NEW ISSUE—BOOK-ENTRY ONLY Ratings: Moody’s: Aa1 S&P: AA+ Fitch: AA+
(See “RATINGS” herein)
This Official Statement has been prepared by the State of North Carolina (the “State”) to provide information on the State of North Carolina Capital Improvement Limited Obligation Bonds, Series 2011A (the “Series 2011A Bonds”). Selected information is presented on this cover page for the convenience of the user. Investors must read the entire Official Statement to obtain information essential to the making of an
informed investment decision.
$500,000,000 STATE OF NORTH CAROLINA CAPITAL IMPROVEMENT LIMITED OBLIGATION BONDS, SERIES 2011A
Dated: Date of Delivery Due: May 1, as shown on the inside cover
Nature of the State’s The payment of amounts by the State with respect to the Series 2011A Bonds Payment Obligation: shall be limited to funds appropriated for that purpose by the North Carolina General Assembly in its discretion. The obligation to make payments with respect to the Series 2011A Bonds is not a general obligation of the State, and the taxing power of the State is not pledged directly or indirectly to secure any monies due to the owners of the Series 2011A Bonds.
Tax Treatment: In the opinion of Co-Bond Counsel, under existing law and subject to compliance with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), as described herein, interest on the Series 2011A Bonds (a) will not be includable in gross income of the owners thereof for federal income tax purposes, (b) will not be a specific item of tax preference for purposes of the federal alternative minimum tax imposed by the Code on corporations and other taxpayers, including individuals, and (c) will be exempt from all State of North Carolina income taxes. See “TAX TREATMENT” herein.
Redemption: Certain maturities of the Series 2011A Bonds are subject to optional redemption prior to maturity as described herein.
Interest Payment Dates: May 1 and November 1 of each year, commencing November 1, 2011
Denominations: $5,000 or integral multiples thereof
Sale Date: February 2, 2011
Expected Delivery Date: February 16, 2011
Trustee: U.S. Bank National Association
Co-Bond Counsel: Hunton & Williams LLP and The Charleston Group
Financial Advisor: FirstSouthwest
The date of this Official Statement is February 2, 2011
MATURITY SCHEDULE
Due May 1 Principal Amount Interest Rate Yield CUSIP Number 2012 12,295,000 3.000% 0.650% 65825PCM0 2013 17,430,000 5.000% 0.920% 65825PCN8 2014 17,950,000 5.000% 1.350% 65825PCP3 2015 18,490,000 5.000% 1.850% 65825PCQ1 2016 19,230,000 5.000% 2.150% 65825PCR9 2017 20,000,000 5.000% 2.450% 65825PCS7 2018 20,800,000 5.000% 2.800% 65825PCT5 2019 21,630,000 5.000% 3.120% 65825PCU2 2020 22,495,000 5.000% 3.390% 65825PCV0 2021 23,395,000 5.000% 3.600% 65825PCW8 2022 24,330,000 5.000% 3.790% 65825PCX6 2023 25,545,000 5.000% 3.960% 65825PCY4 2024 26,825,000 5.000% 4.140% 65825PCZ1 2025 28,165,000 4.000% 4.250% 65825PDA5 2026 29,575,000 5.000% 4.390% 65825PDB3 2027 31,050,000 5.000% 4.500% 65825PDC1 2028 32,605,000 4.500% 4.650% 65825PDD9 2029 34,235,000 5.000% 4.680% 65825PDE7 2030 36,030,000 4.750% 4.830% 65825PDF4 2031 37,925,000 5.250% 4.730% 65825PDG2
No dealer, broker, salesman or other person has been authorized to give any information or to make any representation other than those contained in this Official Statement in connection with the offering described herein, and, if given or made, such other information or representation must not be relied upon as having been authorized. This Official Statement does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the Series 2011A Bonds offered hereby, nor shall there be any offer or solicitation of such offer or sale of the Series 2011A Bonds in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. Neither the delivery of this Official Statement nor the sale of any of the Series 2011A Bonds implies that the information herein is correct as of any date subsequent to the date thereof.
The information contained herein has been obtained from the State and other sources believed to be reliable. The information contained herein is subject to change after the date of this Official Statement, and this Official Statement speaks only as of its date.
TABLE OF CONTENTS
Page
INTRODUCTION ...... 1 THE SERIES 2011A BONDS ...... 2 Plan of Finance ...... 2 Redemption Provisions ...... 2 ESTIMATED SOURCES AND USES OF FUNDS ...... 3 CERTAIN RISKS OF OWNERS ...... 3 Nature of the State’s Payment Obligation ...... 3 Outstanding General Obligation Debt of the State ...... 4 Other Debt of the State Subject to Annual Appropriation ...... 4 CONTINUING DISCLOSURE ...... 4 LEGAL MATTERS ...... 7 TAX TREATMENT ...... 7 General ...... 7 Original Issue Discount ...... 8 Other Tax Matters ...... 8 LITIGATION ...... 9 RATINGS ...... 9 FINANCIAL ADVISOR ...... 9 SALE AT COMPETITIVE BIDDING ...... 10 MISCELLANEOUS ...... 10
APPENDIX A THE STATE OF NORTH CAROLINA ...... A-1 APPENDIX B FINANCIAL STATEMENTS OF THE STATE OF NORTH CAROLINA ...... B-1 APPENDIX C SUMMARY OF PRINCIPAL LEGAL DOCUMENTS ...... C-1 APPENDIX D FORM OF OPINION OF CO-BOND COUNSEL ...... D-1 APPENDIX E BOOK-ENTRY ONLY SYSTEM ...... E-1 APPENDIX F LIST OF AUTHORIZED PROJECTS ...... F-1
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STATE OF NORTH CAROLINA DEPARTMENT OF STATE TREASURER
JANET COWELL 325 NORTH SALISBURY STREET STATE TREASURER RALEIGH, NORTH CAROLINA 27603-1385
$500,000,000 STATE OF NORTH CAROLINA CAPITAL IMPROVEMENT LIMITED OBLIGATION BONDS, SERIES 2011A
INTRODUCTION
The purpose of this Official Statement, which includes the appendices, is to provide information in connection with the $500,000,000 in aggregate principal amount of State of North Carolina Capital Improvement Limited Obligation Bonds, Series 2011A (the “Series 2011A Bonds”).
The Series 2011A Bonds will be executed and delivered pursuant to a Trust Indenture, dated as of August 1, 2008, as previously amended (the “Original Trust Indenture”), between the State of North Carolina (the “State”) and U.S. Bank National Association, as trustee (the “Trustee”), and a Third Supplemental Trust Indenture dated as of February 1, 2011 (the “Third Supplemental Trust Indenture” and, with the Original Trust Indenture, the “Trust Indenture”), between the State and the Trustee.
Authorization. The State is issuing the Series 2011A Bonds pursuant to the provisions of Session Laws 2003-284 of the General Assembly of the State and the State Capital Facilities Finance Act, Article 9 of Chapter 142 of the North Carolina General Statutes, as amended, (the “State Capital Facilities Finance Act”) and in accordance with the provisions of various Session Laws including most recently Session Law 2010-31 (the “Projects Acts”), a resolution of the North Carolina Council of State and the approval of the State Treasurer.
Purpose. The proceeds of the Series 2011A Bonds will be used for the purposes of (1) financing portions of various capital projects described in Appendix F (the “Projects”) and (2) paying certain costs incurred in connection with the sale and issuance of the Series 2011A Bonds.
Nature of the State’s Payment Obligation. The Series 2011A Bonds are limited obligations of the State and payments thereon shall be limited to funds appropriated for that purpose by the North Carolina General Assembly in its discretion. The obligation to make payments with respect to the Series 2011A Bonds is not a general obligation of the State, and the taxing power of the State is not pledged directly or indirectly to secure any monies due to the owners of the Series 2011A Bonds. The State has not pledged any revenues or other property to secure payment of principal of or interest on the Series 2011A Bonds or any other bonds that may be issued under the Trust Indenture except for certain funds, accounts and subaccounts held by the Trustee pursuant to the Trust Indenture. The Series 2011A Bonds are secured in parity with certain prior bonds of the State and shall be secured by and payable on a parity basis with any other bonds which may be issued under the Trust Indenture in the manner provided in the Trust Indenture.
Details of the Series 2011A Bonds. The Series 2011A Bonds will be dated the date of initial execution and delivery, and will mature, subject to the redemption provisions described herein, on May 1 in the years and amounts set forth on the inside cover hereof. Interest on the Series 2011A Bonds will be payable on each May 1 and November 1, beginning November 1, 2011, at the rates set
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forth on the inside cover hereof. Individual purchases of the Series 2011A Bonds will be made in denominations of $5,000 or whole multiples thereof.
Book-Entry Form. The Series 2011A Bonds will initially be delivered as fully registered certificates in book-entry-only form without physical delivery of certificates to the beneficial owners of the Series 2011A Bonds. The Trustee will make payments of principal and interest on the Series 2011A Bonds to The Depository Trust Company, New York, New York (“DTC”), which will in turn remit such payments to its participants for subsequent distribution to the beneficial owners of the Series 2011A Bonds. See Appendix E hereto.
Tax Status. In the opinion of Co-Bond Counsel, under existing law and subject to compliance with the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), as described herein, interest on the Series 2011A Bonds (a) will not be includable in gross income of the owners thereof for federal income tax purposes, (b) will not be a specific item of tax preference for purposes of the federal alternative minimum tax imposed by the Code on corporations and other taxpayers, including individuals, and (c) will be exempt from all State of North Carolina income taxes. See “TAX TREATMENT” herein.
Continuing Disclosure. Pursuant to the Trust Indenture, the State will undertake to provide continuing disclosure of certain annual financial information and operating data and certain material events. See “CONTINUING DISCLOSURE” herein.
Definitions: Document Summaries. See Appendix C for a summary of certain provisions of the Trust Indenture and for the definition of certain capitalized terms used herein. Unless otherwise indicated, capitalized terms used herein and not otherwise defined shall have the same meanings given such terms in the Trust Indenture.
THE SERIES 2011A BONDS
Plan of Finance
The Series 2011A Bonds are being issued by the State to provide funding for projects authorized for “special indebtedness” (as defined in the State Capital Facilities Finance Act). To date, $2,543,333,565 of special indebtedness has been so authorized to finance the projects set forth in Appendix F (the “Projects”) and other completed projects. The State will use the proceeds of the Series 2011A Bonds to finance portions of some or all of the Projects or projects otherwise authorized for special indebtedness financing. Portions of the Projects have been financed with proceeds of previous issues of special indebtedness and, to the extent necessary, the State currently intends to finance additional portions of the Projects, as well as additional projects authorized for special indebtedness financing from time to time, with the proceeds of additional bonds to be issued under the Trust Indenture.
The Series 2011A Bonds will be delivered as fully registered certificates in book-entry-only form through DTC and will be subject to the provisions of the book-entry-only system described in Appendix E. Individual purchases of the Series 2011A Bonds will be made only in denominations of $5,000 or whole multiples thereof.
Redemption Provisions
Optional Redemption. The Series 2011A Bonds maturing on or after May 1, 2021 are subject to redemption prior to their respective maturities, at the option of the State, from any monies that may be available for such purpose, either in whole or in part on any date on or after May 1, 2020, at
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a redemption price equal to 100% of the principal amount of Series 2011A Bonds to be redeemed, plus accrued interest to the redemption date.
Notice of Redemption. The Bond Registrar shall send notice of redemption of any Series 2011A Bonds to be redeemed by first-class mail, postage prepaid, at least 30 days but not more than 60 days before the redemption to all Owners of Series 2011A Bonds to be redeemed in whole or in part, but notice to DTC will be sent as permitted or required by DTC. Failure to mail any notice to any Owners or any defect in such notice will not affect the validity of any proceedings for such redemption as to any other Owner to whom such notice is properly given.
Any notice of redemption may state that the redemption to be effected is conditioned upon the receipt by the Trustee or the Bond Registrar on or before the redemption date of moneys sufficient to pay the principal of and interest on the Series 2011A Bonds to be redeemed. If such notice contains such a condition and moneys sufficient to pay the principal of and interest on such Series 2011A Bonds are not received by the Trustee or the Bond Registrar on or prior to the redemption date, the redemption will not be made and the Bond Registrar will within a reasonable time thereafter give notice, in the manner in which the notice of redemption was given, that such moneys were not so received.
Selection of Series 2011A Bonds for Redemption. The Series 2011A Bonds will be redeemed only in whole multiples of $5,000. If less than all the Series 2011A Bonds are called for redemption, the Series 2011A Bonds to be so redeemed will be called for redemption in the manner set forth in an Officer’s Certificate filed with the Trustee. If less than all of the Series 2011A Bonds of any one maturity are to be called for redemption, the Bond Registrar will select the Series 2011A Bonds to be redeemed by lot, each $5,000 portion of principal being counted as one Series 2011A Bond for this purpose; provided, however, that so long as the only Owner of the Series 2011A Bonds is DTC, such selection will be made by DTC in accordance with its rules and procedures.
ESTIMATED SOURCES AND USES OF FUNDS
The State estimates the sources and uses of funds for the plan of finance to be as follows:
Sources:
Par Amount of the Series 2011A Bonds $500,000,000.00 Net Original Issue Premium/Discount 32,321,654.45 Total Sources of Funds $532,321,654.45
Uses:
Deposit to Construction Fund $529,044,754.45 Financing Costs(1) 3,276,900.00 Total Uses of Funds $532,321,654.45
______(1) Includes legal fees, underwriters’ compensation, rating agency fees, fees and expenses of the Trustee and financial advisor and miscellaneous fees and expenses.
CERTAIN RISKS OF OWNERS
Nature of the State’s Payment Obligation
The payment of amounts by the State with respect to the Series 2011A Bonds shall be limited to funds appropriated for that purpose by the North Carolina General Assembly in its
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discretion. The obligation to make payments with respect to the Series 2011A Bonds is not a general obligation of the State, and the taxing power of the State is not pledged directly or indirectly to secure any monies due to the Owners of the Series 2011A Bonds.
Pursuant to the Trust Indenture, the Governor of the State shall (1) include principal and interest on the Series 2011A Bonds coming due in each Fiscal Year in the corresponding annual budget request to the General Assembly of the State and (2) if the General Assembly does not include such amounts in the State’s budget, the State shall deliver notice to the Trustee, S&P, Moody’s and Fitch within five days after the adoption by the General Assembly of the State’s budget. Nothing contained in this paragraph, however, obligates the State to appropriate moneys contained in the proposed budget for the payment of principal and interest on the Series 2011A Bonds.
Under the State Constitution, the Governor of the State has the power to delete or reduce appropriations for principal and interest on the Series 2011A Bonds, but only if it has been determined that the authorized receipts of the State will not be sufficient to meet budgeted expenditures.
The Trust Indenture is subject to bankruptcy, insolvency, fraudulent conveyance and other related laws affecting the enforcement of creditors’ rights generally and, to the extent that certain remedies under such instruments require, or may require, enforcement by a court, to such principles of equity as the court having jurisdiction may impose.
See Appendix C for a description of the rights and powers of the Trustee upon the occurrence of an Event of Default under the Trust Indenture.
Outstanding General Obligation Debt of the State
The State has general obligation bonds outstanding and may issue additional general obligation bonds and notes in the future. The State has pledged and will pledge its faith and credit and taxing power to the payment of its general obligation bonds and notes issued or to be issued. See Appendix A hereto under the caption “STATE INDEBTEDNESS” for a description of the State’s outstanding and authorized but unissued general obligation bonds and notes. Funds which may otherwise be available to make payments by the State on the Series 2011A Bonds may be subject to such faith and credit pledge by the State and therefore may be required to be applied to the payment of its general obligation indebtedness.
Other Debt of the State Subject to Annual Appropriation
The State has other special indebtedness and has authorized additional capital facilities to be financed with special indebtedness, all of which is subject to annual appropriation. See Appendix A hereto under the caption “STATE INDEBTEDNESS” for a description of the State’s outstanding and authorized but unissued debt subject to annual appropriation. All debt subject to annual appropriation is subject to the risks herein described relating to annual appropriations in budgets and the obligation of the Governor to take certain steps to reduce appropriations in the event such action is required.
CONTINUING DISCLOSURE
In the Third Supplemental Trust Indenture, the State will undertake, for the benefit of the beneficial owners of the Series 2011A Bonds, to provide to the Municipal Securities Rulemaking Board (the “MSRB”):
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a) by not later than seven months from the end of each Fiscal Year, beginning with the Fiscal Year ending June 30, 2011, (1) the audited financial statements of the State for such Fiscal Year, if available, or, if such audited financial statements of the State are not then available, unaudited financial statements of the State for such Fiscal Year to be replaced subsequently by audited financial statements of the State to be delivered within fifteen (15) days after such audited financial statements become available for distribution;
b) by not later than seven months from the end of each Fiscal Year of the State, beginning with the Fiscal Year ending June 30, 2011, to the MSRB, the financial and statistical data as of a date not earlier than the end of the preceding Fiscal Year for the type of information included under the following headings in Appendix A hereto, to the extent such items are not included in the financial statements referred to in (a) above:
(1) Revenue Structure (tax rates and tables only);
(2) Budgets – General Fund, Highway Fund and Highway Trust Fund (authorized budgets for current biennium only);
(3) Assessed Valuation of Property – Assessed Valuation;
(4) State Indebtedness (excluding Legal Debt Limit, Refunding Bonds, Moral Obligation Bonds, Revenue Bonds, Swap Agreements Relating to General Obligation Bonds, and Capital Financing Outlook); and
(5) Revenue Bonds and Other Indebtedness of State Authorities and Institutions;
c) within ten (10) Business Days following the occurrence of an event, notice of any of the following events with respect to the Series 2011A Bonds:
(1) principal and interest payment delinquencies;
(2) unscheduled draws on debt service reserves reflecting financial difficulties;
(3) unscheduled draws on any credit enhancements reflecting financial difficulties;
(4) substitution of any credit or liquidity providers, or their failure to perform;
(5) issuance by the Internal Revenue Service of a proposed or final determination of taxability with respect to the Series 2011A Bonds; a Notice of Proposed Issues on IRS Form 5701-TEB with respect to the Series 2011A Bonds; adverse tax opinions or other material notices or determination with respect to the tax status of the Series 2011A Bonds; or other event affecting the tax status of the Series 2011A Bonds;
(6) defeasances;
(7) rating changes;
(8) tender offers; and
(9) bankruptcy, insolvency, receivership or similar proceeding by the State;
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d) within ten (10) Business Days following the occurrence of an event, notice of any of the following events with respect to the Series 2011A Bonds, if material:
(1) non-payment related defaults;
(2) modification to the rights of the beneficial owners of the Series 2011A Bonds;
(3) bond calls, other than bond calls relating to mandatory sinking fund redemption;
(4) release, substitution or sale of any property securing repayment of the Series 2011A Bonds;
(5) mergers, consolidations, acquisition and sales of assets (other than in the ordinary course of business);
(6) appointment of a successor or additional trustee or a change in the name of the Trustee;
e) within ten (10) Business Days following the occurrence of a failure, notice of a failure of the State to provide required annual financial information described in (a), (b), (c) or (d) above on or before the date specified.
The State shall provide the documents referred to above to the MSRB in an electronic format as prescribed by the MSRB and accompanied by identifying information as prescribed by the MSRB. The State may discharge its undertaking described above by transmitting the documents referred to above to any entity and by any method authorized or required by the U.S. Securities and Exchange Commission.
At present, Section 143-20.1 of the General Statutes of North Carolina requires the State’s financial statements to be prepared in accordance with generally accepted accounting principles and to be audited in accordance with generally accepted auditing standards.
The Third Supplemental Trust Indenture will also provide that if the State fails to comply with the undertaking described above, the Trustee or any beneficial owner of the Series 2011A Bonds may take action to protect and enforce the rights of all beneficial owners with respect to such undertaking, including an action for specific performance; provided, however, that failure to comply with such undertaking will not be an Event of Default under the Trust Indenture and will not result in any acceleration of the Series 2011A Bonds. All actions shall be instituted, had and maintained in the manner provided in this paragraph for the benefit of all beneficial owners of the Series 2011A Bonds.
Pursuant to the Third Supplemental Trust Indenture, the State will reserve the right to modify from time to time the information to be provided to the extent necessary or appropriate in the judgment of the State, provided that;
a) any such modification may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of the State;
b) the information to be provided, as modified, would have complied with the requirements of Rule 15c2-12 issued under the Securities Exchange Act of 1934 (“Rule 15c2-12”) as
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of the date of this Official Statement, after taking into account any amendments or interpretations of Rule 15c2-12, as well as any changes in circumstances; and
c) any such modification does not materially impair the interests of the beneficial owners of the Series 2011A Bonds, as determined by the Trustee or bond counsel, or by the approving vote of the Owners of a majority in principal amount of the Series 2011A Bonds then Outstanding pursuant to the terms of the Trust Indenture at the time of the amendment.
