NORTH

CAROLINA

COMPREHENSIVE

ANNUAL

FINANCIAL

REPORT

FOR THE FISCAL YEAR

ENDED JUNE 30, 2002

MICHAEL F. EASLEY

GOVERNOR

ROBERT L. POWELL

STATE CONTROLLER

Prepared by Statewide Accounting Division

Office of the State Controller

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

2 State of North Carolina

This report was prepared by the

Statewide Accounting Division of the North Carolina Office of the State Controller.

Don Waugh

ASSISTANT STATE CONTROLLER

dwaugh@ mail. osc. state. nc. us

Anne Godwin, CPA

Statewide Accounting Manager

agodwin@ mail. osc. state. nc. us

John Barfield, CPA

Financial Reporting Manager

jbarfiel@ mail. osc. state. nc. us

Amber Young

Central Compliance Manager

ayoung@ mail. osc. state. nc. us

Statewide Accounting Division Staff

Robert Alford, CPA Darlene Langston, CPA Shirley Trollinger

Ann Anderson Clayton Murphy, CPA Cynthia Vincent

John Eliadis Terri Noblin, CPA Helen Vozzo, CPA

Luke Harris Cindy Salgado, CPA Pam White, CPA

Martha Hunt, CPA Carmen Stanley, CPA

Cathy Johnson Melody Tart

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

MICHAEL F. EASLEY

Governor of North Carolina

4 State of North Carolina

TABLE OF CONTENTS

Comprehensive Annual Financial Report

For the Fiscal Year Ended June 30, 2002

INTRODUCTORY SECTION

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

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

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

FINANCIAL SECTION

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

Management's Discussion and Analysis....................................................................................................................... .................................................................

Basic Financial Statements

Government- wide Financial Statements

Statement of Net Assets — Exhibit A- 1.............................................................................................................................. ..........................................................

Statement of Activities — Exhibit A- 2.............................................................................................................................. ...........................................................

Fund Financial Statements

Balance Sheet— Governmental Funds — Exhibit B- 1.............................................................................................................................. .....................................

Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets — Exhibit B- 1a..................................................................................

Statement of Revenues, Expenditures, and Changes in Fund Balances— Governmental Funds — Exhibit B- 2............................................................................

Reconciliation of the Statement of Revenues, Expenditures, and Changes in Fund Balances

of Governmental Funds to the Statement of Activities — Exhibit B- 2a............................................................................................................................. ...

Statement of Net Assets— Proprietary Funds — Exhibit B- 3.............................................................................................................................. .........................

Statement of Revenues, Expenses, and Changes in Fund Net Assets— Proprietary Funds — Exhibit B- 4....................................................................................

Statement of Cash Flows— Proprietary Funds — Exhibit B- 5.............................................................................................................................. ........................

Statement of Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 6.............................................................................................................................. ............

Statement of Changes in Fiduciary Net Assets— Fiduciary Funds — Exhibit B- 7...................................................................................................................

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

Required Supplementary Information

Schedules of Funding Progress— All Defined Benefit Pension Trust Funds.......................................................................................................................... ......

Schedule of Contributions from the Employers and Other Contributing Entities— All Defined Benefit Pension Trust Funds....................................................

Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances— Budget and Actual

—( Budgetary Basis— Non- GAAP) General Fund........................................................................................................................... ......................................

Notes to Required Supplementary Information— General Fund Budgetary Reporting..................................................................................................................

Combining Fund Statements and Schedules

Nonmajor Governmental Funds

Combining Balance Sheet— Nonmajor Governmental Funds — Exhibit C- 1.............................................................................................................................. .

Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Governmental Funds — Exhibit C- 2........................................

Combining Balance Sheet— Nonmajor Special Revenue Funds — Exhibit C- 3............................................................................................................................

Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Special Revenue Funds — Exhibit C- 4....................................

Combining Schedule of Revenues, Expenditures and Changes in Unreserved Fund Balances

— Budget and Actual ( Budgetary Basis— Non- GAAP) Nonmajor Special Revenue Funds — Exhibit C- 5......................................................................

Combining Balance Sheet— Nonmajor Capital Projects Funds — Exhibit C- 6.............................................................................................................................

Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Capital Projects Funds — Exhibit C- 7.....................................

Combining Balance Sheet— Nonmajor Permanent Funds — Exhibit C- 8.............................................................................................................................. ......

Combining Statement of Revenues, Expenditures, and Changes in Fund Balances— Nonmajor Permanent Funds — Exhibit C- 9.............................................

Proprietary Funds

Nonmajor Enterprise Funds

Combining Statement of Net Assets— Nonmajor Enterprise Funds — Exhibit D- 1......................................................................................................................

Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Nonmajor Enterprise Funds — Exhibit D- 2.................................................

Combining Statement of Cash Flows— Nonmajor Enterprise Funds — Exhibit D- 3....................................................................................................................

Internal Service Funds

Combining Statement of Net Assets— Internal Service Funds — Exhibit E- 1..............................................................................................................................

Combining Statement of Revenues, Expenses, and Changes in Fund Net Assets— Internal Service Funds — Exhibit E- 2..........................................................

Combining Statement of Cash Flows— Internal Service Funds — Exhibit E- 3.............................................................................................................................

Fiduciary Funds

Combining Statement of Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 1.....................................................................................................

Combining Statement of Changes in Fiduciary Net Assets— Private Purpose Trust Funds — Exhibit F- 2.............................................................................

Combining Statement of Changes in Assets and Liabilities— Agency Funds — Exhibit F- 3........................................................................................................

State of North Carolina

Comprehensive Annual Financial Report

For the Fiscal Year Ended June 30, 2002

STATISTICAL SECTION

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

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

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

Revenue Bond Coverage — Table 4.............................................................................................................................. ................................................................

Schedule of General Obligation Bonds Payable — Table 5.............................................................................................................................. ............................

Statewide Assessed Property Values— Real Property, Tangible Personal Property and Public Service Companies — Table 6...................................................

Schedule of Bank and Savings and Loan Deposits of Financial Institutions Located in North Carolina — Table 7.....................................................................

Cash Receipts from Farming by Commodities — Table 8.............................................................................................................................. ..............................

Major Private Employers in North Carolina — Table 9.............................................................................................................................. ..................................

Schedule of Demographic Data — Table 10............................................................................................................................. ....................................................

Ten Largest Non- Agricultural Industries by Number of Employees — Table 11..........................................................................................................................

Required Supplementary Information— Claims Development Information — Public School Insurance Fund — Table 12.........................................................

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

Schedule of Miscellaneous Statistics — Table 14............................................................................................................................. ............................................

6 State of North Carolina

THIS PAGE INTENTIONALLY LEFT BLANK.

INTRODUCTORY

SECTION

State of North Carolina

Office of the State Controller

Michael F. Easley, Governor Robert L. Powell, State Controller

MAILING ADDRESS

1410 Mail Service Center

Raleigh, NC 27699- 1410

Telephone: ( 919) 981- 5454

Fax Number: ( 919) 981- 5567

State Courier: 56- 50- 10

LOCATION

3512 Bush Street

Raleigh, NC

Website: www. osc. state. nc. us

An Equal Opportunity/ Affirmative Action/ Americans With Disabilities Employer

The Honorable Michael F. Easley, Governor

Members of the North Carolina General Assembly

Citizens of North Carolina

It is our pleasure to furnish you with the 2002 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, this financial report is complete and

reliable in all material respects. We believe all disclosures necessary to enable you to gain an understanding of the State's

financial activities have been included.

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 in the United States of America ( GAAP). Except for exhibits and notes clearly labeled

otherwise, this CAFR has been prepared in accordance with GAAP.

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 management discussion and analysis, the basic financial statements ( government- wide

financial statements, fund financial statements, and notes), other required supplementary information, the combining and

individual fund 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.

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.

GASB Statement No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and

Local Governments, requires that management provide a narrative introduction, overview and analysis to accompany the Basic

Financial Statements in the form of management discussion and analysis ( MD& A). This letter of transmittal is intended to

complement MD& A and should be read in conjunction with it. The MD& A can be found immediately following the

Independent Auditor’s Report.

State of North Carolina 9

Profile of the Government

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

units are discretely presented in the government- wide financial statements. The State's discretely

presented major component units are the University of North Carolina System; the State's

community colleges; Golden LEAF, North Carolina Housing Finance Agency, and North

Carolina State Education Assistance Authority. 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.

In addition to internal controls discussed previously, 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, the Office of State Budget and Management ( OSBM)

may approve executive changes to the legal budget. This results in the " Final Budget" presented

in the required supplementary information.

Economic Condition and Outlook

The primary factors affecting the nation’s economy during the period ending June 30, 2002

were the terrorist attacks of September 11 and the continuing impact of the stock market crash.

During the summer of 2001, economists were noting that the economy seemed to be

recovering from the slowdown that had begun the past winter. This seemingly optimistic

viewpoint was supported by a number of indicators including the monthly survey of purchasing

managers, falling energy prices, federal tax cuts robust housing refinancing activity, and stable

consumer spending.

The optimism vanished on September 11. The first impact of the terrorist actions was a

sharp drop in consumer spending during the latter part of September as consumer confidence

dropped by 20 percentage points. When retail activity slowed, manufacturers discovered they

had excess inventory and began paring production. This led to fewer hours for workers and

eventually forced layoffs. The loss of income led workers to cut back on spending even more

and the downward spiral typical of a recession had begun.

State Reporting

Entity and

Its Services

Budgetary

Control

National

Situation

10 State of North Carolina

Compounding the problem was the prolonged pullback in capital spending. The trigger for

this decision by executives was the fact that the 2000- 2002 economy was characterized by the

steepest decline in corporate profits in over five decades. This factor, coupled with the crash of

technology and telecommunications stocks beginning in March 2000, led companies to reduce

spending on new facilities and equipment, even in the face of very favorable interest rates.

The recovery from the events of September 11 has been the most sluggish in decades. The

first stage of the turnaround, beginning last November, was fueled by a combination of additional

interest rate cuts, rapid money supply growth, and aggressive fiscal policy ( tax cuts, federal

disaster assistance). In addition, the level of business inventories fell by a record amount during

the fourth quarter of 2001, setting the stage for a ramping up of production.

Around March of this year, the recovery began to experience what some economists are

calling a “ soft spot.” This loss of momentum was similar to the temporary slowdown

experienced in late 1991, just six months after the beginning of the recovery from the Gulf War.

In fact, the 1991- 93 recovery stalled out three times before a more permanent acceleration took

place in mid- 1993.

At the end of the 2001- 02 fiscal year economic indicators were starting to show signs of

improvement. Examples included unemployment claims, retail activity, money supply growth,

and record refinancing activity due to the lowest mortgage rates in 40 years. This led many

economists to forecast 3- 4% real ( inflation- adjusted) economic growth for the second half of the

calendar year.

There is reason for concern about the fragility of the recovery even though positive signs

are popping up every day. First is the continued weakness in equity prices, especially for

NASDAQ stocks ( down 76% from their 2000 peak). This has devastated the value of 401( k)

balances and other sources of savings, causing a drop in consumer confidence. This pattern is

the converse of the 1995- 99 experience, when skyrocketing stock prices provided fuel for a

consumer spending binge through the “ wealth effect.”

