NORTH

CAROLINA

COMPREHENSIVE

ANNUAL

FINANCIAL

REPORT

FOR THE FISCAL YEAR

ENDED JUNE 30, 1998

JAMES B. HUNT, JR.

GOVERNOR

EDWARD RENFROW

STATE CONTROLLER

Prepared by Statewide Accounting Division

Office of the State Controller

http:// www. state. nc. us/ OSC/

2 State of North Carolina

This report was prepared by the Statewide Accounting Division of the Office of the State Controller.

Don Waugh

ASSISTANT STATE CONTROLLER

dwaugh@ controller. osc. state. nc. us

Anne Godwin, CPA

Statewide Accounting Manager

agodwin@ controller. osc. state. nc. us

John Barfield, CPA

Financial Reporting Manager

jbarfiel@ controller. osc. state. nc. us

Robert Alford, CPA Melissa Lusk, CPA Cynthia Vincent

Tammy Aycock, CPA Laketha Miller, CPA Helen Vozzo, CPA

Carmen Dixon, CPA Clayton Murphy, CPA Jim White, CPA

John Eliadis Terri Noblin, CPA Pam White, CPA

Martha Hunt, CPA Melody Tart Amber Young

Danielle Lowden, CPA Teresa Tate

Special appreciation is given to the chief fiscal officers and the dedicated accounting personnel throughout the State.

Their efforts to contribute accurate and timely financial data for their agencies, universities, community colleges, and

institutions made this report possible.

State of North Carolina 3

JAMES B. HUNT, JR.

Governor of North Carolina

4 State of North Carolina

TABLE OF CONTENTS

Comprehensive Annual Financial Report

For the Fiscal Year Ended June 30, 1998

INTRODUCTORY SECTION

Letter of Transmittal.................................................................................................................... .......................... 8

Certificate of Achievement for Excellence in Financial Reporting......................................................................... 20

Organization of North Carolina State Government, including principal State officials.......................................... 22

FINANCIAL SECTION

REPORT OF INDEPENDENT AUDITOR

Report of Independent Auditor........................................................................................................................ ...... 26

GENERAL PURPOSE FINANCIAL STATEMENTS

Exhibit A- 1 All Fund Types, Account Groups, and Discretely Presented Component Units

— Combined Balance Sheet.......................................................................................................................... .. 30

Exhibit A- 2 All Governmental Fund Types and Expendable Trust Funds — Combined Statement of

Revenues, Expenditures and Changes in Fund Balances.................................................................................. 32

Exhibit A- 3 General Fund and Special Revenue Funds — Combined Statement of Revenues, Expenditures

and Changes in Unreserved Fund Balances — Budget and Actual ( Budgetary Basis — Non- GAAP)............ 33

Exhibit A- 4 All Proprietary Fund Types, Similar Trust Funds, and Discretely Presented Component Units

— Combined Statement of Revenues, Expenses and Changes in Fund Equity................................................ 34

Exhibit A- 5 All Proprietary Fund Types, Nonexpendable Trust Funds, and Discretely Presented Component Units —

Combined Statement of Cash Flows................................................................................................................. 36

Exhibit A- 6 Pension Trust Funds — Combining Statement of Plan Net Assets........................................................................ 40

Exhibit A- 7 Pension Trust Funds — Combining Statement of Changes in Plan Net Assets..................................................... 41

Exhibit A- 8 Investment Trust Fund — Statement of Net Assets............................................................................................... 42

Exhibit A- 9 Investment Trust Fund — Statement of Changes in Net Assets............................................................................. 43

Exhibit A- 10 Component Units — College and University Funds — Combined Statement of Changes in Fund Equity............. 44

Exhibit A- 11 Component Units — College and University Funds — Combined Statement of Current Funds Revenues,

Expenditures and Transfers...................................................................................................................... ........ 45

Notes to the Financial Statements..................................................................................................................... ..... 48

REQUIRED SUPPLEMENTARY INFORMATION

Year 2000 Issues......................................................................................................................... ........................... 108

Schedules of Funding Progress — All Pension Trust Funds................................................................................... 110

Schedule of Contributions from the Employers

and Other Contributing Entities — All Pension Trust Funds............................................................................ 111

COMBINING, INDIVIDUAL FUND AND ACCOUNT GROUP STATEMENTS AND SCHEDULES

SPECIAL REVENUE FUNDS 115

Exhibit B- 1 Combining Balance Sheet.......................................................................................................................... ............ 116

Exhibit B- 2 Combining Statement of Revenues, Expenditures and Changes in Fund Balances................................................. 118

Exhibit B- 3 Combining Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances —

Budget and Actual ( Budgetary Basis — Non- GAAP)...................................................................................... 120

State of North Carolina 5

Comprehensive Annual Financial Report

For the Fiscal Year Ended June 30, 1998

CAPITAL PROJECTS FUNDS 123

Exhibit C- 1 Combining Balance Sheet.......................................................................................................................... ............ 124

Exhibit C- 2 Combining Statement of Revenues, Expenditures and Changes in Fund Balances................................................. 125

ENTERPRISE FUNDS 127

Exhibit D- 1 Combining Balance Sheet.......................................................................................................................... ............ 128

Exhibit D- 2 Combining Statement of Revenues, Expenses and Changes in Fund Equity.......................................................... 129

Exhibit D- 3 Combining Statement of Cash Flows...................................................................................................................... 130

INTERNAL SERVICE FUNDS 133

Exhibit E- 1 Combining Balance Sheet.......................................................................................................................... ............ 134

Exhibit E- 2 Combining Statement of Revenues, Expenses and Changes in Fund Equity.......................................................... 136

Exhibit E- 3 Combining Statement of Cash Flows...................................................................................................................... 138

TRUST AND AGENCY FUNDS 142

Exhibit F- 1 Combining Balance Sheet— Trust and Agency Funds............................................................................................ 143

Expendable Trust Funds:

Exhibit F- 2 Combining Balance Sheet.......................................................................................................................... .... 144

Exhibit F- 3 Combining Statement of Revenues, Expenditures and Changes in Fund Balances......................................... 145

Nonexpendable Trust Funds:

Exhibit F- 4 Combining Balance Sheet.......................................................................................................................... .... 146

Exhibit F- 5 Combining Statement of Revenues, Expenses and Changes in Fund Balances............................................... 147

Exhibit F- 6 Combining Statement of Cash Flows.............................................................................................................. 148

Agency Funds:

Exhibit F- 7 Combining Statement of Changes in Assets and Liabilities..................................................................... 150

GENERAL FIXED ASSETS ACCOUNT GROUP 153

Exhibit G- 1 Schedule of General Fixed Assets by Function....................................................................................................... 154

Exhibit G- 2 Schedule of Changes in General Fixed Assets by Function.................................................................................... 155

GENERAL LONG- TERM OBLIGATIONS ACCOUNT GROUP 156

Exhibit H- 1 Statement of General Long- Term Obligations........................................................................................................ 157

Exhibit H- 2 Schedule of General Obligation Bonds Payable..................................................................................................... 158

COMPONENT UNITS FUNDS 162

Proprietary Funds:

Exhibit I- 1 Combining Balance Sheet.......................................................................................................................... ............ 164

Exhibit I- 2 Combining Statement of Revenues, Expenses and Changes in Fund Equity.......................................................... 168

Exhibit I- 3 Combining Statement of Cash Flows...................................................................................................................... 170

College and University Funds:

Exhibit I- 4 Combining Balance Sheet.......................................................................................................................... ............ 174

Exhibit I- 5 Combining Statement of Changes in Fund Equity.................................................................................................. 175

Exhibit I- 6 Combining Statement of Current Funds Revenues, Expenditures and Transfers.................................................... 176

6 State of North Carolina

TABLE OF CONTENTS ( continued)

Comprehensive Annual Financial Report

For the Fiscal Year Ended June 30, 1998

STATISTICAL SECTION

Table 1 Revenues by Source and Expenditures by Function — All Governmental Fund Types ( GAAP Basis)................. 178

Table 2 Schedule of Revenues by Source — General Fund ( GAAP Basis)......................................................................... 180

Table 3 General Obligation Bonds Debt Ratios................................................................................................................... 183

Table 4 Revenue Bond Coverage....................................................................................................................... ................. 184

Table 5 Statewide Assessed Property Values — Real Property, Tangible Personal Property

and Public Service Companies...................................................................................................................... ... 186

Table 6 Schedule of Bank and Savings and Loan Deposits of Financial Institutions Located in North Carolina................ 187

Table 7 Cash Receipts from Farming by Commodities........................................................................................................ 188

Table 8 Major Private Employers in North Carolina........................................................................................................... 189

Table 9 Schedule of Demographic Data........................................................................................................................... .. 190

Table 10 Ten Largest Non- Agricultural Industries by Number of Employees....................................................................... 192

Table 11 Required Supplementary Information — Claims

Development Information — Public School Insurance Fund............................................................................ 194

Table 12 Required Supplementary Information — Claims Development Information

Workers' Compensation Fund........................................................................................................................... 196

Table 13 Total Number of State Government Permanent Positions Funded in the State Budget by Agency........................ 197

Table 14 Schedule of Miscellaneous Statistics..................................................................................................................... 198

INTRODUCTORY

SECTION

3512 Bush Street l Raleigh, North Carolina 27609- 7509 l Telephone ( 919) 981- 5454

State Courier 56- 50- 10 · FAX ( 919) 981- 5560

An Equal Opportunity/ Affirmative Action/ Americans With Disabilities Employer

State of North Carolina

Office of the State Controller

James B. Hunt, Jr. Edward Renfrow

Governor State Controller

The Honorable James B. Hunt, Jr.

Governor of the State of North Carolina, and

Members of the North Carolina General Assembly

It is our pleasure to furnish you with the 1998 Comprehensive Annual Financial Report ( CAFR) of the State of North

Carolina in compliance with G. S. 143B- 426.39. This report has been prepared by the Office of the State Controller.

Responsibility for both the accuracy of the data and the completeness and fairness of the presentation, including all disclosures,

rests with the State government and this office. To the best of our knowledge and belief, the enclosed data are accurate in all

material respects and are reported in a manner designed to present fairly the financial position and results of operations of the

various funds and account groups of the State of North Carolina. We believe all disclosures necessary to enable you to gain an

understanding of the State's financial activities have been included.

For the convenience of users we have divided this comprehensive annual financial report into three major sections,

described as follows:

· The introductory section includes this transmittal letter and the State's organization chart, including a listing of principal

State officials.

· The financial section includes the general purpose financial statements ( combined statements, the notes, and the required

supplementary information), the combining and individual fund and account group financial statements, and schedules.

· The statistical section includes selected financial, non- financial and demographic information, much of which is

presented on a ten- year basis, as well as required supplementary information.

The State of North Carolina entity as reported in the CAFR includes all fund types and

account groups of the departments, agencies, boards, commissions and authorities governed and

legally controlled by the State's executive, legislative and judicial branches. In addition, the

reporting entity includes legally separate component units for which the State is financially

accountable. Most component units are presented discretely in the financial statements. Two

component units are blended into the financial statements because their activities are so

intertwined with the State that they are substantively part of the State. The State's discretely

presented component units are the University of North Carolina system, the State's community

colleges, and various proprietary organizations providing specific services to the public and

private sector. The criteria for inclusion in the reporting entity and its presentation are defined

by the Governmental Accounting Standards Board ( GASB) in its GASB Codification Section

2100. These criteria are described in Note 1 of the accompanying financial statements.

The State and its component units provide a broad range of services to its citizens,

including public education; higher education; health and human services; economic

development; environment and natural resources; public safety, corrections, and regulation;

transportation; agriculture; and general government services. The costs of these services are

reflected in detail and in summary in this report.

State Reporting

Entity and

Its Services

State of North Carolina 9

Major Initiatives

During fiscal year 1997- 98, the Governor, the General Assembly, and the departments and

agencies of State government worked to address key issues facing the citizens of North Carolina.