Any annual financial information containing modified operating data or financial information is required to explain, in narrative form, the reasons for the modification and the impact of the change in the type of operating data or financial information being provided.
The undertaking described above will terminate upon payment, or provision having been made for payment in a manner consistent with Rule 15c2-12, in full of the principal of and interest on all of the Series 2011A Bonds.
The State has complied with the terms of all prior undertakings under Rule 15c2-12.
LEGAL MATTERS
Certain legal matters relating to the authorization, execution, sale and delivery of the Series 2011A Bonds are subject to the approval of Hunton & Williams LLP, Raleigh, North Carolina, and The Charleston Group, Fayetteville, North Carolina, Co-Bond Counsel. The proposed form of the approving legal opinion of Co-Bond Counsel is included in Appendix D hereto. Such legal opinion will be limited to matters relating to authorization and validity of the Series 2011A Bonds and to the tax status of interest thereon, as described in the section “TAX TREATMENT.” Co-Bond Counsel has not been engaged to investigate the financial resources of the State or its ability to provide for payment of the Series 2011A Bonds, and the bond opinion will make no statement as to such matters or as to the accuracy or completeness of this Official Statement or any other information that may have been relied on by anyone in making the decision to purchase Series 2011A Bonds.
TAX TREATMENT
General
In the opinion of Co-Bond Counsel, under current law, interest on the Series 2011A Bonds (a) will not be included in gross income for federal income tax purposes, (b) will not be an item of tax preference for purposes of the federal alternative minimum income tax imposed on individuals and corporations; however, with respect to corporations (as defined for federal income tax purposes) subject to the alternative minimum income tax, such interest is taken into account in determining adjusted current earnings for purposes of computing such tax, and (c) will be exempt from all State of North Carolina income taxes. No other opinion is expressed by Co-Bond Counsel regarding the tax consequences of the ownership of or the receipt or accrual of interest on the Series 2011A Bonds.
Co-Bond Counsel’s opinion will be given in reliance upon certifications by representatives of the State as to certain facts relevant to both the opinion and requirements of the Internal Revenue Code of 1986, as amended (the “Code”), and is subject to the condition that there is compliance subsequent to the issuance of the Series 2011A Bonds with all requirements of the Code that must be satisfied in order for interest thereon to remain excludable from gross income for federal income tax purposes. The State has covenanted to comply with the current provisions of the Code regarding, among other matters, the use, expenditure and investment of the proceeds of the Series 2011A Bonds and the timely payment to the United States of any arbitrage rebate amounts with respect to the Series 2011A Bonds. Failure by the State to comply with such covenants, among other things, could
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cause interest on the Series 2011A Bonds to be included in gross income for federal income tax purposes retroactively to their date of issue.
The Internal Revenue Service (the “Service”) has a program to audit state and local government obligations to determine whether the interest thereon is includible in gross income for federal income tax purposes. If the Service does audit the Series 2011A Bonds, under current Service procedures, the Service will treat the State as the taxpayer and the Owners of the Series 2011A Bonds will have only limited rights, if any, to participate.
Co-Bond Counsel’s opinion represents a legal judgment based in part upon the representations and covenants referenced therein and a review of current law, but is not a guarantee of result or binding on the Service or the courts. Co-Bond Counsel assumes no duty to update or supplement such opinion to reflect any facts or circumstances that may thereafter come to Co-Bond Counsel’s attention or to reflect any changes in law or the interpretation thereof that may thereafter occur or become effective.
Co-Bond Counsel’s opinion speaks only as of its date, and nothing should be interpreted or construed to express or imply any opinion concerning the effect of any future events or actions on the exclusion of interest on the Series 2011A Bonds from gross income for purposes of federal income taxation.
Original Issue Discount
The initial public offering prices of certain of the Series 2011A Bonds may be less than their stated principal amount. In the opinion of Co-Bond Counsel, under existing law, the difference between the stated principal amount of such Series 2011A Bonds and the respective initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of such Series 2011A Bonds is sold will constitute original issue discount. The offering prices set forth on the inside cover of this Official Statement are expected to be the initial offering prices to the public at which a substantial amount of each maturity of Series 2011A Bonds are sold.
Under the Code, for purposes of determining a holder’s adjusted basis in a Series 2011A Bonds with original issue discount, such discount treated as having accrued while the holder holds the Series 2011A Bond will be added to the holder’s basis therein. Original issue discount will accrue on a constant-yield-to-maturity method based on regular compounding. The adjusted basis will be used to determine taxable gain or loss upon the sale or other disposition (including redemption or payment at maturity) of such Series 2011A Bond.
Prospective purchasers of Series 2011A Bonds should consult their own tax advisors as to the calculation of accrued original issue discount and the state and local tax consequences of owning or disposing of such Series 2011A Bonds.
Other Tax Matters
In addition to the matters addressed above, prospective purchasers of the Series 2011A Bonds should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to certain taxpayers, including without limitation financial institutions, property and casualty insurance companies, S corporations, foreign corporations subject to the branch profits tax, recipients of Social Security or Railroad Retirement benefits and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations. Prospective purchasers of the Series 2011A Bonds should consult their tax advisors as to the applicability and impact of such consequences.
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There are many events which could affect the value and liquidity or marketability of the Series 2011A Bonds after their issuance, including but not limited to public knowledge of an audit of the Series 2011A Bonds by the Service, a general change in interest rates for comparable securities, a change in federal income tax rates, legislative or regulatory proposals affecting state and local government securities and changes in judicial interpretation of existing law. In addition, certain tax considerations relevant to Owners of Series 2011A Bonds who purchase Series 2011A Bonds after their issuance may be different from those relevant to purchasers upon issuance. Neither the opinion of Co-Bond Counsel nor this Official Statement purport to address the likelihood or effect of any such potential events or such other tax considerations, and purchasers of Series 2011A Bonds should seek advice concerning such matters as they deem prudent in connection with their purchase of Series 2011A Bonds.
Prospective purchasers of the Series 2011A Bonds should consult their own tax advisors as to the status of interest on the Series 2011A Bonds under the tax laws of any state other than North Carolina.
LITIGATION
No litigation is now pending in any court seeking to restrain or enjoin the authorization, execution or delivery of the Series 2011A Bonds or contesting the authority of proceedings for the authorization, execution or delivery of the Series 2011A Bonds or the validity thereof, or the creation, organization, corporate existence or powers of the State, or the title of any of the present officers thereof to their respective titles or the authority or proceedings for the execution and delivery of the Third Supplemental Trust Indenture or the Trust Indenture by the State.
RATINGS
Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc. (“S&P”), and Fitch Inc. (“Fitch”) have assigned ratings of Aa1, AA+ and AA+, respectively, to the Series 2011A Bonds. These ratings reflect only the view of such rating agencies, and an explanation of the significance of such ratings may be obtained from such rating agencies. Certain information and materials not included in this Official Statement were furnished to such rating agencies. There is no assurance that such ratings will continue for any given period of time or that such ratings will not be revised downward or withdrawn entirely if, in the judgment of such rating agencies, circumstances so warrant. Any such downward revision or withdrawal of such ratings may have an adverse effect on the market price of the Series 2011A Bonds.
FINANCIAL ADVISOR
FirstSouthwest is employed as Financial Advisor to the State in connection with the issuance of the Bonds. The Financial Advisor’s fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. FirstSouthwest has agreed, in its Financial Advisory contract, not to bid for the Bonds, either independently or as a member of a syndicate organized to submit a bid for the Bonds. FirstSouthwest, in its capacity as Financial Advisor, does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies.
The Financial Advisor to the State has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the State and, as applicable, to investors under
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the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information.
SALE AT COMPETITIVE BIDDING
The 2011A Bonds were awarded pursuant to electronic competitive bidding held via PARITY® on Wednesday, February 2, 2011 to the sole underwriter of Wells Fargo Bank, National Association (the “Underwriter”). The Underwriter has supplied the information as to the initial yields on the 2011A Bonds as set forth on the inside cover of this Official Statement. The 2011A Bonds are being purchased from the State by the Underwriter at an aggregate discount of $2,845,000 from the initial public offering prices derived from the yields set forth on the inside front cover page of this Official Statement. The Underwriter may offer to sell the 2011A Bonds to certain dealers and others at prices lower than the initial offering prices, and the public offering prices may be changed from time to time by the Underwriter.
MISCELLANEOUS
Any statements in this Official Statement involving matters of opinion or estimates, whether or not expressly so stated, are intended as such and not as representations of fact. The execution and delivery of this Official Statement and its distribution and use by the Underwriters have been duly authorized and approved by the State.
State of North Carolina
By: /s/ Janet Cowell State Treasurer
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APPENDIX A
THE STATE OF NORTH CAROLINA
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APPENDIX A - TABLE OF CONTENTS PAGE
STATE OF NORTH CAROLINA ...... 3 General Description ...... 3 Economic Characteristics ...... 3 State Government Organization and Major Responsibilities ...... 5
REVENUE STRUCTURE ...... 8 Description and Treatment of Funds ...... 8 General Fund ...... 8 Highway Fund and Highway Trust Fund ...... 13
STATE GOVERNMENT EXPENDITURES ...... 17
REQUIREMENTS FOR BALANCED BUDGET ...... 17 Constitutional Provision ...... 17 State Budget Act ...... 17
BUDGETS ...... 17 General Description ...... 17 Events Leading to the Current Biennuim ...... 18 2009-2010 General Fund Budget and Commentary ...... 18 2010-2011 General Fund Budget and Commentary ...... 21 2011-2012 General Fund Budget and Commentary ...... 23 Highway Fund and Highway Trust Fund ...... 24
GENERAL INFORMATION ...... 25 Assessed Valuation of Property ...... 25 Per Capita Income ...... 26 Employment Information ...... 26 Major Employers ...... 28
STATE INDEBTEDNESS ...... 29 General Obligation Indebtedness ...... 29 Special Indebtedness ...... 31 Annual Debt Service Requirements for General Obligation Bonds and Special Indebtedness ...... 33 Per Capita Indebtedness (General Obligation Bonds and Special Indebtedness) ...... 34 Percentage of Annual General Obligation Bonds and Special Indebtedness Debt Service to General Expenditures ...... 34 Related Matters ...... 35
REVENUE BONDS AND OTHER INDEBTEDNESS OF STATE AUTHORITIES AND INSTITUTIONS AT JUNE 30, 2010 ...... 36
RETIREMENT AND PENSION PLANS ...... 37 Generally ...... 37 Other Plans ...... 39 Failure to Appropriate Annual Required Contributions ...... 40
OTHER POST-EMPLOYMENT BENEFITS ...... 41 Retiree Health Benefits ...... 41 Disability Income Plan of North Carolina ...... 42
LITIGATION ...... 42
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STATE OF NORTH CAROLINA
General Description
The State is located on the Atlantic seacoast and is bordered by the states of South Carolina, Georgia, Tennessee and Virginia. The State has a land area, exclusive of waterways and lakes, of 48,619 square miles. The State’s population as of April 1, 2010 was 9,535,483, ranking 10th in the nation. During the period from 2000 to 2010, the State’s estimated population increased by 1,486,170 or 18.5% (the 5th largest increase among the states in actual numbers and the 6th largest on a percentage basis). The State Demographer’s Office estimates that North Carolina has eight cities with populations in excess of 100,000, including two cities with populations in excess of 250,000.
Economic Characteristics
Overview – The State’s major industry sectors are services, agriculture, trade, manufacturing, exports and tourism, but the military presence and housing starts are also important factors. During the period from 1999 to 2009, per capita income in the State grew from $24,473 to $34,711, an increase of 10.6% when adjusted for inflation. North Carolina’s seasonally adjusted unemployment rate in October was 9.6%, down 0.1 percentage points from September. The decrease in the unemployment rate is due to discouraged workers dropping out of the labor force, not employment gains. The State’s unemployment rate is 1.3 percentage point lower than it was in October 2009, but 4.7 percentage points higher than it was in December 2007.
Among sectors identified under the North American Industry Classification System the sectors within the State with the most employment decline since December 2007 are: Manufacturing (down 99,900); Construction (down 79,900); Trade, Transportation, Warehousing and Utilities (down 64,100); and Professional & Business Services (down 24,000). Two sectors have experienced gains: Education and Health Services (up 15,900) and Government (up 31,900). Compared to October 2009, North Carolina has experienced an increase in employment of 26,000 nonfarm payroll jobs.
Service – The service industry sector is the single largest job segment of the State’s economy and constituted approximately 41.0% (1,580,500 jobs) of the State’s total nonfarm employment in May 2010. This industry includes a broad base of occupations throughout the State, including legal services, educational services, accommodation and food services, health services and technology services. Employment in service industries increased by 14,100 between October 2009 and October 2010.
One major component of the State’s service economy is the Research Triangle Park (the “Park”), located within Wake and Durham Counties. It is one of the largest planned research parks in the world, covering over 7,000 acres of rolling, wooded landscape. Founded in 1959, it is approximately equidistant from Duke University in Durham, the University of North Carolina at Chapel Hill, and North Carolina State University in Raleigh. The Park’s primary objective is to attract research- related institutions to the area. The Park currently contains more than 170 organizations, including International Business Machines Corporation, GlaxoSmithKline, Cisco Systems, MCNC (formerly Micro Electronics Center), RTI International (formerly Research Triangle Institute), the United States Environmental Protection Agency, and the National Institute of Environmental Health Services. The research institutions in the Park employ over 42,000 fulltime knowledge workers and an estimated 10,000 contract employees.
Agriculture – Agriculture is another basic element of the State’s economy. In calendar year 2009 North Carolina’s agricultural industry, including food, fiber and forest, contributed over $74.3 billion to the State’s economy, and accounted for 18% of the State’s income. Gross agricultural income was $10.9 billion in 2009, placing the State eighth in the nation in gross agricultural income and seventh in the nation in net farm income. The poultry industry is the leading source of agricultural income in the State, accounting for approximately 26.4% of gross agricultural income in A-3
2009, followed by the pork industry at approximately 20.4%, nursery and greenhouse products at approximately 8.8% and the tobacco industry at approximately 8.1%. According to the State Commissioner of Agriculture, the State ranks first in the nation in the production of all tobacco, flue- cured tobacco, and sweet potatoes, second in hog production, turkeys and Christmas trees sold, and third in processing cucumbers.
Trade – The trade sector is an integral part of the State’s economy, employing more than 18.4% of the State’s total nonfarm employment in October 2010. This industry sector includes wholesale and retail trade, transportation, warehouse, and utilities.
Manufacturing – The State’s economy has historically enjoyed a strong manufacturing base. As of October 2010, employees of manufacturing firms constituted 11.1% of the total nonfarm employment, down 3.7 percentage points from 14.8% in 2005. Manufacturing jobs in the traditional sectors of textiles and apparel have declined due to competition in international markets. These sectors, however, accounted for only 1.2% of total nonfarm employment in June of 2010. While North Carolina remains the national leader in the textile sector, textile and apparel sector employment has declined from 29% of total goods-producing sector (Natural Resource, Mining, Construction, and Manufacturing) in June 1990 to 7.7% as of June 2010, reflecting the growing diversification of the State’s economy.
Exports – North Carolina was the sixteenth largest exporter among the 50 states in 2009 and exports have steadily increased since the beginning of 2010. The total value of goods exported by firms in the State rose 15.9% to $6.1 billion in the first quarter of 2010, when compared to the $5.3 billion expected in the first quarter of 2009.
Tourism – Travel and tourism are a major industry in North Carolina and significant to the State’s economy. Travel and tourism revenues contributed over $15.6 billion to the State’s economy in 2009, an increase of 7.4% over 2008. The North Carolina travel and tourism industry supports more than 183,800 jobs, which directly and indirectly represented 4.8% of total nonfarm employment for 2009.
Military – A significant military presence in North Carolina contributes further to the diversity of the State’s economic base, as evidenced by research findings conducted in 2008 by the North Carolina Department of Commerce, as an update and expansion of a study originally completed by the East Carolina University Regional Development Services & Regional Economic Models, Inc. The 2008 model determined that 7% of the State’s 2007 Gross State Product (total goods and services), or $23.4 billion, is attributed to the military sector in North Carolina. The major military installations in North Carolina are Camp Lejeune Marine Corps Base, New River Air Station, Fort Bragg Army Base, Pope Air Force Base, Cherry Point Marine Corps Air Station, and Seymour Johnson Air Force Base.
Housing - Although remaining mostly flat from the previous year, authorization of privately owned housing units remains strong in North Carolina. During the last two years, North Carolina has ranked among the top states in the nation as shown in the following table:
New Housing Units Authorized by Building Permits
State 2009 Total State 2010* Total
1. Texas 71,119 1. Texas 72,441 2. Florida 29,491 2. California 34,157 3. North Carolina 29,289 3. Florida 33,857 4. California 28,292 4. North Carolina 29,588 5. Virginia 17,779 5. Virginia 18,925 ______*Year to Date through October
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Source: U.S. Department of Commerce, Bureau of the Census. State Government Organization and Major Responsibilities
State governmental powers are divided among the legislative, executive and judicial branches.
The General Assembly, the legislative branch, is composed of the 50-member Senate and 120- member House of Representatives and has three major functions: to enact general and local laws governing the affairs of the State, to provide and allocate funds for operating State government by enacting revenue and appropriation laws, and to study regulation and funding aspects of State operations. The main work of the General Assembly is the enactment of legislation. The General Assembly is required by law to meet on a biennial basis, a budget being adopted for the biennium in odd numbered years. However, since 1973 the General Assembly also has met in the second year of each biennium for the purpose of reviewing the State budget and financial condition.
The Governor, elected for a four-year term, is the chief officer of the executive branch. The Governor functions as director of the budget, with responsibilities for all phases of budgeting from initial preparation to final execution. The Governor is commander-in-chief of the State military and is chair of the Council of State, which is composed of the elected officials of the executive branch. The Constitution of the State permits the Governor and Lieutenant Governor to serve two consecutive terms. The Governor has the power to veto budgetary and certain other legislative matters.
The judicial branch administers, through a unified system of courts, the judicial powers of the State in the areas of civil and criminal law.
The largest cost items in the State’s budget relate to the State’s significant responsibilities in the areas of education, health and human services, corrections and transportation. The first three of these areas are discussed below. See “REVENUE STRUCTURE – Highway Fund and Highway Trust Fund” for a discussion of the transportation area. Currently budgeted expenditures are subject to change as described hereafter – see “BUDGETS – 2010-2011 General Fund Budget and Commentary.”
Education
Public School System - The State is primarily responsible for the supervision, administration and funding of the State’s public school system. The general cost of operating the system of public schools is paid from the State’s General Fund rather than locally levied ad valorem property taxes. State appropriations are allotted in accordance with various formulae, primarily based upon average daily membership. The State pays a substantial portion of current operating expenses such as salaries of teachers and other staff, instructional supplies, textbooks and transportation. These current operating expenditures are supplemented by the counties. Counties are generally responsible for capital improvements, plant maintenance, insurance and energy costs. The State has also assisted counties in their responsibility for capital outlay expenditures. General Fund appropriations for public schools in fiscal year 2010-2011 comprise 37.6% of the State’s General Fund budget. In addition to other appropriations for school purposes, $267,408,736 was set aside by the fiscal 2010-2011 budget to supplement funding for small and low-wealth counties.
The Charter Schools Act of 1996, as amended by the General Assembly in 1997, provides the opportunity for individuals or groups to create public schools through a private non-profit organization. Charter schools are designed to give significant autonomy to individual schools and in turn to hold these schools accountable for results. Charter schools receive funding based on the average per pupil allocation in the local education agency from which a student comes. Ninety-nine charter schools are operating in the State in the 2010-2011 school year.
The following tables summarize the average daily membership (“ADM”) (including charter schools) and the number of public schools (including charter schools) in the State in the school years presented: A-5
Average Daily Membership
Elementary (K-5) Middle (6-8) Secondary (9-12) Total School Year ADM ADM ADM ADM
2006-07 674,968 329,443 419,372 1,434,162 2007-08 690,210 329,984 424,773 1,444,867 2008-09 698,074 329,642 426,003 1,453,719 2009-10 688,625 331,893 426,852 1,447,370 2010-11 690,112 337,644 429,307 1,457,063
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Source: North Carolina Department of Public Instruction first-month ADM.