In addition, investors and consumers have been shaken by the accounting fraud and the

potential military action against Iraq. A final concern is the mountain of debt taken on by

consumers and businesses during the favorable impact of the free- spending 1990s. To date, the

debt overhang for individuals has not been a problem due to the impact of low mortgage rates on

the demand for housing and incentive- driven demand for vehicles. Once refinancing slows and

the bubble in housing prices breaks, the underpinning for the unusually stable spending levels

during this recession may evaporate.

The final issue has to do with the prolonged decline in business investment. Many

manufacturers continue to experience excess capacity and add new facilities until demand

improves. In addition, they are reluctant to rehire laid off workers, preferring to extend the

workweek of the employees and bring in temporary workers. Until a major turnaround in stock

prices occurs or we get additional federal monetary or fiscal stimulus, we think that the national

recovery will continue to be sluggish. The good news is that the combination of depressed

inventories and historically low interest rates should prevent the economy from going back into a

recession.

State of North Carolina 11

One of the primary characteristics of the 2001 recession was the impact on the

manufacturing sector. This is important to North Carolina because 18% of nonagricultural

employment is in manufacturing in our state versus 12% nationally. A more important measure

might be the share of gross state product tied to manufacturing: around 23% in North Carolina

versus 17% for the United States.

The decline in manufacturing jobs did not begin with the 2001 recession. Data compiled

by the Employment Security Commission show that manufacturing experienced a fairly rapid

recovery from the 1990- 91 recession, with job growth of 2.6% in 1993. In fact, the “ boom and

bust” nature of manufacturing is one reason why the state’s economy grew 33% faster than the

national experience following the 1981- 82 recession and 45% faster following the Gulf War

downturn. In fact, North Carolina was the fifth fastest growing state during the 1992- 94 period.

Manufacturing employment began a steady decline in mid- 1995 as the national economy

experienced a mild slowdown following the Fed rate hikes in 1994. The rate of decline began to

accelerate in February 2001 and peaked at an 8.5% year- over- year rate in late 2001. Particularly

hard hit were the textile and apparel sectors, dropping over 15% annually by the spring of 2001.

There are some signs that the state’s economy has begun to improve. For one thing, the

unemployment rate has dropped from 6.9% in April to 6.0% in October and we have seen

improvement in the unemployment claims numbers. State sales tax receipts during the quarter

ending September 30 were up 1.7% over the same quarter last year and increased 2.3% during

the second calendar quarter. This compares to - 2.0% for the first quarter and - 3.5% for the final

quarter of 2001. Unit sales of cars and light trucks rose 2.9% in May and June this year. Finally,

real estate conveyance tax collections, levied on a “ percent of value” basis, continue to benefit

from favorable mortgage rates.

Even with the recent improvements, the State is budgeting on the basis of a continued

sluggish recovery. This would be very different from the explosive growth after the last two

recessions. One reason is the continued weakness of tech stock prices. As the state has

diversified away from the traditional manufacturing industries ( textiles, apparel, furniture, and

tobacco) to electronics and other technology- oriented companies, we have become more

vulnerable to problems in the new sectors.

A classic example is the experience of the Catawba Valley region ( Hickory). During the

late- 1990s, this area had an unemployment rate as low as 1.5% due to the explosive growth of

fiber optic manufacturing. Now, the unemployment rate in this county is 9.4%, one of the

highest rates in the state. We are concerned that it may take some time for the nation’s

telecommunications companies to work down excess inventory.

State

Prospects

12 State of North Carolina

In addition, it is not clear how areas affected by the displacement of workers in traditional

industries will recover. The prevailing view of many local officials is that not only are the jobs

lost in recent years the textile, apparel, and furniture sectors gone forever but the shift away from

U. S. production is spreading to other types of manufacturing operations.

Key Economic Forecast Variables

(% Change Unless Noted)

Fiscal Year 2001- 2002

Actual

Fiscal Year 2002- 2003

Budgeted

National

Real Economic Growth* 1.9% 1.4%

Real Consumer Spending* 3.0% 2.1%

Industrial Production - 4.0% 0.6%

Nominal Personal Income 3.3% 1.9%

Consumer Price Index 1.8% 2.3%

Short- Term Interest Rates 2.3% 1.8%

Pre- Tax Profits ( Calendar Yr.) - 17.9% - 7.5%

North Carolina

Total Employment - 1.1% - 1.4%

Manufacturing Employment - 7.1% - 4.5%

Unemployment Rate 6.3% 7.4%

Personal Income 1.3% 1.8%

* Adjusted for inflation

— Economic analysis prepared by David Crotts

Fiscal Research Division

North Carolina General Assembly

November 15, 2002

State of North Carolina 13

Issues and Observations

During fiscal year 2002, the Governor, the General Assembly, and the departments and

agencies of State government worked to address key issues facing State government and the

citizens of North Carolina.

While this report presents the financial condition of the State on a GAAP basis, it is

important to note some of the budget and program realities that contributed to our current

condition. With the adoption of the General Fund budget for fiscal year ended June 30, 2003,

North Carolina will have experienced its third straight year in which spending needs exceeded

recurring revenues. This problem has been increased by the economic downturn experienced

nationally and in North Carolina. The increase in spending needs is attributed to enrollment

growth in the public schools and higher education institutions along with continued increased

costs in the health and human services areas such as Medicaid and children services. The result

is that North Carolina has spent more money than it has realized in the General Fund during the

last four consecutive years.

In order to meet the constitutional requirement of a balanced budget for the General Fund,

the Governor has exercised his constitutional powers through the enactment of Executive Orders

to control spending and to identify resources to meet spending requirements. Among these

resources are the Highway Trust Fund, the Tobacco Trust Fund, agency special funds, and

reductions to employer contributions to some of the State retirement systems. State agencies and

institutions have been operating under Executive Orders since February 2001. The current

Executive Order allows spending at an average of 96.5% of the authorized General Fund budget

for fiscal year 2003.

Because of the budget shortfalls, the need to use State reserves, and the inability to

replenish reserves, the result has been an overall reduction in the net worth of the General Fund

( GAAP basis) component of the State budget. In the last three years, the unreserved balance has

gradually declined to its current level of negative $ 575 million for the fiscal year ended June 30,

2002. The Savings Reserve Account balance was used to balance the budget in fiscal year 2001,

and the General Assembly authorized new funds to replenish that reserve in fiscal year 2002. But

the Savings Reserve Account balance again was required to manage the budget shortfall for

fiscal year 2002. As of June 30, 2002, the Savings Reserve had a zero balance.

For fiscal year 2003 through December 11, $ 215.6 million has been set aside in the

Governor’s Executive Order Reserve and is available to manage any potential budget shortfall

that may occur. It is important to note, however, that some of these funds will be needed for the

continued recovery of eastern North Carolina from the aftermath of Hurricane Floyd. This

Reserve coupled with spending restrictions and zero economic revenue growth are the tools the

Governor is using to manage the 2003 budget.

In August 2002, Moody’s investors service advised North Carolina of a downgrade in its

credit from AAA to Aa1 representing the first time since 1960 that North Carolina had less than

AAA credit. Moody’s advised that the North Carolina budget had been under too much financial

strain for too long and that the North Carolina economy was not sufficient to retain our rating at

this time While the rating service praised the strength of executive powers available to insure a

balanced budget, they cited lack of structural balance, a weakened GAAP balance sheet, and the

continued reliance on non- recurring resources as major factors in the downgrade. They made

specific note of the reversal of GAAP balances that have reversed from positives to negatives in

a relatively short period of time.

Challenges continue to exist for State government financial and program managers as we

move further into this decade. The Governor will propose his 2003- 05 budget to the 2003

Session of the General Assembly and many of the fiscal issues will continue into this legislative

Fiscal

Accountability

and Reporting

14 State of North Carolina

session. More discussion of the financial issues of North Carolina can be found in the

Management’s Discussion and Analysis ( MD& A) section of this document.

Financial Information

The MD& A provides an overview of the State’s financial activities addressing both

governmental and business- type activities reported in the government- wide financial statements.

In addition, MD& A focuses on the State’s major funds: the General Fund, the Highway Fund and

the Highway Trust Fund.

Pensions. The State contributes to the Teachers' and State Employees' Retirement System, the

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

Rescue Squad Workers' Pension Fund, the Supplemental Retirement Income Plan of North

Carolina, 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.

The retirement systems experienced a total return from investments of - 4.34% for the one-year

period, a return of 0.62% for the three- year period and a return of 5.97% for the five- year

period, ended June 30, 2002. These returns are among the better results for public pension plans

in the United States, and reflect the conservative asset allocation and attention to investment

quality that have guided the plans investment policy. Recent reports indicate that the North

Carolina Retirement System investment performance ( all pension plans under management) was

among the top 12% of all public plans for the last 12 months, and among the top 9% for the past

five years for the period ended September 30, 2002.

The Teachers' and State Employees' Retirement System ( TSERS), the largest of the pension

trust funds, continued to be fully funded, based on the December 31, 2001 actuarial valuation.

Specifically, the TSERS was funded at 111.6%, with the actuarial value of assets of $ 42.1 billion

exceeding the actuarial accrued liability of $ 37.7 billion by $ 4.4 billion at December 31, 2001.

Employer contributions to the TSERS decreased by $ 110.3 million, or 35.7% from the prior

fiscal year. Investment balances declined by $ 2.8 billion, or 6.3% from the prior fiscal year, with

a net investment income loss of $ 1.9 billion representing a decline in net earnings of $ 811

million, or 75.3% from the prior year. The TSERS experienced a $ 130.8 million increase in

benefit payments to retirees, an increase of 7.7% from fiscal year 2001.

Employee and Retiree Health Insurance. The State Health Plan ( reported as a component unit

for fiscal year 2001) provides comprehensive major medical care for employees and retirees of

the State and its participating component units, and it allows for optional coverage of employee

and retirees' dependents. This care is also extended to employees and retirees of the Local

Education Agencies ( LEAs), which are not part of the State's reporting entity. Coverage is self-funded

by contributions to the State Health Plan ( the Plan), a proprietary component unit of the

State. Contributions for employee and retiree coverage are made by the State, its participating

component units, and LEAs. Contributions for dependent coverage are made by employees and

retirees. Coverage is also extended to certain individuals as an other postemployment benefit.

The Plan pays most expenses that are medically necessary and eligible for coverage based on

usual, customary and reasonable allowances. Claims are subject to specified annual deductible

and copayment requirements. The Plan disallows claims in excess of a lifetime maximum of $ 5

million.

As of July 1, 2001, an estimated $ 240 to $ 300 million of cost savings for the State Health

Plan were implemented in the form of increased insurance premiums, reduction of benefits to

employees and dependents, and in the form of cuts in payments to providers. The State Health

Plan pays 100% of the health insurance premium for employees and retirees, but employees and

Pension

and Other

Post-employment

Benefits

State of North Carolina 15

retirees must pay for optional family or dependent coverage. Employer contributions account for

80% of State Health Plan funding. Effective October 1, 2001, the insurance premium for

dependent coverage rose by 30%. Net assets increased from a negative $ 159.7 million at June

30, 2001 to a negative $ 99.4 million at June 30, 2002, an increase ( deficit decrease) of $ 60.3

million, or 37.7%, with premium revenues for fiscal year 2002 rising to $ 1.27 billion, an increase

of $ 331.1 million, or 35.3%. For fiscal year 2002, claims and benefits totaled $ 1.18 billion, an

increase of $ 54.5 million, or 4.8%.

Historically, the State's health benefits package has been a key component of an overall

compensation package enabling the State to hire and retain quality personnel.