The State Board of Education developed the ABCs of Public Education in response to the

School- Based Management and Accountability Program ( Senate Bill 1139) enacted by the

General Assembly in June 1996. The ABCs focuses on strong accountability with an emphasis

on high educational standards; teaching the basics; and maximum local control. An

accountability model for elementary and middle schools was implemented in 1996- 97. The high

school accountability model was developed during 1996- 97, and was implemented for the first

time in 1997- 98. The ABCs Accountability Model for K- 8 ( elementary and middle school) and

the ABCs High School Accountability Model establish growth standards for each school in the

State. Schools that attain specified levels of growth are eligible for incentive awards or other

recognition. Schools where growth and performance fall below specified levels are designated as

low- performing.

The Clean Water Management Trust Fund approves grants across North Carolina. These

projects are empowering local communities to work proactively to protect and restore water

quality in the creeks and rivers of the State. The Clean Water Management Trust Fund is

fulfilling the vision of the North Carolina General Assembly. In response to public concerns

about water quality problems across the state, the Legislature established the Clean Water

Management Trust Fund in 1996 to assist in financing projects to protect or restore water quality

in the rivers, creeks, lakes, and estuaries of North Carolina.

On November 3, 1998, North Carolina voters approved $ 800 million of new debt to finance

grants and loans to local government units for water supply systems, wastewater collection

systems, wastewater treatment works, and water conservation and water reuse projects.

Effective January 1, 1999, the State will repeal the inheritance tax and levy an estate tax

equal to the Federal state death tax credit. The net affect of this legislation will be a decrease in

tax revenues of an estimated $ 310.2 million through fiscal year 2002- 03. Effective May 1, 1999,

the State will repeal the sales tax on food. This is estimated to cost the State $ 790.2 million

through fiscal year 2002- 03. The repeal of income tax ( result of Bailey Case, see Note 18) on

the pension income of retired government employees is estimated to cost the State $ 128.6 million

in fiscal year 1998- 99 and thereafter.

The Department of Health and Human Services works in local offices, schools and

hospitals, building a stronger North Carolina. Examples of the Department of Health and Human

Services at work include: social workers finding families for children who need foster care or

adoption; case workers helping people find their way to self- sufficiency; child support agents

tracking down deadbeat parents and making them take responsibility for their children and for

paying child support; rehabilitation specialists helping the disabled learn everyday skills so they

can live life to the fullest; counselors motivating troubled youth and helping them avoid a life of

crime; health professionals bringing services to families without access to health care in rural and

urban communities; advisors helping families understand their options for home- based and

community care for older relatives; public health nurses immunizing children to protect them

from disease; teachers educating children who are deaf or blind to prepare them for the working

world; licensing specialists overseeing the safety and proper management of child care centers,

emergency medical services, hospitals, nursing homes or other health facilities.

Education

Environment

Tax Relief

Social Programs

10 State of North Carolina

Throughout the State and nation, overall crime rates remain high. Younger offenders are

committing more serious crimes. The juvenile population of North Carolina is expected to grow

faster than the general population and additional efforts will be required to enhance prevention

and promote more effective punishment among our adolescent population. Additional emphasis

will be placed on the problem of youth access to drugs, alcohol and tobacco. Crime is on the

increase in rural areas as drug dealers expand their operations from cities to the country.

Prevention and enforcement programs involving more than one State agency can provide help to

local law officers in problem areas. The State is shifting its philosophy of public safety to a more

comprehensive, community- based approach and problem- oriented crime prevention. The

demand from both the public and the private sectors for relevant, accurate and timely criminal

justice information will continue to grow. Through initiatives like the Criminal Justice

Information Network ( CJIN), the State has an opportunity to use technology to maximize

existing resources.

On July 23, 1998, Governor Hunt signed the Economic Opportunity Act of 1998. The law

is designed to promote economic development throughout the State. It allows various credits and

tax reductions for certain recycling facilities and allows various sales tax and property tax

exemptions for air couriers. The new Economic Opportunity Act also provides for the

designation of economically distressed areas located within municipalities as State Development

Zones. It further authorizes enhanced incentives for businesses that locate in a development zone.

In addition, the Industrial Development Fund has been enhanced to provide additional funds or

to expand the availability of funds that can be used for equipment, capital improvements and

utility distribution lines. The Fund also provides financial assistance to local government units

of the most economically distressed counties in the State. To encourage the development of air

courier hubs in North Carolina, the bill provides a reduction in the state's sales tax and property

tax for interstate air couriers. Beginning with the 2001 property tax year, the bill provides a

property tax exemption for aircraft owned by an air courier and apportioned for property tax

purposes to the courier’s hub in North Carolina.

On November 3, 1998, the North Carolina voters approved $ 200 million of new debt to

finance grants, loans, or other financing to public or private entities for construction of natural

gas facilities.

The Year 2000 issue is the result of shortcomings in many electronic data processing

systems and other equipment that make operations beyond the year 1999 troublesome. For many

years, programmers eliminated the first two digits from a year when writing programs.

Unfortunately, many programs ( if not corrected) will not be able to distinguish between the Year

2000 and the year 1900. This may cause the programs to process data inaccurately or to stop

processing data altogether. All information systems in North Carolina that use dates to generate

data will be affected by the new millennium: for example, kindergarten registration and blood

supply could be affected. In addition, non- information systems such as forms need to be

evaluated because they provide input to software applications. Mail processing equipment may

need to be modified to handle the new millennium. Other areas such as elevators, security

systems, and vaults will be affected by the Year 2000.

In early 1997, the Year 2000 Project Team ( including a statewide Steering Committee and

agency coordinators) was formed to manage the Year 2000 project from a statewide perspective.

The Year 2000 Project Team is responsible for prioritizing systems statewide, developing and

maintaining statewide conversion schedules, analyzing third- party product compliance,

maintaining a statewide Year 2000 repository, defining the overall conversion approach and

milestones, reporting the status of statewide conversion projects, providing statewide

communications and coordination, reporting the status of statewide Year 2000 funding and use,

reporting the status of statewide quality assurance, developing and maintaining a statewide risk

Crime

Economic

Development

Year 2000

State of North Carolina 11

management plan, coordinating the Year 2000 budget process, maintaining an evolving cost

estimate, and analyzing the automated tool offerings.

Economic Condition and Outlook

For the seventh straight year, both the national and North Carolina economies grew in 1998. At

the national level, Gross Domestic Product, the broadest measure of economic activity, grew an

estimated 3.2% during the year. Over three million jobs were added, and the national

unemployment rate fell to a twenty- eight year low of 4.5%. The pace of economic activity in

North Carolina exceeded that for the nation. Gross State Product, a measure of economic output

in the State, rose by over 5% in 1998. The State’s job market also improved, with over 40,000

net new jobs added to the labor force. The State’s unemployment rate fell to 3.5%, and in the

State’s metropolitan areas, unemployment dropped to under 2.5%.

Economic growth in North Carolina was widespread across most economic sectors. One

exception was the textile and apparel sector, where 11,000 jobs were cut in 1998. Inflation and

interest rates were helpful to the economy in 1998. As the year ended, the annual inflation rate at

the retail level was running under 2%, less than 1997’ s rate. Both long and short- term interest

rates also fell over one percentage point during the year. The improved interest rate situation

was helped by a turnaround in federal fiscal affairs. For the first time in twenty- nine years, the

unified federal budget ran a surplus. Growth in federal revenues ( over 7% annually) exceeding

growth in federal spending ( 3% annually) was the major reason for the surplus. The surplus

reduced the need for borrowing by the federal government and reduced the pressure on interest

rates.

Despite this rosy economic news, clouds formed over the economy in 1998. Financial problems

in several foreign countries, including Japan, contributed to sharp declines in the U. S. stock

market. Thus, as 1998 came to a close, more and more decision- makers were questioning

whether the long economic expansion was about to be overtaken by a recession. There are two

major issues facing today’s economy. One is the financial and economic decline in several

foreign countries, including Japan, Russia, South Korea, Indonesia, and Brazil. These countries

are in recession and their stock markets have tumbled. The concern is that these economic

problems will spread to the United States and North Carolina.

Although the decline of foreign economies can adversely affect the U. S. through reduced export

sales and failed investments, these impacts can be overstated. U. S. exports to the troubled

foreign economies account for less than 3% of total U. S. income, and U. S. bank investments in

the same countries are also less than 3% of total bank assets. These percentages are even smaller

for North Carolina. Therefore, it is unlikely that the current foreign economic troubles will send

the United States and North Carolina economies into tailspins. The other major economic issue

is the prospect for faster rising labor costs. Due to the tight labor market, labor costs have been

rising at faster rates for several years. For example, labor costs rose an estimated 3.5% in 1998,

up from 3.1% in 1997 and 2.8% in 1996. Thus far, improved labor productivity has offset the

additional labor costs. But many economists think this fortunate circumstance will not continue.

If businesses are faced with higher labor costs and are not compensated by improved labor

productivity, then three outcomes are possible. Business can pass on the higher costs in the form

of higher prices, thereby generating higher general inflation. Or, business can reduce labor costs

by dismissing workers. The third possibility is that businesses can absorb the higher labor costs

and reduce profits. All three possibilities are not good for the economy. Each would cause the

economy to grow at a slower rate. The outlook is that the economy will indeed grow more

slowly in 1999. Nationally, Gross Domestic Product will grow 2.5%, and no net new jobs will

be added to the national payrolls. In North Carolina, Gross State Product will increase 3.5%, and

job growth will be 1.5 %, down from 1998’ s 2% growth rate.

Condition

Outlook

12 State of North Carolina

As the economy slows in 1999, businesses making durable goods, like manufacturing and

construction, will be the most adversely affected. For example, job growth in North Carolina’s

manufacturing sector is expected to be only 0.6% in 1999. The real ( inflation- adjusted) value of

residential construction in the State rose 14% in 1998, but is forecasted to rise only 5.5% in

1999. Pushed by faster climbing labor costs, the inflation rate is projected to rise to between 2%

and 2.5% in 1999, up from 1998’ s rate of 1.6%. Interest rates will either change little or edge up

slightly.

In conclusion, an economic slowdown is forecasted for the nation and for North Carolina in

1999. An economic slowdown is not a recession. A recession means the economy actually

shrinks; a slowdown means the economy continues to grow, albeit at a slower pace. North

Carolina’s economy will move forward in 1999, but at a walk, not a trot!

— Economic analysis prepared by Dr. Michael L. Walden, Professor

North Carolina State University

November 2, 1998

Financial Information

Management of the government is responsible for establishing and maintaining an internal

control structure designed to ensure that the assets of the State are protected from loss, theft or

misuse and to ensure that adequate accounting data are compiled to allow for the preparation of

financial statements in conformity with generally accepted accounting principles. The internal

control structure is designed to provide reasonable, but not absolute, assurance that these

objectives are met. The concept of reasonable assurance recognizes that: ( 1) the cost of a

control should not exceed the benefits likely to be derived, and ( 2) the valuation of costs and

benefits requires estimates and judgments by management.

As a recipient of federal financial assistance, the State also is responsible for ensuring that

an adequate internal control structure is in place to ensure compliance with applicable laws and

regulations related to those programs. This internal control structure is subject to periodic

evaluation by management, internal audit staff, and independent auditors of the government.

In addition, the State maintains budgetary controls. The objective of these budgetary

controls is to ensure compliance with legal provisions embodied in the annual appropriated

budget approved by the General Assembly. Activities of the General Fund and most

departmental special revenue funds are included in the annual appropriated budget. The State

Highway Fund and the Highway Trust Fund, the State's major special revenue funds, are

primarily budgeted on a multi- year basis. Capital projects are funded and planned in accordance

with the time it will take to complete the project. The level of budgetary control ( that is, the

level at which expenditures cannot legally exceed the appropriated amount) is exercised at both

the departmental and university level by way of quarterly allotments, with allotment control

exercised by the State Controller, and on the program line- item levels requiring certain approvals

by the Director of the Budget. Legislative authorization of departmental expenditures appears in

the State Appropriation Bill. This " Certified Budget" is the legal expenditure authority;

however, executive changes to the legal budget may be approved by the Office of State Budget

and Management ( OSBM). This results in the " Final Budget" presented in the financial

statements.