Number of Public Schools
Total Elementary Middle Secondary Number School Year (K-5) (6-8) (9-12) Various1 of Schools
2006-07 1,190 414 440 432 2,407 2007-08 1,383 423 472 179 2,457 2008-09 1,231 430 491 349 2,501 2009-10 1,238 429 495 356 2,518 2010-11 1,241 440 494 349 2,524 ______
1Schools that contain other grade configurations (e.g., K-6, 4-8, 8-12)
Community College System - North Carolina has a system of 58 community colleges dedicated to providing technical and vocational training in over 2,655 curriculum programs. The State currently provides approximately 64% ($1.087 billion the fiscal 2010-2011 budget) of the system’s funding, with the remaining funds coming from federal sources, tuition and fees and local funding sources.
In fiscal year 2009-2010, 847,165 people took one or more courses at a local community college, including 334,879 enrolled in curriculum programs leading toward an associate degree, certificate or diploma. Another 278,589 individuals enrolled in occupational extension programs. In addition, all 58 community colleges are approved to offer the college transfer curriculum program, allowing students to take the first two years toward a baccalaureate degree at a community college. In fiscal year 2009-2010, the system was also the State’s primary provider of adult literacy training, providing training for approximately 139,339 literacy students.
The community college system has three programs designed to respond to the multiple needs of the State’s business and industrial community. North Carolina began the nation’s first program specifically designed to train the initial workforce of a new industry relocating to the State or an already existing industry in an expansion mode. The system also operates 58 Customized Training Centers designed to assist employees of established North Carolina industries in upgrading their workforce skills. At present, all 58 community colleges have Small Business Centers providing technical and managerial assistance and counseling to small business owners, would-be owners and their employees.
University of North Carolina System - The University of North Carolina (the “University”) includes the State’s 16 public universities which are commonly referred to as the “constituent A-6 institutions” and one constituent high school, the North Carolina School of Science and Mathematics. It is governed by a 32-member Board of Governors elected by the General Assembly. In addition, each constituent institution is governed by a board of trustees. Fall 2009 headcount enrollment, which grew 38% from 1999 to 2009, totaled 222,322. Only five states have higher enrollments in state systems of higher education. The University’s constituent institutions offer more than 200 degree programs.
The University’s fiscal year 2009-2010 operating budget totaled $4,007,817,194 of which $2,706,834,335 was appropriated from the State’s General Fund, with the rest being budgeted from revenues generated by the constituent institutions. Appropriations to the University account for approximately 14% of the State’s General Fund appropriations in fiscal year 2009-2010.
Since it was chartered in 1789, the University has followed a State constitutional mandate to make higher education accessible and affordable to all North Carolinians. For the 2010-2011 school year, annual tuition and required fees for in-state undergraduate students ranged from $3,451 to $6,487. For non-resident undergraduates, annual tuition and required fees ranged from $13,163 to $25,102.
In addition to its teaching mission, the University is committed to academic and scientific research. Annual sponsored project awards to the University institutions were in excess of $1.1 billion for fiscal year 2008-2009. Sponsored program funding has experienced substantial growth over the past decade (100% in current dollars). The majority of the University-sponsored program funds are awarded to the flagship research universities, North Carolina State University (“NC State”) and UNC Chapel Hill, and are derived from federal sources. The upward funding trends are an indication that the existence of high quality faculty at the University has steadily improved its position among all university systems nationally with respect to federal funds received for research and development. Between 2006 and 2009 the University realized nearly a 10% increase in federal sponsored research. Both UNC Chapel Hill and NC State continue to rank high among their peers in various national comparisons.
The University has a long-standing commitment to public service programs that extend the knowledge and expertise of its faculty to North Carolina residents not enrolled at the constituent institutions. These services include patient care and laboratory services (in teaching hospitals and other health service centers), agricultural extension services, the delivery of public television programming throughout the State and a wide variety of specialized services to governmental and private community groups.
Approximately $360 million of the proceeds of the Series 2011A Bonds will be used for capital improvements at various campuses of the University with an estimated additional $10 million used for repairs and renovations to University facilities.
Health and Human Services
The Department of Health and Human Services (“DHHS”) is responsible for administering a broad range of health and human services programs, including medical assistance (Medicaid), public health services, mental health services, social services, services for children, services for the aged, blind, and disabled, and vocational rehabilitation. In all, DHHS is responsible for the management and coordination of approximately 15 programmatic divisions and offices. The services and aid provided by DHHS are designed to assist individuals, families, and communities across the State in achieving adequate levels of physical, mental, social, and economic well-being. Programs are financed through a combination of state, local, and federal funds. Counties and regional agencies are often required to match a percentage of State and/or federal funds. Programs often provide grants to counties and regional agencies using formulas based on population, poverty level, population age and other needs-related bases.
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Expenditures for health care and health-related costs make up approximately 85% of the State appropriations allocated to DHHS. These programs include Medicaid, mental health, public health and North Carolina’s insurance program for children (“Health Choice”). For fiscal year 2010- 2011, the State’s General Fund budget allocated approximately $3.9 billion in state appropriations to DHHS. The total DHHS budget, combined with federal and other receipts, for fiscal year 2010-11 is $17.3 billion, of which 69% is for the Medicaid program. Of the non-health care services, social services is the largest portion and reflects 10% of the total DHHS budget at $1.72 billion in total funding, of which $192.7 million came from State appropriations.
For fiscal year 2010-11, DHHS will make payments totaling $40,368,012 to the Centers for Medicare and Medicaid Services under a federally approved plan to repay the State’s 2008-09 overdraw of federal Medicaid funds. The overdraw, which totaled approximately $335 million, will be fully repaid by March 2013.
Corrections
The Department of Correction has continued to build new and more efficient correctional facilities across the State and to expand and renovate existing correctional facilities. This has allowed for the effective implementation of sentencing reform, resulting in substantial increases in time served by offenders. The State’s correctional facility population has more than doubled since 1980 to approximately 40,082 inmates as of June 30, 2010.
The 2009 Legislative Session, as a budget balancing and recurring reduction measure, directed the Department of Corrections to close seven correctional facilities. All seven facilities were closed by April 2, 2010.
For fiscal year 2010-11, the Department of Correction’s General Fund budget was $1.29 billion, which represents 6.8% of the State’s total General Fund budget.
REVENUE STRUCTURE
Description and Treatment of Funds
The State has three major operating funds that receive revenues and from which moneys are expended: the General Fund; the Highway Fund; and the Highway Trust Fund. The taxes described below produce a majority of the State’s tax revenue. All revenues are collected by the Department of Revenue, except the highway use tax on motor vehicle sales and motor vehicle license tax and fees, which are collected by the Department of Transportation. These are no prohibitions or limitations in the North Carolina Constitution on the State’s power to levy taxes, except the income tax rate limitation of 10% and a prohibition against a capitation or “poll” tax. Current tax rates and subjects may be subject to change as described hereafter – see “BUDGETS – 2010-2011 General Fund Budget and Commentary.”
General Fund
The following table shows the amount of tax revenue and non-tax revenue (excluding federal and departmental receipts) reported in the General Fund in each fiscal year 2005-2006 through 2009-2010 with the annual percentage increases/decreases for each of such fiscal years:
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Tax and Non-Tax Revenue (Expressed in Millions)
Percent Increase Fiscal Tax Percent Increase/Decrease Tax and Non-Tax (Decrease) Year Revenue From Previous Year Revenue From Previous Year
2005-06 $17,472.1 10.8 $17,903.8 11.00% 2006-07 19,148.3 9.6 19,676.3 9.90 2007-08 19,147.5 0.0 19,761.2 .04 2008-09 16,526.4 (13.7) 17,021.5 (13.90) 2009-10 18,674.7 13.0 19,119.1 12.30 ______
Sources: Office of the State Controller and the State’s Comprehensive Annual Financial Reports (GAAP basis).
See Appendix B for complete financial statements showing tax revenues and non-tax revenues for such fiscal years.
Tax Revenue
Individual Income Tax – State taxable income is determined by making certain statutory adjustments to federal taxable income. State income tax due is computed under a multi-tiered bracket system with tax rates of 6%, 7%, and 7.75%; the breaking points for the higher marginal tax rates vary according to filing status. Additionally, a temporary income tax surtax is imposed on individuals who meet certain income requirements for tax years beginning on or after January 1, 2009, and before January 1, 2011. The surtax is a percentage (2% or 3% depending on NC taxable income level and filing status) of state income tax payable prior to consideration of withholding, payments, or tax credits. The North Carolina Constitution limits the maximum individual tax rate to 10% of net income.
Corporation Income Tax – A tax is levied at the rate of 6.9% on net income of both foreign and domestic corporations. Additionally, a temporary income tax surtax of 3% of a corporation’s tax payable prior to consideration of payments or tax credits is imposed for tax years beginning on or after January 1, 2009, and before January 1, 2011. Net income is derived by making certain adjustments to the federal taxable net income of corporations, such as taxes on income and excess profits and interest on obligations of the United States. Corporations having income from both within and outside of the State apportion their income according to a three-factor formula based on payroll, sales (double weighted) and value of property. Alternative formulas may be utilized with the approval of the Secretary of Revenue. The North Carolina Constitution limits the maximum corporate tax rate to 10% of net income.
Sales and Use Tax – A State general tax rate of 5.75% (reverting to 4.75% effective July 1, 2011, due to repeal of the temporary additional 1% rate) is levied on the sale or use (includes certain remote “click-through” sales) or rental of tangible personal property, electronically delivered or accessed digital property, magazines delivered by mail, and selected services such as the rental of hotel and motel rooms and laundry and dry cleaning services. The local rate is 2% for most counties, but with 17 counties (as of January 1, 2011) levying an additional 0.25%. A combined general rate of 8% (reverting to 7% effective July 1, 2011) applies to sales of telecommunications service, ancillary service, video programming services (direct-to-home satellite and cable), and to sales of spirituous liquor other than mixed beverages. The combined general rate is the State’s general rate plus the rate of local tax authorized for every county in the State. Preferential tax rates are also levied on sales, use or rental of specific types of property and services as follows: boats and aircraft, 3% (maximum of $1,500 per boat or aircraft); manufactured/mobile homes, 2% (maximum of $300 per
A-9 section); modular homes, 2.5%; residential electricity sales, 3%, and sales of electricity to commercial laundries or to pressing and dry cleaning establishments for use in machinery used in direct performance of the laundering or the pressing and cleaning service, 2.83%. Sales of electricity to farmers, manufacturing industries and manufacturing plants are exempt. Principal items exempt from the tax include raw materials, containers, labels, packaging and shipping materials, baler twine, fertilizer and seed sold to farmers, feed, certain farm products, prescription medicines, and certain computer software. Food purchased for home consumption, with a few narrowly-defined exceptions, is exempt from the State sales tax. Motor vehicle sales and rentals and motor fuels are taxed under different schedules. Refunds of the tax are granted to the federal and local governments and other specified governmental entities; certain 501(c)(3) organizations; nonprofit hospitals; fire and emergency medical service volunteer organizations; certain qualified retirement facilities, a university-affiliated nonprofit organization that provides facilities for use by a constituent institution of the UNC system; major recycling facilities; certain low enterprise or development tier businesses; certain industrial facilities; utility companies; taxpayers engaged in analytical services; interstate passenger air carriers for taxes paid on fuel; railroad intermodal facilities; interstate carriers; and motorsports racing teams or motorsports sanctioning bodies. State agencies are granted refunds of local sales taxes paid. Local sales and use taxes are collected on transactions taxed at the general State rate. Food is subject to a local sales and use tax of 2.0% in all counties. Local sales and use taxes are distributed to counties and, with limited exception, to local units within the county.
Privilege Tax on Certain Machinery and Equipment – A privilege tax at the rate of 1% of sales price is imposed on manufacturers purchasing mill machinery, parts and accessories; major recycling facilities purchasing cranes, port and dock facilities, rail, and material handling equipment; research and development companies in the physical, engineering, and life sciences purchasing certain research and development equipment; software publishing companies purchasing certain equipment to include associated attachments and repair parts; and certain data centers purchasing computer equipment, cooling systems, or electrical equipment; and industrial machinery refurbishing companies purchasing certain repair parts, attachments, or equipment. The maximum tax on a single article is $80. Fuel purchased by manufacturers to operate an industry or plant is exempt. Items subject to these privilege taxes are not subject to sales and use taxes. State agencies are exempt from this privilege tax.
Gross Receipts Tax on Motor Vehicle Rentals and Highway Use Tax on Motor Vehicle Sales – Gross receipts from long-term lease or rental of motor vehicles (at least 365 continuous days to the same person) are taxed at the rate of 3%; gross receipts from short-term lease or rental of motor vehicles are taxed at the rate of 8%. For both short and long-term rentals, the maximum tax for a vehicle leased continuously to the same person is $1,000 for Class A and B commercial vehicles and $1,500 for other recreational vehicles. A 3% highway use tax is levied on the retail sale of motor vehicles with a maximum ceiling of $1,000 for Class A and B commercial vehicles and $1,500 for other recreational vehicles. A retailer engaged in the business of leasing or renting motor vehicles may elect to pay the 3% highway use tax on the retail value of motor vehicles (same maximums per vehicle as described above) purchased for lease or rental rather than the 3% or 8% tax on gross receipts from renting or leasing the vehicles. Collections of the 8% tax from short-term rentals are credited to the General Fund and all collections of the two 3% levies are credited to the Highway Trust Fund.
Corporation Franchise Tax – A franchise tax is levied on business corporations at the rate of $1.50 per $1,000 of the largest of three alternate bases. These bases are (a) the amount of the capital stock, surplus and undivided profits apportionable to the State; (b) 55% of the appraised value of property in the State subject to local taxation or (c) the book value of real and tangible personal property in the State less any debt outstanding which was created to acquire or improve real property in the State. A tax of 3.22% is levied on the gross receipts of electric power and light companies. Municipalities (with minor adjustments) receive quarterly distributions equal to 3.09% of taxable gross receipts from sales of electric power within their jurisdictions during the preceding calendar quarter.
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Piped Natural Gas Excise Tax – An excise tax is levied on piped natural gas on a declining block rate based on the number of therms of gas consumed in a month. The rate starts at 4.7¢ for the first 200 therms received and declines to 0.3¢ for the number of therms received in excess of 500,000. Sales of piped natural gas to manufacturers or to farmers to be used in their operations are exempt. Municipalities receive quarterly distributions equal to one-half of the tax proceeds collected from customers within their jurisdictions during the previous calendar quarter.
Alcoholic Beverage Taxes – Liquor is sold in stores owned and operated by local ABC (Alcoholic Beverage Control) Boards where such stores are permitted by local governments. A tax at the rate of 30% of the sales price is levied by the State. Profits from operation of the stores are distributed to the county or municipality where the store is located. Beer is taxed at the rate of 61.71¢ per gallon. Wine is taxed at per liter rates as follows: fortified wine – 29.34¢; unfortified wine – 26.34¢. Counties and municipalities where beer and wine are sold receive on a per capita basis an annual distribution equal to the following percentages of the net amount of excise taxes collected on the sale of malt beverages and wine during the 12-month period ending March 31 each year: 20.47% (7.24% for period ending March 31, 2010) of beer tax revenue; 49.44% (18% for period ending March 31, 2010) of unfortified wine tax revenue; and 18% (6.49% for period ending March 31, 2010) of fortified wine tax revenue. Local elections may be held on the question of permitting the sale of liquor by the drink by qualified restaurants and clubs. An additional tax of $20 per four liters is levied on liquor purchased by restaurants and clubs for resale as mixed beverages, of which $9 remains with the local jurisdiction, $10 is distributed to the General Fund and $1 is dedicated to DHHS for alcohol or substance abuse rehabilitation.
Insurance Tax – A tax is levied on insurance companies based on gross premiums from business in the State at the following rates: (a) 0.74% additional tax for property coverage (10% of the gross premiums from insurance contracts for automobile physical damage coverage and 100% of the gross premiums from all other contracts for property coverage); (b) 2.5% for workers’ compensation; and (c) 1.9% for all other policies including those of health maintenance organizations. Out-of-state insurers are also subject to a premium tax and must pay the higher of the rates that would apply to North Carolina insurers doing business in the home state or North Carolina tax rates. In addition to the gross premiums tax, various license taxes are levied on insurance companies and agents. In addition, a regulatory charge against the gross premiums tax liability is levied with proceeds used to finance operations of the Department of Insurance. The rate for the regulatory charge, which is set annually, is currently set at 6.0% of the gross premiums tax liability for calendar year 2010.
Estate Tax – Under current law, which does not take into account the federal tax law adopted in December 2010, the North Carolina estate tax is equal to the state estate tax credit that was allowable under the Internal Revenue Code as it existed prior to 2002 but may not exceed the amount of the federal estate tax due or what would be due without a deduction for State estate taxes. With the new federal law reviving the estate tax for 2011 and 2012 with a lower than anticipated rate and a higher exclusion than anticipated, and adding alternatives for the estates of decedents dying in 2010, it is expected changes in the North Carolina estate tax will be enacted.
Tobacco Products Tax – A 2.25¢ tax is levied on each cigarette (45¢ for each pack of 20, 56.25¢ for each pack of 25). Tobacco products other than cigarettes are subject to a tax of 12.8% of the cost of the products; of the net proceeds, an amount equal to 3% of the cost price of the products is credited to the General Fund with the remainder credited to the University Cancer Research Fund.
Other Taxes – Other taxes levied for support of the General Fund include a freight car tax, and various privilege taxes.
Non-Tax Revenue
Institutional and Departmental Receipts – The State receives various items of institutional and departmental receipts which are deposited with the State Treasurer. The most important of these are fees, tuition payments and federal funds collected by State agencies. A-11
Disproportionate Share Hospital Receipts – Like most states, North Carolina receives Medicaid Disproportionate Share Hospital (“DSH”) payments from the federal government for its public hospitals that serve a disproportionate share of indigent patients. DSH payments to State-owned public hospitals are returned to the State and the General Assembly appropriates a specified amount of these receipts as non-tax revenue.
Tobacco Fund Settlement – On November 23, 1998, 46 states’ Attorneys General and the major tobacco companies signed a settlement agreement that, among other things, reimburses states for smoking-related medical expenses paid through Medicaid and other health care programs. The maximum that North Carolina could receive is approximately $4.6 billion over the first 25 years pursuant to the settlement agreement; provided, however, that the formulation of the actual amounts payable each year depends upon various factors, including the market share of such companies. Under the general framework established for the application of the proceeds of the national tobacco settlement funds, one-half of the receipts for each year are to be transferred to the Golden L.E.A.F. Foundation, a special non-profit corporation dedicated to assisting economic development in tobacco dependent regions of the State. The remaining half of the annual settlement receipts is deposited equally to two trust funds, the Tobacco Trust Fund, a special trust fund created to foster the vitality and solvency of the tobacco-related segment of the State’s agricultural economy, and the Health and Wellness Trust Fund, a special trust fund created to address the health needs of North Carolina. In certain years, tobacco settlement receipts ear-marked for the two Trust Funds have been diverted to the General Fund to fund a part of the budgetary deficits in those years.
The following table set forth the tobacco settlement funds received to date, the amounts transferred to the General Fund and the balance paid to the two Trust Funds and the Golden L.E.A.F. Foundation.
Settlement Proceeds Settlement Proceeds Paid to Settlement Transferred to Trust Funds and Fiscal Year Proceeds Received General Fund Golden L.E.A.F.
2000-01 $ 140,273,653.02 $ 0.00 $140,273,653.02 2001-02 175,835,881.98 (64,009,022.21 ) 111,826,859.77 2002-03 169,200,688.26 (78,000,000.00 ) 91,200,688.26 2003-04 150,507,203.64 (63,046,734.06 ) 87,460,469.58 2004-05 148,640,948.78 (60,000,000.00 ) 88,640,948.78 2005-06 136,453,087.12 (32,134,175.77 ) 104,318,911.35 2006-07 142,825,077.78 (30,000,000.00 ) 112,825,077.78 2007-08 159,953,561.72 0.00 159,953,561.72 2008-09 175,186,910.62 (48,796,581.88 ) 126,390,328.74 2009-10 146,358,489.02 (10,000,000.00 ) 136,358,489.021 Total $1,545,235,501.94 ($385,986,513.92 ) $1,159,248,988.02 ______1 The State intends to fund the payments with respect to certain installment financings that provided University-related projects and youth development centers from a portion of the amounts received under the national tobacco settlement funds and deposited to the Tobacco Trust Fund and the Health and Wellness Trust Fund.
The federal government is currently suing the major tobacco companies to recoup costs of the federal government related to smoking. Any award to the federal government in such lawsuit could have an impact on the tobacco companies’ ability to make payments under the settlement with the State.