The State’s general obligation bonds are rated Aa1 by Moody’s, AAA by Standard &

Poors, and AAA by Fitch. During the fiscal year, Moody’s Investors Services downgraded the

State of North Carolina’s general obligation rating to Aa1, from AAA. According to Moody’s,

the primary reasons for the downgrade were the State’s continued budget pressure, reliance on

non- recurring revenues, and weakened balance sheet. Also, Moody’s commented that the task of

restoring structural budget balance and rebuilding reserves faces political and economic

obstacles.

The 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. 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 2002,

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 5.38%.

The State maintains self- insurance programs for employee health; general liability; medical

malpractice; workers’ compensation; and automobile, fire and other property losses. The State

limits its risk for general liability; medical malpractice; and automobile fire and other property

losses by purchasing private insurance for losses in excess of deductibles. 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 reporting entity is

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

examination was conducted in accordance with auditing standards generally accepted in the

United States of America and the standards applicable to financial audits contained in

Government Auditing Standards, issued by the Comptroller General of the United States, 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.

Debt

Administration

Cash

Management

Risk

Management

Independent

Audit

16 State of North Carolina

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,

2001. The Certificate of Achievement is a prestigious national award recognizing conformance

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

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,

Robert L. Powell

State Controller

December 12, 2002

Certificate of

Achievement

Acknowledgments

State of North Carolina 17

THIS PAGE INTENTIONALLY LEFT BLANK.

CERTIFICATE OF ACHIEVEMENT

20 State of North Carolina

ORGANIZATION OF NORTH CAROLINA STATE GOVERNMENT

INCLUDING PRINCIPAL STATE OFFICIALS

EXECUTIVE BRANCH

Council of State

Governor

Michael F. Easley

Lieutenant Governor

Beverly E. Perdue

Secretary of State

Elaine F. Marshall

State Auditor

Ralph Campbell, Jr.

State Treasurer

Richard H. Moore

Superintendent of

Public Instruction

Dr. Michael E. Ward

Attorney General

Roy A. Cooper, III

Commissioner of

Agriculture

Meg Scott Phipps

Commissioner of

Labor

Cherie K. Berry

Commissioner of

Insurance

James E. Long

Cabinet Secretaries — Appointed by the Governor

Administration

Gywnn T. Swinson

Correction

Theodis Beck

Crime Control and

Public Safety

Bryan E. Beatty

Cultural Resources

Lisbeth C. Evans

Commerce

James T. Fain

Environment

& Natural Resources

William G. Ross, Jr.

Health and Human

Services

Carmen Hooker Odom

Revenue

E. Norris Tolson

Transportation

W. Lyndo Tippett

Appointed by Governor, confirmed by Legislature

Office of the

State Controller

Robert L. Powell

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

Juvenile Justice and

Delinquency Prevention

George L. Sweat

State of North Carolina 21

LEGISLATIVE BRANCH JUDICIAL BRANCH

Component Units

State of North Carolina Web Page

http:// www. ncgov. com

North Carolina

Supreme Court

Chief Justice

I. Beverly Lake, Jr.

Associate Justices

G. K. Butterfield, Jr.

Robert H. Edmunds, Jr.

Robert F. Orr

Mark D. Martin

Sarah Parker

George L. Wainwright, Jr.

Administrative

Office of the Courts

John Kennedy

Director

University of North

Carolina System

Community Colleges State Education

Assistance Authority

General Assembly

Senate

House of

Representatives

Speaker

James B. Black

Speaker Pro Tempore

Joe Hackney

Majority Leader

Philip A. Baddour

Minority Leader

N. Leo Daughtry

President

Lieutenant Governor

President Pro Tempore

Marc Basnight

Deputy Pres. Pro Tempore

Frank W. Ballance, Jr.

Majority Leader

Tony Rand

Minority Leader

Patrick J. Ballentine

Golden LEAF NC Housing Finance

Agency

Other Component

Units

22 State of North Carolina

THIS PAGE INTENTIONALLY LEFT BLANK.

FINANCIAL

SECTION

24 State of North Carolina

State of North Carolina 25

26 State of North Carolina

THIS PAGE INTENTIONALLY LEFT BLANK.

MANAGEMENT’S

DISCUSSION AND

ANALYSIS

28 State of North Carolina

Highlights

MANAGEMENT'S DISCUSSION AND ANALYSIS ( MD& A)

The following is a discussion and analysis of the State of North Carolina’s ( the State’s) financial

performance, providing an overview of the activities for the fiscal year ended June 30, 2002. Please

read it in conjunction with the transmittal letter at the front of this report and with the State's financial

statements, which follow this section. Because fiscal year 2002 represents the first year in which the

State implemented the provisions of Governmental Accounting Standards Board ( GASB) Statement

No. 34, Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local

Governments, this discussion and analysis provides few comparisons with the previous year. Future

reports are required to include extensive comparisons.

Government- wide:

 The State’s total net assets remained virtually unchanged as a result of this year’s operations.

While net assets of governmental activities increased by $ 562 million, or nearly 2.6 percent, net

assets of business- type activities decreased by $ 509 million, or about 36.5 percent. At year- end,

net assets of governmental activities and business- type activities totaled $ 22.015 billion and $ 886

million, respectively.

 Component units reported net assets of $ 8.2 billion, an increase of $ 362.1 million from the

previous year. The largest component unit, the University of North Carolina System had net assets

of $ 5.79 billion at June 30, 2002, an increase of $ 178 million, or a 3.2% increase from fiscal year

2001.

Fund Level:

 As of the close of the fiscal year, the State’s General Fund reported a total fund balance deficit of

$ 349 million, with reserves of $ 227.8 million, and an unreserved fund balance of negative $ 576.3

million.

 The business- type activities funds reported net assets at year- end of $ 886 million during the year.

State Highway System:

 The State highway system includes roadway surfaces, bridges, signage, railings, markings and

other structures related to the State’s motor vehicle transportation system. The system includes

78,350 miles of roads, constituting the second largest highway system in the nation. The system

includes 17,250 bridges spanning 380 miles.

 For fiscal year 2002, the State reflected $ 11.5 billion ( net of accumulated depreciation) of highway

system infrastructure, an increase of $ 917 million ( net), or 8.6%.

Long- term Debt:

 The State’s general obligation debt payable increased during the fiscal year to $ 3.478 billion, an

increase of $ 439 million ( or by 14.5%), which represents the net difference between new issuances,

and payments, recognition of accretion, and the amortization of premiums on outstanding debt.

 During the year the State issued general obligation bonds in the amount of $ 605 million. More

detailed information regarding these activities and funds begins on page 85.

OVERVIEW OF THE FINANCIAL STATEMENTS

This discussion and analysis is an introduction to the State’s basic financial statements, which

comprise three components: 1) government- wide financial statements, 2) fund financial statements, and

3) notes to the financial statements. This report also contains additional required supplementary

information ( General Fund budgetary schedules, pension funding progress and contributions) and other

supplementary information ( combining financial statements) in addition to the basic financial

statements. These components are described below.

Government- wide Financial Statements

The Statement of Net Assets and the Statement of Activities are two financial statements that report

information about the State, as a whole, and about its activities that should help answer this question: Is

State of North Carolina 29

the State, as a whole, better off or worse off as a result of this year’s activities? These statements

include all non- fiduciary assets and liabilities using the accrual basis of accounting. The current year’s

revenues and expenses are taken into account regardless of when cash is received or paid. The

Statement of Net Assets ( page 46) presents all of the State’s assets and liabilities, with the difference

between the two reported as “ net assets”. Over time, increases and decreases in net assets measure

whether the State’s financial position is improving or deteriorating.

The Statement of Activities ( pages 48 and 49) presents information showing how the State’s net

assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the

underlying events giving rise to the change occur, regardless of the timing of related cash flows.

Therefore, revenues and expenses are reported in these statements for some items that will only result in

cash flows in future fiscal periods ( e. g. uncollected taxes and earned but unused vacation leave).

Both statements report three activities:

Governmental Activities – Most of the State’s basic services are reported under this category. Taxes

and intergovernmental revenues generally fund these services.

Business- type Activities – The State charges fees to customers to help it cover all or most of the cost of

certain services it provides. The State’s Unemployment Compensation Fund is the predominant

business- type activity.

Discretely Presented Component Units – Component units are legally separate organizations for which

the elected officials of the primary government are financially accountable. A description of the

component units and an address for obtaining their separately issued financial statements can be found

beginning on page 64. All component units are combined and displayed in a separate discrete column

in the government- wide financial statements to emphasize their legal separateness from the State. In

addition, condensed financial statements for major component units are presented in the notes to the

financial statements ( page 119).

This report includes two schedules ( pages 53 and 55) that reconcile the amounts reported on the

governmental fund financial statements ( modified accrual accounting) with governmental activities

( accrual accounting) on the appropriate government- wide statements. The following summarizes the

impact of transitioning from modified accrual to accrual accounting:

 Capital assets used in governmental activities are not reported on governmental fund statements.

 Certain tax revenues that are earned, but not available, are reported as governmental activities, but are reported as deferred

revenue on the governmental fund statements.

 Other long- term assets that are not available to pay for current period expenditures are deferred in governmental fund

statements, but not deferred on the government- wide statements.

 Internal service funds are reported as governmental activities, but reported as proprietary funds in the fund financial

statements.

 Certain pension trust funds have been funded in excess of their annual required contribution. These assets are recorded only

in the government- wide statements.

 Unless due and payable, long- term liabilities, such as capital lease obligations, compensated absences, litigation, bonds and

notes payable, and others only appear as liabilities in the government- wide statements.

 Capital outlay spending results in capital assets on the government- wide statements, but are reported as expenditures on the

governmental fund statements.

 Bond and note proceeds result in liabilities on the government- wide statements, but are recorded as other financing sources

on the governmental fund statements.

 Certain other outflows represent either increases or decreases in liabilities on the government- wide statements, but are

reported as expenditures on the governmental fund statements.

The Notes to the Financial Statements provide additional information that is essential to a full

understanding of the data provided in the government- wide and fund financial statements. The notes

can be found beginning on page 64 of this report.

30 State of North Carolina

Fund Financial Statements

The fund financial statements begin on page 52 and provide detailed information about the major

individual funds. A fund is a fiscal and accounting entity with a self- balancing set of accounts that the

State uses to keep track of specific sources of funding and spending for a particular purpose. In addition

to the major funds, page 137 begins the individual fund data for the non- major funds. The State's funds

are divided into three categories – governmental, proprietary, and fiduciary – and use different

accounting approaches.

Governmental funds -- Most of the State's basic services are reported in the governmental funds,

which focus on how money flows into and out of those funds and the balances left at year- end that

are available for future spending. The governmental fund financial statements provide a detailed

short- term view of the State's general government operations and the basic services it provides.

Governmental fund information helps determine whether there are more or fewer financial

resources that can be spent in the near future to finance the State's programs. These funds are

reported using modified accrual accounting, which measures cash and all other financial assets that

can readily be converted to cash. Governmental funds include the General Fund and special

revenue, capital project, and permanent funds.

Proprietary funds -- When the State charges customers for the services it provides, whether to

outside customers or to other agencies within the State, these services are generally reported in

proprietary funds. Proprietary funds ( enterprise and internal service) utilize accrual accounting; the

same method used by private sector businesses. Enterprise funds report activities that provide

supplies and services to the general public. The Unemployment Compensation Fund is our most

significant enterprise fund. Internal service funds report activities that provide supplies and

services for the State's other programs and activities - such as the State's State Property Fire

Insurance Fund, the Motor Fleet Management Fund, Centralized Computing Services Fund, and

Telecommunications Services Fund. Internal service funds are reported as governmental activities

on the government- wide statements.

