extension, Economic Development, and
Planning and Inspections; spending rate of 46.3% of Budgeted Expenditures; no major performance variance
• General Government includes Board of Elections, Clerk to the Board, County Attorney, County Manager,
Register of Deeds, and Tax Administration; spending rate of 54.9% of Budgeted Expenditures is 4.8% more
than prior year, this is due to elections and revaluation expenditures
• Education expenditures dollar amount has increased due to new funding for School Safety and Nurses
contracts; Education category includes Current Expenditures and Recurring Capital; School Debt Service of
$16 million is budgeted in Non-Departmental
• Support Services includes Asset Management, Community Relations, Finance, HR, and IT; spending rate of
43.7% is 2.5% higher due to AMS storm support and IT maintenance contracts escalations
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General Position
Oct-16 Nov-16 Dec-16
BEGINNING CASH BALANCE $ 3798379164 $ 3398369301 $ 7596549237
RECEIPTS $ 10,07807 $ 57,502,677 $ 41,993,818
DISBURSEMENTS $ 1410791750 $ 1516841741 $ 1710441356
NET CASH $ (4,000,863) $ 41,817,936 $ 24,949,462
ENDING CASH BALANCE $ 3398369301 $ 7596549237 $ 10096039699
The second quarter cash flow reflects inflow of property tax receipts.
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Investment Portfolio Balances
11-1--- 11--- 1- -- 1 7M4 TWWA
_
1 North Carolina Capital Management Trust
2 General Cash $ 7,949,161 $ 11,451,556 $ 6,973,969 Operating
3 Term 18,022,163 64,640,228 64,680,776 Operating
4 Total NCCMT $ 25,971,324 $ 76,091,784 $ 71,654,745
5
6 SunTrust
7 Sportsplex Fund $ 1,805,825 $ 239,737 $ 307,601 Operating
8 Balance Account 1,899,820 1,899,820 1,899,820 Operating
9 General Account 5,279,176 11,084,499 38,733,819 Operating
10 Money Market 4,300,805 4,300,941 4,301,082 Operating
11 Total SunTrust $ 13,285,626 $ 17,524,997 $ 45,242,321
12
13 BB&T
14 Lockbox $ 4,615,513 $ 4,613,706 $ 8,246,454 Operating
15
16 Finistar
17 Finistar $ 459 $ - $ - Operating
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19 Total Cash $ 43,872,923 $ 98,230,487 $ 125,143,520
20
21 Commercial Paper
22 CP JP Morgan $ 5,000,000 $ 5,000,000 $ 5,000,000
23 CP Toyota 5,000,000 5,000,000 5,000,000
24 CP JP Morgan 5,000,000 5,000,000 5,000,000
25 Total Commercial Paper $ 15,000,000 $ 15,000,000 $ 15,000,000
26
27 Total Cash and Investments $ 58,872,923 $ 113,230,487 $ 140,143,520
*These funds represent amounts to meet liquidity requirements.