Disputed Payments under the Master Settlement Agreement – A number of tobacco manufacturers that participate in the Tobacco Fund Settlement described above have determined to
A-12 dispute a portion of their 2006 payment. Approximately $755 million of their total expected payments of $6.5 billion due in April 2006 was placed in a disputed payments account pending determination as to whether the participating states have diligently enforced the terms required by the settlement as contained in each state’s statute. This dispute could result, if not decided in the State’s favor, in approximately $18 million of the funds the State received in April 2006 being returned to the manufacturers in the form of a reduction of a future year’s payment. Each year’s payment after 2006 is subject to similar dispute and the amount of any year’s potential return to the manufacturers would be based on sales numbers for the year in question.
State Lottery – North Carolina approved an education lottery in 2005. The net proceeds of the North Carolina State Lottery provide enhanced educational opportunities, support public school construction, and fund college and university scholarships. Lottery ticket sales began on March 3, 2006. Gross sales since start-up through October 31, 2010 totaled $5.350 billion and the North Carolina State Lottery earned over $1.710 billion for educational programs and the State of North Carolina during that period.
Earned for Education/ Gross Sales State of NC Fiscal Year ($ millions) ($ millions)
2006-07 885.6 315.5 2007-08 1,078.2 350.9 2008-09 1,293.1 414.0 2009-10 1,421.3 432.2 2010-11 (4 months unaudited) 442.6 135.1 Total to Date $5,120.8 $1,647.7
The North Carolina State Lottery Commission estimates that the lottery program will earn $40 million less than expected in the current year because of weak ticket sales mostly due to the prolonged economic slump, with consumers having less money to spend on entertainment. The commission revised its sales estimate in approving a new budget. The revised plan projects that the lottery will be able to provide $402 million for state education programs during the current fiscal year ending June 30, 2011.
Other Non-Tax Revenue – The State receives other non-tax revenue that is deposited in the General Fund. The most important sources are interest earned by the State Treasurer on investments of General Fund moneys and revenues from the judicial branch. Various fees and other charges and receipts are also classified as “other non-tax revenue.”
Highway Fund and Highway Trust Fund
The State has an approximately 79,186-mile highway system, including roadways, rights-of- way, structures, signs, markings, traffic signals and ferry operations. The maintenance and preservation of the highway system absorbs a major portion of the State Highway Fund which dates back to 1921 and the imposition of the State’s first tax on gasoline.
The North Carolina Highway Trust Fund was created by the General Assembly in 1989. Moneys in the Highway Trust Fund are used for a variety of highway and transportation purposes, including paying debt service on State general obligation bonds issued for highway purposes, and debt service of certain bonds of the North Carolina Turnpike Authority. In addition, in most of the years since its creation, the General Assembly has made transfers from the Highway Trust Fund to the General Fund.
Transfers to General Fund from Highway Trust Fund – The amount of the transfer by the General Assembly to the General Fund from the Highway Trust Fund is shown below for fiscal years 2000-2001 through 2009-2010:
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Transfer to General Fund Fiscal From Highway Trust Fund Year (Expressed in Millions)
2000-01 $170.01 2001-02 251.72 2002-03 377.43 2003-04 252.4 2004-05 242.54 2005-06 252.6 2006-07 57.55 2007-08 172.5 2008-09 147.56 2009-10 108.67
______
1 This amount was transferred in each of the fiscal years 1991-1992 through 2000-2001. 2 In 2001-02 the General Assembly (a) added $80 million annually to the prior number and (b) instituted an inflation factor. 3 The increase reflects an additional transfer to the General Fund from the Highway Trust Fund of $125 million, with such amount treated as a loan. 4 The decrease reflects a partial reimbursement from the General Fund to the Highway Trust Fund of approximately $10 million with respect to the $125 million loan in 2002-03. 5 The decrease reflects a final reimbursement from the General Fund to the Highway Trust Fund of $115 million (the remaining amount of the $125 million loan in 2002-03), as well as a reduction of $80 million in the transfer to the General Fund from the Highway Trust Fund, ending that additional amount instituted in 2001-02. 6 Amount reflects reduction in transfer to the General Fund and the transfer of $25 million to the North Carolina Turnpike Authority for certain costs or debt service on certain bonds. 7 Amount reflects an additional $39 million reduction in the transfer to the General Fund for funding for the North Carolina Turnpike Authority bringing the total for funding the Turnpike Authority to $64 million for 2009-10. Of the $64 million, $40 million was transferred to the Turnpike Authority for certain costs or debt service on certain bonds and the remaining $24 million of unused 2009-10 funds were authorized to be transferred to the Mobility Fund in the preceding fiscal year by the 2009 General Assembly.
Legislation has been adopted under which the General Assembly has committed $84 million to the North Carolina Turnpike Authority for fiscal year 2010-11. The amount increases to $99 million for fiscal year 2011-12 and fiscal year 2012-13. It is further increased to $112 million in fiscal year 2013-14, thereby reducing the amount available for transfer to the General Fund. Additional funds for the Mobility Fund are also authorized. Under current provisions, the scheduled transfer to the General Fund is reduced to $72.9 million for fiscal year 2010-11, $41.5 million for fiscal year 2011-12, $27.5 million for 2012-13, and $1.7 million for fiscal year 2013-14.
Tax Revenues - The proceeds of the taxes hereinafter described are deposited in the Highway Fund and the Highway Trust Fund. The Highway Fund and the Highway Trust Fund revenues for fiscal years 2005-2006 through 2009-2010 are shown in Appendix B.
Motor Fuels Tax – The tax on motor fuels is 17.5¢ per gallon plus the greater of 3.5¢ per gallon or 7% of the average wholesale price determined semiannually by the Secretary of Revenue and stated as cents per gallon. In the 2009 Session of the North Carolina General Assembly, a floor was established so that the variable component of the motor fuels tax cannot go below the rate of 12.4¢ per gallon. The current tax rate, based on the average wholesale price for the six months ending September 30, 2010, is 32.5¢ per gallon (effective January 1, 2011). Refunds or exemptions are granted to the federal government, State and local governments and selected non-profit organizations. An amount equal to collections from 0.5¢ per gallon is transferred to funds created to pay the cost of certain environmental cleanup programs, 75% of the remaining net collections are
A-14 deposited in the Highway Fund for highway purposes; the balance is deposited in the Highway Trust Fund for highway and other road construction purposes.
Highway Use Tax – For the privilege of using the highways, a tax of 3% is levied on the retail value of motor vehicles when purchased or titled in North Carolina. Collections, along with the 3% portion of the tax on gross receipts from motor vehicle rentals described under “REVENUE STRUCTURE – General Fund – Tax Revenue-Gross Receipts Tax on Motor Vehicle Rentals and Highway Use Tax on Motor Vehicle Sales” above are deposited in the Highway Trust Fund.
Motor Vehicle License Tax – An annual license tax is levied at the rate of $28 per private passenger vehicle. The tax imposed on vehicles of common carriers of passengers and on property- hauling vehicles is based on weight. The tax on farm trucks is approximately one-half of the rate levied on private and contract haulers. Collections are deposited in the Highway Fund.
Non-Tax Revenue – The State places non-tax revenue from various sources in the Highway Fund. The most important source is federal aid. Other sources are interest on the investment of Highway Fund moneys and a gasoline inspection fee of ¼¢ per gallon. In addition, the Highway Trust Fund receives non-tax revenues generated by increases in fees charged for the issuance of certificates of title and other fee increases and all interest and income earned by the Highway Trust Fund. Amounts earned on investments in the Highway Fund and the Highway Trust Fund for fiscal years 2005-2006 through 2009-2010 are as follows:
Investment Earnings1 (millions) Fiscal Year Highway Fund Highway Trust Fund
2005-06 $38.3 $ 3.0 2006-07 49.0 6.5 2007-08 67.9 2.6 2008-09 30.6 1.1 2009-10 31.6 0.9 ______
1Total fund balances in the Highway Fund and the Highway Trust Fund have declined over the five year period. See Appendix B – “FINANCIAL STATEMENTS OF THE STATE OF NORTH CAROLINA” for the five year balance sheets of the Highway Fund and the Highway Trust Fund.
Sources: Office of State Budget and Management, Office of the State Controller and the State’s Comprehensive Annual Financial Reports (GAAP basis).
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The following table shows the amount of tax revenue and non-tax revenue received in the Highway Fund in each fiscal year 2005-2006 through 2009-2010 and the annual percent increases/decreases for each of such fiscal years:
Highway Fund Tax and Non-Tax Revenue (Expressed in Millions)
Percent Fiscal Motor Fuels Other State Federal Other Total Increase Year Tax Revenue1 Revenue Funds Funds Revenue (Decrease)
2005-06 $1,114.7 $665.1 $ 993.9 $14.8 $2,788.5 4.7% 2006-07 1,179.1 738.2 793.6 30.8 2,741.7 (1.7) 2007-08 1,163.5 770.2 904.4 21.0 2,859.1 4.3 2008-09 1,117.1 691.3 1,119.3 28.9 2,956.6 3.4 2009-10 1,146.1 659.6 823.4 30.0 2,659.1 (10.1) ______
1Motor Fuels Tax Revenue includes the Motor Fuels Tax and the Highway Use Tax. The gasoline tax rate is adjusted each January 1 and July 1 based upon consumption during the preceding six months. The purpose of this adjustment is to assure a constant revenue stream regardless of consumption amounts.
Source: Office of the State Controller and the State’s Comprehensive Annual Financial Reports (GAAP basis).
The following table shows the amount of tax revenue and non-tax revenue received in the Highway Trust Fund in fiscal years 2005-2006 through 2009-2010 and the annual percent increases/decreases for each of such fiscal years:
Highway Trust Fund Tax and Non-Tax Revenue (Expressed in Millions)
Motor Other Percent Fiscal Fuels Tax State Other Increase Year Revenue Revenue Funds Total Revenue (Decrease)
2005-06 $ 949.3 $113.7 $2.0 $1,065.0 4.4% 2006-07 1,001.2 123.4 5.3 1,129.9 6.1 2007-08 953.9 111.0 5.5 1,070.4 (5.3) 2008-09 819.6 92.1 0.3 912.0 (14.8) 2009-10 822.2 89.7 3.0 914.9 0.3 ______
Sources: Office of the State Controller and the State’s Comprehensive Annual Financial Reports (GAAP basis).
Possible Changes in Tax Rates and Subjects and Non-Tax Revenue - Current tax rates and subjects for amounts deposited into the Highway Trust Fund and the Highway Fund may be subject to legislative or other change as described hereafter. In addition, non-tax revenue therefor may be affected by legislative or other changes affecting the budget and related matters, including the availability of funds for investment and the accrual of investment earnings. See “BUDGETS - 2010- 2011 General Fund Budget and Commentary.”
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STATE GOVERNMENT EXPENDITURES
The State receives the tax and non-tax revenue discussed above, as well as various funds from the federal government. The financial statements of the State included in Appendix B to this Official Statement show the total receipts and expenditures from both sources for the General Fund, the Highway Fund, and the Highway Trust Fund for the five fiscal years ended June 30, 2006 to 2010. Unless otherwise indicated, the information set forth below covering the State’s recent and current financial status and budgets excludes federal receipts and expenditures.
REQUIREMENTS FOR BALANCED BUDGET
Constitutional Provision
The State Constitution in Article III, Section 5 details the duties of the Governor to prepare and recommend to the General Assembly a comprehensive budget of anticipated revenue and proposed expenditures of the State for the ensuing fiscal period. Furthermore, once a budget is enacted by the General Assembly, the Governor is required to administer this budget and ensure that the State does not incur a deficit during any fiscal period. To comply with this mandate the Governor must survey the collection of revenue and shall effect the necessary economies in the State expenditures whenever she determines that receipts during the fiscal period in question, when added to the beginning unreserved General Fund balance, will not be sufficient to meet budgeted expenditures.
State Budget Act
The State Budget Act (“SBA”) sets out the procedures by which the State’s budget is prepared, adopted and administered. The SBA requires the adoption of a balanced budget and G.S. 143C-4-1 provides guidance as to what constitutes a balanced budget. A budget for a fund is balanced when the beginning unreserved fund balance for a fiscal year, together with the projected receipts to the fund during the fiscal year, is equal to or greater than the sum of appropriations from the fund for that fiscal year. If the Governor finds that revenues to any fund, when added to the beginning unreserved fund balance in that fund, will be insufficient to support appropriations, the Governor shall immediately notify the General Assembly that a deficit is anticipated. Furthermore, the Governor shall report in a timely manner to the General Assembly a plan containing the expenditure reductions and other lawful measures that are to be implemented to avert a deficit. However, the North Carolina Constitution provides that any such reduction in appropriations to avert a deficit shall be made “after first making adequate provision for the prompt payment of the principal of and interest on bonds and notes of the State according to their terms.”
The State Constitution and statutory requirements for the State budget, in part for historical reasons, provide for the use of budgetary financial data rather than financial data presented in conformity with generally accepted accounting principles (“GAAP”). The differences between budgetary financial data and GAAP financial data include that budgetary funds are accounted for on a cash basis, rather than on a modified accrual basis, and there is a significant variance in the treatment of appropriated but unspent funds at the end of a fiscal period. The financial statements in Appendix B are GAAP statements.
BUDGETS
General Description
The total State budget is supported from four primary sources of funds: (1) General Fund tax and non-tax revenue; (2) Highway Fund and Highway Trust Fund tax and non-tax revenue; (3) federal funds and (4) other receipts, generally referred to as departmental receipts. Federal funds comprise approximately 33.1% of the total State budget for fiscal year 2009-2010. The largest share of federal funds is designated to support programs of the Department of Health and Human
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Services. The other major recipients of federal funds are public schools, universities, community colleges and transportation, including highway construction and safety.
Departmental receipts consist of revenues that are received directly by a department and are not tax or non-tax revenue as designated by the General Assembly. Departmental receipts consist of tuition at the universities and community colleges, patient receipts at the hospitals and institutions, sales of goods and services, grants, and various other receipts. These receipts represent approximately 16.1% of the total State budget.
All funds presented to and reviewed by the General Assembly and approved in accordance with its procedures are considered “appropriated” or authorized by the General Assembly.
As noted in “REQUIREMENTS FOR BALANCED BUDGET,” State budgets are accounted for on a cash basis using budgetary financial data rather than GAAP financial data with a modified accrual basis. Therefore, the following discussion of the State budget in various fiscal years does not directly correspond to data or conclusions presented in the GAAP financial statements in Appendix B. For a budgetary basis schedule for the General Fund and reconciliation of budgetary versus GAAP reporting differences, see the “Schedule of Revenues, Expenditures and Changes in Fund Balance, Budget and Actual (Budgetary Basis – Non-GAAP) General Fund” and accompanying notes in the Required Supplemental Information section of the State’s 2010 CAFR, available in Appendix B and at http://www.osc.nc.gov/financial/10CAFR/index.html.
Events Leading to the Current Biennuim
The State began to feel the effects of the national recession in the second half of fiscal year 2007-2008. While North Carolina’s revenue forecast for fiscal year 2008-2009 anticipated a slowdown, it did not expect a major recession. The global financial market collapse in September 2008 sent an already contracting economy into a severe recession, resulting in unprecedented declines of over 11% in fiscal year 2008-2009 General Fund revenues. The State balanced the 2008- 2009 budget by various cuts in expenditures, deferrals of certain capital improvements and the temporary increase in certain taxes.
2009-2010 General Fund Budget and Commentary
The following table sets forth the fiscal year 2009-2010 General Fund budgeted revenues and appropriations, excluding federal and departmental receipts and expenditures, as approved by the General Assembly in 2009, and the actual performance on the budgetary cash basis (which is not subject to audit) for the 2009-2010 fiscal year (in millions). The table also sets forth comparative results for the twelve months of the preceding fiscal year.
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Percentage of $ Millions Budget Realized/ Expended for Twelve Authorized Actual for Twelve Months Months Ended Budget Ended June June 1 2009-10 2010 * 2009 2010 Total Beginning Fund Balance $ 619.7 619.7$ $ 1,949.2
Revenues: Tax Revenues: Individual Income $ 9,514.2 $ 9,047.6 $ 9,470.2 95.1% Corporate Income 1,051.1 1,197.9 835.5 114.0% Sales and Use 5,628.6 5,565.0 4,677.9 98.9% Franchise 622.0 724.5 651.9 116.5% Insurance 487.3 486.8 466.6 99.9% Beverage 287.9 282.3 228.5 98.1% Other: Inheritance 113.1 71.9 104.3 63.6% Privilege 35.1 39.2 37.5 111.7% Tobacco Products 247.4 251.7 227.1 101.7% Gift - 12.0 12.3 N/A Freight Car Lines - 0.3 0.2 N/A Piped Natural Gas 36.1 33.8 34.2 93.6% Mill Machinery 32.3 31.9 32.9 98.8% Other - 0.1 - N/A Total Tax Revenues $ 18,055.1 17,745.0$ $ 16,779.1 98.3% Nontax Revenues: Treasurer's Investments 67.2 40.8 113.3 60.7% Judicial Fees 247.8 216.9 191.2 87.5% Insurance 77.7 69.6 76.5 89.6% Disproportionate Share Receipts 125.0 125.0 100.0 100.0% Total Nontax Revenues 517.7 452.3 481.0 87.4% Total Tax and Nontax Revenues$ 18,572.8 18,197.3$ $ 17,260.1 98.0%
Transfers In: Highway / Highway Trust Fund $ 126.1 126.2$ 165.1$ 100.1% Other transfers 227.6 382.2 2 1,720.5 3 167.9% Total Transfers In 353.7 508.4 1,885.6 143.7% Total Revenues and Transfers In $ 18,926.5 18,705.7$ $ 19,145.7 98.8%
Debt Proceeds 487.5 487.5 600.0 100.0% Total Available Funds $ 20,033.7 19,812.9$ $ 21,694.9 98.9%
Source: Office of the State Controller
1 As authorized by the 2009 Session (SL 2009-451) of the General Assembly. Amounts not updated for actual fiscal year 2010 results. 2 Includes Other Non-tax Revenue Transfers of $333.9 million and $48.3 million Non-Reverting Departmental Funds Transfer from Reserves. 3 Includes $192.8 million of Other Non-Tax Revenue Transfers and $45.3 million Transfer from Reserves, $802 million Governor's Executive Order #6 which allowed for the transfer of non-general fund and non-highway fund receipts to the general fund to support appropriation expenditures in fiscal year 2009 and $680.4 million American Recovery & Reinvestment Act. * Preliminary (unaudited)
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Percentage of $ Millions Budget Realized/ Expended for Twelve Authorized Actual for Twelve Months Months Ended Budget Ended June June 1 2009-10 2010 * 2009 2010 Expenditures Current Operations $18,315.9 $17,852.7 $18,996.8 97.5% Capital Improvements: Funded by General Fund 4.9 4.9 23.1 100.0% Funded by Debt Proceeds 4 487.5 487.5 600.0 100.0% Debt Service 644.1 609.8 548.1 94.7% Total Budgetary Expenditures$ 19,452.4 18,954.9$ $ 20,168.0 97.4%
Additional Expenditures/Transfers 50.0 5 51.8 6 907.2 7 103.6% from/to Reserves Total Expenditures$ 19,502.4 19,006.7$ $ 21,075.2 97.5%
Ending Fund Balance
Unreserved $ 3.8 234.7$ $ 92.2 Reserved 527.5 571.5 8 527.5 9 Total Ending Fund Balance $ 531.3 806.2$ $ 619.7
Source: Office of the State Controller
1 As authorized by the 2009 Session (SL 2009-451) of the General Assembly. Amounts not updated for actual fiscal year 2010 results. 4 Represents debt issuances in the fiscal year. 5 Includes $50 million Clean Water Trust Fund Expenditures. 6 Includes $47.5 million Clean Water Trust Fund Expenditures, $2.2 million Disaster Relief Reserve and $2.1 million Job Development Incentive Grants Reserve. 7 Includes expenditures of $53.2 million for the Disaster Relief Budget Shortfall, $84.5 million Clean Water Trust Fund, $6.6 million Job Development Incentive Grants Reserve, $19.3 million Disproportionate Reserve, $36.1 million Non-Reverting Departmental Funds, $636.6 million "Rainy Day" Savings Reserve Account, $69.8 million Repairs and Renovations Reserve and $1.1 million from the ONE NC Fund Reserve. 8 Includes $150.0 million "Rainy Day" Savings Reserve, $41.8 Disaster Relief Budget Shortfall $3.1 Job Development Incentive Grant and $376.6 Non-Reverting Departmental Funds. 9 Includes $150 million "Rainy Day" Savings Reserve, $44 million Disaster Relief Reserve $5.2 Job Development Incentive Grant and $328.3 Non-Reverting Departmental Funds. * Preliminary (unaudited)
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2010-2011 General Fund Budget and Commentary
Under the North Carolina budget process, in odd numbered years the General Assembly enacts a State budget for the next biennium, consisting of an annual budget for each of the two fiscal years in the biennium. The General Assembly customarily convenes in the second year of the biennium and makes adjustments to the budget previously enacted for that second fiscal year. The State is currently in the biennium that began July 1, 2009 and that ends on June 30, 2011, thus the original budget for the 2010-2011 fiscal year was enacted in 2009.