Fiduciary funds -- The State acts as a trustee or fiduciary, for its employee pension plans. It is also

responsible for other assets that, because of a trust arrangement, can be used only for the trust

beneficiaries. The State's fiduciary activities are reported in separate Statements of Fiduciary Net

Assets and Changes in Fiduciary Net Assets beginning on page 60. These funds, which include

pension ( and other employee benefits), private- purpose, investment trust, and agency funds, are

reported using accrual accounting. The government- wide statements exclude fiduciary fund

activities and balances because these assets are restricted in purpose and cannot be used to support

the State’s own programs.

Additional Required Supplementary Information

Following the basic financial statements and note disclosures is additional Required Supplementary

Information that further explains and supports the information in the financial statements. The Required

Supplementary Information includes General Fund budgetary comparison schedules reconciling the

statutory and generally accepted account principles ( GAAP) fund balances at fiscal year- end, and

pension plan trend information related to funding progress and contributions.

Supplementary Information

Supplementary information includes the introductory section, and the combining financial

statements for non- major governmental, proprietary, and fiduciary funds. These funds are added

together, by fund type, and presented in single columns in the basic financial statements, but are not

reported individually, as with major funds, on the governmental fund financial statements.

State of North Carolina 31

FINANCIAL ANALYSIS OF THE GOVERNMENT AS A WHOLE

Statement of Net Assets. The State’s combined net assets increased $ 68.3 million, or .3% over the

course of this fiscal year’s operations. The net assets of the governmental activities increased $ 577.7

million or 2.7% and business- type activities had a decrease of $ 509.4 million or 36.5%.

Governmental Business- type Total Primary

Activities Activities Government

Current and other non-current

assets........................ $ 10,312 $ 1,142 $ 11,454

Capital assets, net..................... 22,340 42 22,382

Total assets.............................. 32,652 1,184 33,836

Long- term liabilities.................... 3,711 10 3,721

Other liabilities........................... 6,926 288 7,214

Total liabilities.......................... 10,637 298 10,935

Net assets:

Invested in capital assets,

net of related debt.................. 22,025 38 22,063

Restricted.................................. 1,605 798 2,403

Unrestricted............................... ( 1,615) 50 ( 1,565)

Total net assets........................ $ 22,015 $ 886 $ 22,901

Net Assets as of June 30, 2002

( In Millions)

The largest component ( 98%) of the State’s net assets reflects its investment in capital assets ( land,

buildings, machinery and equipment, State highway systems, general infrastructure, and other capital

assets), less any related debt outstanding that was needed to acquire or construct the assets. In

subsequent years, comparative data will provide the basis for more detailed analysis.

The State of North Carolina, like many other state and local governments, issues general obligation

debt and distributes the proceeds to local governments and component units. The proceeds are used to

expand university and community college capacity, fund capital maintenance, build local schools, and

to provide local access to clean water and natural gas utilities. Of the $ 3.48 billion of outstanding

general obligation debt at June 30, 2002, $ 3.17 billion of the outstanding debt is attributable to debt

issued as State aid to component units ( universities and community colleges) and local governments.

The balance sheets of component unit and local government recipients reflect ownership of the related

constructed capital assets without the burden of recording the debt obligation. The policy of selling

general obligation bonds and funneling the cash proceeds to non- primary government ( non- State)

entities has been in place for decades. Through this policy the State was able to promote improved

financial management, save bond issuance costs, and receive more attractive financing arrangements.

However, by issuing debt and sending the cash proceeds outside of the State, the State is left to reflect

significant liabilities on its statement of net assets ( balance sheet) which are reflected in the unrestricted

net asset component since there are no offsetting capital assets.

The government- wide statement of net assets for governmental activities reflects a negative $ 1.6

billion unrestricted net asset balance, with total net assets of $ 22.015 billion, and capital assets, net of

related debt of $ 22.025 billion. Total restricted governmental assets for fiscal year 2002 was $ 1.6

billion. From the governmental activities perspective, the fiscal year 2002 statement of net assets

indicates that the State is over- committed by $ 1.6 billion, primarily because of the distribution of debt

proceeds mentioned previously and other unfunded liabilities.

32 State of North Carolina

Statement of Activities. The following condensed financial information was derived from the

government- wide Statement of Activities and reflects how the State’s net assets changed during the

fiscal year:

Governmental Business- type Total Primary

Activities Activities Government

Revenues

Program revenues

Charges for services...................................... $ 1,313 $ 4 61 $ 1,774

Operating grants and contributions................. 8,787 439 9,226

Capital grants and contributions..................... 714 1 715

General revenues

Taxes

Individual income tax.................................. 7,235 — 7,235

Corporate income tax................................. 599 — 599

Sales and use tax....................................... 3,779 — 3,779

Gasoline tax................................................ 1,213 — 1,213

Franchise tax.............................................. 591 — 591

Highway use tax......................................... 555 — 555

Insurance tax.............................................. 348 — 348

Beverage tax.............................................. 201 — 201

Inheritance tax............................................ 107 — 107

Other taxes................................................. 279 — 279

Tobacco settlement........................................ 176 — 176

Unrestricted investment earnings................... 139 — 139

Miscellaneous................................................ 57 — 57

Total revenues.............................................. 26,093 901 26,994

Expenses

General government....................................... 874 — 874

Primary and secondary education.................. 6,803 — 6,803

Higher education............................................ 2,520 — 2,520

Health and human services............................ 10,377 — 10,377

Economic development.................................. 469 — 469

Environment and natural resources................ 627 — 627

Public safety, corrections and regulation........ 2,109 — 2,109

Transportation................................................ 1,531 — 1,531

Agriculture...................................................... 122 — 122

Interest on long- term debt.............................. 149 — 149

Unemployment compensation........................ — 1,337 1,337

Other business- type activities......................... — 25 25

Total expenses............................................. 25,581 1,362 26,943

Excess ( deficiency) before contributions

and transfers.............................................. 512 ( 461) 51

Contributions to permanent funds................... 2 — 2

Transfers........................................................ 48 ( 48) —

Increase ( decrease) in net assets................ 562 ( 509) 53

Net assets - beginning - restated.................... 21,453 1,395 22,848

Net assets - ending........................................ $ 22,015 $ 8 86 $ 22,901

Changes in Net Assets

For the Fiscal Year Ended June 30, 2002

( In Millions)

As a result of this year’s operations, the net assets of governmental activities increased by $ 562

million, or 2.6%. While this indicates that current year revenues were sufficient to cover current year

expenses, the growth in net assets was limited by the slowdown in the State’s economy and the

associated increased demand for government services.

State of North Carolina 33

The State highway system is estimated to have a public service life of 50 years based on the planned

maintenance schedule. Therefore, instead of charging the entire cost of additions to expense for the

State highway system in the year of construction, the State highway system is capitalized and

depreciated ( costs allocated) over the estimated life of the highway system. The expenses are allocated

over the periods of service to the public.

Business- type activities reflect a decrease in net assets of $ 509 million. The Unemployment

Compensation Fund is the predominant activity accounting for 89.5% of the total net assets of the

business type activities. Please refer to the discussion of major funds for more information on the

Unemployment Compensation Fund.

Governmental Activities:

The following chart depicts revenues of the governmental activities for the fiscal year:

Revenues - Governmental Activities

Fiscal Year Ending June 30, 2002

Charges for services

5%

Capital grants and

contributions

3%

Individual income and

corporate income taxes

30%

Gasoline and highway

use taxes

7%

Other taxes

6%

Miscellaneous

2%

Sales and use tax

14%

Operating grants and

contributions

33%

The State sales tax was increased by a half- cent from 4% to 4.5%, effective October 16, 2001, This

increase is scheduled to expire July 1, 2003. Effective July 1, 2002, the provisions for local government

tax reimbursements were repealed, and local governments now have the optional authority to impose an

additional half- cent sales tax. Effective for the tax years January 1, 2001 through December 31, 2003,

the highest individual income tax rate increased from 7.75% to 8.25%.

34 State of North Carolina

The following chart depicts expenses of the governmental activities for the fiscal year:

Expenses - Governmental Activities

Fiscal Year Ending June 30, 2002

—

$ 1,000

$ 2,000

$ 3,000

$ 4,000

$ 5,000

$ 6,000

$ 7,000

$ 8,000

$ 9,000

$ 10,000

$ 11,000

General

government

Primary and

secondary

education

Higher

education

Health and

human services

Economic

development

Environment

and natural

resources

Public safety,

corrections, and

regulation

Transportation Agriculture Interest on long-term

debt

Expenses

Program Revenues ( excluding Capital

Grants)

Millions

Business- type Activities

Net assets of the business- type activities decreased by $ 509.4 million during the fiscal year. The

primary factor contributing to these results included:

 Due to the increasing unemployment in the State ( due to the slowing economy and losses or lower

profits for business in North Carolina), the North Carolina Unemployment Compensation Funds’

payment of benefits increased from $ 678 million in fiscal year 2001 to $ 1.3 billion during fiscal

year 2002. However the negative impact on net assets was only $ 515 million, because of increases

in operating revenues during the year. Operating revenues increased by $ 412.8 million, or 104%.

State of North Carolina 35

General Fund

General Fund

Budgetary

Highlights

FINANCIAL ANALYSIS OF THE STATE’S INDIVIDUAL FUNDS

As the State completed the year, the governmental funds reflected fund balances of $ 3.08 billion.

This represented a decline in fund balances of $ 513.5 million in fiscal year 2002. The General Fund

decline of $ 319.5 million, and the Highway Trust Fund decline of $ 274.6 million represent the largest

portion of the overall decrease in governmental funds.

The General Fund is the chief operating fund of the State. At the end of fiscal year 2002, the State’s

General Fund reported a total fund balance deficit ( negative) of $ 349 million, with unreserved fund

balance of negative $ 576.3 million and reserved fund balance of $ 227.8 million. With the addition of

management designations as described in Note 8, the State’s General Fund was over- committed by $ 1.1

billion at June 30, 2002. Total fund balance diminished significantly during the fiscal year ($ 319.5

million), primarily the result of lower tax collections and the general slowing of the economy. The

public’s demand for government services tends to grow or remain strong during times of economic

difficulty, particularly in relation to the primary functions funded by General Fund operations

( education, health and human services). By the end of fiscal year 2002, General Fund revenues had

declined .21% from the prior year. On a modified accrual basis, individual income tax decreased by

$ 385.7 million, or 5%. Corporate income tax decreased by $ 164 million, or 23%. Franchise tax

revenues decreased by $ 154.4 million, or 20.7%. Sales and use tax increased by $ 336.8 million, or

9.8%, although the rate of increase was less than expected given the half- cent rate increase effective for

fiscal year 2002. Despite the decline in revenues, General Fund expenditures increased by 366.4

million, or 1.7%.