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Economic Overview
• NC State 2017 Economic Outlook indicates:
— National economy expected to accelerate primarily
from Federal stimulus of reduced tax rates
— Both inflation rates and interest rates expected to
trend higher
— 100,000 Net New Payroll Jobs
— Unemployment rate in Raleigh-Durham metro area to
remain under 4% for calendar year
— Fastest job growth in higher-paying and lower-paying
jobs, with slowest growth in middle-paying jobs
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STATE
THE NORTH CAROLINA ECONOMIC OUTLOOK
FIRST QUARTER 2017 (posted December 27, 2016)
Prepared by Dr. Michael L. Walden, William Neal Reynolds Distinguished Professor,
Department of Agricultural and Resource Economics, North Carolina State University
Contact Methods: phone: 919-219-8923; e-mail: michael_walden @ncsu.edu
EIGHT NORTH CAROLINA ECONOMC HEADLINES FOR 2017
1. NATIONAL ECONOMIC GROWTH WILL ACCELERATE IN 2017 RESULTING
PRIMARILY FROM AN EXPECTED FEDERAL ECONOMIC STIMULUS OF REDUCED
TAX RATES
2. BOTH INFLATION RATES AND INTEREST RATES WILL TREND HIGHER IN 2017
3. NORTH CAROLINA'S AGGREGATE ECONOMIC MEASURES WILL ALSO TREND
HIGHER IN 2017, WITH 100,000 NET NEW PAYROLL JOBS ADDED
4. NORTH CAROLINA'S AGGREGATE GROWTH WILL EXCEED NATIONAL AGGREGATE
GROWTH IN 2017,REVERSING THE TREND DURING MUCH OF THE CURRENT
ECONOMIC RECOVERY
5. THE "HEADLINE"JOBLESS RATE WILL FALL TO UNDER 4%IN ASHEVILLE,
DURHAM,AND RALEIGH,BUT THE RATE WILL REMAIN ABOVE 6%IN GOLDSBORO
AND ROCKY MOUNT
6. IN NORTH CAROLINA, FASTEST JOB GROWTH WILL CONTINUE IN BOTH HIGHER-
PAYING AND LOWER-PAYING JOBS, WITH SLOWEST GROWTH IN MIDDLE-PAYING
JOBS;HOWEVER, THE DIFFERENCES WILL NOT BE AS GREAT AS IN RECENT
YEARS
7. NORTH CAROLINA COULD BENEFIT FROM TRUMP ADMINISTRATION POLICIES
EXPANDIND MILITARY SPENDING AND INCREASING OFF-SHORE ENERGY
EXPLORATION
8. TO INCREASE AND SPREAD PROSPERITY,NORTH CAROLINA NEEDS TO
FACILITATE MORE RAPID GROWTH IN HIGH-PRODUCTIVITY INDUSTRIES
1
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The National Economy: Are Happy Days Here Again?
What a difference a month made. In the four weeks after the 2016 elections, the stock
market (measured by the Dow-Jones Industrial Average) soared 7%, close to the milestone
20,000 level. To put this number in context, at the bottom of the Great Recession the Dow-Jones
average was 6600, having lost over half its value during that historic downturn.
The stock market has always been viewed as a barometer of the economy, rising when
economic fundamentals suggest improvement and falling when challenges pull the economy
down. So has the outlook for the economy suddenly and dramatically improved, and if so, why?
A Look at 2016
Before answering these questions, a review of the economy's track record in 2016 is
presented. Table 1 shows the national economy's performance on several key variables. Real
GDP is the broadest measure of the economy, as it combines the output of all sectors of the
economy—including goods and services — into one number. It improved in 2016 and actually
accelerated in the second half of the year. Still, the growth rates in real GDP in both the years
since the Great Recession (2009-2015) and in 2016 have been below the historical average
(1960-2009).
There are similar conclusions for the four labor market (labor force, payroll jobs, labor
productivity, real wage rate) measures. Each improved in 2016 but —with the exception of the
2
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Table 1. Performance of Key National Economic Measures.
Measure Annual average, Annual average, 2016 Forecast 2017
1960-2009 2009-2015
Growth rate in:
Real GDP 3.1% 2.2% 1.6%1 2.5%
Labor force 1.6% 0.5% 1.3%2 1.4%
Payroll jobs 1.8% 1.7% 1.6%2 1.7%
Labor productivity 2.4% 0.8% 0.8%2 1.0%
Real wage rate 0.4%3 0.2% 0.5%2 0.5%
Business investment, GDP % 17.6% 15.5% 16.3%4 17.0%
All-items inflation rate 4.0% 1.7% 1.7%2 2.3%
Core inflation rate 4.0% 1.7% 2.1%2 2.2%
Short-term interest rates 5.4% 0.1% 0.3%' 0.8%
Long-term interest rate6 6.9% 2.5% 1.8%' 3.1%
Source: U.S. Dept.of Commerce; Federal Reserve
2015III-2016I11;2 November 2015-November 2016; 31962-2009;4 based on 2016 I,II,III;53-month
Treasury bill rate;610-year Treasury note rate; 'through November
real wage rate- at rates below their long-run averages. Of particular concern is the continuing
slow growth in labor productivity, which has a long-run correlation with improvements in the
standard of living. Economists debate the factors behind the sluggishness in worker productivity
gains, with a focus on the contributions of demographics (younger inexperienced workers
replacing older experienced workers), shortcomings in worker training and skill development,
and even the potential for distractions in the workplace from the use of social media and personal
tech devices. The average real wage rate significantly improved in 2016 as a result of the
tightening labor market, but there are questions about how far these gains can go without faster
labor productivity improvements.