Although the State budgets and manages its financial affairs on the cash basis of

accounting, G. S. 143- 20.1 requires the Office of the State Controller to prepare a comprehensive

annual financial report ( CAFR) in accordance with generally accepted accounting principles

( GAAP). Furthermore, the Governmental Accounting Standards Board and the nation's financial

community have encouraged states to present, in their annual reports, financial statements of the

Internal

Control

Budgetary

Control

GAAP

Accounting

State of North Carolina 13

governmental funds that are prepared on the modified accrual basis of accounting, following

generally accepted accounting principles. Under this basis, which more adequately serves the

financial community's analytical and other needs, revenues are recognized when they become

both measurable and available to finance operations of the fiscal year, or to liquidate liabilities

existing at fiscal year- end. Generally, expenditures are recognized when a liability is incurred.

Except for exhibits and notes clearly labeled otherwise, this CAFR has been prepared in

accordance with GAAP.

Results of Operations

General Governmental Funds

Revenues and other financing sources for general governmental functions ( General Fund,

special revenue funds, and capital projects funds) amounted to $ 23.4 billion for the fiscal year

ended June 30, 1998, using the modified accrual basis of accounting. The major categories of

revenues and other financing sources are shown in the following table. Amounts are expressed in

millions.

Percent

of

Amount Total

Revenues:

Taxes..................................................................... $ 13,288 56.8%

Federal funds.......................................................... 5,983 25.6%

Local funds............................................................. 463 2.0%

Investment earnings................................................. 576 2.5%

Fees, licenses and fines.......................................... 826 3.5%

Other..................................................................... 326 1.4%

Total revenues........................................................... 21,462 91.8%

Other Financing Sources:

Operating transfers in and other sources..................... 1,232 5.3%

Proceeds from bond sale........................................... 700 2.9%

Total other financing sources...................................... 1,932 8.2%

Total Revenues and Other Financing Sources........ $ 23,394 100.0%

Tax Revenues. Tax revenues increased by $ 1.1 billion in 1998, reflecting a continuing

favorable economic climate in North Carolina. Income tax collections increased by $ 800.2

million in 1998 to $ 7.1 billion, a 12.7% increase over 1997. Sales tax collections grew by $ 138

million in 1998, a 4.4% increase over 1997. Highway taxes were $ 1.477 billion in 1998, $ 89.9

million more than in 1997.

Federal Funds. Federal funds revenues grew by $ 125 million in 1998, up by 2.1% over 1997.

Increases in Federal revenues are due to increased Federal program expenditures for which the

State is reimbursed.

Revenues

and Other

Financing

Sources

14 State of North Carolina

Investment Earnings. Investment earnings reflect an increase of $ 121 million in 1998. Several

factors contributed to this increase. In fiscal year 1998, the State implemented GASB Statement

No. 31, Accounting and Financial Reporting for Certain Investments and for External

Investment Pools, which resulted in fair value accounting for investments, and an investment

earnings increase of $ 7 million. Securities lending activity resulted in an increase of $ 40 million,

while interest earnings on bond proceeds accounted for $ 51 million of the investment earnings

increase. General growth in investment earnings accounts for the remaining increase of $ 23

million. The growth in 1998 can be directly attributed to the favorable investment climate

through June 30, 1998, and the investment management strategies of the State Treasurer.

Expenditures and other financing uses for general governmental purposes totaled $ 22.9

billion in 1998, using the modified accrual basis of accounting. The major categories of

expenditures and other financing uses, by function, are shown in the following table. Amounts

are expressed in millions.

Percent

of

Expenditures: Amount Total

Current:

General government................................................. $ 1,116 4.9%

Education............................................................... 5,416 23.7%

Health and human services...................................... 7,300 31.9%

Economic development............................................ 322 1.4%

Environment and natural resources........................... 333 1.5%

Public safety, corrections, and regulation.................. 1,579 6.9%

Transportation......................................................... 2,384 10.4%

Agriculture.............................................................. 69 0.3%

Retiree tax judgments.............................................. 400 1.7%

Capital outlay............................................................ 204 0.9%

Debt service.............................................................. 170 0.7%

Total expenditures..................................................... 19,293 84.3%

Other Financing Uses:

Operating transfers out.............................................. 1,218 5.3%

Operating transfers to component units....................... 2,374 10.4%

Total other financing uses.......................................... 3,592 15.7%

Total Expenditures and Other Financing Uses........ $ 22,885 100.0%

Significant changes in expenditures. The trend of increases in expenditures, an increase of

$ 1.6 billion for 1998, was directly related to the continued emphasis on education, health and

human services, and transportation. A large portion of the increase in governmental

expenditures, retiree tax judgments, is the result of the North Carolina Supreme Court ruling in

the Bailey case ( Note 18). On June 9, 1998, representatives of the State and the various retirees

involved in the Bailey and Patton cases announced a settlement, which was later approved by the

court, in the amount of $ 799 million. Of this amount, $ 400 million will be disbursed in refunds

in fiscal year 1998- 99, and $ 399 million will be paid in refunds during fiscal year 1999- 2000.

Educational expenditures increased by $ 640 million largely because of growth in dollars spent on

State administered programs and the increasing costs associated with providing public education.

Health and human services increased by $ 477 million in 1998 ($ 143 million when adjusted for

reorganization), with this increase largely attributable to the reorganization of the State’s public

health resources. An offsetting decrease in expenditures of $ 335 million occurred in

expenditures for environment and natural resources. There was a decrease in spending for 1998

for public safety, corrections, and regulation of $ 35 million. This decrease compared to 1997 is

the result of decreased emergency assistance payments ( hurricane relief) through June 30, 1998.

Transportation expenditures increased in fiscal year 1998 by $ 179 million. Debt service will

continue to climb, a $ 39 million increase from 1997 to 1998, as the State continues to issue

general obligation debt to fund capital projects for education, highways and utilities.

Additional information, in greater detail and for the past ten years, may be examined in the

statistical section.

Expenditures

and Other

Financing

Uses

State of North Carolina 15

General Fund

The fund balance of the General Fund declined by $ 39 million in 1998. Although the

growth in tax and other revenues once again exceeded expectations this year, which directly

contributed to the strong condition of the General Fund at year end, expenditures and transfers

out exceeded revenues and transfers in by $ 33.8 million. At June 30, 1998 the fund balance of

the General Fund on the modified accrual basis was $ 1.665 billion, in comparison to a $ 1.704

billion balance at the end of 1997.

The following chart illustrates the fund balances on the modified accrual ( GAAP) basis of

the General Fund for the last ten fiscal years.

FUND BALANCES OF THE GENERAL FUND ( GAAP basis)

( 300)

( 100)

100

300

500

700

900

1,100

1,300

1,500

1,700

1,900

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Reserved

Unreserved

Millions $

Fiscal Years 1994 to 1998 reflect implementation of GASB Statement No. 22, dealing with accrual of revenues.

During the 1991 session, the General Assembly established a Savings Reserve Account as a

restricted reserved portion of fund balance in the General Fund, becoming effective for the year

ended June 30, 1992. Under this legislation, one- fourth of any unreserved credit balance

( defined by the General Statutes as "... the credit balance, as determined on a cash basis, not

already reserved to the Savings Reserve Account.") remaining in the General Fund at the end of

each fiscal year will be transferred to the Savings Reserve until the account contains funds equal

to 5% of the amount appropriated to the General Fund operating budget for the preceding year.

On June 30, 1998, $ 21.6 million was transferred into the Savings Reserve Account, bringing the

total reserve to the 5% cap of $ 522.5 million.

Summary of Savings Reserve Account ( in millions) : Increase/

Date Description ( Decrease) Balance

Reserve - Budget Stabilization

( Rainy Day Fund) ........................................................... $ 0.4 $ 0.4

June 1992 Statutory Reservation - G. S. 143- 15.3 .............................. 41.2 41.6

June 1993 Statutory Reservation - G. S. 143- 15.3 .............................. 134.3 175.9

July 1993 Withdrawal from Reserve................................................... ( 121.0) 54.9

June 1994 Statutory Reservation - G. S. 143- 15.3 .............................. 155.7 210.6

January 1995 Budget Stabilization Appropriation..................................... 66.7 277.3

June 1995 Statutory Reservation - G. S. 143- 15.3 .............................. 146.3 423.6

June 1996 Statutory Reservation - G. S. 143- 15.3 .............................. 77.3 500.9

June 1997 Statutory Reservation - G. S. 143- 15.3 .............................. — 500.9

June 1998 Statutory Reservation - G. S. 143- 15.3 .............................. 21.6 $ 522.5

The 1993 General Assembly, in an effort to provide for the State's capital needs,

established the Repairs and Renovations Reserve Account ( G. S. 143- 15.3A). Repairs and

Renovations Reserve Account is defined to consist of 3.0% of the replacement value of all State

buildings supported by the General Fund, at the end of each fiscal year. The funds in the Repairs

GAAP

Fund

Balance

Savings

Reserve

Repairs and

Renovations

Reserve

16 State of North Carolina

and Renovations Reserve Account are to be used only for the repair and renovation of State

buildings and related infrastructure that are supported by the General Fund. For fiscal year 1997-

98, the General Assembly placed $ 145 million into this reserve. The balance in the Repairs and

Renovations Reserve at June 30, 1998 was $ 174.2 million.

For fiscal year 1995- 96, the General Assembly established the Clean Water Management

Trust Fund to finance projects to clean up or prevent surface water pollution ( G. S. 113- 145.3).

The amount reserved in the General Fund each year is defined as 6.5% of any unreserved credit

balance remaining in the General Fund at the end of the fiscal year or $ 30 million, whichever is

greater. For the 1997- 98 fiscal year, $ 47.4 million was placed in this reserve.

For fiscal year 1996- 97, the General Assembly established the Railroad Reserve Account.

In order to help promote trade, industry, and transportation within the State of North Carolina

and to advance the economic interests of the State and its citizens, the General Assembly

determined it to be advantageous for the State to acquire the outstanding shares of the North

Carolina Railroad Company not held by the State. At June 30, 1997, the amount of $ 61 million

of the unreserved General Fund balance was placed in the Railroad Reserve Account. On April

1, 1998 the General Fund loaned the North Carolina Railroad Company $ 61 million for the

retirement of non- State owned common stock shares of the Railroad. The $ 61 million will

remain in reserve until the related debt is satisfied. At June 30, 1998, the balance in the reserve

was $ 61 million.

For the fiscal year 1997- 98, the General Assembly reserved $ 55 million of unexpended

General Fund appropriations to be used by the Department of Public Instruction ( DPI) to fund

public school employee performance bonuses, longevity payments, school bus purchases, and the

purchase of additional school technology.

Disproportionate share payments are Medicaid payments made to hospitals which serve a

disproportionate share of indigent patients. This account was established to reserve for future

appropriation any excess collection of disproportionate share revenues above those budgeted as

departmental receipts or non- tax revenues. There was $ 35.4 million in this reserve at June 30,

1998.

For the fiscal year 1997- 98, the General Assembly established the Work First Reserve

Fund. At the end of each fiscal year, the State Controller shall reserve State funds in an amount

equaling one- fourth of any Work First Program funds from General Fund appropriations

remaining unexpended at the end of the fiscal year, up to a maximum balance in the account of

$ 50 million. The General Assembly may appropriate additional funds into this reserve. The

balance in this reserve at June 30, 1998 was $ 19.5 million.

Other Funds

Operating revenues and operating expenses for the State's enterprise funds were $ 23.7

million and $ 26.8 million, respectively, in 1998. Operating loss was $ 3.1 million.

Combined operating results for the State's internal service funds exhibited continued

strength in 1998. Operating revenues and expenses for these cost- reimbursement funds totaled

$ 1.004 billion and $ 998 million, respectively, in 1998. Principal internal service fund operations

include the State Health Plan, the Disability Income Plan, the Death Benefit Plan, Prison

Clean Water

Management

Trust Fund

North

Carolina

Railroad

Acquisition

DPI

Allocation

Disproportionate

Share

Work

First

Proprietary

Funds

State of North Carolina 17

Enterprises, the State Property Fire Insurance, Motor Fleet Management, Centralized Computing

Services, and State Telecommunications.

