Graham’s city council held a special meeting Monday afternoon – the first of two scheduled this month – to hear possible options for financing upwards of $75 million in capital improvement projects (i.e., construction and upgrades) that city officials say will be needed by 2031.
Graham city officials have identified $11.1 million to $13.1 million in “general fund” capital projects – most notably, the construction of a fire substation that is yet to be designed – plus another $61.7 million in water/sewer projects that they say will be needed within five years.
The potential tax impact for the general fund projects could range from an additional 1 to 3 cents on the city’s tax rate, starting with the upcoming fiscal year that begins on July 1.
Overall, through 2031, approximately $48.6 million in water/sewer projects would be financed through debt, and $13.1 million would be in “cash funding,” based on an analysis that Davenport Public Finance has completed for the city of Graham.
“On the utility side, there’s less room to maneuver because we’re operating on state guidelines for what has to be funded,” Graham city manager Megan Garner told the council Monday afternoon.
The $61.7 million in water and sewer projects that Graham city officials have identified for the next five years consist of: water and sewer line extensions, connections, and replacements ($30.1 million by 2031); sewer lift station upgrades ($6.7 million); water treatment plant design and upgrade ($21.6 million by 2031); and wastewater treatment plant projects ($3 million).
The water/sewer projects are projected to require a 10.25 percent increase in water and sewer fees, starting with the upcoming fiscal year, according to figures that Ted Cole of Davenport Public Finance presented to the council. Additional future rate increases, of 12 percent and 19.25 percent, would be needed over the next two subsequent fiscal years, Davenport’s analysis indicated.
In 2029, debt service payments for an $18.3 million water treatment plant upgrade would kick in, the consultant pointed out, adding, “There’s some ways this could be massaged a little bit.”
By 2030, Graham’s water and sewer rates would need to increase by 6.25 percent. There would be no increase for the fiscal year ending June 30, 2031, but an additional 5.25 percent increase in water and sewer rates would be needed the following year.
“We’re not suggesting you need to go into your [upcoming fiscal year 2027] budget with a 10 percent rate increase…this is intended to give you that forward look,” Cole told the council.
Davenport’s analysis showed that Graham started the current fiscal year with enough cash on hand within the water and sewer fund to cover 310 days of expenses, or the equivalent of 84.82 percent of the total water and sewer fund budget. “Historically, this has been managed very well,” Cole said.
Graham currently has $85 million in outstanding debt for capital projects within the water/sewer fund, primarily through low-interest revolving state and federal loan funds, according to Davenport’s analysis of the city’s finances, which included no breakdown of the projects funded by the outstanding debt.
Other potential mechanisms for financing the city’s five-year capital improvement plan (CIP) could include a mix of loans, bonds, installment payments, “reserves,” and cash, as well as other revenue streams, such as fees for services and the local occupancy and local sales taxes.
One potential option would be to issue bonds that would likely require voter approval of a referendum, according to the consultant’s analysis.
Graham currently isn’t rated by a credit agency (Moody’s, Standard and Poor’s, or Fitch), which municipalities usually seek in order to issue bonds to finance big-ticket capital expenses, the consultant, Cole, explained. “In North Carolina, Moody’s has rated 43 municipalities,” he told the council. “For one reason or another, their capital needs have driven them going to the bond market.”
Approximately 26 N.C. utility systems are currently rated by Moody’s, the consultant said. “Clearly many in North Carolina do not have a rating,” Cole told the council. “It’s not uncommon…For every dollar of debt you want to have at least $1.40 in revenue to cover it.”
For the fiscal year that ended June 30, 2024, Graham had $9.84 in water/sewer revenue to cover every dollar of debt service, based on the report the council heard Monday.
“You do not have to get rated up front typically; the rating is issued in conjunction with a debt issuance,” Cole said, noting that the $18.3 million in water/sewer debt that the city is projected to take on in 2028 would also fund moving and upgrading the Cooper Road lift station in Haw River, as well as other lift station upgrades and maintenance projects. “If revolving loans are not approved for that, then you would want to go to [the] bond market – but you want to make sure you have exhausted those other options,” he said.
At the same time, Cole urged the council, “Don’t take any of this to mean we need to go in a different direction from revolving loans.”
“The process of securing that debt is about a three-month process,” the consultant elaborated. “You’ve got to get it designed and bid; it doesn’t require a bond rating. [You would need to have] two council meetings, a public hearing, a bank [Request for Proposals]; a resolution. Then we layer in the financing part right on top of that.”