Business investment improved in 2016 but was still under its long-run average. Both the
all-item and core inflation rates continued their recent trend in 2016 of being historically low,
and the same result occurred for short-term and long-term interest rates. Analysts question
whether these low rates are a result of plentiful supply or weak demand.
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An Attitude Shift
For most of 2016 there was continuing concern over a slowly improving economy on the
verge of stagnation. Then everything changed after the November election. As already noted,
the stock market soared. The Federal Reserve raised their key short-term interest rate by 0.25
percentage points, and other short-term rates were poised to follow. Long-term interest rates,
which are based on broader factors than just Federal Reserve policy,jumped almost a full
percentage point. Even expectations for future inflation rose. Most analysts interpreted these
moves as resulting from a new optimism about the future economy.
So what happened to warrant such optimism? The answer is the stock market is looking
forward and anticipating changes in national public policy under the new Trump Administration
that will improve economic growth and business earnings. Specifically, the business world
expects substantial tax reductions, major investments in public infrastructure, an overhaul of key
financial, energy, and environmental regulations, and a strong pro-business attitude from the new
president that will significantly increase domestic production, sales, and incomes from the trend
set since the end of the Great Recession.
This anticipated additional spending and economic activity is also expected to increase
both public and private borrowing, which in turn led to the rise in interest rates at the end of
2016. Also, the increase in interest rates in the private market could cause some of the $2
trillion in excess reserves banks have parked at the Federal Reserve to be withdrawn and
invested in the economy. Higher interest rates will also motivate holders of money to spend that
money faster. Both of these changes could lead to higher inflation rates, which the financial
markets already anticipate.
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It is important to note the financial market changes in stocks, interest rates, and expected
inflation happened at the end of 2016 occurred before Donald Trump was inaugurated as
President and any specific proposals were sent to Congress. Financial markets attempt to
account for future changes and price those changes into current values.
Of course, expectations can be proven inaccurate, and there are still many questions
about the content and impacts of the emerging Trump agenda. While a tax reduction and
infrastructure spending package are almost certain to be sent to Congress, the final forms of the
Trump plans are unknown. Nor do we know how Congress might change those plans. Tax plans
are always contentious, with debates over rates, deductions and credits, and impacts for
households of different income levels. The size of the infrastructure package, the designation of
projects, and the speed of starting the projects will be debated both within the Trump
Administration as well as between the Administration and the Congress.
There are also questions about the economic impact of the tax and spending proposals.
Will President-elect Trump's goal of 4% annual growth be achieved? In the 36 years since
1980, a 4% annual growth rate in GDP has occurred only nine times, and it has not happened at
all since 2000. Some say the reason is not economic policy, but rather is demographics. Like
most developed countries, the U.S. is aging. Historically, older societies have slower rates of
economic growth.
President-elect Trump has also vowed to reduce regulations by changing recent
legislative acts in health care (the Affordable Care Act), the financial system (Dodd-Frank
Financial Reregulation Act), and the environment (several recent Environment Protection
Agency rulings). The speed of making changes and the ultimate results are still unknown.
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Perhaps the biggest question mark for the Trump Administration will be their proposals
on international trade. During the campaign, Mr. Trump forcefully talked about reducing the
trade deficit by limiting imports and moving foreign production operations to the U.S. He said
he would renegotiate trade treaties, sue countries that are alleged to be violating provisions of the
treaties, and possibly even impose tariffs (taxes on imports) on some products as high as 35%.