In June 2010, the General Assembly enacted legislation amending the original 2010-2011 fiscal year budget with adjustments that closed a projected cumulative budget gap of $1.3 billion. The reason behind this gap and the adjustments made are as follows.
Revenues Lower than Forecast - In April 2010, the General Assembly’s Fiscal Research Division and the Office of State Budget and Management lowered the consensus revenue forecast for the 2010-2011 fiscal year by $703 million due to a downgraded economic forecast for the nation and the State’s economy. Another $85 million loss from the estate tax was also anticipated because it is tied to the federal estate tax, which expired January 1, 2010. These changes (aggregating $788 million) reduced fiscal year 2010-2011 baseline revenue growth (removing tax law changes) to 2.7% from 3.3%. In addition to the revised revenue forecast, the General Assembly made various adjustments to availability totaling $41.8 million. The most significant was a refundable income tax credit to small businesses whose gross receipts are less than $1 million.
Appropriations and Expenditures - In the revised budget for the 2010-2011 fiscal year, appropriations were reduced from $19.6 billion to $18.95 billion. The net change in appropriations included (1) replacement of $563 million in State funds with additional federal Medicaid assistance, (2) budget reductions totaling $906 million, and (3) increased funding of $866 million to address unanticipated growth in Medicaid costs, a dramatic increase in higher education enrollment, economic development initiatives and other priorities. Because the State budget was enacted prior to Congressional approval of additional federal Medicaid assistance, the State budget legislation also directed the Governor to manage the non-realization of the federal assistance through a variety of budgetary actions.
The following table sets forth the fiscal year 2010-2011 General Fund budgeted revenues and appropriations, excluding federal and departmental receipts and expenditures, as approved by the General Assembly in June 2010, and the actual performance on the budgetary cash basis (which is not subject to audit) for the 2010-2011 fiscal year (in millions). The table also sets forth comparative results for the related period in the preceding fiscal year.
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Percentage of $ Millions Budget Realized/ Expended for Six Authorized Actual for Six Months Months Ended Budget Ended December December FY 2010-11 1 FY 2011* FY 2010 FY 2011
Beginning Fund Balance, July 1 Unreserved$ 236.9 $ 236.9 92.2$ Reserved 570.8 570.8 527.5 Total Beginning Fund Balance $ 807.7 807.7$ $ 619.7
Revenues: Tax Revenues: Individual Income 9,543.3$ 4,869.2$ 4,826.4$ 51.0% Corporate Income 1,017.5 435.6 684.3 42.8% Sales and Use 5,690.8 2,940.0 2,601.3 51.7% Franchise 697.9 199.4 291.9 28.6% Insurance 494.5 142.6 155.3 28.8% Beverage 277.2 138.2 134.2 49.9% Other: Inheritance 10.1 19.5 47.8 193.1% Privilege 41.9 21.6 19.4 51.6% Tobacco Products 251.4 135.6 125.1 53.9% Real Estate Conveyance Excise - 2.5 2.8 N/A Gift - 1.3 10.9 N/A Solid Waste - 4.7 4.9 N/A White Goods Disposal - 1.0 1.0 N/A Scrap Tire Disposal - 4.0 3.6 N/A Piped Natural Gas 34.2 9.0 10.8 26.3% Mill Machinery 33.4 16.3 15.3 48.8% Other - (0.2) 0.2 N/A Total Tax Revenues $ 18,092.2 8,940.3$ 8,935.2$ 49.4% Nontax Revenues: Treasurer's Investments 57.5 11.9 23.9 20.7% Judicial Fees 253.0 111.7 103.7 44.2% Insurance 67.0 14.2 15.3 21.2% Disproportionate Share Receipts 135.0 135.0 125.0 100.0% Total Nontax Revenues 512.5 272.8 267.9 53.2% Total Tax and Nontax Revenues$ 18,604.7 9,213.1$ 9,203.1$ 49.5%
Transfers In: Highway / Highway Trust Fund $ 90.4 44.9$ $ 63.1 49.7% Other transfers 282.8 217.8 2 250.4 3 77.0% Total Transfers In 373.2 262.7 313.5 70.4% Total Revenues and Transfers In $ 18,977.9 9,475.8$ 9,516.6$ 49.9%
Debt Proceeds 500.0 - 487.5 0.0% Total Available Funds $ 20,285.6 10,283.5$ 10,623.8$ 50.7%
Source: Office of the State Controller
1 As authorized by the 2009 Session (SL 2009-451) of the General Assembly. Amounts not updated for actual fiscal year 2010 results. 2 Includes Other Non-tax Revenue Transfers of $114.3 million, $97.2 million Non-Reverting Departmental Funds Transfer from Reserves and $6.3 million Job Development Incentive Grants Reserve. 3 Includes $163.9 million of Other Non-Tax Revenue Transfers, $79.5 Non-Reverting Department Funds and $7.0 million Job Development Incentive Grants Reserve. * Preliminary (unaudited)
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Percentage of $ Millions Budget Realized/ Expended for Six Authorized Actual for Six Months Months Ended Budget Ended December December 1 FY 2010-11 FY 2011* FY 2010 FY 2011 Expenditures Current Operations $18,190.3 $8,757.7 $8,592.5 48.1% Capital Improvements: Funded by General Fund 11.2 11.2 - 100.0% Funded by Debt Proceeds 4 500.0 - 487.5 0.0% Debt Service 707.5 149.4 154.2 21.1% Total Budgetary Expenditures $ 19,409.0 8,918.3$ 9,234.2$ 45.9%
Additional Expenditures/Transfers 50.0 5 25.0 6 36.5 7 50.0% from/to Reserves Total Expenditures $ 19,459.0 8,943.3$ 9,270.7$ 46.0%
Ending Fund Balance
Unreserved $ 255.8 666.0$ $ 740.6 Reserved 570.8 674.2 8 612.5 9 Total Ending Fund Balance $ 826.6 1,340.2$ 1,353.1$
Source: Office of the State Controller
1 As authorized by the 2009 Session (SL 2009-451) of the General Assembly. Amounts not 4 Represents debt issuances in the fiscal year. 5 Includes $50 million Clean Water Trust Fund Expenditures. 6 Includes $24.9 million Clean Water Trust Fund Expenditures and $0.1 million Disaster Relief Reserve. 7 Includes expenditures of $1.5 million for the Disaster Relief Budget Shortfall, $35.0 million Clean Water. 8 Includes $150.0 million "Rainy Day" Savings Reserve, $41.2 Disaster Relief Budget Shortfall $9.4 Job Development Incentive Grant and $473.6 Non-Reverting Departmental Funds. 9 Includes $150 million "Rainy Day" Savings Reserve, $42.5 million Disaster Relief Reserve $12.2 Job Development Incentive Grant and $407.8 Non-Reverting Departmental Funds. * Preliminary (unaudited)
Based on current revenue forecasts, it is believed the State 2010-2011 General Fund ending balance will be generally as presented above. If further revisions in expenditures are required beyond those in the budget revised in June 2010, there are alternatives available to the Governor for further budgetary actions including freezing vacant positions and salary increases, limiting purchase orders for goods and services, and restricting non-essential travel.
2011-2012 General Fund Budget and Commentary
Preliminary numbers for the State’s fiscal year 2011-2012 budget, based in part on assumptions of modest revenue growth and expenditures for services at existing levels, show an approximate $3.7 billion gap between revenues and expenditures. This is derived from the need to
A-23 replace $1.6 billion in expiring American Recovery and Reinvestment Act (ARRA) funds, $1.3 billion in taxes expiring on or before July 1, 2011, and $400 million in one-time reductions and transfers of fund balances, as well as the anticipated increased costs (without any inflation assumption) of existing programs at current levels. Additional pressures on the budget are:
(1) the continued borrowing from the Federal Unemployment Account at the Employment Security Commission, with interest thereon scheduled to begin in 2011 and the need to start addressing repayment (see Note 8 H to the financial statements in Appendix B and “STATE INDEBTEDNESS – Related Matters – Advances to Employment Security Commission” hereafter);
(2) the need for contributions to pension and other retirement systems and benefit plans at levels increased from prior years (see “RETIREMENT AND PENSION PLANS” and “OTHER POST- EMPLOYMENT BENEFITS” hereafter and Notes 2 B, 12 and 14 to the financial statements in Appendix B); and
(3) the unfunded liability for a court judgment payable at $731 million (see the discussion of NC Schools Boards v. Moore in “LITIGATION” hereafter) and compensated absences of $420 million (see the table Changes in Long-Term Liabilities in Note 8 A to the financial statements in Appendix B). Notwithstanding such matters, it is expected and required by State law that actions be taken, through increases in revenues, the reduction of expenditures, extraordinary actions or some combination thereof, which will result in a balanced budget, with any reduction in appropriations required to avert a deficit only occurring after provision is made for payment of State debt.
Highway Fund and Highway Trust Fund
Prior Years (2008-2009 Actual), (2009-2010 Actual-Cash Basis) and (2010-11 Authorized)
A summary, prepared by the North Carolina Department of Transportation, excluding federal and departmental receipts and expenditures, of the actual revenues and expenditures for the 2008- 09 and 2009-2010 fiscal years and the authorized budget amounts for the 2010-2011 fiscal year is presented below (in millions):
Highway Fund (Expressed in Millions)
Actual Actual Authorized 2008-09 2009-10 2010-11
Beginning Balance, July 1 $ 891.74 $ 1,021.23 $852.98 Revenue 1,847.81 1,865.28 1,792.54 GARVEE Bond Proceeds - 263.14 - Interfund Transfer (Highway Trust Fund) 50.13 39.74 - Total Available Funds $2,789.69 $3,153.19 $2,645.52
Expenditures and Obligations Current Operations $1,332.97 $1,835.13 $1,459.36 GARVEE Capital Expenditures 137.52 146.38 - Interfund Transfer (General Fund) 290.02 309.69 333.18 Capital Improvements 7.94 9.07 - Total Expenditures and Obligations $1,768.45 $2,300.21 $1,792.54 Ending Fund Balance, June 30 $ 1,021.23 $852.98 $ 852.98
A-24
Highway Trust Fund (Expressed in Millions)
Actual Actual Authorized 2008-09 2009-10 2010-11
Beginning Balance, July 1 $ (74.61) $ (169.63) $ (18.94) Revenue 912.09 916.64 928.73 Interfund Transfer (General Fund) (172.50) (152.68) (108.56) Interfund Transfer (NC Turnpike Authority) (25.00) (25.00) (64.00) Total Available Funds $ 639.98 $ 569.33 $ 737.23
Expenditures and Obligations Current Operations $ 809.61 $ 588.27 $ 737.23 Ending Fund Balance, June 30 $ (169.63) $ (18.94) $ -
GENERAL INFORMATION
Assessed Valuation of Property
The following table shows the assessed valuation of real property, tangible personal property and property of public service companies for the last ten fiscal years. Exempt property is excluded from the table. Counties are required by statute to assess property at 100% of its appraised value. Real property must be revalued every 8 years but counties may elect to revalue more frequently. The State does not levy an ad valorem tax on real property and tangible personal property.
Assessed Valuation Tangible Personal Public Service Fiscal Year Real Property Property Company Property Total
2000-01 $382,422,908,009 $112,992,132,642 $21,952,438,541 $517,367,479,192 2001-02 421,831,969,378 116,740,143,820 23,355,586,210 561,927,699,408 2002-03 448,370,864,967 118,788,285,500 22,602,081,344 589,761,231,811 2003-04 486,461,699,574 117,944,792,111 22,997,034,378 627,403,526,063 2004-05 528,533,828,510 117,683,367,201 23,258,360,938 669,475,556,649 2005-06 572,381,845,957 122,599,101,419 23,633,784,744 718,614,732,120 2006-07 614,693,874,746 130,271,584,966 24,343,997,001 769,309,456,713 2007-08 704,351,774,474 134,254,054,069 24,292,362,350 862,898,190,893 2008-09 783,589,059,363 137,705,527,419 24,989,880,076 946,284,466,858 2009-10 819,271,076,080 134,833,894,416 25,094,980,476 979,199,950,972
______
Source: Compiled by Department of Revenue from reports submitted by counties and municipalities.
A-25
Per Capita Income
North Carolina Compared to United States
Population Per Capita Income U.S. N.C. N.C. United Increase North Increase as a States from Prior Carolina from Prior United North Percentage Year Population Period Population Period States Carolina of U.S.
1950 151,868,000 (1) 4,061,929(1) $ 1,496(2) $ 1,037(2) 69.32% 1960 179,979,000 (1) 18.51% 4,556,155(1) 12.17% 2,254(2) 1,615(2) 71.65 1970 203,849,000 (1) 13.26 5,084,411(1) 11.59 4,072(2) 3,255(2) 79.94 1980 226,546,000 (1) 11.13 5,880,095(1) 15.65 10,062(2) 8,090(2) 80.40 1990 248,791,000 (1) 9.82 6,632,448(1) 12.79 19,588(2) 17,295(2) 88.29 2000 281,421,906 (1) 3.46 8,049,313(1) 5.25 29,770(2) 27,055(2) 90.88 2001 285,081,556 (3) 1.30 8,203,451(3) 1.91 31,145(4) 28,382(4) 91.13 2002 287,803,914 (3) 0.95 8,316,617(3) 1.38 31,462(4) 28,460(4) 90.46 2003 290,326,418 (3) 0.88 8,416,451(3) 1.20 32,271(4) 28,955(4) 89.72 2004 293,045,739 (3) 0.94 8,531,283(3) 1.36 33,881(4) 30,557(4) 90.19 2005 295,753,151 (3) 0.92 8,669,452(3) 1.62 35,424(4) 32,035(4) 90.43 2006 298,593,212 (3) 0.96 8,866,977(3) 2.28 37,698(4) 33,558(4) 89.02 2007 301,579,895 (3) 1.00 9,064,074(3) 2.22 39,392(4) 34,865(4) 88.51 2008 304,374,846 (3) 0.93 9,247,134(3) 2.02 40,166(4) 35,249(4) 87.76 2009 307,006,550 (3) 0.86 9,380,884(3) 1.45 39,138(4) 34,452(4) 88.03 2010 308,745,538 (3) 0.57 9,535,483(3) 1.65 (5) (5)
______
Source: 1 U.S. Department of Commerce, Bureau of the Census. N.C. Office of State Planning. 2 U.S. Department of Commerce, Bureau of Economic Analysis. N.C. Office of State Budget and Management. 3 U.S. Census Bureau estimate. 4 U.S. Bureau of Economic Analysis estimate. 5 Data could not be estimated.
Employment Information
The following table sets forth the State’s labor force and the number of non-agricultural jobs by major sector from 2007-2009 and October 2010. Statistics with respect to the labor force are based upon actual laborers available in the workforce; while statistics with respect to jobs relate to actual jobs established (one member of the labor force may maintain more than one job). Please note the Labor Force and CES data listed for 2007 through 2009 are unadjusted and data for October are seasonally adjusted.
A-26
EMPLOYMENT DATA FOR THE CALENDAR YEARS 2007 – 2009, October 2010
2007 2008 2009 October 2010 Labor Force Data S easonally Adjusted Civilian Labor Force: 4,531,444 4,569,876 4,544,622 4,468,491 Employed 4,318,170 4,286,827 4,060,764 4,041,400 Unemployed 213,274 283,049 483,858 427,091 Unemployment Rate (%) 4.7 6.2 10.6 9.6
Jobs (Establishment Data): NORTH AMERICAN INDUSTRY CLASSIFICATION SYSTEM INDUSTRY TITLE
TOTAL PRIVATE 3,457,300 3,429,400 3,200,000 3,175,800 TOTAL GOVERNMENT 687,800 705,700 715,700 725,900 TOTAL NONFARM 4,145,100 4,135,100 3,915,700 3,901,700
GOODS PRODUCING 800,100 758,600 644,600 610,400 Natural Resource Mining 7,000 6,600 6,000 6,100 Construction 254,700 236,000 190,900 171,800 Manufacturing 538,500 516,000 447,700 432,500 Durable Goods 289,400 277,100 231,400 226,500 Non Durable Goods 249,100 238,900 216,300 206,000
SERVICE PROVIDING 3,345,000 3,376,500 3,271,100 3,291,300 Trade, Trans, Warehousing & Utilities 778,100 769,000 719,700 716,000 Wholesale Trade 182,300 179,900 166,300 164,700 Retail Trade 465,900 462,900 436,800 439,300 Trans., Warehouse & Utilities 129,900 126,200 116,600 112,000 Information 72,700 72,200 69,800 70,900 Financial Activities 211,500 211,300 201,900 198,000 Professional and Business Services 499,800 501,700 463,500 482,200 Educational and Health Services 522,600 535,500 542,400 548,700 Leisure and Hospitality Services 399,900 403,600 393,400 389,900 Other Services 172,600 177,500 164,700 159,700 Government * 687,800 705,700 715,700 725,900
Sources: North Carolina Employment Security Commission: Labor Market Information (LMOR; LAUS (Labor Area Unemployment Statistics), Annual 2007 - 2009, October 2010; and CES (Current Employmet Statistics) Annual 2007 - 2009, Ocotber 2010. * Repeats the TOTAL GOVERNMENT line above to show component portion of SERVICE PROVIDING.
North Carolina’s seasonally adjusted unemployment rate, at 9.6 percent, decreased 0.1 of a percentage point from the previous month’s revised rate of 9.7 percent. The rate was 10.9 percent in October 2009. At 9.6 percent, North Carolina’s unemployment rate is the same as the United States’ 9.6 percent rate.
The number of people employed decreased over the month by 0.1 percent to 4,041,400, while the number of people unemployed fell 1.6 percent to 427,091. During October, North Carolina’s seasonally adjusted labor force participation rate decreased 0.2 of a percentage point over the month
A-27 to 61.6 percent from 61.8 percent. The US rate also decreased 0.2 of a percentage point to 64.5 percent.
Seasonally adjusted Total Nonfarm employment remained the same over the month at 3,901,700, but added 9,100 jobs since October 2009. Over the month, six sectors experienced job growth: Education & Health Services (4,000); Trade, Transportation & Utilities (1,900); Professional & Business Services (800); Construction (500); Other Services (400); and Mining & Logging (200).
Losses were reported for the following sectors: Leisure & Hospitality Services (4,000); Government (2,100); Financial Activities (1,300); Information (300); and Manufacturing (100).
The major sectors to report over-the-year seasonally adjusted job increases were: Professional & Business Services (18,500); Trade, Transportation & Utilities (5,900); Education & Health Services (3,900); Information (2,200); and Mining & Logging (100).
Not seasonally adjusted, six major sectors reported over-the-year job increases: Professional & Business Services (18,600); Trade, Transportation & Utilities (5,900); Education & Health Services (4,000); Information (2,200); Government (100); and Mining & Logging (100).
Manufacturing reported an over-the-year job loss of 3,600. Losses were experienced in 13 major sectors: Textile Mills (4,400); Food (3,200); Wood Product (2,700); Apparel (1,600); Computer & Electronic Product (1,600); Electrical Equipment, Appliance & Component (1,500); Chemical (1,200); Printing & Related Support Activities (1,000); Beverage & Tobacco Product (900); Textile Product Mills (700); Plastics & Rubber Products (600); Furniture & Related Product (600); and Machinery (500). Increases were reported in Transportation Equipment (800); and Fabricated Metal Product (500). Food remains North Carolina’s leading sector in manufacturing employment with 49,300. Chemical follows with 39,600.
Major Employers
The State’s largest major private sector employers, ranked in order according to employment as of the first quarter of 2010 are listed below:
2010 Rank Employer Type of Industry
1 Wal-Mart Associates Inc. Retail Trade 2 Duke University Educational Services/Health Services 3 Food Lion LLC Retail Trade 4 Wells Fargo Bank N.A. Finance Activities 5 Lowes Home Centers Inc. Retail Trade 6 Bank of America N.A. Finance Activities 7 Harris Teeter Inc. Retail Trade 8 Smithfield Foods Inc. Manufacturing 9 International Business Machines Manufacturing 10 Branch Banking & Trust Financial Activities 11 United Parcel Service Inc. Transportation 12 AT&T Services Inc. Information 13 Target Corporation Retail Trade 14 North Carolina Baptist Hospitals Health Services 15 WakeMed Health & Hospitals Health Services 16 US Airways Inc Transportation 17 Ingles Markets Inc. Retail Trade 18 Lowes Food Stores Retail Trade 19 Moses H Cone Memorial Hospital Health Services 20 Belk Inc. Retail Trade
A-28
21 Memorial Mission Hospital Inc. Health Services 22 Novant Health Corporation Health Services 23 Progress Energy Carolinas Utilities 24 Home Depot USA Inc Retail Trade 25 Britthaven, Inc. Health Services
______
Source: North Carolina Employment Security Commission.
