|
small (250x250 max)
medium (500x500 max)
Large
Extra Large
large ( > 500x500)
Full Resolution
|
|
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...................................................... —
Click tabs to swap between content that is broken into logical sections.
Title | Comprehensive annual financial report for the year ended June 30,... |
Other Title | North Carolina comprehensive annual financial report |
Date | 2002 |
Description | 2002 |
Digital Characteristics-A | 2 KB; 211 p. |
Digital Format | application/pdf |
Pres Local File Path-M | \Preservation_content\StatePubs\pubs_borndigital\images_master\ |
Full Text | 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...................................................... — |
OCLC number | 21060442 |
|
|
|
1 |
|
A |
|
B |
|
C |
|
D |
|
F |
|
G |
|
L |
|
M |
|
N |
|
O |
|
R |
|
S |
|
T |
|
V |
|
W |
|
|
|