Certainly substituting increased domestic production for imports would contribute to
faster economic growth in the U.S. The question is whether the tactics used to do this (law suits,
tariffs) would invite retaliation by other countries to do the same and reduce their purchases of
products made in the U.S. U.S. exports to foreign countries currently total $2.4 trillion annually,
or 13% of the country's total economic production. Any significant reduction in U.S. exports
would work against increasing the rate of economic growth. Indeed, U.S. exports are already
facing the headwind of a rising international value of the dollar that has occurred with the
growing expectation of faster U.S. economic growth. A stronger valued dollar makes U.S.
exports more expensive to foreign buyers and imports to the U.S. cheaper.
National Forecasts for 2017
The right column of Table 1 gives 2017 forecasts for the nation on the key economic
measures. Most of the growth measures show improvement over 2016, suggesting an economic
bump from the likely combination of tax cuts and increased federal spending. However, "costs"
of this program will be higher interest rates, higher inflation, and an increase in federal
borrowing. These costs could be reduced or avoided if the economy grew sufficiently faster or if
federal spending was re-arranged so as to not require additional borrowing.
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The North Carolina Economy: Uneven Growth Continues
Table 2 shows North Carolina enjoyed a positive year in 2016 for four top economic
measures. There were gains in real GDP, the labor force, payroll jobs, and the real(inflation-
adjusted) wage rate, and each of these gains exceeded their counterparts at the national level.
Although the state did perform better than the nation in 2016, there is concern over recent
trends. Figure 1 shows North Carolina's rebound from recessions has become progressively less
robust during the last three business cycles. For example, 2016 is the seventh year of recovery
from the Great Recession, and the state's real GDP in 2016 was 8% higher than at the beginning
of the recovery. But the comparable gain following the 2001 recession was 19%, and following
the 1990-91 recession it was 36%.1 Furthermore, Figure 2 shows the state's recovery compared
to the national recovery has narrowed over the last three recessions —indeed in the current
recession it has been slower than the national recovery.
A major reason for North Carolina's relatively slower growth in the current economic
recovery is shown in Table 3. Compared to the nation, North Carolina has had significantly
slower growth in several high productivity sectors —including utilities, finance, nondurable
manufacturing, and agriculture— and faster growth in low productivity sectors like
arts/leisure/hospitality,personal services, and administrative services. In particular, the decline
in the state's non-durable manufacturing sector, once a mainstay of the North Carolina economy,
has been more than four times greater than the sectors' downsizing at the national level in the
current economic expansion. This contrast suggests the economic transformation in North
1 The comparison to the 2001 recession is for the sixth year,the last year of that's cycle's recovery.
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Table 2. Performance of Key North Carolina Economic Measures.
Measure Annual average, Annual average, 2016 Forecast
1987-2009 2009-2015 2017
Growth rate in:
Real GDP 3.3% 1.2% 2.3%1 2.6%
Labor force 1.5% 0.7% 2.2%2 1.8%
Payroll jobs 1.5% 1.8% 2.0%2 2.3%
Real wage rate not available -0.2% 2.4%2 1.5%
Source: U.S Dept. of Commerce; 1 2015 II—2016 II; 2 November 2015 —November 2016
Figure 1. North Carolina Real GDP Relative to Recession's Trough Value (trough=100).a
1.5
1.4
1.3
1.2
1.1
1
1 2 3 4 5 6 7
Year Since Trough (bottom)of Recession
•1990-91 •2001 •2007-09
Source: U.S. Dept.of Commerce; 'the recovery from the 2001 recession lasted six years
Figure 2.North Carolina's Real GDP to Trough Value Relative to US Real GDP to Trough
Value.