The operations of the Teachers' and State Employees' Retirement System continued its

steady growth in 1998. The system's contributions increased by .6%. The system experienced a

10.4% increase in benefit payments to participants. For the fiscal year ended June 30, 1998, the

State continued to fund the actuarial required contribution. The State also participates in the

Consolidated Judicial Retirement System, the Legislative Retirement System, the Firemen's and

Rescue Squad Workers' Pension Fund and the North Carolina National Guard Pension Fund.

The Local Governmental Employees' Retirement System is administered by the State but the

State is not a participant. Each of these systems continued to show a positive trend in funding.

At June 30, 1998, the State had a number of debt issues outstanding. These issues included

$ 2.1 billion in general obligation bonds, $ 1.3 billion in revenue bonds in the component unit

proprietary funds and $ 839 million in revenue bonds in the university funds. North Carolina

continues to have AAA bond ratings issued by Standard and Poor's Corporation and Moody's

Investors Service, the highest ratings attainable. These favorable ratings have enabled the State

to sell its bonds at interest rates considerably below the Bond Buyer's Index, thereby providing

substantial savings to North Carolina taxpayers. North Carolina is one of only a very small

number of states currently having the AAA ratings. In addition, approximately 25 percent of all

AAA ratings for state and local governments nationwide are located in North Carolina.

It is the policy of the State that all agencies, institutions, departments, bureaus, boards,

commissions and officers of the State shall devise techniques and procedures for the receipt,

deposit and disbursement of monies coming into their control and custody which are designed to

maximize interest- bearing investment of cash, and to minimize idle and nonproductive cash

balances. The State Controller, with the advice and assistance of the State Treasurer, the State

Budget Officer, and the State Auditor, develops, implements, and amends the Statewide Cash

Management Policy. All cash deposited with the State Treasurer by State entities is managed in

pooled investment accounts to maximize interest earnings. During fiscal year 1998,

uncommitted State funds were invested in short- term and medium- term U. S. Government notes

and bonds, as well as other deposits, which had a composite average yield of 6.394%.

The State has a limited risk management program for fire and other property losses. As

part of this comprehensive plan, resources are being accumulated in an internal service fund to

meet potential losses. See Note 12 of the Notes to the Financial Statements for a full description

of the State's risk management program.

Other Information

In compliance with State statute, an annual financial audit of the State entity is completed

each year by the North Carolina Office of the State Auditor. The Auditor's examination was

conducted in accordance with generally accepted government auditing standards and his opinion

has been included in this report. In addition, the State coordinates the " Single Audit" effort of all

federal funds through the State Auditor.

The Government Finance Officers Association of the United States and Canada ( GFOA)

awarded a Certificate of Achievement for Excellence in Financial Reporting to the State of North

Carolina for its comprehensive annual financial report ( CAFR) for the fiscal year ended June 30,

1997. The Certificate of Achievement is a prestigious national award recognizing conformance

with the highest standards for preparation of state and local government financial reports.

Pension

Trust

Funds

Debt

Administration

Cash

Management

Risk

Management

Independent

Audit

Certificate of

Achievement

18 State of North Carolina

In order to be awarded a Certificate of Achievement, a government unit must publish an

easily readable and efficiently organized comprehensive annual financial report, whose contents

conform to program standards. The CAFR must satisfy both generally accepted accounting

principles and applicable legal requirements.

A Certificate of Achievement is valid for a period of one year only. We believe our current

report continues to conform to the Certificate of Achievement program requirements, and we are

submitting it to GFOA.

In conclusion, we believe this report provides useful data to all parties using it in evaluating

the financial activity of the State of North Carolina. We in the Office of the State Controller

express our appreciation to the financial officers throughout State government and to the Office

of the State Auditor for their dedicated efforts in assisting us in the preparation of this report.

Any questions concerning the information contained in this Comprehensive Annual Financial

Report should be directed to the Office of the State Controller at ( 919) 981- 5454.

Respectfully submitted,

Edward Renfrow

State Controller

December 4, 1998

Acknowledgments

State of North Carolina 19

General Governmental

General, Special Revenue, and Capital Projects Funds

For the Fiscal Year Ended June 30, 1998

Revenues and Other Financing Sources

$ 23.394 billion

Taxes

$ 13,288 million

56%

Fees, licenses,

fines

$ 826 million

4%

Federal funds

$ 5,983 million

26%

Operating transfers in

$ 1,233 million

5%

Other

$ 2,064 million

9%

Expenditures and Other Financing Uses

$ 22.885 billion

Operating transfers out

$ 1,218 million

5%

Operating transfers to

component units

$ 2,374 million

10%

Other

$ 1,165 million

5%

Education

$ 5,416 million

24%

Public safety, corrections,

regulation $ 1,579 million

7%

Health and

human services

$ 7,300 million

32%

General

government

$ 1,116 million

5%

ENR

$ 333 million

2%

Transportation

$ 2,384 million

10%

CERTIFICATE OF ACHIEVEMENT

22 State of North Carolina

ORGANIZATION OF NORTH CAROLINA STATE GOVERNMENT

INCLUDING PRINCIPAL STATE OFFICIALS

EXECUTIVE BRANCH

Council of State

Governor

James B. Hunt, Jr.

Lieutenant Governor

Dennis A. Wicker

Secretary of State

Elaine F. Marshall

State Auditor

Ralph Campbell, Jr.

State Treasurer

Harlan E. Boyles

Superintendent of

Public Instruction

Dr. Michael E. Ward

Attorney General

Michael F. Easley

Commissioner of

Agriculture

James A. Graham

Commissioner of

Labor

Harry E. Payne, Jr.

Commissioner of

Insurance

James E. Long

Cabinet Secretaries — Appointed by the Governor

Administration

Katie G. Dorsett

Correction

Mack Jarvis

Crime Control and

Public Safety

Richard H. Moore

Cultural Resources

Betty Ray McCain

Commerce

Rick Carlisle

Environment

& Natural Resources

Wayne McDevitt

Health and Human

Services

Dr. H. David Bruton

Revenue

Muriel K. Offerman

Transportation

E. Norris Tolson

Appointed by Governor, confirmed by Legislature

Office of the

State Controller

Edward Renfrow

State Controller

State Board

of Education

Phillip J. Kirk, Jr.

Chairman

H. Martin Lancaster

President

Molly C. Broad

President

Appointed by University

Board of Governors

Appointed by State Board

of Community Colleges

State of North Carolina 23

LEGISLATIVE BRANCH JUDICIAL BRANCH

Component Units

State of North Carolina Web Page

http:// www. state. nc. us

North Carolina

Supreme Court

Chief Justice

Burley B. Mitchell, Jr.

Associate Justices

Henry E. Frye

I. Beverly Lake, Jr.

Robert F. Orr

Sarah Parker

John Webb

Willis P. Whichard

Administrative

Office of the Courts

Dallas A. Cameron, Jr.

Director

University of North Carolina System Community

Colleges

Proprietary

Funds

General Assembly

Senate

House of

Representatives

Speaker

Harold J. Brubaker

Speaker Pro Tempore

Carolyn B. Russell

Majority Leader

N. Leo Daughtry

Minority Leader

James B. Black

President

Lieutenant Governor

President Pro Tempore

Marc Basnight

Deputy Pres. Pro Tempore

R. C. Soles, Jr.

Majority Leader

J. Richard Conder

Minority Leader

Betsy L. Cochrane

24 State of North Carolina

THIS PAGE INTENTIONALLY LEFT BLANK.

FINANCIAL

SECTION

26 State of North Carolina

State of North Carolina 27

28 State of North Carolina

THIS PAGE INTENTIONALLY LEFT BLANK.

GENERAL

PURPOSE

FINANCIAL

STATEMENTS

30 State of North Carolina

ALL FUND TYPES, ACCOUNT GROUPS, AND DISCRETELY PRESENTED COMPONENT UNITS

COMBINED BALANCE SHEET

June 30, 1998

( Dollars in Thousands)

Proprietary

Governmental Fund Types Fund Types

Special Capital Internal

General Revenue Projects Enterprise Service

ASSETS AND OTHER DEBITS

Cash and cash equivalents ( Note 4)........................... $ 2,504,859 $ 2,409,353 $ 282,895 $ 29,123 $ 420,441

Investments ( Note 4).................................................. 3 ,019,561 1 ,044,896 — 41,632 6 71,024

Deposit with Federal government ( Note 4).................. — — — — —

Receivables, net:

Taxes receivable....................................................... 6 75,428 1 03,133 — — —

Accounts receivable.................................................. 1 01,960 1 1,385 2 03 1,622 1 9,551

Intergovernmental receivables................................... 4 40,646 9 2,766 1 76 — 5 47

Interest receivable..................................................... 2 1,657 8 ,800 — 116 1 ,942

Premiums receivable................................................. — — — 812 4 97

Contributions receivable............................................ 1 4,519 — — — 5 ,044

Other receivables...................................................... — 6 ,962 — — —

Due from other funds ( Note 8)..................................... 1 2,045 3 5,865 3 ,250 — 2 3,556

Due from component units ( Note 8)............................. 2 0,179 — — — 1 ,266

Due from primary government ( Note 8)....................... — — — — —

Advances to component units ( Note 8)........................ 9 4,054 — — — —

Notes receivable.......................................................... 4 97 1 12,371 — — —

Inventories................................................................... 4 8,997 8 1,887 — 386 1 3,784

Food stamps............................................................... 9 3,695 — — — —

Prepaid items.............................................................. 6 7 1 ,290 — 1,287 4 82

Fixed assets ( Note 5)................................................. — — — 23,225 1 65,678

Sureties....................................................................... — 3 2,802 — — —

Amount available in other funds.................................. — — — — —

Amount to be provided for retirement

of general long- term obligations.............................. — — — — —

Total Assets and Other Debits..................................... $ 7,048,164 $ 3,941,510 $ 286,524 $ 98,203 $ 1,323,812

LIABILITIES, FUND EQUITY AND OTHER CREDITS

Liabilities:

Accounts payable and accrued liabilities..................... $ 4 33,120 $ 2 33,036 $ 1 9,949 $ 267 $ 1 3,603

Tax refunds payable.................................................... 7 08,708 — — — —

Obligations under securities lending............................ 2 ,958,149 1 ,022,734 — 17,443 2 99,771

Retiree tax judgements payable ( Note 7)..................... 4 00,000 — — — —

Intangibles tax judgements payable ( Note 7)............... — — — — —

Due to other funds ( Note 8)......................................... 2 3,939 4 1,758 7 0 9 2 ,900

Due to component units ( Note 8)................................. 4 ,278 4 6,984 2 21 — —

Due to primary government ( Note 8)........................... — — — — —

Advance from primary government ( Note 8)................ — — — — —

Obligations under reverse repurchase

agreements............................................................. — — — — —

Contracts payable....................................................... — — — — —

Notes payable ( Note 7)................................................ — — — 130 —

Claims and benefits payable....................................... 4 44,171 5 5 — 9,024 3 46,622

Capital leases payable ( Note 6).................................. — — — — —

Bonds payable ( Note 7).............................................. — — — — —

Interest payable........................................................... — — — — —

Deposits payable......................................................... — 9 3,837 7 ,700 — 6 3

Distributions payable................................................... — — — — —

Accrued vacation leave............................................... — — — 300 2 ,876

Deferred revenue......................................................... 4 11,149 1 8,533 — 2,318 3 ,544

Total Liabilities............................................................ 5 ,383,514 1 ,456,937 2 7,940 29,491 6 69,379

Fund Equity and Other Credits:

Contributed capital...................................................... — — — 36,365 5 8,850

Retained earnings....................................................... — — — 32,347 5 95,583

Investment in fixed assets........................................... — — — — —

Fund balances:

Reserved/ restricted ( Note 15).................................. 1 ,219,621 9 40,304 8 8,871 — —

Unreserved/ unrestricted.......................................... 4 45,029 1 ,544,269 1 69,713 — —

Total Fund Equity and Other Credits........................... 1 ,664,650 2 ,484,573 2 58,584 68,712 6 54,433

Total Liabilities, Fund Equity

and Other Credits.................................................... $ 7,048,164 $ 3,941,510 $ 286,524 $ 98,203 $ 1,323,812

The accompanying Notes to the Financial Statements are an integral part of this statement.