(. 6)

(. 5)

(. 4)

(. 3)

(. 2)

(. 1)

—

.1

.2

.3

.4

.5

.6

.7

.8

.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

FUND BALANCES OF THE GENERAL FUND ( GAAP Basis)

Unreserved

Reserved

Billions $

Original versus Final Budget. The General Fund is the State’s only major fund, as defined by GASB

Statement No. 34, to have a legally adopted annual budget. The original and final annual budgets

include budget appropriations supported by tax, non- tax, and other departmental receipts. The portion

of the original budget comprising departmental receipts is not intended to be a controlling point in the

effort to manage the State’s General Fund budget. The final budget includes amendments for

departmental receipts collected during the fiscal year. General Fund departmental receipts are typically

36 State of North Carolina

authorized for expenditure within the activity that generated the receipt. Historically, final estimated

receipts have varied significantly from the original estimate at the beginning of the fiscal year. State

agencies expend departmental receipts prior to spending State tax and non- tax supported appropriations.

If departmental receipts are higher than expected, appropriated dollars may go unspent and be re-appropriated

in a subsequent fiscal year.

Final Budget versus Actual Experience. The Schedule of Revenues, Expenditures and Changes in

Unreserved Fund Balance— Budget and Actual ( Budgetary Basis— Non- GAAP), General Fund is

intended to demonstrate legal compliance. In a typical year of General Fund budgetary operations,

federal and intra- governmental transactions will be significantly under- realized with an offsetting

under- expenditure in the primary and secondary education; health and human services; and public

safety, corrections, and regulation. When departmental receipts reflect under- realized revenues, there is

an offsetting under- expenditure of dollars against total budgeted appropriations.

For fiscal year 2002, the State experienced a shortfall in tax and non- tax receipts on the order of

$ 1.55 billion. Typical with the experience of other state governments, the slowing national and state

economy, resulted in a general decline in tax collections. Net of refunds to taxpayers, individual

income taxes fell short of estimates by $ 1.04 billion, corporate income taxes were less than expected by

$ 177 million, sales and use tax was $ 90.5 million less than expected, and franchise tax was $ 192.7

million under budget estimates. Inheritance tax collections fell short of estimates by $ 25.4 million.

Higher unemployment, lower individual business and corporate earnings, and a declining stock market,

resulting in lower capital gains, represented the common thread in the general tax revenue decline.

In the effort to meet the State constitutional mandate of balancing the General Fund budget,

reductions of $ 789.2 million were implemented, with the remainder of the budget funded by $ 437.7

million of non- General Fund dollars, and $ 239.3 million transferred from the Savings Reserve account.

Budget reductions affecting the major General Fund functions of our State government were as

follows: general government, 9.9%; primary and secondary education, 1.8%; community colleges,

7.1%; public universities, 8.6%; health and human services, 3.9%; economic development, 12.9%;

environment and natural resources, 18.9%, public safety, correction, and regulation, 4.5%; and

agriculture, 12.5%.

Investment income fell short of estimated budgetary receipts by $ 34.2 million as a result of lower

General Fund cash available for investment and lower investment rates of return.

Our State manages the budget through the Office of State Budget and Management ( OSBM). For

fiscal year 2002, OSBM executed the necessary cuts in the budget by withholding portions of quarterly

allotments and by giving agencies targeted reductions in spending. The final budget for tax and non- tax

revenues is never amended without a special session of the General Assembly. The appropriation of

increases in departmental receipts is authorized by the General Assembly through special provision in

the biennial budget bill.

Each state has flexibility in how it decides to establish and execute its budget. For example, North

Carolina nets certain distributions of State funds to local governments and other entities directly out of

taxes, where other states may appropriate similar activities. Effective for fiscal year 2003, certain local

government distributions previously considered continuing State appropriations from State revenue

collections, will be accounted for and reported as local government funds.

Refunds to individual income taxpayers of $ 1.373 billion represented 15.9% of total gross individual

income collections for fiscal year 2002. Refunds to corporate taxpayers of $ 230.8 million represented

23.2% of gross corporate income tax collections. Refunds of sales and use tax totaled $ 398.7 million in

fiscal year 2002, or 6.8% of gross collections.

For fiscal year 2002, the General Fund again closed the year with an extremely low unreserved fund

balance. For the fiscal years ended June 30, 2000, 2001, and 2002, the ending unreserved fund balance

was zero, zero, and $ 3.8 million, respectively. To gain a sense of perspective, since 1965 unreserved

State of North Carolina 37

fund balance in the General Fund averaged $ 200 million per year, or 3.9% of total appropriation

expenditures, equivalent to 10 business days disbursements of appropriation expenditures. In the

decade of the 1990’ s, unreserved fund balance averaged $ 293 million, or 3.1% of appropriation

expenditures, equivalent to eight business days worth of disbursements of appropriation expenditures.

47

51

76

32

53

33

39

33

71

28

8

10

19

21

19

26

12

8

5

17

22

16 17 17

6

8

—

4

11 11

7

10

8

11

6

— — —

—

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

General Fund Budgetary Basis —

Number of Days of Appropriation Expenditures in Unreserved

Fund Balance

at June 30

Days

Fiscal Year

North Carolina is required by its constitution to balance the General Fund on a budgetary basis. The

budgetary basis reserved fund balance totaled $ 390.1 million ( see table below). See the notes to

required supplemental information for a more detailed discussion of our State’s budgetary process. The

following schedule summarizes current year changes in the budgetary reserve accounts. Amounts are

expressed in thousands.

Transfers Transfers to

from General Fund

Balance General Fund Unreserved Balance

General Fund June 30, Unreserved Unbudgeted Fund Unbudgeted June 30,

Reserved Fund Balance 2001 Fund Balance Revenues Balance Expenditures 2002

Savings..............................$ 157,522 $ 90,000 $ 7 ,352 $ ( 239,342) $ ( 15,532)$ —

Retirees' health premium... 53,895 — — — ( 3,085) 50,810

N. C. Railroad acquisition... 31,582 — — — ( 9,501) 22,081

Disproportionate share....... 1,170 — — — ( 1,170) —

Disaster relief..................... 448,608 — 123,583 — ( 254,956) 317,235

Exec. Order # 3................... 178,472 2,911 — — ( 181,383) —

Exec. Order # 19................. — — 440,915 ( 324,915) ( 116,000) —

Total...................................$ 871,249 $ 92,911 $ 5 71,850 $ ( 564,257) $ ( 581,627) $ 390,126

Increases ( Decreases)

38 State of North Carolina

Highway

Fund

Highway

Trust Fund

General Fund Fiscal Year 2003 Budget. The General Fund State appropriations budget for fiscal year

2003 is $ 14.35 billion. The General Assembly took action on several revenue enhancements for fiscal

year 2003, totaling $ 866.1 million. The most significant action was the accelerated repeal of the local

government reimbursements paid to replace revenues lost by local governments as the result of actions

taken by the State ($ 333.4 million for fiscal year 2003). Local governments were granted the authority

to establish a one- half cent local option sales tax to replace the reimbursements. Additionally, the

annual transfer from the Highway Trust Fund was increased by $ 205 million for 2002- 2003, of which

$ 80 million is to be on a recurring basis, with $ 125 million established a one- time advance to be repaid

in the future. Additional non- recurring transfers of $ 38 million, from the Tobacco Trust Fund, and $ 40

million, from the Health and Wellness Trust Fund were approved by the General Assembly for fiscal

year 2003. The following table summarizes the fiscal year 2003 revenue enhancements. Amounts are

expressed in millions.

Amount

Local government reimbursements cancelled ............................................ $ 333.4

Highway Trust Fund Transfer — advance .................................................. 125.0

Business tax revisions ................................................................................ 90.0

Highway Trust Fund Transfer — recurring adjustment ............................... 80.0

Delay 2001 tax breaks ................................................................................ 51.7

Transfer from Health and Wellness Trust Fund — non- recurring ............... 40.0

Departmental fee increases ........................................................................ 39.3

Transfer from Tobacco Trust Fund — non- recurring .................................. 38.0

Department of Revenue — Project Collect Tax .......................................... 32.5

Special Fund / Trust Fund Transfers — non- recurring ............................... 20.4

Internal Revenue Code Conformity ............................................................ 15.8

Total ............................................................................................................

$ 866.1

The Highway Fund accounts for most of the activities of the North Carolina Department of

Transportation, including the construction and maintenance of the State primary, secondary, and urban

road systems. The principal revenues of the Highway Fund are gasoline ( motor fuels) taxes, motor

vehicle registration fees, driver's license fees, and federal aid.

While the effects of the slowing economy have had an impact on business travel, commercial

transportation and general consumer travel and tourism, the States highway fund taxes and fees have

still shown growth. Although total revenue of the Highway Fund declined by $ 29 million, or 1.3%,

gasoline tax increased by $ 20 million, or 2.3%, and fees, licenses, and fines increased by $ 18.8 million,

or 4.8%. The largest decrease came in the decline of accrued federal funds, $ 52 million, or 5.8%.

Expenditures for highway construction, maintenance, and administration grew by $ 103 million, or

4.5%.

The Highway Trust Fund was established to provide a dedicated funding mechanism to meet

highway construction needs for North Carolina. Taxes were increased for the specific purpose of

improving identified primary transportation corridors within the State and for the completion of urban

loops around seven major metropolitan areas. Additionally, this fund provides supplemental allocations

for secondary road construction and supplemental assistance to municipalities for local street projects.

The fund also makes transfers to the General Fund and the Highway Fund. The principal revenues of

the Highway Trust Fund are highway use taxes, motor fuels taxes, and various title and registration

fees.

Total revenues of the Highway Trust Fund declined by $ 10.8 million, or 1%. The decline in

investment and interest earnings of $ 26.7 million, as a result of lower cash balances to invest, had the

largest impact on the Highway Trust Fund. Gasoline tax increased by $ 8.3 million, or 2.9%, and

highway use tax grew by $ 9 million, or 1.7%. Transportation related expenditures of the Highway

Trust Fund grew by $ 63.5 million, or 11.9%.

State of North Carolina 39

Unemployment

Compensation

Fund

The Unemployment Compensation Fund accounts for the State’s unemployment insurance program,

which is part of a national system established to provide temporary benefit payments to eligible

unemployed workers. The unemployment benefits are financed primarily by State unemployment

insurance taxes, distributions of federal unemployment insurance taxes, and federal funding for the

unemployment benefits.

For fiscal year 2002, employer contributions grew by $ 52.5 million, or 13.8%. Federal Funds grew

by $ 361.3 million, or 2,465%. The drastic growth in revenues was driven by a slowing economy and an

increasing unemployment rate in North Carolina. Unemployment benefits paid in fiscal year 2002

totaled $ 1.3 billion, a 96.6% increase in payments over fiscal year 2001. Net assets of $ 793 million at

June 30, 2002 represented a decline of $ 516.2 million, or 39.4%.

CAPITAL ASSETS AND DEBT ADMINISTRATION

Capital Assets: At the end of the fiscal year 2002, the Statement of Net Assets reflected $ 22.382

billion, net of accumulated depreciation, in a broad range of capital assets ( see the table below).

Depreciation charges for this fiscal year totaled $ 515.7 million.

Governmental Business- type Total Primary

Activities Activities Government

Land............................................. $ 7,209 $ 3 $ 7,212

Buildings....................................... 1,330 15 1,345

Machinery and equipment............. 576 1 577

General infrastructure................... 88 7 95

State highway system................... 11,547 — 11,547

Other............................................ 135 — 135

Subtotal....................................... 20,885 26 20,911

Construction in progress............... 1,455 16 1,471

Total............................................. $ 22,340 $ 4 2 $ 22,382

Capital Assets, Net as of June 30, 2002

( In Millions)

The effort to manage the State’s General Fund budget shortfall resulted in the postponement of most

construction and maintenance activity. The State’s fiscal year 2001- 2002 capital outlay budget

included spending $ 32.9 million for new projects at various state agency buildings. More detailed

information about the State’s capital assets is presented in Note 4 to the financial statements, and in

Note 17.