1.15
1.1
1.05
1
0.95
0.9
1 2 3 4 5 6 7
Year Since Trough (bottom)of Recession
—1990-91 —2001 —2007-09
Source: U.S. Dept.of Commerce
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Table 3. North Carolina and U.S. Real GDP Growth by Sector Ranked from High to Low
Productivity, 2009-2015 (>> indicates significantly slower North Carolina Growth in High
Productivity Sectors; > designates significantly faster North Carolina Growth in Low
Productivity Sectors)
Sector (listed from high to low productivity) N.C. Growth Rate U.S. Growth Rate
>>Utilities -0.87% 5.41%
>>Finance 8.62% 10.97%
>>Nondurable Manufacturing -18.38% -4.48%
>>Agriculture 2.37% 6.36%
Information 25.16% 21.16%
Durable Manufacturing 27.97% 26.90%
Wholesale Trade 23.41% 19.54%
Retail Trade 13.68% 15.11%
Construction 0.87% 8.07%
Transportation/Warehousing 10.66% 11.77%
Professional Services 26.94% 17.48%
> Arts/Leisure/Hospitality 28.98% 19.36%
> Personal Services 6.37% 3.05%
> Administrative Services 40.09% 25.37%
Management 37.23% 40.08%
Education/Heath Care 7.42% 11.56%
Government -5.00% -1.10%
Source: U.S. Dept.of Commerce
Carolina's economy, which has been on-going for several decades, is continuing.
Recent North Carolina economic growth has been characterized by two types of
"unevenness." One is between workers, where those with more education and pay have done
much better in the 21st century economy than those without these characteristics. The recent
labor market has been characterized by a "hallowing-out," with slowest gains in middle-paying
jobs. The second unevenness is between geographic regions of the state. The state's
metropolitan counties, especially those around Charlotte and Raleigh, have raced ahead in the
21st century, capitalizing on their college-educated workforce and new-age industries in
technology, medicine, finance, and professional services. For many of the state's small-town
and rural counties, achieving economic growth is still a challenge.
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These two types of unevenness did not abate in the state in 2016, with one exception.
Figure 3 shows the continuing trends of the fastest job growth in the higher and lower paying
employment sectors, with the slowest growth in middle paying sectors. One "plus" for 2016 is
that some job growth shifted from lower-paying to middle-paying sectors. Figure 4 illustrates
more rapid job growth in large and medium-sized metros especially compared to small metros.
An exception in 2016 was the very strong job boost in non-metro (rural) areas — even greater
than the job growth among large metros. This may mean that employers are motivated to extend
their search for workers to rural counties as the economic recovery ages and unemployment rates
approach low levels in large metropolitan regions.
As indicated in Table 2, the North Carolina economy is likely to expand in 2017 and—
like the nation— at a slightly faster clip than in 2016. One reason is faster population growth in
the state compared to the nation. U.S Census forecasts suggest North Carolina's population will
increase 30% faster than the nation's population in 2017.
Of course, all the economic policies of the Trump Administration will have impacts on
North Carolina, but two stand out. One is a possible increase in military spending. North
Carolina is the home to the largest military base in the world, at Ft. Bragg, as well as several
other major installations. If greater military spending results in significantly more military
personnel, then North Carolina— and especially the Fayetteville area - could see a big boost in
economic activity. However, if the added military spending is mainly allocated to equipment,
then the economic impact in the state will be modest.