State of North Carolina 31

Exhibit A- 1

Fiduciary TOTAL TOTAL

Fund Types Account Groups PRIMARY Component Units REPORTING

General General GOVERNMENT ENTITY

Trust and Fixed Long- Term ( Memorandum College and ( Memorandum

Agency Assets Obligations only) Proprietary University only)

$ 1 ,224,695 $ — $ — $ 6 ,871,366 $ 2 05,518 $ 1 ,551,580 $ 8,628,464

5 5,687,867 — — 6 0,464,980 7 62,590 2 ,561,331 63,788,901

1 ,285,741 — — 1 ,285,741 — — 1,285,741

2 03,260 — — 9 81,821 — — 981,821

1 5,155 — — 1 49,876 1 7,979 2 04,093 371,948

7 ,792 — — 5 41,927 8 ,135 1 18,841 668,903

8 ,147 — — 4 0,662 2 0,946 1 1,547 73,155

— — — 1 ,309 — — 1,309

1 27,847 — — 1 47,410 — — 147,410

— — — 6 ,962 — — 6,962

5 ,349 — — 8 0,065 — 6 6,637 146,702

— — — 2 1,445 — 1 ,753 23,198

— — — — 1 3,494 5 1,288 64,782

2 5,000 — — 1 19,054 — — 119,054

3 37,296 — — 4 50,164 1 ,300,877 8 4,127 1,835,168

1 ,433 — — 1 46,487 8 02 5 2,500 199,789

— — — 9 3,695 — — 93,695

— — — 3 ,126 5 ,552 7 ,744 16,422

— 3 ,178,549 — 3 ,367,452 1 88,374 5 ,772,790 9,328,616

5 08,872 — — 5 41,674 — — 541,674

— — 1 03 1 03 — — 1 03

— — 3 ,058,990 3 ,058,990 — — 3,058,990

$ 5 9,438,454 $ 3 ,178,549 $ 3 ,059,093 $ 7 8,374,309 $ 2 ,524,267 $ 10,484,231 $ 91,382,807

$ 5 38,041 $ — $ — $ 1 ,238,016 $ 2 8,037 $ 1 88,667 $ 1,454,720

— — — 7 08,708 — — 708,708

4 ,104,051 — — 8 ,402,148 1 70,406 7 26,748 9,299,302

— — 3 99,000 7 99,000 — — 799,000

— — 3 33,000 3 33,000 — — 333,000

1 1,389 — — 8 0,065 — 6 6,637 146,702

1 3,299 — — 6 4,782 1 13 1 ,640 66,535

— — — — 1 6,843 3 ,686 20,529

— — — — 5 8,054 — 58,054

— — — — — 1 61,152 161,152

— — — — 7 ,395 — 7,395

— — 4 ,166 4 ,296 9 2,022 4 3,520 139,838

1 63,592 — 7 ,401 9 70,865 1 6 3 9,014 1,009,895

— — 1 90 1 90 3 ,277 4 96 3,963

— — 2 ,123,944 2 ,123,944 1 ,328,636 8 38,993 4,291,573

— — — — 1 9,938 1 2,409 32,347

7 33,473 — — 8 35,073 6 2 3 96,447 1,231,582

1 ,454 — — 1 ,454 — — 1,454

— — 1 91,392 1 94,568 1 ,500 1 29,422 325,490

6 6,865 — — 5 02,409 7 ,903 2 5,962 536,274

5 ,632,164 — 3 ,059,093 1 6,258,518 1 ,734,202 2 ,634,793 20,627,513

— — — 9 5,215 2 03,496 — 298,711

— — — 6 27,930 5 86,569 — 1,214,499

— 3 ,178,549 — 3 ,178,549 — 4 ,977,606 8,156,155

5 2,164,871 — — 5 4,413,667 — 1 ,560,829 55,974,496

1 ,641,419 — — 3 ,800,430 — 1 ,311,003 5,111,433

5 3,806,290 3 ,178,549 — 6 2,115,791 7 90,065 7 ,849,438 70,755,294

$ 5 9,438,454 $ 3 ,178,549 $ 3 ,059,093 $ 7 8,374,309 $ 2 ,524,267 $ 10,484,231 $ 91,382,807

32 State of North Carolina

ALL GOVERNMENTAL FUND TYPES AND EXPENDABLE TRUST FUNDS

COMBINED STATEMENT OF REVENUES, EXPENDITURES AND

CHANGES IN FUND BALANCES

For the Fiscal Year Ended June 30, 1998 Exhibit A- 2

( Dollars in Thousands)

Fiduciary

Governmental Fund Types Fund Type TOTALS

Special Capital Expendable ( Memorandum

General Revenue Projects Trust only)

Revenues:

Taxes............................................................. $ 11,679,679 $ 1,607,930 $ — $ 285,772 $ 1 3,573,381

Federal funds................................................ 5,174,406 801,975 6 ,622 9,342 5 ,992,345

Local funds.................................................... 436,347 26,515 1 7 273 4 63,152

Investment earnings...................................... 447,669 128,232 — 409,444 9 85,345

Interest earnings on loans............................. — 5,676 — 6,640 1 2,316

Sales and services........................................ 67,533 16,037 5 17 29,199 1 13,286

Sale, rental, and lease of property................ 6,066 20,015 2 40 502 2 6,823

Fees, licenses, and fines............................... 244,674 581,817 — 8,871 8 35,362

Contributions, gifts, and grants...................... 13,206 29,194 1 8,789 193,520 2 54,709

Funds escheated........................................... — — — 18,866 1 8,866

Miscellaneous................................................ 137,269 11,426 9 9 413 1 49,207

Total revenues............................................... 18,206,849 3,228,817 2 6,284 962,842 2 2,424,792

Expenditures:

Current:

General government.................................. 1,079,048 36,715 — 12,686 1 ,128,449

Education.................................................. 5,017,690 398,796 — 19,287 5 ,435,773

Health and human services....................... 7,255,348 44,914 — 1,923 7 ,302,185

Economic development............................. 122,032 199,581 — — 3 21,613

Environment and

natural resources................................... 206,945 125,858 — 8,986 3 41,789

Public safety, corrections, and regulation.. 1,403,276 175,709 — 29,451 1 ,608,436

Transportation........................................... — 2,384,455 — — 2 ,384,455

Agriculture................................................. 68,289 284 — 4,901 7 3,474

Claims and benefits................................... — — — 473,353 4 73,353

Retiree tax judgements............................. 400,000 — — — 4 00,000

Capital outlay................................................. — — 2 03,605 — 2 03,605

Debt service:

Bond principal retirement.......................... 91,585 — — — 9 1,585

Bond interest............................................. 73,229 5,225 — — 7 8,454

Total expenditures......................................... 15,717,442 3,371,537 2 03,605 550,587 1 9,843,171

Excess revenues over ( under)

expenditures.............................................. 2,489,407 ( 142,720) ( 177,321) 412,255 2 ,581,621

Other Financing Sources ( Uses):

Operating transfers in.................................... 291,221 756,309 1 68,019 20,581 1 ,236,130

Operating transfers

from component units................................. 14,692 724 1 ,207 — 1 6,623

Operating transfers out.................................. ( 470,456) ( 745,267) ( 2,030) ( 15,739) ( 1,233,492)

Operating transfers

to component units..................................... ( 2,358,657) ( 15,190) ( 350) ( 13,299) ( 2,387,496)

Proceeds from bond sale.............................. — 700,000 — — 7 00,000

Total other financing sources ( uses)............. ( 2,523,200) 696,576 1 66,846 ( 8,457) ( 1,668,235)

Excess revenues and other sources over

( under) expenditures and other uses......... ( 33,793) 553,856 ( 10,475) 403,798 9 13,386

Fund balances — July 1 ( Note 16)................ 1,707,418 1,936,458 2 80,444 3,349,203 7 ,273,523

Restatements ( Note 16)................................ 384 ( 210) — ( 1) 1 73

Residual equity transfers in ( Note 17)........... 55 37 — — 9 2

Residual equity transfers out ( Note 17)......... ( 9,769) ( 9,943) ( 11,385) ( 151) ( 31,248)

Increase ( decrease) in reserve for

related assets............................................. 355 4,375 — 100 4 ,830

Fund balances — June 30............................ $ 1,664,650 $ 2,484,573 $ 2 58,584 $ 3,752,949 $ 8 ,160,756

The accompanying Notes to the Financial Statements are an integral part of this statement.

State of North Carolina 33

GENERAL FUND AND SPECIAL REVENUE FUNDS

COMBINED STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN

UNRESERVED FUND BALANCES — BUDGET AND ACTUAL ( BUDGETARY BASIS — NON- GAAP)

For the Fiscal Year Ended June 30, 1998 Exhibit A- 3

( Dollars in Thousands)

General Fund Special Revenue Funds

Variance- Variance-

Final Favorable Final Favorable

Budget Actual ( Unfavorable) Budget Actual ( Unfavorable)

Revenues:

Taxes:

Individual income....................................... $ 5,546,500 $ 6,028,870 $ 4 82,370 $ — $ — $ —

Corporate income...................................... 679,600 696,339 16,739 — — —

Sales and use............................................ 3,249,100 3,255,372 6,272 — — —

Franchise................................................... 409,900 407,257 ( 2,643) — — —

Insurance................................................... 269,700 283,763 14,063 — — —

Beverage.................................................... 152,700 153,724 1,024 — — —

Intangibles................................................. — 320 320 — — —

Other.......................................................... 253,800 266,802 13,002 — — —

Non- Tax:

Fees, licenses and fines............................. 116,800 112,790 ( 4,010) — — —

Investment income..................................... 237,400 248,131 10,731 — — —

Other.......................................................... 95,500 91,161 ( 4,339) — — —

Transfers in...................................................... 182,600 182,600 — — — —

Departmental:

Federal funds............................................. 5,301,525 4,817,261 ( 484,264) 293,907 2 27,940 ( 65,967)

Local funds................................................ 710,088 592,637 ( 117,451) 13,210 1 1,919 ( 1,291)

Inter- agency grants and allocations........... 34,354 4,516 ( 29,838) 23,782 1 7,669 ( 6,113)

Intra- governmental transactions................. 1,906,252 1,739,009 ( 167,243) 425,365 4 06,873 ( 18,492)

Sales and services..................................... 64,421 66,499 2,078 11,786 1 2,785 9 99

Sale, rental and lease of property.............. 4,425 4,321 ( 104) 2,161 3 ,659 1 ,498

Fees, licenses and fines............................. 101,748 102,310 562 89,919 9 7,187 7 ,268

Contributions, gifts and grants................... 42,357 32,423 ( 9,934) 1,527 1 ,469 ( 58)

Miscellaneous............................................ 73,517 52,972 ( 20,545) 14,924 1 0,883 ( 4,041)

Universities...................................................... 472,182 457,332 ( 14,850) 87,449 8 7,801 3 52

Total Revenues................................................ 19,904,469 19,596,409 ( 308,060) 964,030 8 78,185 ( 85,845)

Expenditures:

Current:

General government.................................. 552,558 534,563 17,995 154,603 7 7,972 7 6,631

Education................................................... 6,341,188 6,208,442 132,746 — — —

Health and human services........................ 8,631,327 8,158,386 472,941 74,134 6 3,530 1 0,604

Environment and natural

resources............................................... 281,513 252,300 29,213 157,645 1 33,396 2 4,249

Economic development.............................. 197,850 164,695 33,155 280,942 2 15,246 6 5,696

Public safety, corrections, and regulation... 1,760,590 1,490,821 269,769 260,153 2 33,123 2 7,030

Transportation............................................ 10,610 10,610 — — — —

Agriculture.................................................. 75,791 70,706 5,085 — — —

Capital outlay................................................... 327,252 327,252 — — — —

Debt service..................................................... 166,035 164,814 1,221 — — —

Universities...................................................... 1,951,989 1,922,830 29,159 124,492 8 8,975 3 5,517

Total Expenditures........................................... 20,296,703 19,305,419 991,284 1,051,969 8 12,242 2 39,727

Excess revenues over ( under)

expenditures.............................................. ( 392,234) 290,990 683,224 ( 87,939) 6 5,943 1 53,882

Transfers from reserves ( Note 2C)................... 174,545 174,545 — — — —

Transfers to reserves ( Note 2C)....................... — ( 268,995) ( 268,995) — — —

Unreserved fund balances ( budgetary

basis) at July 1, 1997................................. 318,690 318,690 — 192,498 1 92,498 —

Unreserved fund balances ( budgetary

basis) at June 30, 1998 ( Note 2B).............. $ 101,001 $ 515,230 $ 4 14,229 $ 104,559 $ 2 58,441 $ 1 53,882

The accompanying Notes to the Financial Statements are an integral part of this statement.