For fiscal year 2002, the State reflected $ 11.5 billion ( net of accumulated depreciation) of highway

system infrastructure, an increase of $ 917 million ( net), or 8.6%. Depreciation expense for the highway

system was $ 315 million for fiscal year 2002. Based on the requirements of GASB Statement No. 34,

governments were only required to capitalize major infrastructure systems back to July 1, 1980. The

North Carolina Department of Transportation was able to recall and capitalize construction expenditure

information to include highway system construction costs since 1953.

40 State of North Carolina

Long- term Debt: The State authorizes, issues, and sells debt obligations. General obligation bonds,

issued by the State, are backed by the full faith and credit of the State. The State also issues revenue

dedicated bonded debt, whose payment for principal and interest comes solely out of funds that receive

legally restricted revenues. More detailed information regarding the State’s long- term obligations is

presented in Note 6 to the financial statements.

Governmental Business- type Total Primary

Activities Activities Government

General obligation bonds

( backed by the state)................... $ 3,478 $ — $ 3,478

Revenue bonds and notes

( backed by specific tax and

fee revenues).............................. — 10 10

Total............................................... $ 3,478 $ 1 0 $ 3,488

Outstanding Bonded Debt as of June 30, 2002

( In Millions)

During fiscal year 2002, the State issued general obligation debt totaling $ 605 million ($ 300 million

for capital maintenance and expanding the capacity of universities and community colleges; $ 215

million for clean water; $ 55 million for local school construction; and $ 35 million for natural gas).

The State is in the process ($ 300 million referred to above issued in fiscal year 2002) of fulfilling a

significant commitment to increase the capacity of the universities and community colleges and to

provide funding for renovations. In November 2000, the State’s voters approved $ 3.1 billion of

University and Community College general obligation bonds. The General Assembly has

predetermined the specific building projects to be funded by the bond proceeds. At June 30, 2002, there

was a remaining bond authorization of $ 2.55 billion of higher education bonds yet to be issued,

constituting 82.3% of the original $ 3.1 billion higher education bond authorization.

State of North Carolina 41

Bond Ratings

The State’s general obligation bonds are rated Aa1 by Moody’s, AAA by Standard & Poors, and

AAA by Fitch. During the fiscal year, Moody’s Investors Services downgraded the State of North

Carolina’s general obligation rating to Aa1, from Aaa. According to Moody’s, the primary reasons for

the downgrade were the State’s continued budget pressure, reliance on non- recurring revenues, and

weakened balance sheet. Also, Moody’s commented that the task of restoring structural budget balance

and rebuilding reserves faces political and economic obstacles.

Limitations on Debt

The limitations on the increase of State debt are contained in the State Constitution, Article 5,

Section 3. This section restricts the General Assembly from contracting debts secured by a pledge of

the faith and credit of the State, unless approved by a majority of the qualified voters of the State except

for:

1. To fund or refund a valid existing debt;

2. To supply an unforeseen deficiency in the revenue;

3. To borrow in anticipation of the collection of taxes due and payable within the current fiscal year to

an amount not exceeding 50 percent of such taxes;

4. To suppress riots or insurrections, or to repel invasions;

5. To meet emergencies immediately threatening the public health or safety, as conclusively

determined in writing by the Governor;

6. For any other lawful purposes, to the extent of two- thirds of the amount by which the State's

outstanding indebtedness shall have been reduced during the next preceding biennium.

No short- term borrowing occurred in fiscal year 2002.

ECONOMIC CONDITION AND OUTLOOK

The unemployment rate has dropped from 6.9% in April to 6.0% in October, and we have seen

improvement in the unemployment claims numbers. State sales tax receipts during the quarter ending

September 30 were up 1.7% over the same quarter last year and increased 2.3% during the second

calendar quarter. This compares to - 2.0% for the first quarter and - 3.5% for the final quarter of 2001.

Unit sales of cars and light trucks rose 2.9% in May and June this year.

Even with the recent improvements, the State is budgeting on the basis of a continued sluggish

recovery. As the state has diversified away from the traditional manufacturing industries ( textiles,

apparel, furniture, and tobacco) to electronics and other technology- oriented companies, we have

become more vulnerable to problems in the new sectors.

Key Economic Forecast Variables

(% Change Unless Noted)

Fiscal Year 2002

Actual

Fiscal Year 2003

Budgeted

North Carolina

Total Employment - 1.1% - 1.4%

Manufacturing Employment - 7.1% - 4.5%

Unemployment Rate 6.3% 7.4%

Personal Income 1.3% 1.8%

42 State of North Carolina

REQUESTS FOR INFORMATION

This financial report is designed to provide our citizens, taxpayers, customers, investors, and

creditors with a general overview of the State’s finances and to demonstrate the State’s accountability

for the money it receives. If you have any questions about this report or need additional financial

information, contact the North Carolina Office of the State Controller, Financial Reporting Section at

( 919) 981- 5454.

The State’s component units issue their own separately issued audited financial statements. These

statements may be obtained by directly contacting the component unit. A list of component units and

contact information is available in Note 1, beginning on page 64.

BASIC

FINANCIAL

STATEMENTS

44 State of North Carolina

THIS PAGE INTENTIONALLY LEFT BLANK.

GOVERNMENT- WIDE

FINANCIAL

STATEMENTS

46 State of North Carolina

STATEMENT OF NET ASSETS

June 30, 2002 Exhibit A- 1

( Dollars in Thousands)

Primary Government

Governmental Business- type Component

Activities Activities Total Units

ASSETS

Cash and cash equivalents ( Note 3)............................... $ 3 ,628,804 $ 7 05,163 $ 4 ,333,967 $ 1 ,877,906

Investments ( Note 3)...................................................... 4 18,848 3 5,888 4 54,736 3 ,058,029

Securities lending collateral ( Note 3)............................... 3 ,674,464 2 00,009 3 ,874,473 —

Receivables, net.............................................................. 1 ,765,221 1 97,621 1 ,962,842 5 84,511

Due from fiduciary funds ( Note 7).................................... 5 ,681 — 5 ,681 —

Due from component units ( Note 7)................................. 9 ,391 — 9 ,391 584

Due from primary government ( Note 7)........................... — — — 1 55,677

Internal balances............................................................. 390 ( 390) — —

Inventories...................................................................... 1 34,715 416 1 35,131 6 5,880

Prepaid items.................................................................. 6 ,965 2 ,519 9 ,484 1 1,524

Advances to component units ( Note 7)............................ 4 7,081 — 4 7,081 —

Notes receivable............................................................. 5 22,684 — 5 22,684 2 ,445,722

Endowment investments................................................. 4 9,730 — 4 9,730 —

Deferred charges............................................................. — 129 129 1 7,605

Securities held in trust..................................................... 4 8,432 — 4 8,432 —

Pension assets ( Note 9).................................................. 37 — 37 —

Capital assets, net ( Note 4)............................................. 2 2,339,580 4 2,358 2 2,381,938 5 ,120,036

Total Assets ................................................................... 3 2,652,023 1 ,183,713 3 3,835,736 1 3,337,474

LIABILITIES

Accounts payable and accrued liabilities......................... 1 ,019,291 1 8,335 1 ,037,626 5 49,201

Medical claims payable................................................... 7 09,514 — 7 09,514 4 ,233

Unemployment benefits payable..................................... — 5 3,966 5 3,966 —

Tax refunds payable........................................................ 9 45,426 — 9 45,426 —

Obligations under securities lending................................ 3 ,674,464 2 00,009 3 ,874,473 —

Interest payable............................................................... 4 4,786 25 4 4,811 2 2,825

Due to fiduciary funds ( Note 7)........................................ 8 ,673 — 8 ,673 —

Due to component units ( Note 7)..................................... 1 55,677 — 1 55,677 584

Due to primary government ( Note 7)............................... — — — 1 8,218

Unearned revenue........................................................... 2 73,318 1 4,882 2 88,200 8 3,456

Advance from primary government ( Note 7).................... — — — 5 5,908

Obligations under reverse repurchase agreements......... — — — 3 4,995

Deposits payable............................................................. 176 141 317 2 2,040

Funds held for others...................................................... 9 4,393 — 9 4,393 3 98,684

Long- term liabilities ( Note 6):

Due within one year...................................................... 2 27,080 268 2 27,348 2 09,672

Due in more than one year........................................... 3 ,484,516 9 ,904 3 ,494,420 3 ,733,590

Total Liabilities................................................................ 1 0,637,314 2 97,530 1 0,934,844 5 ,133,406

NET ASSETS

Invested in capital assets, net of related debt.................. 2 2,025,039 3 8,267 2 2,063,306 3 ,851,666

Restricted for:

Nonexpendable:

Environment and natural resources........................... 4 3,846 — 4 3,846 —

Higher education....................................................... — — — 5 83,336

Expendable:

Primary and secondary education............................. 1 5,811 — 1 5,811 —

Higher education....................................................... 4 03,934 — 4 03,934 1 ,931,330

Health and human services....................................... 3 9,210 — 3 9,210 —

Economic development............................................. 5 3,389 — 5 3,389 2 31,901

Environment and natural resources........................... 4 4,125 — 4 4,125 —

Public safety, corrections, and regulation.................. 1 8,151 — 1 8,151 —

Transportation........................................................... 8 03,385 — 8 03,385 —

Unemployment compensation................................... — 7 93,118 7 93,118 —

Other purposes......................................................... 1 82,921 4 ,319 1 87,240 7 ,192

Unrestricted..................................................................... ( 1,615,102) 5 0,479 ( 1,564,623) 1 ,598,643

Total Net Assets.............................................................. $ 2 2,014,709 $ 8 86,183 $ 2 2,900,892 $ 8 ,204,068

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

State of North Carolina 47

THIS PAGE INTENTIONALLY LEFT BLANK.