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Figure 3.North Carolina Payroll Job Growth in High,Middle, and Low-Paying Sectors
(annualized percentage change) a
3.5
3
2.5
2
1.5
1
0.5 ■
0
High-paying Middle-paying Low-paying
•2016 •2009-2015
Source:U.S.Dept.of Commerce; a high-paying sectors are financial services,information,and
professional/business services;middle-paying sectors are manufacturing,government,construction,and
education/health care;low-paying sectors are trade/transportation,leisure/hospitality,and other services
Figure 4. North Carolina Payroll Job Growth in Large, Medium, and Small Metro Areas
and in Non-Metro Areas (annualized percentage change) a
3.5
3
2.5
2
1.5
1
0.5 ■
0
-0.5
Large metros Medium metros Small metros Non-Metros
•2016 •2009-2015
Source: U.S.Dept.of Commerce; a large metros are Charlotte,Durham-Chapel Hill,Greensboro,Raleigh,and
Winston-Salem;medium metros include Asheville,Burlington,Fayetteville,Greenville,Hickory,and Wilmington;
small metros are composed of Goldsboro,Jacksonville,New Bern,and Rocky Mount;and non-metros are counties
not included in the large,medium,and small metro categories
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The other policy is energy exploration. The Trump Administration is expected to push
for an easing of regulations on accessing energy deposits in the nation, both on-shore and off-
shore. It is estimated the largest quantity of undersea oil deposits on the eastern seaboard are off
the coast of North Carolina. If these deposits were accessed and produced, I calculate the
annual economic activity could generate $1.9 billion of income and 17,000 permanent jobs.2
Balanced against these potential benefits would have to be a consideration of potential costs to
the environment and existing coastal industries (mainly tourism and fishing).
Like other states, North Carolina will be affected by the expected debate about new
international trade policies in 2017. In 2015, 16% of the North Carolina economy was directly
related to international trade ($81 billion of export and import activity combined from a total
economy of$495 billion). If a"trade war" occurred that significantly reduced the state's
exports, then the state's leading export sectors—including advanced manufacturing, agriculture,
auto parts, and technology- could be adversely affected.
Once again, large and medium-sized metro areas in North Carolina will have the lowest
unemployment rates at the end of 2017 (Table 3). However, with the labor market expected to
further tighten in 2017 and with an economic stimulus likely from the federal level, all regions
should see improvement in the labor market, and the state should see 100,000 net new jobs
generated.
2 Michael L.Walden, The Economic Potential from Developing North Carolina's On-Shore and Off-shore Energy
Resources, Dept. of Agricultural and Resource Economics, North Carolina State University,April 2013. The report
also shows the economic impacts of on-shore energy development in the state would be minor. In late December
2016, President Obama permanently banned energy exploration in large parts of the Atlantic coast; however the
ban does not include ocean areas off the coast of North Carolina.
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Table 3. Regional Unemployment Rate Forecasts, % (not seasonally-adjusted)
Region Actual October 2016 Forecasted December 2017
Asheville 3.8 3.4
Burlington 4.5 4.2
Charlotte 4.5 4.1
Durham 4.2 3.8
Fayetteville 6.2 5.9
Goldsboro 6.5 6.2
Greensboro-High Point 4.8 4.4
Greenville 5.6 5.2
Hickory 4.7 5.4
Jacksonville 5.2 5.0
New Bern 5.3 5.0
Raleigh 4.1 3.7
Rocky Mount 7.2 6.9
Wilmington 4.5 4.0
Winston-Salem 4.5 4.2
Rural 5.6 5.2
State Not seasonally adjusted:4.8 Not seasonally adjusted:4.5
Seasonally adjusted: 5.0 Seasonally adjusted: 4.6
Source: U.S. Dept. of Commerce;author's forecasts
A Fascinating Year
For the economy, 2017 should be a fascinating year, both nationally and in North
Carolina. The Trump Administration is expected to be very active in recommending programs
and policies to accelerate economic growth. Although one party (Republican) will control both
the Presidency and Congress, there will still be deliberations and debates about competing ideas
and proposals.
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North Carolina will again have divided government, with newly elected Governor
Cooper, a Democrat, working with the Republican dominated General Assembly. This situation
will likely lead to more strenuous debates over a wider range of items than has occurred in recent
years.
Still, both national and state policymakers, in their shared goal of improving the economy
for more people, will be faced with forces beyond their control, including an aging society, a
workforce requiring more cognitive skills, technologically-induced unemployment, faster growth
in metropolitan regions, a world where economic competition is now global rather than local or
national, and— as always —unexpected events (both positive and negative) that force forecasts
and expectations to be tossed aside.
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