34 State of North Carolina

ALL PROPRIETARY FUND TYPES, SIMILAR TRUST FUNDS, AND

DISCRETELY PRESENTED COMPONENT UNITS

COMBINED STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND EQUITY

For the Fiscal Year Ended June 30, 1998

( Dollars in Thousands) TOTAL

Fiduciary PRIMARY

Proprietary Fund Types Fund Types GOVERNMENT

Internal Nonexpendable ( Memorandum

Enterprise Service Trust only)

Operating Revenues:

Sales and services.......................................................... $ 1,256 $ 2 68,310 $ 423 $ 2 69,989

Federal funds.................................................................. — — 25,273 2 5,273

Investment earnings........................................................ 5,687 8 5,328 13,661 1 04,676

Interest earnings on loans............................................... — — 7,271 7 ,271

Rental and lease earnings.............................................. 3,566 1 1 — 3 ,577

Fees, licenses and fines.................................................. 6,474 1 ,043 1,314 8 ,831

Contributions................................................................... — 6 5,459 4 6 5,463

Insurance premiums........................................................ 6,713 5 81,613 — 5 88,326

Miscellaneous.................................................................. 22 2 ,505 219 2 ,746

Total operating revenues................................................. 23,718 1 ,004,269 48,165 1 ,076,152

Operating Expenses:

Personal services............................................................ 5,547 5 0,622 14 5 6,183

Supplies and materials.................................................... 534 1 3,548 5 1 4,087

Services........................................................................... 4,175 8 1,337 9 8 5,521

Interest............................................................................ 847 1 5,693 2,887 1 9,427

Cost of goods sold.......................................................... 465 3 8,983 — 3 9,448

Depreciation/ amortization................................................ 1,458 2 9,131 — 3 0,589

Grants to local governments........................................... — — 2,788 2 ,788

Claims and benefits......................................................... 10,152 7 31,608 — 7 41,760

Insurance and bonding.................................................... 2,579 1 0,916 — 1 3,495

Other............................................................................... 1,063 2 6,024 445 2 7,532

Total operating expenses................................................ 26,820 9 97,862 6,148 1 ,030,830

Operating income ( loss).................................................. ( 3,102) 6 ,407 42,017 4 5,322

Net Nonoperating Revenues ( Expenses)............ 334 1 06 — 4 40

Income ( loss) before operating transfers........................ ( 2,768) 6 ,513 42,017 4 5,762

Operating Transfers:

Transfers in..................................................................... 290 2 ,822 14,499 1 7,611

Transfers from component units...................................... — — — —

Transfers from primary government................................ — — — —

Transfers out................................................................... ( 127) ( 16,941) ( 3,181) ( 20,249)

Transfers to primary government.................................... — — — —

Total operating transfers in ( out)..................................... 163 ( 14,119) 11,318 ( 2,638)

Net income ( loss)............................................................ ( 2,605) ( 7,606) 53,335 4 3,124

Excess of revenues over

( under) expenditures from

governmental operations.............................................. — — — —

Fund equity — July 1 ( Note 16)....................................... 64,968 6 61,422 358,737 1 ,085,127

Restatements ( Note 16).................................................. — 5 73 ( 20) 5 53

Increase ( decrease) in contributed capital...................... 6,349 4 4 — 6 ,393

Fund equity — June 30................................................... $ 68,712 $ 6 54,433 $ 412,052 $ 1 ,135,197

The accompanying Notes to the Financial Statements are an integral part of this statement.

State of North Carolina 35

Exhibit A- 4

TOTAL

Component REPORTING

Units ENTITY

Proprietary ( Memorandum

Fund Types only)

$ 57,416 $ 3 27,405

— 2 5,273

44,943 1 49,619

98,293 1 05,564

5,556 9 ,133

183 9 ,014

— 6 5,463

— 5 88,326

6,245 8 ,991

212,636 1 ,288,788

40,083 9 6,266

11,688 2 5,775

30,273 1 15,794

85,164 1 04,591

— 3 9,448

18,170 4 8,759

— 2 ,788

631 7 42,391

1,529 1 5,024

13,171 4 0,703

200,709 1 ,231,539

11,927 5 7,249

( 66,270) ( 65,830)

( 54,343) ( 8,581)

— 1 7,611

9,531 9 ,531

113,621 1 13,621

— ( 20,249)

( 51) ( 51)

123,101 1 20,463

68,758 1 11,882

( 1,086) ( 1,086)

707,920 1 ,793,047

( 7,452) ( 6,899)

21,925 2 8,318

$ 790,065 $ 1 ,925,262

36 State of North Carolina

ALL PROPRIETARY FUND TYPES, NONEXPENDABLE TRUST FUNDS, AND

DISCRETELY PRESENTED COMPONENT UNITS

COMBINED STATEMENT OF CASH FLOWS

For the Fiscal Year Ended June 30, 1998

( Dollars in Thousands)

TOTAL

Fiduciary PRIMARY

Proprietary Fund Types Fund Types GOVERNMENT

Internal Nonexpendable ( Memorandum

Enterprise Service Trust Funds only)

Cash Provided From ( Used For)

Operations:

Operating income ( loss)........................................................... $ ( 3,102) $ 6 ,407 $ 4 2,017 $ 4 5,322

Adjustments to reconcile operating income

to net cash flows from operating activities:

Depreciation/ amortization.................................................. 1 ,458 2 9,131 — 3 0,589

Investment earnings........................................................... ( 5,687) ( 85,328) ( 13,661) ( 104,676)

Securities lending fees....................................................... 8 47 1 5,692 2 ,887 1 9,426

Construction projects expensed......................................... — — — —

Mortgage/ loan/ note principal repayments........................... — — 1 5,421 1 5,421

Loan sales......................................................................... — — — —

Mortgages/ loans/ notes issued............................................ — — ( 39,064) ( 39,064)

Mortgage/ loan/ note cancellation and writeoffs.................... — — — —

Allowances and uncollectible accounts.............................. — — — —

Restatements and adjustments to cash............................. 3 5 6 09 6 7 7 11

Development stage expense.............................................. — — — —

Nonoperating miscellaneous income/ expense................... ( 62) 1 67 — 1 05

Interest expense................................................................ — — — —

( Increases) decreases in assets:

Receivables....................................................................... 5 ,468 ( 4,028) ( 34) 1 ,406

Due from other funds......................................................... — ( 4,454) — ( 4,454)

Due from component units................................................. — ( 32) — ( 32)

Due from primary government............................................ — — — —

Inventories......................................................................... 1 5 ( 1,747) — ( 1,732)

Prepaid items..................................................................... 3 53 ( 279) — 7 4

Increases ( decreases) in liabilities:

Accounts payable and accrued liabilities............................ 4 8 2 ,838 ( 262) 2 ,624

Due to other funds............................................................. ( 1) 1 52 — 1 51

Due to component units..................................................... — ( 2,197) — ( 2,197)

Due to primary government................................................ — — — —

Claims and benefits payable.............................................. 1 ,158 2 1,017 — 2 2,175

Contracts payable.............................................................. — — — —

Deposits payable............................................................... — 2 — 2

Accrued vacation leave...................................................... 3 5 1 97 — 2 32

Deferred revenue............................................................... 2 74 4 82 — 7 56

Total cash provided from ( used for) operations........................ 8 39 ( 21,371) 7 ,371 ( 13,161)

Cash Provided From ( Used For)

Noncapital Financing Activities:

Proceeds from sale of bonds/ notes.......................................... — — — —

Repayment of bond/ note principal............................................ — — — —

Interest payments on bonds and notes.................................... — — — —

Bond issuance cost.................................................................. — — — —

Grants...................................................................................... — — — —

Grants, aid and subsidies......................................................... — — — —

Operating transfers in............................................................... 2 90 2 ,822 1 4,499 1 7,611

Operating transfers from component units............................... — — — —

Operating transfers from primary government.......................... — — — —

Operating transfers out............................................................ ( 12) ( 16,940) ( 3,181) ( 20,133)

Operating transfers to primary government.............................. — — — —

Advance from primary government.......................................... — — — —

Nonoperating cash donations................................................... 1 72 — — 1 72

Increase in contributed capital.................................................. 4 ,614 — — 4 ,614

Decrease in contributed capital................................................ — — — —

Long term contract payments .................................................. — — — —

Total cash provided from ( used for)

noncapital financing activities............................................... 5 ,064 ( 14,118) 1 1,318 2 ,264

The accompanying Notes to the Financial Statements are an integral part of this statement.

State of North Carolina 37

Exhibit A- 5

TOTAL

Component REPORTING

Units ENTITY

Proprietary ( Memorandum

Fund Types only)

$ 1 1,927 $ 5 7,249

1 8,170 4 8,759

( 44,943) ( 149,619)

5 ,657 2 5,083

5 5

1 11,852 1 27,273

1 ,140 1 ,140

( 308,890) ( 347,954)

6 ,984 6 ,984

1 ,944 1 ,944

( 5,873) ( 5,162)

( 2,969) ( 2,969)

1 ,105 1 ,210

5 5,835 5 5,835

( 8,732) ( 7,326)

— ( 4,454)

— ( 32)

1 08 1 08

( 48) ( 1,780)

( 323) ( 249)

2 ,010 4 ,634

— 1 51

( 58) ( 2,255)

( 10) ( 10)

— 2 2,175

4 ,652 4 ,652

( 259) ( 257)

1 66 3 98

( 360) 3 96

( 150,910) ( 164,071)

3 27,400 3 27,400

( 103,040) ( 103,040)

( 61,159) ( 61,159)

( 2,787) ( 2,787)

3 ,398 3 ,398

( 70,114) ( 70,114)

— 1 7,611

9 ,531 9 ,531

1 13,621 1 13,621

— ( 20,133)

( 51) ( 51)

2 ,427 2 ,427

3 ,699 3 ,871

5 00 5 ,114

( 3,898) ( 3,898)

( 4,115) ( 4,115)

2 15,412 2 17,676

Continued

38 State of North Carolina

ALL PROPRIETARY FUND TYPES, NONEXPENDABLE TRUST FUNDS, AND

DISCRETELY PRESENTED COMPONENT UNITS

COMBINED STATEMENT OF CASH FLOWS ( continued)

For the Fiscal Year Ended June 30, 1998

( Dollars in Thousands)

TOTAL

Fiduciary PRIMARY

Proprietary Fund Types Fund Types GOVERNMENT

Internal Nonexpendable ( Memorandum

Enterprise Service Trust Funds only)

Cash Provided From ( Used For)

Capital Financing Activities:

Acquisition of fixed assets........................................................ ( 91) ( 38,748) — ( 38,839)

Proceeds from the sale of fixed assets.................................... 1 9 2 ,817 — 2 ,836

Proceeds from sale of bonds/ notes.......................................... — — — —

Repayment of bond/ note principal............................................ ( 40) — — ( 40)

Interest payments on bonds, notes and capital leases............. ( 11) — — ( 11)

Bond issuance cost.................................................................. — — — —

Operating transfers out............................................................ ( 115) — — ( 115)

Capital grants........................................................................... — — — —

Principal payment on capital leases......................................... — — — —

Dredging costs......................................................................... — — — —

Total cash provided from ( used for)..........................................

capital financing activities..................................................... ( 238) ( 35,931) — ( 36,169)

Cash Provided From ( Used For)

Investment Activities:

Proceeds from the sale/ maturities of non- State

Treasurer investments......................................................... 5 42 — 1 37 6 79