STATE INDEBTEDNESS
General Obligation Indebtedness
General Obligation Indebtedness Outstanding1
Bonds Bonds Bonds As of 6/30 (General) (Highway) (Total)
2006 $4,977,910,995 $756,755,000 $5,734,665,995 2007 5,197,445,272 702,080,000 5,899,525,272 2008 4,885,609,403 648,025,000 5,533,634,403 2009 4,575,330,000 593,935,000 5,169,265,000 2010 4,742,737,008 527,922,992 5,270,660,000
______
1Table includes refunding debt but not refunded debt since sufficient funds have been placed with an escrow agent to pay all principal and interest and any premium on the debt refunded to and including: their respective maturities or dates of redemption.
Bonds issued: fiscal year 2001-2002 through January 1, 2011.
2001-02 $204,400,000 Public Improvement Bonds, Series 2002A (Tax-Exempt), 6.32 years average maturity, 4.0583% true interest cost. $35,000,000 Public Improvement Bonds, Series 2002B (Taxable), 1.5 years average maturity, 3.6317% true interest cost. $10,600,000 Public Improvement Bonds, Series 2002C (Tax-Exempt), 2.89 years average maturity, 3.4911% true interest cost. $355,000,000 Variable Rate General Obligation Bonds, Series 2002 D-G issued at a weekly rate.
2002-03 $18,800,000 Clean Water Bonds, Series 2002A, 13.02 years average maturity, 4.4516% true interest cost. $50,000,000 Natural Gas Bonds, Series 2002A – Federally Taxable Interest 3.5 years average maturity, 3.3733% true interest cost. $56,480,000 Refunding bonds, Series 2002A, 5.45 years average maturity, 3.2460% true interest cost. $499,870,000 Variable Rate General Obligation Refunding Bonds issued at weekly rate, rates fixed (pursuant to interest rate swap agreements with Goldman Sachs Mitsui Marine Derivative Products, L.P. and Bank of America, N.A.) at 3.089% and 3.283% to maturity. $2,900,000 Clean Water Bonds, Series 2003A, 3.35 years average maturity, 2.7516% net interest cost. $320,000,000 Public Improvement Bonds, Series 2003A, 15.07 years average maturity, 4.3415% true interest cost.
A-29
$283,255,000 Public Improvement Bonds, Series 2003B, 13.41 years average maturity, 4.3094% true interest cost. $33,000,000 Natural Gas Bonds, Series 2003-Federally Taxable Interest, 3.0 years average maturity, 2.8471% true interest cost. $3,645,000 Clean Water Bonds, Series 2003B, 2.94 years average maturity, 2.8190% net interest cost.
2003-04 $91,000,000 Refunding Bonds, Series 2003D, 2.66 years average maturity, 2.3396% true interest cost. $235,710,000 Refunding Bonds, Series 2003E, 5.49 years average maturity, 3.2991% true interest cost. $400,000,000 General Obligation Bonds, Series 2003, 10.14 years average maturity, 3.8298% true interest cost. $707,900,000 Public Improvement Bonds, Series 2004A, 14.13 years average maturity, 3.928491% true interest cost. $36,000,000 Natural Gas Bonds, Series 2004A, 3.00 years average maturity, 2.4798% true interest cost. $15,255,000 Clean Water Bonds, Series 2004A, 2.957 years average maturity, 2.2783% net interest cost.
2004-05 $300,000,000 Highway Bonds, Series 2004, 8.67 years average maturity, 3.5837% true interest cost. $382,260,000 Refunding Bonds, Series 2004, 5.63 years average maturity, 2.9429% true interest cost. $705,500,000 Public Improvement Bonds, Series 2005A, 12.84 years average maturity, 3.9753% true interest cost. $106,985,000 Refunding Bonds, Series 2005A, 9.96 years average maturity, 3.4900% true interest cost. $16,000,000 Natural Gas Bonds, Series 2005, 3.17 years average maturity, 3.5758% true interest cost. $470,510,000 Refunding Bonds, Series 2005B, 8.74 years average maturity, 3.5386% true interest cost.
2005-06 $70,000,000 Clean Water Bonds, Series 2006A, 11.17 years average maturity, 4.0859% true interest cost. $300,000,000 Higher Education Bonds, Series 2006A, 10.5 years average maturity, 4.2434% true interest cost.
2006-07 $502,745,000 Public Improvement Bonds, Series 2007A, 10.55 years average maturity, 4.0824% true interest cost. $84,385,000 Refunding Bonds, Series 2007B, 15.4 years average maturity, 4.3520% true interest costs.
2009-10 $371,920,000 Refunding Bonds, Series 2009A, 6.904 years average maturity, 2.2637% true interest cost. $487,700,000 Public Improvement Bonds, Series 2010A, 10.52 years average maturity, 3.4798% true interest costs.
2010-11 $472,595,000 Refunding Bonds, Series 2010B, 6.15 years average maturity, 1.72% true interest cost. $302,150,000 Refunding Bonds, Series 2010C, 9.86 years average maturity, 2.38% true interest cost.
Authorized but Unissued – The State of North Carolina has no authorized but unissued general obligation indebtedness. The State Constitution permits additional general obligation bonds to be issued without a referendum to the extent of two-thirds of the amount by which the State’s A-30 outstanding indebtedness (defined for this purpose as general obligation bonds) shall have been reduced during the preceding biennium.
Special Indebtedness
Pursuant to the State Capital Facilities Finance Act, the State issues various types of debt that is not supported by the full faith, credit and taxing power of the State. Termed “Special Indebtedness”, such debt is supported primarily by annual appropriations for debt service by the General Assembly, but may also be secured by a lien on facilities, equipment or other assets. Examples of Special Indebtedness include certificates of participation, lease-revenue bonds and limited obligation bonds.
Outstanding - The table below shows outstanding special indebtedness as of the end of the last five fiscal years. Bonds issued by the North Carolina Turnpike Authority, now a part of the State Department of Transportation, are not included since, while payable from annual appropriations for debt service from the General Assembly, such appropriations are to come from the Highway Trust Fund. See “Related Matters - North Carolina Turnpike Authority” hereafter.
Total Debt Subject to As of 6/30 Annual Appropriation
2006 $ 709,105,000 2007 972,685,000 2008 1,200,925,000 2009 1,744,630,000 2010 1,668,350,000
Debt issued: fiscal year 2002-2003 through January 1, 2011.
2002-03 $17,500,000 Certificates of Participation, Series 2003A (Wildlife Projects), 12.38 years average maturity, 4.6816% all-in true interest cost.
2003-04 $218,405,000 Lease-Purchase Revenue Bonds (North Carolina Correctional Facilities Projects), Series 2003, 12.8 years average maturity, 4.3219% all-in true interest cost.
$158,955,000 Certificates of Participation (State of North Carolina Correctional Facilities Project), Series 2004A, 10.47 years average maturity, 4.0861% all-in true interest cost.
$125,000,000 Certificates of Participation (Repair and Renovation Project), Series 2004B, 10.87 years average maturity, 4.3519% all-in true interest cost.
2004-05 $53,640,000 Lease-Purchase Revenue Bonds (North Carolina Facilities Projects), Series 2004, 12.1 years average maturity, 4.24% all-in true interest cost.
2005-06 $188,385,000 Certificates of Participation (2005 Capital Improvements), Series 2005A, 10.95 years average maturity, 4.1756% all-in true interest cost.
2006-07 $100,000,000 Certificates of Participation (2006 Repairs and Renovations), Series 2006A, 10.292 years average maturity, 4.437805% all-in true interest cost.
2006-07 $200,000,000 Certificates of Participation (2006 Capital Improvements), Series 2006A, 10.7861 years average maturity, 4.167624% all-in true interest cost.
2007-08 $200,000,000 Certificates of Participation (Capital Improvements), Series 2007A, 12.97 years average maturity, 4.412% all-in true interest cost.
A-31
$75,000,000 Certificates of Participation (Repair and Renovation), Series 2007B, 11.1 years average maturity, 4.346% all-in true interest cost.
2008-09 $200,000,000 Limited Obligation Bonds (Capital Improvements), Series 2008A, 12.75 year average maturity, 4.3227% all-in true interest cost.
$400,000,000 Limited Obligation Bonds (Capital Improvements), Series 2009A, 11.97 year average maturity, 4.1464% all-in true interest cost.
Authorized but Unissued
Remaining Balance Authorized 2011A Bonds Authorized but Purpose Date Approved but Unissued 1, 2 Offered Hereby Unissued
Psychiatric Hospitals 6/9/2003 $ 253,368,397 $ 35,350,800 $ 218,017,597 Correctional Facilities 2003/06/07/08/09 118,209,397 62,068,700 56,140,697 University Projects 2004/06/07/08/09/10 902,185,085 358,038,800 544,146,285 Parks and Land 2004/06/07/09 40,000,000 - 40,000,000 State Projects and Other 2006/07/08/09 80,574,378 16,798,800 63,775,578 Repairs and Renovations 2009/10 159,555,896 17,496,000 142,059,896 Green Square Project 2008/09 34,371,888 10,246,900 24,124,988 $ 1,588,265,041 $ 500,000,000 $ 1,088,265,041
______
1Total represents Special Indebtedness Authorization. 2 Does not include North Carolina Turnpike Authority authorization.
A-32
Annual Debt Service Requirements for General Obligation Bonds and Special Indebtedness
General Obligation (including Highway) Special Indebtedness Total Series 2011A Bonds Existing Debt Existing Debt Existing Debt 1,2,3,4 Debt Service Fiscal Principal Principal Principal Principal Year Principal & Interest Principal & Interest Principal & Interest Principal & Interest
2010-11$ 380,280,000 $ 627,900,105.54 $ 77,700,000 $ 157,213,311.28 $ 457,980,000 $ 785,113,416.82 2011-12 375,705,000 607,634,281.10 79,260,000 155,257,669.40 454,965,000 762,891,950.50 $ 12,295,000 41,674,613.02 2012-13 387,295,000 600,213,797.78 80,960,000 153,494,595.64 468,255,000 753,708,393.42 17,430,000 41,375,312.50 2013-14 384,260,000 578,021,260.44 82,730,000 151,546,933.76 466,990,000 729,568,194.20 17,950,000 41,023,812.50 2014-15 387,560,000 562,441,085.56 84,635,000 149,584,550.01 472,195,000 712,025,635.57 18,490,000 40,666,312.50 2015-16 388,010,000 543,749,566.52 86,715,000 147,529,681.27 474,725,000 691,279,247.79 19,230,000 40,481,812.50 2016-17 386,295,000 522,001,416.68 88,875,000 145,474,600.03 475,170,000 667,476,016.71 20,000,000 40,290,312.50 2017-18 386,765,000 504,676,066.80 91,200,000 143,448,481.27 477,965,000 648,124,548.07 20,800,000 40,090,312.50 2018-19 389,210,000 488,080,649.84 93,600,000 141,442,768.76 482,810,000 629,523,418.60 21,630,000 39,880,312.50 2019-20 356,180,000 436,614,749.84 111,160,000 154,128,893.76 467,340,000 590,743,643.60 22,495,000 39,663,812.50 2020-21 275,850,000 339,655,166.52 110,625,000 148,147,156.26 386,475,000 487,802,322.78 23,395,000 39,439,062.50 2021-22 256,690,000 307,767,600.00 112,875,000 145,028,156.26 369,565,000 452,795,756.26 24,330,000 39,204,312.50 2022-23 253,145,000 291,786,050.00 115,225,000 141,822,106.26 368,370,000 433,608,156.26 25,545,000 39,202,812.50 2023-24 227,385,000 254,375,212.50 118,515,000 139,441,100.01 345,900,000 393,816,312.51 26,825,000 39,205,562.50 2024-25 147,785,000 164,955,962.50 82,725,000 98,512,018.76 230,510,000 263,467,981.26 28,165,000 39,204,312.50 2025-26 85,785,000 96,519,812.50 72,605,000 84,375,268.76 158,390,000 180,895,081.26 29,575,000 39,487,712.50 2026-27 68,630,000 75,676,162.50 70,390,000 78,638,543.76 139,020,000 154,314,706.26 31,050,000 39,483,962.50 2027-28 40,885,000 45,037,750.00 63,320,000 68,347,993.76 104,205,000 113,385,743.76 32,605,000 39,486,462.50 2028-29 24,385,000 26,823,500.00 45,235,000 47,327,943.76 69,620,000 74,151,443.76 34,235,000 39,649,237.50 2029-30 24,385,000 25,604,250.00 - - 24,385,000 25,604,250.00 36,030,000 39,732,487.50 2030-31 ------37,925,000 39,916,062.50 $ 5,226,485,000 $ 7,099,534,446.62 $ 1,668,350,000 $ 2,450,761,772.77 $ 6,894,835,000 $ 9,550,296,219.39 $ 500,000,000 $ 799,158,600.52
______
1Table includes refunding debt but not refunded debt since sufficient funds have been placed with an escrow agent to pay all principal and interest and any premium on the debt refunded to and including their respective maturities or dates of redemption. 2The table above includes $355,000,000 Variable Rate General Obligation Bonds issued in spring 2002. These bonds bear interest on a variable interest rate basis, initially in a weekly mode, which may not exceed 12% per annum. The table reflects interest on these bonds calculated at a 4% interest rate. 3Does not include North Carolina Turnpike Bonds (which are payable from the Highway Trust Fund). 4Does not include the Series 2011A Bonds.
A-33
Per Capita Indebtedness (General Obligation Bonds and Special Indebtedness)
Outstanding General Obligation Debt and Special Indebtedness Subject to Annual As of 6/30 Population Appropriation 2 Per Capita
2004 ...... 8,531,283 1 $5,495,719,379 $644.18 2005 ...... 8,669,452 1 6,433,296,426 742.06 2006 ...... 8,866,977 1 6,443,770,995 726.72 2007 ...... 9,064,074 1 6,874,464,474 758.43 2008 ...... 9,247,134 1 6,734,539,403 728.28 2009 ...... 9,380,884 1 6,913,895,000 737.02 2010 ...... 9,535,483 1 6,939,010,000 727.70
______
1 U.S. Census Bureau estimate. 2 Does not include North Carolina Turnpike Authority Bonds.
Percentage of Annual General Obligation Bonds and Special Indebtedness Debt Service to General Expenditures
Total Fiscal Year Debt Service General Ended (Principal and Governmental June 30 Interest)1 Expenditures2 Percentage
2006 657,679,000 33,785,856,000 1.95 2007 726,673,000 37,119,507,000 1.96 2008 759,504,000 38,935,704,000 1.95 2009 803,641,000 40,151,563,000 2.00 2010 822,160,000 40,313,496,000 2.04 ______
Source: Comprehensive Annual Financial Report, N.C. Office of the State Controller.
1Debt service on special indebtedness subject to appropriation and general obligation indebtedness. Amounts do not include North Carolina Turnpike Bond debt service.
2Includes General Fund appropriations, Federal funds, funds from Highway Fund and Highway Trust Fund, and other departmental receipts.
A-34 Related Matters
North Carolina Turnpike Authority
The North Carolina Turnpike Authority, a part of the Department of Transportation (the “Turnpike Authority”), is authorized to construct and operate toll roads within the State, and to issue toll road revenue bonds to finance such costs. The General Assembly has enacted legislation authorizing the transfer of funds from the Highway Trust Fund to the Turnpike Authority, with the proceeds of such transfer to be used to pay debt service on bonds issued by the Turnpike Authority for its Turnpike Projects and for certain related purposes. The Turnpike Authority has issued $586,595,000 in such bonds supported by a legislative commitment of $49 million annually for such projects and expects to issue more bonds supported by that appropriation and an additional legislative commitment of $63 million annually for other projects.
Legal Debt Limit
The State Constitution provides in substance that the State shall not contract a debt, other than refunding debt, by borrowing money in any biennium and pledge its faith and credit to the payment thereof for an amount in excess of two-thirds of the amount by which the outstanding debt of the State shall have been reduced in the preceding biennium unless the proposed debt is submitted to and approved by the voters at an election. Exceptions to this requirement, arising either from specific language in the State Constitution or court cases, include refunding bonds, notes or other obligations issued in anticipation of revenues, moral obligation bonds, revenue bonds and obligations as to which the State’s payments are subject to annual appropriation, including special indebtedness or similar bonds.
Swap Agreements
The State has previously entered into various swap agreements. See Note 7 “Derivative Instruments” in the notes to the financial statements included in Appendix B hereto for a more complete description of such swap agreements and the State’s obligations thereunder.
Advances to the Employment Security Commission
The State has borrowed from the Federal Unemployment Account (FUA) as described in Note 8, “Long-Term Liabilities” in the Notes to the financial statements included in Appendix B (which shows the June 30, 2010 amounts), and has continued to borrow for the purposes described therein in the current fiscal year. At December 31, 2010 the outstanding amount borrowed from the FUA was $2.508 billion.
Refunding Bonds
The State is authorized to issue refunding bonds from time to time as determined by the State Treasurer, without voter approval or action by the General Assembly, to refund any bonds of the State then outstanding. If favorable market conditions occur, the State may issue bonds to refund any of its existing bonds if such issuance will result in desirable debt service savings to the State.
Moral Obligation Bonds
There are no outstanding bonds of the State which contemplate the appropriation by the General Assembly of such amount as may be necessary to make up any deficiency in a debt service reserve thereof. Furthermore, no legislation has been enacted by the General Assembly which would authorize the issuance of any such bonds.
A-35 Revenue Bonds
Pursuant to Section 136-18(12b) of the North Carolina General Statutes and the State and Local Government Revenue Bond Act, the State issued $287.57 million and $242.52 million of Grant Anticipation Revenue Vehicle (GARVEE) Bonds in 2007 and 2009 respectively. The bonds were issued for the purpose of accelerating various transportation projects across the State and to pay certain costs incurred in connection with the Bonds. The GARVEE Bonds are payable solely from certain federal aid revenues received on behalf of the State and do not create a debt, liability or obligation of the State or any political subdivision of the State. Such federal aid revenues consist of amounts derived from the National Highway System and other federal surface transportation programs. See also “REVENUE BONDS AND OTHER INDEBTEDNESS OF STATE AUTHORITIES AND INSTITUTIONS” hereafter.
Guaranteed State Energy Contracts
The State is authorized to finance up to $500 million for projects that provide energy cost savings that are sufficient to pay the debt service on the projects’ financing. As of January 1, 2011 a total of $128,001,357 of such contracts had been entered into.
Capital Financing Outlook
After the issuance of the Bonds, the State will have authorized but unissued debt subject to annual appropriation of approximately $588 million, and the State anticipates that all or a large portion of this debt subject to annual appropriation will be issued from time to time over the next several years. The timing and size of additional future issues will depend upon a number of factors, including the cash flow requirements of the State for the programs and projects to be financed with the debt proceeds, the State’s financial condition at the time the debt is proposed to be issued, and capital market conditions. The amount and timing of these sales has not been established. See “North Carolina Turnpike Authority” below for the intention to issue debt subject to annual appropriation from the Highway Trust Fund.
REVENUE BONDS AND OTHER INDEBTEDNESS OF STATE AUTHORITIES AND INSTITUTIONS AT JUNE 30, 2010
The following chart outlines the revenue bonds and other indebtedness of State authorities and institutions at June 30, 2010. The State is not responsible for debt service on any of the revenue bonds and other indebtedness represented in this chart.
Appalachian State University ...... $ 202,310,596 East Carolina University ...... 179,783,443 Elizabeth City State University ...... 17,771,449 Fayetteville State University ...... 6,518,527 North Carolina A & T State University ...... 14,845,000 North Carolina Central University ...... 88,056,173 North Carolina School of the Arts ...... 9,215,000 North Carolina State University at Raleigh ...... 334,550,703 University of North Carolina at Asheville ...... 19,740,000 University of North Carolina at Chapel Hill ...... 1,305,929,932 University of North Carolina at Charlotte...... 201,125,874 University of North Carolina at Greensboro ...... 137,863,539 University of North Carolina at Pembroke ...... 32,966,682 University of North Carolina at Wilmington ...... 231,327,089 Western Carolina University ...... 63,297,881
A-36 Winston-Salem State University ...... 69,439,919 North Carolina Capital Facilities Finance Agency ...... 2,922,760,281 North Carolina Eastern Municipal Power Agency ...... 2,441,345,000 North Carolina Housing Finance Agency ...... 1,470,170,000 North Carolina Medical Care Commission ...... 6,989,322,431 North Carolina Municipal Power Agency No. 1 ...... 1,606,455,000 North Carolina State Education Assistance Authority ...... 4,494,804,923 North Carolina State Ports Authority ...... 104,757,560 Total ...... $22,944,357,002 ______
Source: Chief fiscal officer of each authority or institution.