General fund projects
The “general fund” capital projects that city officials have identified for the next five years include: the construction of a fire substation (estimated at $6 to $8 million); a new fire truck ($1 million); and quadrupling annual funding for street resurfacing from $550,000 to $2.2 million. Those projects could be financed through debt, such as bonds and/or loans, with reserves from cash, investments, and fund balance (“rainy-day” savings).
Graham had $11.3 million in unassigned fund balance within the general fund, which represented the equivalent of 56.5 percent of the total general fund budget, as of June 30, 2024, the latest period for which the most recent financial audit has been completed, according to Davenport’s analysis of the city’s future debt capacity. (Cole said his firm’s analysis will be revised once the city’s audit for the fiscal year that ended on June 30, 2025 is finalized.)
The fund balance (“rainy day savings”) within the city’s general fund had increased by about 45 percent, from $11 million to $16 million, between 2019 and 2024, based on figures that Cole cited for the council. Graham’s fund balance represented about 60 percent of its total budget in 2019 but dipped to about 55 percent in 2023 and 2024, while continuing to outpace the amount of reserves that other N.C. and U.S. municipalities had on hand during that timeframe, according to Davenport.
If the council were willing to “take the reserves down to 40 percent” of city’s budget, that would free up about $3.3 million in potential future capital funding, the consultant pointed out.
A likely scenario for funding the construction of a fire substation and buying a new fire truck would be installment debt, Cole said.
Graham mayor pro tem Ricky Hall asked the consultant whether “it would make it easier for us to sell to residents of Graham” if the fire substation were a $6 or $8 million project.
“I don’t know,” Cole responded. “The impact is about a half a penny’s worth of debt service.”
Councilman Bobby Chin pointed out, “It would help if we knew what the $8 million is buying – a two-bay or three-bay [substation].”
“It’s hard to nail that down, when nothing is designed, and we don’t know what construction prices are going to do within the next 12 months,” the city manager said.
Garner told the council, “A lot of it is going to be driven by costs at the time we go out to bid; we can’t go out to bid until it’s designed…The city has to pay for design up front and may never get reimbursed for it. That’s a distinction we all need to be on the same page [about].”
“The [Local Government Commission] doesn’t want you to borrow for design work; they want you borrowing when the project is ready to be constructed,” Cole said. “You’ve got to front some of that design [cost] to get to that point.”
Former Graham city council candidate Randy Phillips (whom councilman Jim Young defeated by 14 votes in the 2025 municipal election) attended Monday’s meeting and was invited to speak at the podium after making a comment from his seat in the audience. “You could design [the substation] however you wanted,” which he indicated could have a menu of possible options that could then be tailored to meet the final construction budget.
Dissent over $4.1 million estimated cost for Graham Regional Park design
Another “general fund” expenditure that Graham officials have identified as a priority calls for spending approximately $4.1 million to design a master plan, which the consultant said the city would have to fund upfront, for Graham Regional Park along North Jim Minor Road.
Mayor Chelsea Dickey floated the idea of deferring a portion of the estimated $4.1 million design cost by breaking it up into phases but got no traction from her fellow council members. She pointed out that Graham’s retired former recreation and parks director, Melody Wiggins, had designed a plan for the park years ago, adding that it didn’t make sense to pay twice for that work.
“It could be, [but we] would need to talk to the design firm,” Garner responded.
“Lowering the design cost instead of saying, ‘design the end product,’ I’ve found from my experience with the government, when you break it up, the cost never goes down,” Chin said. “What ends up happening is you start tweaking it, and what you thought you were going to save ends up costing you more.”
Council member Bonnie Whitaker agreed. “I worked in government contracting for years,” she said. “Costs don’t go down; they go up.”
At this point, Cole said, the council needs to decide whether it wants to do all of the projects outlined in the CIP and to make sure “the money’s in the budget to service that debt and continue the pay-go [annual capital] funding.”
“We want a consensus for staff so we know what to finalize and what to include for the upcoming budget,” Garner told the council earlier Monday afternoon.
Meanwhile, Davenport is also working with an engineering firm to develop a rate structure for service fees that the city charges for everything from building inspections to water/sewer connections, Garner said.
The council is currently scheduled to resume its discussion about funding the city’s capital improvement plan at 3:00 p.m. on Monday, February 23.