Redemptions from the State Treasurer

Long- Term Investment Pool................................................. — 2 ,000 3 ,251 5 ,251

Purchase of non- State Treasurer investments......................... ( 811) — ( 126) ( 937)

Purchase into State Treasurer

Long- Term Investment Pool................................................. ( 7,500) ( 8,600) ( 1,470) ( 17,570)

Investment earnings................................................................. 1 ,447 2 5,229 4 ,744 3 1,420

Total cash provided from ( used for)

investment activities............................................................. ( 6,322) 1 8,629 6 ,536 1 8,843

Net increase ( decrease) in cash

and cash equivalents........................................................... ( 657) ( 52,791) 2 5,225 ( 28,223)

Deficit from governmental operations....................................... — — — —

Cash and cash equivalents at July 1........................................ 2 9,780 4 73,232 8 2,508 5 85,520

Cash and cash equivalents at June 30..................................... $ 2 9,123 $ 4 20,441 $ 1 07,733 $ 557,297

Noncash Investing, Capital,

and Financing Activities:

Noncash distributions from the State Treasurer

Long- Term Investment Pool................................................. $ 3 ,401 $ 4 4,636 $ 5 ,869 $ 5 3,906

Increase in contributed capital.................................................. 1 ,826 5 2 — 1 ,878

Decrease in contributed capital................................................ ( 91) ( 8) — ( 99)

Assets acquired through the assumption of a

liability.................................................................................. 1 7,443 2 99,771 7 4,069 3 91,283

Interest expense on advance from primary

government.......................................................................... — — — —

Cash and cash equivalents in the Fiduciary Fund Types on the Combined Balance Sheet include:

Expendable Trust Funds........................................................ $ 4 09,311

Nonexpendable Trust Funds.................................................. 1 07,733

Pension Trust Funds.............................................................. 9 9,517

Investment Trust Fund........................................................... 3 ,959

Agency Funds........................................................................ 6 04,175

Total....................................................................................... $ 1 ,224,695

The accompanying Notes to the Financial Statements are an integral part of this statement.

State of North Carolina 39

Exhibit A- 5

TOTAL

Component REPORTING

Units ENTITY

Proprietary ( Memorandum

Fund Types only)

( 45,206) ( 84,045)

4 ,220 7 ,056

6 3,360 6 3,360

( 4,483) ( 4,523)

( 3,483) ( 3,494)

( 1,898) ( 1,898)

— ( 115)

2 1,872 2 1,872

( 3,730) ( 3,730)

( 337) ( 337)

3 0,315 ( 5,854)

5 07,616 5 08,295

— 5 ,251

( 621,622) ( 622,559)

( 442) ( 18,012)

3 4,239 6 5,659

( 80,209) ( 61,366)

1 4,608 ( 13,615)

1 ,086 1 ,086

1 89,824 7 75,344

$ 2 05,518 $ 7 62,815

$ 7 ,181 $ 6 1,087

— 1 ,878

— ( 99)

6 1,210 4 52,493

4 ,966 4 ,966

40 State of North Carolina

PENSION TRUST FUNDS

COMBINING STATEMENT OF PLAN NET ASSETS

DEFINED BENEFIT PENSION PLANS

June 30, 1998 Exhibit A- 6

( Dollars in Thousands)

Firemen's

and North

Teachers' Rescue Carolina Local

and State Consolidated Squad National Governmental

Employees' Judicial Legislative Workers' Guard Employees'

Retirement Retirement Retirement Pension Pension Retirement

System System System Fund Fund System Totals

ASSETS

Cash and cash equivalents............... $ 8 7,891 $ 5 61 $ 190 $ 268 $ 1 98 $ 10,409 $ 99,517

Receivables:

Accounts receivable...................... 212 — — — — 2 02 414

Interest receivable......................... 470 3 1 3 1 3 03 781

Contributions receivable................ 9 2,389 9 16 87 — — 24,573 117,965

Investments, at fair value:

State Treasurer investment pool... 4 1,849,894 3 10,446 24,034 2 29,701 4 2,103 10,389,827 52,846,005

Total Assets....................................... 4 2,030,856 3 11,926 24,312 2 29,972 4 2,302 10,425,314 53,064,682

LIABILITIES

Obligations under

securities lending......................... 2 ,850,420 2 1,233 1,799 15,704 3 ,073 711,399 3,603,628

Due to other funds............................. — — — 1 — — 1

Benefits payable................................ 1 26,275 — — — 1 9 8 126,374

Total Liabilities................................... 2 ,976,695 2 1,233 1,799 15,705 3 ,074 711,497 3,730,003

Fund Balance

Reserved for employees'

pension benefits ( Note 15)............ $ 3 9,054,161 $ 290,693 $ 22,513 $ 2 14,267 $ 3 9,228 $ 9,713,817 $ 49,334,679

A schedule of funding progress for each plan is presented on page 110 .

The accompanying Notes to the Financial Statements are an integral part of this statement.

State of North Carolina 41

PENSION TRUST FUNDS

COMBINING STATEMENT OF CHANGES IN PLAN NET ASSETS

DEFINED BENEFIT PENSION PLANS

For the Fiscal Year Ended June 30, 1998 Exhibit A- 7

( Dollars in Thousands)

Firemen's

and North

Teachers' Rescue Carolina Local

and State Consolidated Squad National Governmental

Employees' Judicial Legislative Workers' Guard Employees'

Retirement Retirement Retirement Pension Pension Retirement

System System System Fund Fund System Totals

Additions:

Contributions:

Employer.................................... $ 616,736 $ 8 ,487 $ 801 $ — $ — $ 149,826 $ 775,850

Plan members............................ 488,212 2 ,466 257 2 ,781 — 180,474 674,190

Other contributions..................... — — — 1 1,735 2,533 — 14,268

Total contributions........................ 1,104,948 1 0,953 1,058 1 4,516 2,533 330,300 1,464,308

Investment Income:

Investment earnings................... 6,512,033 4 8,109 3,662 3 5,162 6,355 1,607,972 8,213,293

Less investment expenses......... ( 161,473) ( 1,207) ( 100) ( 853) ( 167) ( 41,641) ( 205,441)

Net investment income.............. 6,350,560 4 6,902 3,562 3 4,309 6,188 1,566,331 8,007,852

Fees, licenses and fines.............. — — — — — 4,590 4,590

Miscellaneous additions............... 1,379 — — 2 — 18 1,399

Total additions.............................. 7,456,887 5 7,855 4,620 4 8,827 8,721 1,901,239 9,478,149

Deductions:

Administrative expense................ 4,531 4 0 4 3 54 1 9 1,617 6,565

Benefits........................................ 1,369,233 1 1,260 945 1 2,262 1,703 265,793 1,661,196

Refund of contributions................ 73,855 1 06 17 3 22 — 50,698 124,998

Total deductions........................... 1,447,619 1 1,406 966 1 2,938 1,722 318,108 1,792,759

Net increase ( decrease) 6,009,268 4 6,449 3,654 3 5,889 6,999 1,583,131 7,685,390

Fund balance reserved for

employees' pension benefits

Beginning of the year ( Note 16)... 33,044,893 2 44,244 1 8,859 178,378 32,229 8,130,686 41,649,289

End of year................................... $ 39,054,161 $ 2 90,693 $ 2 2,513 $ 214,267 $ 39,228 $ 9,713,817 $ 49,334,679

The accompanying Notes to the Financial Statements are an integral part of this statement.

42 State of North Carolina

INVESTMENT TRUST FUND

STATEMENT OF NET ASSETS

June 30, 1998 Exhibit A- 8

( Dollars in Thousands)

Investment

Trust

Fund

ASSETS

Cash and cash equivalents.........................................$ 3,959

Investments................................................................. 509,527

Receivables:

Interest receivable................................................... 4,063

Total Assets................................................................ 517,549

LIABILITIES

Obligations under

securities lending................................................... 209,485

Distributions payable................................................... 1,454

Total Liabilities............................................................ 210,939

NET ASSETS

Held in trust for

pool participants....................................................... $ 306,610

The accompanying Notes to the Financial Statements are an integral part of this statement.

State of North Carolina 43

INVESTMENT TRUST FUND

STATEMENT OF CHANGES IN NET ASSETS

For the Fiscal Year Ended June 30, 1998 Exhibit A- 9

( Dollars in Thousands)

Investment

Trust

Fund

Net increase in net assets resulting from operations:

Revenues:

Investment income................................................................ $ 2 7,083

Expenses:

Investment expenses............................................................ 9 ,590

Net increase in net assets resulting from operations.............. 1 7,493

Distributions to participants:

Distributions paid and payable................................................ ( 17,493)

Share transactions:

Reinvestment of distributions.................................................. 1 7,424

Net share purchases/( redemptions)........................................ 3 ,806

Total increase in net assets..................................................... 2 1,230

Net assets:

Beginning of the year ( Note 16)............................................... 2 85,380

End of the year........................................................................ $ 3 06,610

The accompanying Notes to the Financial Statements are an integral part of this statement.

44 State of North Carolina

COMPONENT UNITS — COLLEGE AND UNIVERSITY FUNDS

COMBINED STATEMENT OF CHANGES IN FUND EQUITY

For the Fiscal Year Ended June 30, 1998 Exhibit A- 10

( Dollars in Thousands)

Revenues and Other Additions:

Tuition and fees..................................................................................................... $ 404,072

Federal appropriations........................................................................................... 21,937

County appropriations............................................................................................ 112,378

Federal contracts and grants................................................................................. 600,400

State contracts and grants..................................................................................... 78,231

Local contracts and grants..................................................................................... 45,108

Private gifts, contracts and grants......................................................................... 298,905

Endowment income............................................................................................... 21,052

Sales and services................................................................................................. 821,839

Investment earnings.............................................................................................. 175,092

Expended for plant facilities................................................................................... 460,016

Retirement of indebtedness................................................................................... 26,250

Proceeds of refunding debt.................................................................................... 75,113

Income from hospital operations............................................................................ 470,579

Other revenues and additions................................................................................ 46,256

Total Revenues and Other Additions..................................................................... 3,657,228

Expenditures and Other Deductions:

Educational and general........................................................................................ 3,390,568

Auxiliary enterprises.............................................................................................. 474,293

Internal service...................................................................................................... 33,991

Independent operations......................................................................................... 12,060

Professional clinical services................................................................................. 208,085

Indirect cost recovered.......................................................................................... 86,050

Refunded to grantors............................................................................................. 866

Administrative and collection costs,

loan cancellation and bad debts........................................................................ 2,457

Expended for plant facilities................................................................................... 407,768

Retirement of indebtedness................................................................................... 25,848

Payment to escrow agent...................................................................................... 75,125

Interest on indebtedness....................................................................................... 36,298

Disposal of plant facilities...................................................................................... 60,721

Loss on refunding of debt...................................................................................... 4,822

Hospital operations................................................................................................ 405,958

Other expenditures and deductions....................................................................... 4,785

Total Expenditures and Other Deductions............................................................. 5,229,695

Transfers- Additions ( Deductions):

Operating transfers from primary government....................................................... 2,273,875

Operating transfers to primary government........................................................... ( 16,572)

Operating transfers to component units................................................................. ( 9,531)

Net transfers.......................................................................................................... 2,247,772

Net increase in fund equity.................................................................................... 675,305

Fund equity — July 1 ( Note 16)............................................................................. 7,178,460

Restatements ( Note 16)......................................................................................... ( 4,273)

Residual equity transfers in ( Note 17)................................................................... 739

Residual equity transfers out ( Note 17)................................................................. ( 793)

Fund equity — June 30.......................................................................................... $ 7,849,438

The accompanying Notes to the Financial Statements are an integral part of this statement.