RETIREMENT AND PENSION PLANS
Generally
The State reports a number of defined benefit public employee retirement plans and one defined contribution plan administered by the State. There are other defined contribution plans administered by a third party under the auspices of the State. The State may or may not make supplementary contributions to these plans. Although the assets of the administered plans are commingled for investment purposes, each plan’s assets may be used only for payment of benefits to the members of the plans and for related administrative costs. The State also provides an optional retirement plan for certain university employees and a special separation allowance for eligible sworn law enforcement officers.
Actuarial valuations are used to determine contribution rates for the plans. The State has used 7.25% as the estimated future investment return for the plans for a number of years in making such valuations. The unfunded accrued actuarial liability is a measure of the present value of benefits estimated to be due in the future for current or past employees given assumptions as to mortality, pay levels, retirement experience and employee turnover, less the present value of assets available to pay those benefits given assumptions including normal cost and member contributions. Such determinations result in the calculation of an expected contribution amount (known as the “annual required contribution” or “ARC”) for the State. The level of the contribution amount in later years depends on actual investment return, whether the various other assumptions as to expenditures from the plans correspond to actual facts and whether the State has contributed the complete ARC in intervening years.
Each of the following three defined benefit plans involves employees of the State:
Teachers’ and State Employees’ Retirement System – Membership is comprised of employees of State agencies and institutions, including teachers and employees of the local boards of education, university and community college faculty and employees, and State-employed law enforcement officers. Total active member accounts estimated at December 31, 2009 amounted to 323,580, and in addition, there were 97,474 inactive members. Annuitants for December 31, 2009 totaled 156,791. Benefits accrue at the rate of 1.82% of the 4-year average compensation for each year of service. For the fiscal year beginning July 1, 2010, the system is funded by a member contribution of 6% of compensation and an employer contribution of 4.93%, in addition to investment income. The plan does not provide for automatic post-retirement benefit increases. Increases are contingent on actuarial gains of the plan. See “Failure to Appropriate Annual Required Contributions” hereafter.
Consolidated Judicial Retirement System – Membership is comprised of judges, district attorneys and clerks of court. Total active member accounts estimated at December 31, 2009 amounted to 559 and in addition, there were 52 inactive members. Annuitants for December 31, 2009 totaled 529. Benefits accrue at the rates of 3.02%, 3.52% or 4.02% of final compensation for
A-37 each year of service, depending on the status of members. For the fiscal year beginning July 1, 2010 the system is funded by a member contribution of 6% of compensation and an employer contribution of 15.11% of covered payroll, in addition to investment income. The plan does not provide for automatic post-retirement benefit increases. Increases are contingent on actuarial gains of the plan.
Legislative Retirement System – Membership is comprised of members of the General Assembly. Total active member accounts estimated at December 31, 2009 amounted to 169, and in addition, there were 83 inactive members. Annuitants for December 31, 2009 totaled 270. Benefits accrue at the rate of 4.02% of final compensation for each year of service. For the fiscal year beginning July 1, 2010 the system is funded by a member contribution of 7% of compensation, in addition to investment income. No contribution was made by the State for the fiscal year beginning July 1, 2010 because the plan had a market value in excess of its liabilities. The plan does not provide for automatic post-retirement benefit increases. Increases are contingent on actuarial gains of the plan.
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A-38 The following financial and statistical data represent a consolidation of the three retirement systems with State employee members for the four years ending December 31, 2009.
RETIREMENT SYSTEMS RECEIPTS AND DISBURSEMENTS ($millions)
2006 2007 2008 2009
Receipts: Employee Contribution $749.7 $803.5 $853.7 $851.1 Employer Contribution 371.2 396.7 517.3 501.7 Investment Earnings 5,833.2 4,639.0 (11,358.5) 6,688.6 Other 1.9 4.6 3.0 1.7 Total $6,956.0 $5,843.8 ($9,984.5) $8,043.1 Disbursements: Benefit $2,656.9 $2,835.5 $3,022.8 $3,168.9 Refunds 83.2 76.9 74.7 69.1 Other 9.1 15.2 14.0 12.0 Total $2,749.2 $2,927.6 $3,111.5 $3,250.0 Excess of Income over Disbursements $4,206.8 $2,916.2 ($13,096.0) $4,793.1 Net Assets $56,066.3 $59,112.0 $46,016.0 $50,809.2 Actuarial Value of Assets1 $52,856.4 $55,744.2 $55,591.3 $56,287.9 Actuarial Value of Accrued Liabilities ($49,792.0) ($53,256.1) ($55,983.8) ($58,676.7) Difference2 3,064.4 2,488.1 (392.5) (2,388.8) Ratio of Assets to Liabilities 1.07 1.05 0.99 0.96 ______1 Actuarial Value of Assets is 5 year smoothed market. 2 A positive number indicates the System is more than 100% funded. Source: North Carolina Retirement System Financial Statements; Consulting Actuary – Buck Consultants.
Fiscal year ending June 30, 2010 performance - For the fiscal year ending June 30, 2010, the investment performance for the North Carolina pension fund returned 11.97 percent compared with a return in the S&P 500 index of 14.43 percent. The market value of pension fund assets was $65.3 billion compared to $60.2 billion on June 30, 2009.
One year period ending September 30, 2010 performance - For the one year period ending September 30, 2010, the investment performance for the North Carolina pension fund returned 9.44 percent compared with a return in the S&P 500 index of 10.16 percent. The market value of pension fund assets at September 30, 2010 was $69.7 billion compared to $65.3 billion at June 30, 2010. No representation is made herein as to the future performance of the investments in the retirement systems.
Other Plans
In addition to the above retirement plans, the State administers the following pension and retirement plans. All are defined benefit plans except for the Sheriff’s Supplemental Pension Fund which is a defined contribution plan.
Firemen and Rescue Squad Pension Fund – Membership is comprised of both volunteer, State and locally employed firemen and certified rescue squad personnel who elect, membership. Estimated membership totaled 38,484 at June 30, 2010. Pensioners as of June 2010 totaled 11,298. Benefits are $170 per month payable at age 55 with a minimum of 20 years of service. The plan is
A-39 funded by a $10 monthly contribution by the member, investment income and an actuarially based State appropriation.
National Guard Pension Fund – Membership is established at age 60 for former members of the North Carolina National Guard who have 20 or more years active duty with the National Guard. Benefits are $95 per month for the first 20 years of service and $9.50 per month for each additional year of service to a maximum of $190.00 per month. Pensioners at December 31, 2009 totaled 3,677. The plan is funded by an actuarially based State appropriation and investment income.
Legislative Retirement Fund – The law creating this fund was repealed in 1973. Membership is comprised of members and former members of the General Assembly. Accrued rights were preserved for members at the date of repeal. Benefits totaling $18,900 were being paid to 13 annuitants for the calendar year ended December 2009. The State appropriates annually the amount necessary to pay benefits due for each year.
Sheriffs’ Supplemental Pension Fund – This plan was created to provide supplemental retirement benefits to retired county sheriffs who are at least age 55 with 10 or more years of service as a sheriff. The plan is funded by $1.25 from each cost of court assessed in criminal cases. The amount of the benefit is equal to one share amount for each year as a sheriff not to exceed 75% of a retired sheriff’s final rate of pay offset by benefits from the Local Government Employees’ Retirement System, to a maximum of $1,500 per month from the plan. For fiscal year 2008-2009, there were 84 retired sheriffs in receipt of benefits at an annual cost of $1.329 million (unaudited).
Local Governmental Employees’ Retirement System – Membership is comprised of general employees and local law enforcement officers of participating local governmental entities. Benefits are nearly identical to the benefits that accrue to members of the Teachers’ and State Employees’ Retirement System described above. The system is funded by an employee contribution of 6% and an employer contribution at varying rates by the participating local governments. As of July 1, 2010 the normal employer contribution rate was 6.35% while the contribution rate for employers of law enforcement members was 6.82%. The State’s responsibility is administrative.
Registers of Deeds’ Supplemental Pension Fund – This plan was created to provide supplemental retirement benefits to retired elected county Registers of Deeds who have 10 or more years of service as a Register. The plan is funded by monthly remittances to the Department of State Treasurer, by each county, equal to 1.5% of the receipts collected pursuant to Article 1 of Chapter 161 of the General Statutes. The amount of the benefit is 75% of a retired Register of Deeds’ final rate of pay offset by benefits from the Local Governmental Employees’ Retirement System, to a maximum of $1,500 per month from the plan. As of December 31, 2009 there were 84 retired Registers of Deeds in receipt of benefits at an annual cost of $1,486,314. The State’s ARC for the current fiscal year is zero.
As of December 31, 2009, the total calculated unfunded actuarial accrued liability of the defined benefit plans other than the three plans in the table above was approximately $157.65 million, less than 1% of the asset value in the plans which had an unfunded liability.
Failure to Appropriate Annual Required Contributions
Effective July 1, 2010, for the Teachers’ and State Employees’ Retirement System, the State established an employer contribution rate of 4.93% of compensation. Of this, 1.36% was held until a determination was made as to whether federal funds for Medicaid would be received by the State. In August, 2010, those funds were authorized and the 1.36% and all subsequent payments were made to the Retirement System. This is still below the annual required contribution of 6.71%. The employer contributions to the Consolidated Judicial Retirement System and Firemen’s and Rescue Squad Workers’ Pension Fund will also be less than the respective annual required contributions. Absent unexpected investment returns or other facts at variance with current assumptions, not
A-40 making the amounts calculated as the ARC at the very least will result in the continued existence of an unfunded accrued actuarial liability as of June 30, 2011. Whether such unfunded accrued actuarial liability is increased from the prior year will depend upon the amount of the contributions actually made, the actual investment return and other factors.
OTHER POST-EMPLOYMENT BENEFITS
The State administers two post-employment benefit plans, the Retiree Health Benefit fund and the Disability Income Plan. Although the assets of the administered plans are commingled for investment purposes, each plan’s assets may be used only for payment of benefits to the members of the plans and for related administrative costs.
In April 2004, GASB issued Statement No. 43, Financial Reporting for Postemployment Benefit Plans Other Than Pension Plans (effective for fiscal year 2006-2007) and in June 2004, GASB issued Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions (effective for fiscal year 2007-2008), collectively termed “OPEB”.
The actuarial data is disclosed in the notes to the State’s CAFR, based on the disclosure requirements for a cost-sharing, multiple-employer plan, and are also presented as required supplementary information (RSI). The unfunded actuarial liability is not recorded as an accounting liability but is disclosed in the notes to the financial statements, and as required supplementary information.
Beginning with fiscal year 2007-2008, the State’s CAFR presents the required disclosures as an employer under GASB Statement No. 45. GASB Statement No. 45 requires the presentation of the State’s OPEB costs. See Note 14 to the financial statements in Appendix B for more information on these benefit plans.
State contributions to such plans depend on actual investment return, whether the various other assumptions as to expenditures from the plans correspond to actual facts and what amounts in excess of the payment of current costs, if any, the State has contributed in intervening years.
Retiree Health Benefits
Aon Consulting completed the fourth actuarial valuation of retiree health benefits plan as of December 31, 2009. The State retiree healthcare benefit is currently funded on a pay-as-you-go basis, with minimal additional accumulation of funds to pay the retiree health benefit. Based on the current funding method with limited accumulation of funds, the actuarial assumptions reflect a short-term discount rate of 4.25%. The projected unit credit method indicated an accrued liability of $33.322 billion for the retiree healthcare plan ($32.765 billion unfunded), with an annual required contribution of $3.019 billion. In the aggregate for the 2009-2010 fiscal year, the participating employers in the retiree healthcare plan funded OPEB costs of $678.8 million.
For the fiscal year 2009-2010, the State and its Component Units, as employers in the cost- sharing, multiple employer plan, funded OPEB costs of $328.4 million for the retiree healthcare plan, its statutorily required contribution.
Participating employers in the retiree health care benefit plan include the primary government State agencies, local education agencies (LEAs), the University of North Carolina, community colleges, and several local governments.
In the 2006 Session of the General Assembly ratified Senate Bill 837 establishing that for employees first hired on and after October 1, 2006, and members of the General Assembly first taking office on or after February 1, 2007, future coverage as retired employees and retired members
A-41 of the General Assembly is subject to the requirement that the future retiree have 20 or more years of retirement service credit in order to receive coverage on a noncontributory basis. Employees or members of the General Assembly with 10 but less than 20 years of retirement service credit are eligible for coverage on a partially contributory basis.
The 2007 Session of the General Assembly established the Committee on Actuarial Valuation of Retired Employees’ Health Benefits. This committee consist of five members serving ex officio, as follows:
• State Budget Officer, who shall serve as the chair; • State Auditor; • State Controller; • State Treasurer; and • Executive Administrator for the North Carolina State Health Plan for Teachers and State Employees (the “State Health Plan”).
Disability Income Plan of North Carolina
The latest actuarial valuation of disability income benefits plan was done by Buck Consulting and dated December 31, 2009 (Buck report). The Buck report was released on October 27, 2010.
The Buck report employed the aggregate actuarial cost method, which does not identify or separately amortize unfunded liabilities. Information about the plan’s funded status and funding progress was prepared using the entry-age actuarial cost method as an approximation. Using the entry-age method, the Buck report indicated an accrued liability of $492.7 million for the plan of which ($140.1 million unfunded), with an ARC of $72.4 million for the 2009-2010 fiscal year.
In aggregate for the 2009-2010 fiscal year, the participating employers in the disability income plan funded OPEB costs of $77.4 million.
For the fiscal year 2009-2010, the State, as one employer in the cost-sharing multiple employer plan, funded OPEB costs of $37.9 million for the disability income plan, its statutorily required contribution.
Participating employers in the Disability Income Plan of North Carolina include the primary government, State agencies, local education agencies (LEAs), the University of North Carolina, and Community Colleges.
LITIGATION
According to the North Carolina Attorney General, no litigation of any kind is now pending (either in State or federal courts) or, to the knowledge of the Department of State Treasurer after consultation with the Attorney General, threatened, to restrain or enjoin the issuance or delivery of the 2011A Bonds or in any manner questioning the proceedings or authority under which the 2011A Bonds are issued or affecting the validity of the 2011A Bonds.
Litigation
The following are cases pending in which the State faces the risk of either a loss of revenue or an unanticipated expenditure. Although an adverse result in any of the cases could have negative budgetary consequences, in the opinion of the Department of State Treasurer after consultation with the Attorney General, an adverse decision in any of these cases would not materially adversely affect the State’s ability to meet its financial obligations.
A-42 Hoke County et al. v. State of North Carolina and State Board of Education – Right to a Sound Basic Education (formerly Leandro). In 1994, students and boards of education in five counties in the State filed suit in Superior Court requesting a declaration that the public education system of North Carolina, including its system of funding, violates the State constitution by failing to provide adequate or substantially equal educational opportunities, by denying due process of law, and by violating various statutes relating to public education. Five other school boards and students therein intervened, alleging claims for relief on the basis of the high proportion of at-risk and high- cost students in their counties’ systems.
The suit is similar to a number of suits in other states, some of which resulted in holdings that the respective systems of public education funding were unconstitutional under the applicable state law. The State filed a motion to dismiss, which was denied. On appeal, the North Carolina Supreme Court upheld the present funding system against the claim that it unlawfully discriminated against low wealth counties, but remanded the case for trial on the claim for relief based on the Court’s conclusion that the constitution guarantees every child the opportunity to obtain a sound basic education. Trial on the claim of one plaintiff-county was held in the fall of 1999. On October 26, 2000 the trial court, in Section Two of a projected three-part ruling, concluded that at-risk children in North Carolina are constitutionally entitled to such pre-kindergarten educational programs as may be necessary to prepare them for higher levels of education and the “sound basic education” mandated by the Supreme Court. On March 26, 2001, the Court issued Section Three of the three- part ruling, in which the judge ordered all parties to investigate certain school systems to determine why they are succeeding without additional funding. The State filed a Notice of Appeal to the Court of Appeals, which resulted in the Court’s decision to re-open the trial and call additional witnesses. That proceeding took place in the fall of 2001. On April 4, 2002 the Court entered Section Four of the ruling, ordering the State to take such actions as may be necessary to remedy the constitutional deficiency for those children who are not being provided with access to a sound basic education and to report to the Court at 90-day intervals remedial actions being implemented. On July 30, 2004, the North Carolina Supreme Court affirmed the majority of the trial court’s orders, thereby directing the executive and legislative branches to take corrective action necessary to ensure that every child has the opportunity to obtain a sound, basic education. The Supreme Court did agree with the State that the trial court exceeded its authority in ordering pre-kindergarten programs for at-risk children. The State is now undertaking measures to respond to the trial court’s directives. The magnitude of State resources which may ultimately be required cannot be determined at this time; however, the total cost could exceed $100 million.
N.C. School Boards Association, et al. v. Richard H. Moore, State Treasurer, et. al. – Use of Administration Payments. On December 14, 1998, plaintiffs, including county school boards of Wake, Durham, Johnston, Buncombe, Edgecombe and Lenoir Counties, filed suit in Superior Court requesting a declaration that certain payments to State administrative agencies must be distributed to the public schools on the theory that such amounts are civil penalties which under the North Carolina Constitution must be paid to the schools.
On December 14, 2001, the Superior Court of Wake County granted summary judgment in favor of the plaintiffs on all issues, concluding that the funds in dispute are civil fines or penalties required by Article IX, Section 7 of the Constitution to be remitted to the public schools in the county where the violation occurred. The court further determined a three-year statute of limitations to be applicable, making the order retroactive to December 1995. This case was argued in the Court of Appeals in February, 2003. The North Carolina Court of Appeals rendered a decision in September 2003 substantially favorable to the State. On July 1, 2005 the Supreme Court reversed the Court of Appeals in part, concluding that a majority of the funds in dispute are civil penalties required to be paid into the Civil Penalty and Forfeiture Fund for the benefit of public schools. The case was remanded to Superior Court and on August 8, 2008 the Superior Court entered a judgment in the amount of $749.886 million. The court acknowledged, however, that the judicial branch did not have the power to force the State to satisfy the judgment and that any decision to do so would have to come from the legislature. It has been indicated to the school boards that the General Assembly will
A-43 take the decision into account in its considerations for appropriations to the public schools and they have not attempted to enforce the judgment.
State Employees Association of North Carolina v. State; Stone v. State – Diversion of Employer’s Retirement System Contribution. On May 22, 2001, SEANC filed an action in Wake County Superior Court demanding repayment of approximately $129 million in employer retirement contributions to the Retirement Systems. The Governor withheld, and subsequently used, the withheld funds under his constitutional authority to balance the State budget. The trial court dismissed the action on May 23, 2001, and the North Carolina Court of Appeals affirmed this dismissal on December 3, 2002. The Supreme Court, on June 13, 2003, reversed the Court of Appeals on issues related to class standing and remanded with instructions to consider procedural issues raised but not addressed by the Court of Appeals. The Court of Appeals remanded the case to the Superior Court of Wake County without opinion and without considering any remaining issues.
In June 2002, the Stone case was filed in Wake County Superior Court on behalf of individual State employees and retirees seeking repayment of the withheld employer contribution and a prohibition against future diversions. A class comprised of all members of the Retirement System has been certified and the case is currently proceeding through class notification and toward trial. On September 6, 2006, the trial court issued an interlocutory order in response to cross-motions for summary judgment. The court’s order found the diversion of funds to be in violation of the constitution, but did not direct any repayment of funds, reserving the question of repayment for consideration, if necessary after appeal of the constitutional issues. On August 5, 2008 the Court of Appeals affirmed the Superior Court order. Both sides gave notice of appeal and filed petitions for discretionary review with the North Carolina Supreme Court. On June 17, 2009, the Supreme Court dismissed the appeals and denied the petitions for discretionary review.
The case now returns to the Superior Court for consideration of damages. Because the General Assembly has repaid the principal amount withheld from the Retirement System, consideration will focus on lost interest and earnings, if any. A new judge will need to be appointed to hear the case, as the judge previously assigned to the case is now employed by the North Carolina Department of Transportation.