48 State of North Carolina

STATEMENT OF ACTIVITIES

For the Fiscal Year Ended June 30, 2002

( Dollars in Thousands)

Operating Capital

Charges for Grants and Grants and Net ( Expense)

Functions/ Programs Expenses Services Contributions Contributions Revenue

Primary Government:

Governmental Activities:

General government................................................... $ 874,208 $ 184,982 $ 1 28,677 $ 2,544 $ ( 558,005)

Primary and secondary education.............................. 6,802,979 14,648 7 20,923 — ( 6,067,408)

Higher education........................................................ 2,519,703 789 1 5,281 — ( 2,503,633)

Health and human services........................................ 10,376,807 133,275 7 ,014,086 — ( 3,229,446)

Economic development.............................................. 469,102 21,828 2 44,531 — ( 202,743)

Environment and natural resources............................ 627,369 92,604 1 58,720 39,192 ( 336,853)

Public safety, corrections, and regulation................... 2,109,487 327,457 2 08,348 30,863 ( 1,542,819)

Transportation............................................................ 1,530,870 524,198 2 82,519 638,690 ( 85,463)

Agriculture.................................................................. 121,729 13,178 1 4,169 2,795 ( 91,587)

Interest on long- term debt.......................................... 148,595 — — — ( 148,595)

Total Governmental Activities............................. 25,580,849 1,312,959 8 ,787,254 714,084 ( 14,766,552)

Business- type Activities:

Unemployment Compensation................................... 1,336,718 433,364 4 34,439 — ( 468,915)

Other business- type activities..................................... 25,431 27,477 4 ,321 1,121 7,488

Total Business- type Activities............................. 1,362,149 460,841 4 38,760 1,121 ( 461,427)

Total Primary Government............................................. $ 26,942,998 $ 1,773,800 $ 9 ,226,014 $ 715,205 $ ( 15,227,979)

Component Units:

Golden LEAF Foundation........................................... $ 11,366 $ — $ ( 12,995)$ — $ ( 24,361)

University of North Carolina System........................... 5,132,174 3,045,092 3 91,424 35,484 ( 1,660,174)

Community Colleges.................................................. 1,155,149 183,081 3 45,531 54,361 ( 572,176)

N. C. Housing Finance Agency................................... 161,449 170,778 — — 9,329

N. C. State Education Assistance Authority................. 101,819 69,352 5 3,254 — 20,787

Other component units............................................... 197,548 39,958 1 0,774 11,044 ( 135,772)

Total Component Units................................................... $ 6,759,505 $ 3,508,261 $ 7 87,988 $ 100,889 $ ( 2,362,367)

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

Program Revenues

State of North Carolina 49

STATEMENT OF ACTIVITIES ( continued)

For the Fiscal Year Ended June 30, 2002 Exhibit A- 2

( Dollars in Thousands)

25XX............. Total

Governmental Business- type Component

Activities Activities Total Units

Changes in Net Assets:

Net ( expense) revenue $ ( 14,766,552) $ ( 461,427) $ ( 15,227,979) $ ( 2,362,367)

General Revenues:

Taxes

Individual income tax.............................................. 7,234,431 — 7 ,234,431 —

Corporate income tax............................................. 599,382 — 5 99,382 —

Sales and use tax................................................... 3,778,873 — 3 ,778,873 —

Gasoline tax........................................................... 1,212,788 — 1 ,212,788 —

Franchise tax.......................................................... 590,992 — 5 90,992 —

Highway use tax..................................................... 555,320 — 5 55,320 —

Insurance tax.......................................................... 347,893 — 3 47,893 —

Beverage tax.......................................................... 200,593 — 2 00,593 —

Inheritance tax........................................................ 106,491 — 1 06,491 —

Other taxes............................................................. 278,740 — 2 78,740 —

Tobacco settlement.................................................... 175,836 — 1 75,836 —

Unrestricted investment earnings............................... 139,350 — 1 39,350 —

State operating aid..................................................... — — — 2,473,602

State capital aid.......................................................... — — — 217,306

Miscellaneous............................................................ 57,484 — 5 7,484 2,384

Contributions to permanent funds................................... 2,019 — 2 ,019 —

Contributions to term and permanent endowments........ — — — 31,148

Transfers........................................................................ 47,957 ( 47,957) — —

Total general revenues and transfers............................. 15,328,149 ( 47,957) 1 5,280,192 2,724,440

Change in net assets...................................................... 561,597 ( 509,384) 5 2,213 362,073

Net assets — July 1, as restated.................................... 21,453,112 1,395,567 2 2,848,679 7,841,995

Net assets — June 30.................................................... $ 22,014,709 $ 886,183 $ 2 2,900,892 $ 8,204,068

Primary Government

50 State of North Carolina

THIS PAGE INTENTIONALLY LEFT BLANK.

FUND FINANCIAL

STATEMENTS

52 State of North Carolina

BALANCE SHEET

GOVERNMENTAL FUNDS

June 30, 2002 Exhibit B- 1

( Dollars in Thousands)

Highway Other Total

Highway Trust Governmental Governmental

General Fund Fund Funds Funds

ASSETS

Cash and cash equivalents ( Note 3)............................... $ 7 82,364 $ 4 73,860 $ 5 48,061 $ 1 ,761,147 $ 3 ,565,432

Investments ( Note 3)...................................................... 1 ,762 — — 3 96,053 3 97,815

Securities lending collateral ( Note 3)............................... 1 ,949,795 4 57,674 4 05,796 8 40,379 3 ,653,644

Receivables, net:

Taxes receivable.......................................................... 7 45,719 8 2,808 3 0,070 2 ,163 8 60,760

Accounts receivable..................................................... 1 05,399 2 ,795 3 29 2 8,921 1 37,444

Intergovernmental receivable....................................... 6 59,024 2 6,151 4 73 1 0,307 6 95,955

Interest receivable........................................................ 8 ,720 2 ,008 2 ,072 7 ,776 2 0,576

Contributions receivable............................................... 1 9,987 — — — 1 9,987

Other receivables......................................................... — 6 ,275 — 1 7 6 ,292

Due from fiduciary funds ( Note 7).................................... 5 ,457 — — 2 16 5 ,673

Due from other funds ( Note 7)......................................... 3 ,826 7 8,227 3 7 2 6,039 1 08,129

Due from component units ( Note 7)................................. 5 ,101 — — 2 ,659 7 ,760

Inventories...................................................................... 4 3,772 6 3,332 — 2 7,333 1 34,437

Prepaid items.................................................................. — — — 5 7 5 7

Advances to other funds ( Note 7).................................... — — 2 ,624 — 2 ,624

Advances to component units ( Note 7)............................ 2 2,081 — — 2 5,000 4 7,081

Notes receivable............................................................. 2 ,952 — — 5 19,732 5 22,684

Securities held in trust..................................................... 5 88 1 2,920 — 3 4,924 4 8,432

Endowment investments................................................. — — — 4 9,730 4 9,730

Total Assets.................................................................... $ 4 ,356,547 $ 1 ,206,050 $ 9 89,462 $ 3 ,732,453 $ 10,284,512

LIABILITIES AND FUND BALANCES

Liabilities:

Accounts payable and accrued liabilities:

Accounts payable......................................................... $ 6 3,739 $ 1 46,873 $ 3 7,950 $ 4 9,879 $ 2 98,441

Accrued payroll............................................................ 5 ,072 2 8,632 — 1 ,347 3 5,051

Intergovernmental payable........................................... 5 17,734 9 0,454 4 2,750 9 ,696 6 60,634

Claims payable............................................................. — — — 2 1,658 2 1,658

Medical claims payable................................................... 7 09,514 — — — 7 09,514

Tax refunds payable........................................................ 9 45,426 — — — 9 45,426

Obligations under securities lending................................ 1 ,949,795 4 57,674 4 05,796 8 40,379 3 ,653,644

Interest payable............................................................... 8 88 — — — 8 88

Due to fiduciary funds ( Note 7)........................................ 8 ,673 — — — 8 ,673

Due to other funds ( Note 7)............................................. 1 3,793 8 ,159 7 6,944 2 1,162 1 20,058

Due to component units ( Note 7)..................................... 1 0,791 2 18 — 1 44,067 1 55,076

Deferred revenue............................................................ 4 78,933 2 ,352 3 7 1 8,242 4 99,564

Advance from other funds ( Note 7).................................. — 2 ,624 — — 2 ,624

Deposits payable............................................................. 1 35 3 0 — 1 1 1 76

Funds held for others...................................................... 6 05 5 8,857 — 3 4,931 9 4,393

Total Liabilities................................................................ 4 ,705,098 7 95,873 5 63,477 1 ,141,372 7 ,205,820

Fund Balances:

Reserved ( Note 8)........................................................ 2 27,767 5 3,560 — 1 ,045,479 1 ,326,806

Unreserved, reported in:

General Fund............................................................ ( 576,318) — — — ( 576,318)

Special Revenue Funds............................................ — 3 56,617 4 25,985 1 ,471,625 2 ,254,227

Capital Projects Funds.............................................. — — — 7 3,751 7 3,751

Permanent Funds...................................................... — — — 2 26 2 26

Total Fund Balance......................................................... ( 348,551) 4 10,177 4 25,985 2 ,591,081 3 ,078,692

Total Liabilities and Fund Balances................................. $ 4 ,356,547 $ 1 ,206,050 $ 9 89,462 $ 3 ,732,453 $ 10,284,512

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

State of North Carolina 53

RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET

TO THE STATEMENT OF NET ASSETS

June 30, 2002 Exhibit B- 1a

( Dollars in Thousands)

Total fund balances - governmental funds ( see Exhibit B- 1) $ 3,078,692

Amounts reported for governmental activities in the Statement of Net Assets are different

because:

- Capital assets used in governmental activities are not financial resources and,

therefore, are not reported in the funds ( see Note 4). These consist of:

Cost of capital assets ( excluding internal service funds)..................................................... $ 2 7,845,415

Less: Accumulated depreciation ( excluding internal service funds)..................................... ( 5,593,147)

Net capital assets........................................................................................................ 22,252,268

- Some assets, such as receivables, are not available soon enough to pay for current-period

expenditures and thus, are offset by deferred revenue in the governmental

funds. 228,786

- Pension assets, resulting from contributions in excess of the annual required

contribution are not financial resources and therefore are not reported in

the funds. ( See Note 9) 37

- Long- term debt instruments, such as bonds and notes payable, are not due and

payable in the current period and, therefore, the outstanding balances are not reported

in the funds ( see Note 6). Also, unamortized debt premiums are reported in the

Statement of Net Assets but are not reported in the funds. These balances consist of:

General obligation bonds payable....................................................................................... ( 3,467,325)

Unamortized debt premiums ( to be amortized as interest expense).................................... ( 13,709)

Less: Unamortized debt discounts ( to be amortized as interest expense)........................... 3,081

Notes payable..................................................................................................................... ( 11,753)

Capital leases payable........................................................................................................ ( 216)

Net long- term debt....................................................................................................... ( 3,489,922)

- Other liabilities not due and payable in the current period and, therefore, not reported

in the funds ( see Note 6) consist of:

Accrued interest payable..................................................................................................... ( 43,898)

Compensated absences ( excluding internal service funds)................................................. ( 207,563)

Obligations for workers compensation................................................................................. ( 7,145)

Arbitrage rebate payable..................................................................................................... ( 1,287)

Net pension obligation......................................................................................................... ( 3,775)

Total other liabilities..................................................................................................... ( 263,668)

- Internal service funds are used by management to charge the costs of certain

activities to individual funds. The assets and liabilities of the internal service funds

are included in governmental activities in the Statement of Net Assets ( see Exhibit B- 3). 208,516

Total net assets - governmental activities ( see Exhibit A- 1) $ 2 2,014,709

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

54 State of North Carolina

STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES

GOVERNMENTAL FUNDS

For the Fiscal Year Ended June 30, 2002 Exhibit B- 2

( Dollars in Thousands)

Highway Other Total

Highway Trust Governmental Governmental

General Fund Fund Funds Funds

Revenues:

Taxes:

Individual income tax................................................... $ 7 ,219,794 $ — $ — $ 4 54 $ 7,220,248

Corporate income tax.................................................. 5 48,046 — — 5 4,330 602,376

Sales and use tax........................................................ 3 ,766,285 — — 1 2,900 3,779,185

Gasoline tax................................................................ — 8 89,919 2 96,964 2 6,613 1,213,496

Franchise tax............................................................... 5 92,259 — — — 592,259

Highway use tax.......................................................... — — 5 55,320 — 555,320

Insurance tax............................................................... 3 40,785 — — 7 ,108 347,893

Beverage tax............................................................... 2 00,593 — — — 200,593

Inheritance tax............................................................. 1 04,799 — — — 104,799