State of North Carolina 45

COMPONENT UNITS — COLLEGE AND UNIVERSITY FUNDS

COMBINED STATEMENT OF CURRENT FUNDS

REVENUES, EXPENDITURES AND TRANSFERS

For the Fiscal Year Ended June 30, 1998 Exhibit A- 11

( Dollars in Thousands)

Revenues:

Tuition and fees..................................................................................................... $ 402,155

Federal appropriations........................................................................................... 21,937

County appropriations............................................................................................ 90,734

Federal contracts and grants................................................................................. 515,884

State contracts and grants..................................................................................... 70,127

Local contracts and grants..................................................................................... 5,857

Private gifts, contracts and grants......................................................................... 211,107

Endowment income............................................................................................... 21,867

Sales and services................................................................................................. 821,916

Investment earnings.............................................................................................. 66,171

Other revenues...................................................................................................... 34,078

Total Current Revenues......................................................................................... 2,261,833

Expenditures:

Educational and general:

Instruction.......................................................................................................... 1,515,443

Organized research........................................................................................... 368,829

Public service..................................................................................................... 237,278

Academic support.............................................................................................. 238,274

Student services................................................................................................ 123,924

Institutional support............................................................................................ 363,297

Physical plant operations................................................................................... 268,533

Student financial aid.......................................................................................... 274,989

Total educational and general....................................................................... 3,390,567

Auxiliary enterprises.............................................................................................. 474,293

Internal service...................................................................................................... 33,991

Independent operations......................................................................................... 12,060

Professional clinical services................................................................................. 208,085

Total Expenditures................................................................................................. 4,118,996

Transfers and Additions ( Deductions):

Excess of restricted receipts over transfers to revenues....................................... 15,868

Refund to grantors................................................................................................. ( 856)

Mandatory transfers............................................................................................... ( 61,173)

Non- mandatory transfers....................................................................................... ( 13,970)

Interinstitutional transfers....................................................................................... ( 4,323)

Operating transfers from primary government....................................................... 1,998,719

Operating transfers to primary government........................................................... ( 1,336)

Operating transfers to component units................................................................. ( 9,531)

Net increase in fund equity.................................................................................... $ 66,235

The accompanying Notes to the Financial Statements are an integral part of this statement.

46 State of North Carolina

NOTES TO THE FINANCIAL STATEMENTS

INDEX

Page

Note 1— Summary of Significant Accounting Policies ................................................................................................. 48

A. Basis of Presentation ............................................................................................................................... ............ 48

B. Financial Reporting Entity ............................................................................................................................... ... 48

C. Fund Accounting ............................................................................................................................... ................... 52

D. Basis of Accounting ............................................................................................................................... ............. 54

E. Cash and Cash Equivalents ............................................................................................................................... . 54

F. Investments ............................................................................................................................... ............................ 55

G. Deposit with Federal Government..................................................................................................................... .... 55

H. Receivables and Due from Other Funds............................................................................................................... 55

I. Advances to Other Funds ............................................................................................................................... .... 55

J. Inventories.................................................................................................................... ......................................... 55

K. Food Stamps......................................................................................................................... ................................. 55

L. Fixed Assets ............................................................................................................................... ........................... 55

M. Tax Refund Liabilities.................................................................................................................... ..................... 56

N. Obligations Under Securities Lending ................................................................................................................... 56

O. Retiree and Intangibles Tax Judgements Payable .................................................................................................. 56

P. Lease Obligations.................................................................................................................... ............................. 56

Q. Compensated Absences....................................................................................................................... ................. 56

R. Long- Term Liabilities ............................................................................................................................... ........... 57

S. Sureties....................................................................................................................... ........................................... 57

T. Fund Equity......................................................................................................................... ................................. 57

U. Revenues ............................................................................................................................... ................................ 57

V. Interfund Transactions................................................................................................................... ....................... 57

W. Implementation of GASB Pronouncements ........................................................................................................ 58

X. Totals - Memorandum Only ............................................................................................................................... .. 58

Note 2— Budgetary Accounting and Reporting............................................................................................................. 59

A. Budgetary Process........................................................................................................................ ......................... 59

B. Reconciliation of Budget/ GAAP Reporting Differences........................................................................................ 59

C. Budgetary Reserves....................................................................................................................... ........................ 60

Note 3— Stewardship, Compliance, and Accountability ............................................................................................... 62

Retained Earnings / Fund Balance Deficit .................................................................................................................. 62

DETAIL NOTES ON ALL FUNDS AND ACCOUNT GROUPS

Note 4— Deposits and Investments.................................................................................................................... .............. 63

A. Deposits and Investments with State Treasurer...................................................................................................... 63

B. Deposits Outside the State Treasurer ..................................................................................................................... 67

C. Investments Outside the State Treasurer ................................................................................................................ 68

Note 5— Fixed Assets......................................................................................................................... ................................ 72

Note 6— Lease Obligations— Operating and Capital .................................................................................................... 73

State of North Carolina 47

NOTES TO THE FINANCIAL STATEMENTS

Page

Note 7— Long- Term Obligations.................................................................................................................... .................. 74

A. Changes in Long- Term Liabilities.................................................................................................................... ..... 74

B. Retiree and Intangibles Tax Judgements Payable .................................................................................................. 74

C. Bonds and Notes Payable........................................................................................................................ .............. 75

D. Bonds Authorized But Unissued ............................................................................................................................ 75

E. Capital Appreciation Bonds ............................................................................................................................... ... 75

F. Demand Bonds.......................................................................................................................... ............................ 75

G. Debt Service Requirements ............................................................................................................................... .... 78

H. Arbitrage Rebate Payable........................................................................................................................ .............. 79

I. Bond Defeasances ............................................................................................................................... .................. 79

J. Bond Redemptions ............................................................................................................................... ................. 80

Note 8— Interfund Receivables and Payables................................................................................................................... 81

Note 9— Retirement Plans ............................................................................................................................... ................. 83

A. Plan Descriptions and Contribution Information.................................................................................................... 83

B. Summary of Significant Accounting Policies and Plan Asset Matters ................................................................... 85

C. Actuarial Methods and Assumptions.................................................................................................................... . 85

D. Annual Pension Cost and Net Pension Obligation ................................................................................................. 86

E. Optional Retirement Plan ............................................................................................................................... ....... 88

F. Special Separation Allowance...................................................................................................................... ......... 88

Note 10— Deferred Compensation Plans.......................................................................................................................... 88

Note 11— Other Postemployment Benefits....................................................................................................................... 90

A. Health Care for Long- Term Disability Beneficiaries and Retirees......................................................................... 90

B. Disability Income ............................................................................................................................... ................... 90

Note 12— Risk Management and Insurance ................................................................................................................... 92

A. Public Entity Risk Pools.......................................................................................................................... .............. 92

B. Employee Benefit Plans ............................................................................................................................... ......... 94

C. Other Risks.......................................................................................................................... .................................. 96

Note 13— Segment Information for Enterprise Funds.................................................................................................. 99

Note 14— Component Units— Condensed Financial Information................................................................................. 100

Note 15— Reserved Fund Balances ............................................................................................................................... ... 102

Note 16— Fund Equity Reclassifications and Restatements ......................................................................................... 103

Note 17— Residual Equity Transfers ............................................................................................................................... 103

Note 18— Commitments and Contingencies.................................................................................................................. .. 104

A. No Commitment Debt ............................................................................................................................... ............ 104

B. Litigation..................................................................................................................... .......................................... 104

C. Federal Grants ............................................................................................................................... ........................ 105

D. Highway Construction................................................................................................................... ........................ 105

E. USDA- Donated Commodities.................................................................................................................... ........... 105

F. Construction and Other Commitments ................................................................................................................... 105

Note 19— Subsequent Events......................................................................................................................... .................... 106

Note 20— Events Subsequent to the Issuance of the Original Independent Auditor’s Report ...................................... 106

48 State of North Carolina

NOTES TO THE FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. Basis of Presentation

The accompanying financial statements of the State of

North Carolina financial reporting entity have been prepared in

conformity with generally accepted accounting principles, as

prescribed by the Governmental Accounting Standards Board

( GASB), which consist of GASB Statements and

Interpretations, as well as American Institute of Certified

Public Accountants ( AICPA) and Financial Accounting

Standards Board ( FASB) pronouncements specifically made

applicable to state and local governmental entities by GASB

Statements and Interpretations. In accordance with GASB

Statement No. 20, Accounting and Financial Reporting for

Proprietary Funds and Other Governmental Entities That Use

Proprietary Fund Accounting, the State does not apply FASB

pronouncements issued after November 30, 1989 for

proprietary activities, unless the GASB amends its

pronouncements to specifically adopt FASB pronouncements

issued after that date. The financial statements of the college

and university funds have been prepared in conformity with

generally accepted accounting principles for colleges and

universities as prescribed by GASB Statement No. 15,

Governmental College and University Accounting and

Financial Reporting Models. The financial statements of the

North Carolina Railroad Company ( Railroad), a for- profit

corporation ( discretely presented proprietary component unit),

have been prepared based on FASB pronouncements. The

Railroad’s financial statements have been incorporated into the

State’s reporting entity based on the definition and display

provisions of GASB Statement No. 14, The Financial

Reporting Entity.

The financial statements are presented as of and for the

fiscal year ended June 30, 1998, except for the USS North

Carolina Battleship Commission whose statements are as of

and for the fiscal year ended September 30, 1997, and the

North Carolina Deferred Compensation Plan, the 401( k)

Supplemental Retirement Income Plan, and the North Carolina

Railroad Company whose statements are as of and for the fiscal

year ended December 31, 1997. Occupational licensing boards

have financial statements with various fiscal year ending dates.

B. Financial Reporting Entity

The financial reporting entity includes ( 1) the primary

government, ( 2) organizations for which the primary

government is financially accountable, and ( 3) organizations

for which the nature and significance of their relationships with

the primary government are such that exclusion would cause

the primary government's financial statements to be misleading

or incomplete.

The State of North Carolina, as primary government,

consists of all organizations that make up its legal entity. All

funds, organizations, agencies, boards, commissions, and

authorities that are not legally separate are, for financial

reporting purposes, part of the primary government. The

primary government has a separately elected governing body

( the General Assembly) and the primary government must be

both legally separate and fiscally independent. Component

units are legally separate entities for which the State is

financially accountable. Accountability is defined as the State's

substantive appointment of a majority of the component unit's

governing board. Furthermore, the State must be able to

impose its will upon the component unit or there must be a

possibility that the component unit may provide specific

benefits to, or impose specific financial burdens on, the State.

The State has applied the criteria outlined in GASB Statement

No. 14, The Financial Reporting Entity, in determining

financial accountability.

As required by generally accepted accounting principles,

these financial statements present the State ( the primary

government) and its component units. The component units

are included in the financial reporting entity because of the

significance of their operational or financial relationships with

the State, as described below.

Blended Component Units

Comprehensive Major Medical Plan

The Comprehensive Major Medical Plan ( Plan) is a

component unit that provides medical benefits to employees

and retirees of the State, most of its component units, and local

boards of education that are not part of the reporting entity.

The Plan has corporate powers and is governed by a board

whose members are appointed by either the Governor or the

General Assembly. Provisions and contribution rates are

approved by the General Assembly, with the State making

significant contributions as an employer and through its

funding of local boards of education. The Plan has been

included in the financial statements using the blending method

( internal service fund) because it almost exclusively benefits

the primary government. Even though a substantial number of

covered participants are not employees of the primary

government, the Plan essentially serves only the primary

government by managing the risk associated with providing

health insurance to eligible employees. The other employers in

the Plan do not have risk since the primary government is

responsible for funding the premiums of all covered

employees.

Disability Income Plan of North Carolina

State of North Carolina 49

NOTES TO THE FINANCIAL STATEMENTS

The Disability Income Plan of North Carolina ( Plan) is a

component unit that provides disability benefits to employees

of the State, most of its component units, and local boards of

education that are not part of the reporting entity. The Plan has

corporate powers and is governed by a fourteen- member board.

Ten members are appointed by the Governor, two are

appointed by the General Assembly, and two are elected State

officials. Provisions and contribution rates are approved by the

General Assembly, with the State making significant

contributions as an employer and through its funding of local

boards of education. The Plan has been included in the

financial statements using the blending method ( internal

service fund) because it almost exclusively benefits the primary

government. Even though a substantial number of covered

participants are not employees of the primary government, the

Plan essentially serves only the primary government by

managing the risk associated with providing disability

insurance to eligible employees. The other employers in the

Plan do not have risk since the primary government is

responsible for funding the premiums of all covered

employees.

Discretely Presented Component Units

The component units columns in the combined financial