Other taxes.................................................................. 1 81,657 — — 9 6,970 278,627

Federal funds................................................................. 7 ,266,016 8 45,347 — 3 47,981 8,459,344

Local funds..................................................................... 6 82,310 7 ,269 — 1 2,497 702,076

Investment earnings....................................................... 1 88,310 2 2,866 1 0,183 1 13,723 335,082

Interest earnings on loans.............................................. 2 1 1 27 3 1,526 1 5,747 47,421

Sales and services......................................................... 6 1,259 7 ,060 — 1 26,229 194,548

Rental and lease of property.......................................... 7 ,102 1 3,839 1 ,790 1 ,628 24,359

Fees, licenses, and fines................................................ 2 37,236 4 08,198 9 0,968 1 28,510 864,912

Tobacco settlement........................................................ 1 75,836 — — — 175,836

Contributions, gifts, and grants....................................... 3 3,688 3 ,530 4 88 5 6,096 93,802

Funds escheated............................................................ — — — 9 0,181 90,181

Miscellaneous................................................................ 1 18,690 9 ,466 1 95 1 7,536 145,887

Total revenues......................................................... 2 1,724,686 2 ,207,621 9 87,434 1 ,108,503 26,028,244

Expenditures:

Current:

General government.................................................... 7 41,605 — — 6 7,793 809,398

Primary and secondary education............................... 6 ,495,702 — — 3 06,960 6,802,662

Higher education......................................................... 2 ,296,331 — — 2 23,293 2,519,624

Health and human services......................................... 1 0,333,124 — — 6 5,262 10,398,386

Economic development............................................... 1 88,617 — — 3 10,027 498,644

Environment and natural resources............................. 2 01,369 — — 3 73,502 574,871

Public safety, corrections, and regulation.................... 1 ,809,322 — — 2 60,844 2,070,166

Transportation............................................................. — 2 ,396,459 5 95,728 — 2,992,187

Agriculture................................................................... 7 3,176 — — 4 9,161 122,337

Capital outlay................................................................. — — — 1 26,011 126,011

Debt service:

Principal retirement..................................................... 1 63,723 — 1 6,675 — 180,398

Interest........................................................................ 1 38,148 — 9 ,432 — 147,580

Bond issuance costs................................................... 4 77 — — 2 57 734

Total expenditures.................................................... 2 2,441,594 2 ,396,459 6 21,835 1 ,783,110 27,242,998

Excess revenues over ( under) expenditures................... ( 716,908) ( 188,838) 3 65,599 ( 674,607) ( 1,214,754)

Other Financing Sources ( Uses):

Bonds issued................................................................. — — — 6 05,000 605,000

Other debt issued........................................................... 4 ,832 — — — 4,832

Premium on debt issued................................................. — — — 1 4,733 14,733

Capital leases................................................................. 2 16 — — — 216

Sale of capital assets..................................................... 5 ,950 5 47 1 ,003 5 ,070 12,570

Transfers in.................................................................... 6 16,871 4 00,843 — 4 60,594 1,478,308

Transfers out.................................................................. ( 230,499) ( 197,956) ( 641,170) ( 344,793) ( 1,414,418)

Total other financing sources ( uses)......................... 3 97,370 2 03,434 ( 640,167) 7 40,604 701,241

Net change in fund balances.......................................... ( 319,538) 1 4,596 ( 274,568) 6 5,997 ( 513,513)

Fund balances — July 1, as restated ( Note 19).............. ( 28,086) 3 96,054 7 00,553 2 ,526,882 3,595,403

Increase ( decrease) in reserve for related assets........... ( 927) ( 473) — ( 1,798) ( 3,198)

Fund balances — June 30.............................................. $ ( 348,551) $ 4 10,177 $ 4 25,985 $ 2 ,591,081 $ 3,078,692

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

State of North Carolina 55

RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES,

AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS

TO THE STATEMENT OF ACTIVITIES

June 30, 2002 Exhibit B- 2a

( Dollars in Thousands)

Net change in fund balances - total governmental funds ( see Exhibit B- 2) $ ( 513,513)

Amounts reported for governmental activities in the Statement of Activities are different

because:

- Capital outlays are reported as expenditures in governmental funds. However, in the

Statement of Activities, the cost of capital assets is allocated over their estimated

useful lives as depreciation expense. In the current period, these amounts are:

Capital outlays ( including construction- in- progress) ............................................................ $ 1,979,924

Less: Depreciation expense ................................................................................................ ( 459,627)

Net capital outlay adjustment ....................................................................................... 1,520,297

- Proceeds from the sale of capital assets increase financial resources in the funds,

whereas in the Statement of Activities only the gain or loss on sale is reported. This

adjustment reduces the proceeds by the book value of the capital assets sold. ( 44,841)

- Long- term debt proceeds provide current financial resources to governmental funds,

while the repayment of the related debt principal consumes those financial resources.

These transactions, however, have no effect on net assets. Also, governmental funds

report the effect of premiums and similar items when debt is first issued, whereas these

amounts are deferred and amortized in the Statement of Activities. In the current period,

these amounts consist of:

Debt issued:

Bonds and similar debt issued ......................................................................................... ( 609,832)

Capital lease financings ................................................................................................... ( 216)

Premiums on debt issued ................................................................................................ ( 14,506)

Principal repayments:

Bonds, notes, and similar debt ........................................................................................ 180,398

Net debt adjustments ................................................................................................... ( 444,156)

- Some revenues in the Statement of Activities do not provide current financial

resources and, therefore, are deferred in the funds. Also, revenues related to prior

periods that became available during the current period are reported in the funds but

are eliminated in the Statement of Activities. This amount is the net adjustment. 35,620

- Some expenses reported in the Statement of Activities do not require the use of

current financial resources and, therefore, are not recognized in the funds. Also,

some payments related to prior periods are recognized in the funds but are eliminated

in the Statement of Activities. In the current period, the net adjustments consist of:

Accrued interest .................................................................................................................. ( 2,039)

Compensated absences ...................................................................................................... 5,181

Workers compensation ....................................................................................................... ( 77)

Arbitrage rebate .................................................................................................................. 8,261

Net pension obligation ......................................................................................................... ( 419)

Amortization of deferred amounts ....................................................................................... 797

Net expense accruals .................................................................................................. 11,704

- Inventories of governmental funds are recorded as expenditures when purchased

but in the Statement of Activities are recorded as expenses when consumed. ( 3,198)

- Internal service funds are used by management to charge the costs of certain

activities to individual funds. The net revenues of internal service funds are

included with governmental activities in the Statement of Activities ( see Exhibit B- 4). ( 316)

Change in net assets - governmental activities ( see Exhibit A- 2) $ 561,597

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

56 State of North Carolina

STATEMENT OF NET ASSETS

PROPRIETARY FUNDS

June 30, 2002 Exhibit B- 3

( Dollars in Thousands)

Governmental

Activities —

Unemployment Other Total Internal

Compensation Enterprise Enterprise Service

Fund Funds Funds Funds

ASSETS

Current Assets:

Cash and cash equivalents ( Note 3)............................ $ 6 70,073 $ 3 2,069 $ 7 02,142 $ 6 3,372

Restricted cash and cash equivalents ( Note 3)............ — 724 724 —

Investments ( Note 3)................................................... — 2 7,700 2 7,700 2 1,033

Restricted investments ( Note 3)................................... — 25 25 —

Securities lending collateral ( Note 3)........................... 1 73,899 2 6,110 2 00,009 2 0,820

Receivables:

Accounts receivable, net........................................... 1 9,232 918 2 0,150 2 4,126

Intergovernmental receivables.................................. 1 ,616 — 1 ,616 —

Interest receivable.................................................... 855 73 928 59

Premiums receivable................................................ — 1 ,016 1 ,016 21

Contributions receivable, net.................................... 1 73,724 113 1 73,837 —

Due from fiduciary funds ( Note 7)................................ — — — 8

Due from other funds ( Note 7)..................................... 9 — 9 1 7,028

Due from component units ( Note 7)............................. — — — 1 ,631

Inventories................................................................... — 416 416 278

Prepaid items.............................................................. — 2 ,519 2 ,519 6 ,908

Total current assets............................................... 1 ,039,408 9 1,683 1 ,131,091 1 55,284

Noncurrent Assets:

Restricted/ designated cash and

cash equivalents ( Note 3)......................................... — 2 ,297 2 ,297 —

Investments ( Note 3)................................................... — 52 52 —

Restricted investments ( Note 3)................................... — 8 ,111 8 ,111 —

Receivables:

Accounts receivable, net........................................... — — — 1

Contributions receivable, net.................................... — 74 74 —

Deferred charges......................................................... — 129 129 —

Capital assets, net ( Note 4)......................................... — 4 2,358 4 2,358 8 7,312

Total noncurrent assets......................................... — 5 3,021 5 3,021 8 7,313

Total Assets........................................................... 1 ,039,408 1 44,704 1 ,184,112 2 42,597

LIABILITIES

Current Liabilities:

Accounts payable and accrued liabilities:

Accounts payable..................................................... 4 ,694 357 5 ,051 2 ,806

Accrued payroll......................................................... — 64 64 469

Intergovernmental payable....................................... 548 — 548 —

Claims payable......................................................... 2 ,680 9 ,992 1 2,672 232

Unemployment benefits payable.................................. 5 3,966 — 5 3,966 —

Obligations under securities lending............................ 1 73,899 2 6,110 2 00,009 2 0,820

Interest payable........................................................... — 25 25 —

Due to other funds ( Note 7)......................................... 393 6 399 4 ,709

Due to component units ( Note 7)................................. — — — 601

Deferred revenue......................................................... 1 0,110 4 ,772 1 4,882 2 ,540

Deposits payable......................................................... — 141 141 —

Bonds payable - current............................................... — 235 235 —

Accrued vacation leave - current.................................. — 33 33 201

Total current liabilities............................................ 2 46,290 4 1,735 2 88,025 3 2,378

Noncurrent Liabilities:

Bonds payable, net...................................................... — 9 ,570 9 ,570 —

Accrued vacation leave................................................ — 334 334 1 ,703

Total noncurrent liabilities...................................... — 9 ,904 9 ,904 1 ,703

Total Liabilities....................................................... 2 46,290 5 1,639 2 97,929 3 4,081

NET ASSETS

Invested in capital assets, net of related debt................. — 3 8,267 3 8,267 8 7,312

Restricted for:

Unemployment compensation..................................... 7 93,118 — 7 93,118 —

Other purposes............................................................ — 4 ,319 4 ,319 —

Unrestricted.................................................................... — 5 0,479 5 0,479 1 21,204

Total Net Assets.................................................... $ 7 93,118 $ 9 3,065 $ 8 86,183 $ 2 08,516

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

Business- type Activities —

Enterprise Funds

State of North Carolina 57

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN FUND NET ASSETS

PROPRIETARY FUNDS

For the Fiscal Year Ended June 30, 2002 Exhibit B- 4

( Dollars in Thousands)

Governmental

Activities —

Unemployment Other Total Internal

Compensation Enterprise Enterprise Service

Fund Funds Funds Funds

Operating Revenues:

Employer unemployment contributions............ $ 4 33,364 $ — $ 4 33,364 $ —

Federal funds.................................................. 3 75,908 — 3 75,908 —

Sales and services.......................................... — 1 ,221 1 ,221 2 15,043

Sales and services used as security

for bonds...................................................... —