State of North Carolina v. Phillip Morris, Inc., et al., 98 CVS 14377 – Master Settlement Agreement (“MSA”) Payments. On April 20, 2006, the State of North Carolina filed a Motion for Declaratory Order in the North Carolina Business Court against defendants Phillip Morris, Inc., R. J. Reynolds Tobacco Company, and Lorillard Tobacco Company. The Motion is seeking a declaration that (1) in 2003, North Carolina continuously had a Qualifying Statute in full force and effect and “diligently enforced” its provisions throughout that year in accordance with the MSA; (2) North Carolina is not subject to a Non-Participating Manufacturers’ Adjustment for 2003; and (3) defendants are obligated not to withhold or pay into a disputed payments account any payments due, or seek any offset of any payments made, on the basis that North Carolina is subject to a Non- Participating Manufacturers’ Adjustment for 2003. If the State is unable to ultimately prevail in the diligent enforcement litigation, the State may be unable to recover a portion of the 2003 MSA payment. On December 4, 2006, Judge Tennille allowed the defendant’s motion to compel arbitration of these issues. The Court of Appeals upheld the Order, and the State‘s Petition to the North Carolina Supreme Court has been denied. The State is therefore now participating in a national arbitration process with the tobacco companies and all other MSA States. The State has retained its right to appeal the result of arbitration.
Pendergraph v. North Carolina Department of Revenue – Refund of Income Taxes. Taxpayers have filed a class action complaint and petition for judicial review with the North Carolina Business Court for a refund of income taxes on September 24, 2009. Taxpayers are pursuing a constitutional challenge to N.C. Gen. Stat. § 128-31 (1988), N.C. Gen. Stat. § 135-9 (1988) and N.C. Gen. Stat. § 105-134.6 (1988) which repealed the tax exemptions for state and local retirement benefits and subjected all state, local and federal benefits above $4,000 to tax. These amendments became effective for taxable years beginning on or after January 1, 1989. The
A-44 Department of Revenue has filed a motion to dismiss, which is currently pending before the court. The amount at issue is not readily calculable, but it is likely to be in excess of $20 million dollars.
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APPENDIX B
STATE OF NORTH CAROLINA FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2010
The following pages in Appendix B have been lifted from the Comprehensive Annual Financial Report (“CAFR”) for the State of North Carolina for the fiscal year ended June 30, 2010. All page number references in this Appendix B refer to the original document. Included in addition to the pages lifted from the Comprehensive Annual Financial Report are comparative financial statements of selected funds.
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State of North Carolina
MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)
The following is a n arrative ov erview a nd analysis of t he State of North Carolina’s (the State) financial performance for t he fiscal year ended J une 30, 2010. Please read it in conjunction with the transmittal letter at th e front of this report and with the State's financial statements, which follow this section.
Financial Government-wide Financial Statements: Highlights ⎯ The State’s t otal n et assets in creased by $5 36.491 million or 1. 72% as a result of this year’s operations. Net assets of governmental activities increased by $1.817 billion, or 5.98%, due in part to te mporary tax in creases. Net assets of business-type activities d ecreased by $ 1.28 b illion, or 146%, due to a substantial operating loss in the Unemployment Compensation Fund. At year-end, net assets of governmental activ ities an d business-type activities to taled $32 .204 billion and negative $404.403 million, respectively. ⎯ Component units reporte d net asse ts of $17.328 billion, an increase of $1.037 billion or 6.36% from the previous year. The majority of t he net asset increase is attrib utable to the University of North Carolina System, a major component unit.
Fund Financial Statements: ⎯ The fund deficit of t he General Fund improved from negative $777.573 million at June 30, 2009 (as restated) to n egative $114.168 million at Ju ne 30, 20 10. Th is improvement is at tributable to temporary tax increases, agency allotment reductions, and receipt of federal recovery funds. ⎯ The fund balance of the Highway Fund decreased from $1.025 billion at June 30, 2009 (as restated) to $848.599 million at June 30, 2010, a decrease of 17.18%. ⎯ The fund deficit of the Highway Trust Fund improved from negative $194.005 million at June 30, 2009 (as restated) to negative $20.137 million at June 30, 2010. ⎯ The net asset s o f t he U nemployment C ompensation Fund dec reased from negat ive $299.281 million at June 30, 2009 (as restated) to negative $1.701 billion at June 30, 2010. The decrease is directly related to decline in the state an d national economies. The state u nemployment rate was 10% in June 2010. ⎯ Net ticket sales of the N.C. State Lottery Fund (Lottery) increased 10.61% from the previous fiscal year to $ 1.42 b illion. A s required by law , th e Lo ttery’s n et p rofit o f $43 2.205 million w as transferred to the Education Lottery Fund (nonmajor special revenue fund) to support educational programs. ⎯ The N.C. Turnpike Authority issued $691.558 million in bonds and notes to finance the Triangle Expressway, North Carolina’s first modern toll road now under construction.
Capital Assets: ⎯ The State’s inv estment in capital assets (n et of accumulated depreciation) was $37.788 billion, an increase of 4.65% from the previous fiscal year-end. ⎯ This year’s major capital asset additions were for State highway system construction ($1.8 billion), toll road construction ($259 million), construction of correctio nal facilities ($ 102.3 million), and construction of the Green Square Complex ($32 million). Additionally, the N.C. Mu seum of Art opened a new building to showcase its permanent collection (construction cost of $72 million).
Long-term Debt: ⎯ The State had total long-term debt outstanding (bonds, special indebtedness, and notes payable) of $8.096 billion, an increase of 12.73% from the previous fiscal year-end. The State issued $487.7 million of g eneral obligation public improvement bonds and $242.52 million in grant anticipation revenue v ehicle b onds for its go vernmental activ ities. A dditionally, the State issu ed $ 691.558 million in bonds and notes for the N.C. Turnpike Authority, a business-type activity. ⎯ North C arolina remains one of o nly seve n st ates t o en joy t op-tier ra nkings (i.e., A AA) from al l three credit rating agencies.
B-4 State of North Carolina
OVERVIEW OF THE FINANCIAL STATEMENTS
This d iscussion and an alysis is an in troduction to th e State’s b asic fin ancial state ments, wh ich comprise three components: 1) government-wide financial statements, 2) fund financial statements, and 3) n otes t o t he fi nancial st atements. Thi s re port al so c ontains a dditional re quired supplementary information ( General F und budgetary sc hedule, pe nsion an d other p ostemployment bene fits f unding 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 the State, as a who le, b etter o ff or wo rse o ff as a resu lt o f th is year’s activ ities? These state ments include all non-fiduciary assets and liabilities using the accrual basis of accounting. The current year’s revenues and expe nses a re taken int o account re gardless of whe n cash is receive d or pai d. The Statement of Net Assets (page 54) presen ts all o f the State’s assets and liab ilities, with the difference between th e t wo reported as “n et assets.” Ov er ti me, increases and decreases in net assets measure whether the State’s financial position is improving or deteriorating.
The Statem ent o f Activ ities (p ages 56 an d 5 7) presen ts in formation sho wing how the State’s n et assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying ev ents gi ving ri se t o t he chan ge occ ur, reg ardless of t he t iming of rel ated cash fl ows. 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, the EPA Revolving Loan Fund, the N.C. State Lotte ry Fund, and the N.C. Turnpike Authority are the predominant business-type activities.
Discretely Presented Component Units – Component units are legally separate organizations for which the elected officials of t he primary governm ent are financially accountable. A description of t he component units and an address for obtaining their separately issued financial statements can be found beginning on page 76. All component units are combined and displayed in a separate discrete column in the gov ernment-wide financial state ments to em phasize their legal se parateness from the State. In addition, financial statem ents for major c omponent units are prese nted in the notes t o the financial statements (pages 165 and 166).
Fund Financial Statements The fund financial statements provide more detailed information about the State’s most significant funds (i.e., major funds) – not the State as a whole. 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 particular purposes. In addition to the major funds, page 192 begins the individual fund data for the nonmajor f unds. The St ate's funds are di vided i nto t hree cat egories, governmental, proprietary, an d fiduciary, and they use different accounting approaches.
Governmental funds -- Most of the State's basic se rvices are reported in the governmental funds, which focus on how cash and other financial assets that can rea dily be c onverted to cash flow in and out (i.e., inflows and outflows of spendable resources) and the balances left at year-end that are available for spending (i.e., balances of spendable resources). Consequently, the governmental fund financial statements provide a detailed short-term view that helps users determine whether there are more or fe wer fina ncial res ources that ca n be spent in th e n ear fu ture to finance the State's
B-5 State of North Carolina
programs. The St ate p repares t he governmental fu nd f inancial st atements usi ng t he m odified accrual basis of accounting and a c urrent fina ncial resour ces m easurement foc us. B ecause this information does not encompass the additional long-term focus of the government-wide statements, a reconciliation sche dule, which follows each of the governmental f und fina ncial state ments, explains the relationships (or differences) between them. Information is presented separately in the governmental fund financial statements for the General Fund, the Highway Fund, and the Highway Trust Fund, all of which are considered to be major funds. Data for all other governmental funds are combined into a single aggregated presentation. Individual fund data for each of these nonmajor governmental funds is provided in the form of combining statements elsewhere in this report.
Proprietary funds -- When t he State charges custom ers fo r t he ser vices i t provi des, whether t o outside c ustomers or to a gencies withi n the State, these services a re generally reported in proprietary funds. Proprietary funds (enterprise and internal service) utilize accrual accounting; the same method used by private sector businesses. Enterprise funds a re used to report activities for which fees are charged to external users for goods and services. The Unemployment Compensation Fund, t he EPA Rev olving Loan Fun d, t he N.C. State Lo ttery Fund, an d th e N.C. Tu rnpike Authority are o ur m ost sig nificant en terprise fu nds. Int ernal se rvice funds are used to report activities th at p rovide goods and serv ices to th e State’s other programs an d activ ities o n a co st- reimbursement basis, such as the State Property Fire Insurance Fund, the Motor Fleet Management Fund, Computing Services Fund, a nd the State Telecommunications Services Fund. B ecause the State’s interna l service funds predominantly b enefit go vernmental r ather th an busin ess-type functions, they have been included within governmental activities in the government-wide financial statements.
Proprietary fu nds provide t he sam e t ype of i nformation as t he g overnment-wide fi nancial statements, only in more detail. Information is presented separately in the proprietary fund financial statements for the Unemployment Compensation Fund, the EPA Revo lving Loan Fund, the N.C. State Lottery Fund, and t he N.C. Turnpike Au thority, all o f wh ich are con sidered t o b e m ajor funds. Conversely, separately aggregated columns are presented for the nonmajor enterprise funds and the internal service funds. Individual fund data for the nonmajor enterprise funds and internal service funds is provided in the form of combining statements elsewhere in this report.
Fiduciary funds – Fiduciary funds are used to account for resources held for the benefit of parties outside t he g overnment. Fiduci ary fu nds are not re flected i n t he g overnment-wide fi nancial statements bec ause t he re sources of t hose fund s a re not available to support t he St ate’s own programs. The accounting used for fiduciary funds is much like that used for proprietary funds. The State's fiduciary activities are reported in separate Statements of Fiduciary Net Assets and Changes in Fi duciary Net A ssets. These funds i nclude pe nsion and other em ployee be nefit t rust funds, private-purpose trust funds, investment trust funds, and agency funds.
Notes to the Financial Statements The notes provide additional information that is essential to a full understanding of the data provided in th e g overnment-wide an d fu nd fi nancial state ments. Th e no tes to th e fin ancial state ments can b e found beginning on page 74 of this report.
Required Supplementary Information Required Supplementary Information (RSI) follows the basic financial statements and notes to the financial st atements. The R SI i s m andated by t he GASB an d i ncludes General Fund budgetary comparison sc hedules reconciling the statut ory to the generally accepted acc ounting principles fund balances at fi scal y ear-end, and pe nsion p lan an d ot her postemployment be nefits t rend i nformation related to funding progress and contributions.
Other Supplementary Information Other supplementary information includes the introductory section; combining financial statements for nonmajor governmental funds, nonmajor enterprise funds, internal service funds, fiduciary funds, and nonmajor discretely presented component units; a statement of cash flows for the State Health Plan, a major component unit, which does not issue separate financial statements; and the statistical section.
B-6 State of North Carolina
FINANCIAL ANALYSIS OF THE STATE AS A WHOLE
Over time, increases or decreases in net assets serve as a useful indicator of whether a government’s financial p osition is i mproving o r deteriorating. Th e State’ s co mbined net assets in creased $5 36.491 million or 1.72% over the course of this fiscal year’s operati ons. The net assets of t he governmental activities in creased $1.817 billio n o r 5.98% and bu siness-type activities decreased $ 1.28 b illion o r 146%. The following table was derived from the government-wide Statement of Net Assets:
Net Assets June 30, 2010 and 2009 (dollars in thousands)
Governmental Business-type Total Primary Activities Activities Gove rnm ent 2009 2009 2009 2010 (as restated) 2010 (as restated) 2010 (as restated) Current and other non- current assets...... $ 9,429,629 $ 9,911,105 $ 2,689,996 $ 1,861,267 $ 12,119,625 $ 11,772,372 Capital assets, net...... 37,452,024 36,035,245 336,122 73,924 37,788,146 36,109,169 Total assets...... 46,881,653 45,946,350 3,026,118 1,935,191 49,907,771 47,881,541 Long-term liabilities...... 8,931,687 8,675,751 2,871,240 748,074 11,802,927 9,423,825 Other liabilities...... 5,745,768 6,883,242 559,281 311,170 6,305,049 7,194,412 Total liabilities...... 14,677,455 15,558,993 3,430,521 1,059,244 18,107,976 16,618,237 Net assets: Invested in capital assets, net of related debt...... 35,452,614 34,101,091 158,556 73,924 35,611,170 34,175,015 Restricted...... 704,712 714,014 1,078,689 1,003,613 1,783,401 1,717,627 Unrestricted...... (3,953,128) (4,427,748) (1,641,648) (201,590) (5,594,776) (4,629,338) Total net assets...... $ 32,204,198 $ 30,387,357 $ (404,403) $ 875,947 $ 31,799,795 $ 31,263,304
The largest component of the State’s net assets ($35.611 billion) reflects its investm ent in capital assets (land, buildings, machinery and equipment, state highway system, and other capital assets), less related debt still outstanding that was used to acquire or construct those assets. Restricted net assets are the next largest component ($1.783 billion). Net assets are restricted when constraints placed on their use are 1 ) ext ernally im posed by c reditors, g rantors, c ontributors, or laws o r re gulations of other governments o r 2) leg ally i mposed th rough con stitutional p rovisions. Th e remaining po rtion, unrestricted net assets, consists of net assets that do not meet the definition of “restricted” or “invested in capital assets, net of related debt.”
The government-wide statement of net assets for governmental activities reflects a negative $3.953 billion unrestricted n et asset balance. Th e State o f North Caro lina, lik e m any o ther state an d l ocal governments, i ssues general obligation debt and s pecial i ndebtedness a nd distributes the pr oceeds to local governments and component units. The proceeds are used to construct new buildings and renovate and m odernize exi sting b uildings o n t he St ate’s com munity col lege and uni versity cam puses, assi st county governments in meeting their public school building capital needs, an d to provide grants and loans to local governments for clean water and natural gas projects. Of the $7.636 billion of bonds and special in debtedness ou tstanding for gov ernmental ac tivities at Ju ne 3 0, 2010, $5.39 b illion is attributable to debt issued as state aid to component units (universities and community colleges) and local go vernments. T he bal ance sheet s of com ponent u nit and l ocal go vernment reci pients re flect ownership of the related constructed capital assets without the burden of recording the debt obligation. The p olicy of sel ling gene ral obl igation bonds an d fu nneling t he c ash p roceeds to no n-primary government (non-State) entities has been in place for decades. However, by issuing such debt, the State is left to reflect significant liabilities on its statement of net assets (reflected in the unrestricted net asset component) without the benefit of recording the capital assets constructed or acquired with the proceeds from th e d ebt issuances. Additionally, as of June 30, 2010, th e State’s go vernmental activ ities h ave significant u nfunded liab ilities for a co urt j udgment p ayable o f $731.703 m illion and co mpensated absences of $420.41 million (see Note 8 to th e financial statements). In 2008, a Sup erior Court judge ruled that certain civil fines and penalties should have been remitted to North Carolina public schools and not diverted to other uses. These unfunded liabilities also contribute to the negative unrestricted net asset balance for governmental activities.
B-7 State of North Carolina
The following financial information was derived from the government-wide Statement of Activities and reflects how the State’s net assets changed during the fiscal year:
Changes in Net Assets For the Fiscal Years Ended June 30, 2010 and 2009 (dollars in thousands)
Governmental Business-type Total Primary Activities Activities Governm ent 2009 2009 2009 2010 (as restated) 2010 (as restated) 2010 (as restated) Revenues: Program revenues: Charges for services...... $ 2,075,743 $ 2,115,119 $ 2,564,791 $ 2,453,841 $ 4,640,534 $ 4,568,960 Operating grants and contributions...... 15,838,014 14,005,529 3,251,109 1,110,849 19,089,123 15,116,378 Capital grants and contributions...... 711,433 1,035,742 7,771 41,398 719,204 1,077,140 General revenues: Taxes Individual income tax...... 9,345,441 8,661,565 — — 9,345,441 8,661,565 Corporate income tax...... 1,252,800 997,206 — — 1,252,800 997,206 Sales and use tax...... 5,916,119 4,911,656 — — 5,916,119 4,911,656 Gasoline tax...... 1,557,430 1,523,496 — — 1,557,430 1,523,496 Franchise tax...... 904,651 799,113 — — 904,651 799,113 Highw ay use tax...... 439,506 440,749 — — 439,506 440,749 Insurance tax...... 506,990 500,438 — — 506,990 500,438 Beverage tax...... 295,383 263,553 — — 295,383 263,553 Inheritance tax...... 71,731 103,811 — — 71,731 103,811 Tobacco products tax...... 278,406 242,071 — — 278,406 242,071 Other taxes...... 321,945 316,819 — — 321,945 316,819 Tobacco settlement...... 145,539 175,838 — — 145,539 175,838 Unrestricted investment earnings...... 28,645 66,863 — — 28,645 66,863 Miscellaneous...... 44,354 62,799 — — 44,354 62,799 Total revenues...... 39,734,130 36,222,367 5,823,671 3,606,088 45,557,801 39,828,455
Expenses: General government...... 1,109,142 1,429,407 — — 1,109,142 1,429,407 Primary and secondary education...... 9,830,182 10,079,691 — — 9,830,182 10,079,691 Higher education...... 4,232,267 3,951,862 — — 4,232,267 3,951,862 Health and human services...... 16,809,253 16,172,213 — — 16,809,253 16,172,213 Economic development...... 716,205 636,431 — — 716,205 636,431 Environment and natural resources...... 564,771 717,666 — — 564,771 717,666 Public safety, corrections and regulation..... 2,693,212 2,741,308 — — 2,693,212 2,741,308 Transportation...... 1,998,432 2,192,917 — — 1,998,432 2,192,917 Agriculture...... 119,494 110,268 — — 119,494 110,268 Interest on long-term debt...... 281,499 289,211 — — 281,499 289,211 Unemployment compensation...... — — 5,568,561 3,255,448 5,568,561 3,255,448 N.C. State Lottery...... — — 994,168 877,403 994,168 877,403 EPA Revolving Loan...... — — 30,940 7,868 30,940 7,868 N.C. Turnpike Authority...... — — 4,990 3,847 4,990 3,847 Regulatory commissions...... — — 35,843 37,644 35,843 37,644 Insurance programs...... — — 13,284 14,986 13,284 14,986 North Carolina State Fair...... — — 12,794 13,803 12,794 13,803 Other business-type activities...... — — 9,374 7,324 9,374 7,324 Total expenses...... 38,354,457 38,320,974 6,669,954 4,218,323 45,024,411 42,539,297
Increase (decrease) in net assets before contributions and transfers...... 1,379,673 (2,098,607) (846,283) (612,235) 533,390 (2,710,842) Contributions to permanent funds...... 3,101 3,248 — — 3,101 3,248 Transfers...... 434,067 422,399 (434,067) (422,399) — — Increase (decrease) in net assets...... 1,816,841 (1,672,960) (1,280,350) (1,034,634) 536,491 (2,707,594)
Net assets - beginning - restated...... 30,387,357 32,060,317 875,947 1,910,581 31,263,304 33,970,898 Net assets - ending...... $ 32,204,198 $ 30,387,357 $ (404,403) $ 875,947 $ 31,799,795 $ 31,263,304
B-8 State of North Carolina
Governmental The State’s total revenues for governmental activities grew more rapidly than total expenses during Activities fiscal year 2010. Revenues increased by 9.7% ($3 .51 billion), while total expenses increased less than one percent ($33.48 million). The growth in revenues is attributable mainly to temporary tax increases enacted by the General Assembly and increases in federal recovery funds (see below).
On February 17, 2009 the U.S. Congress enacted the American Recovery and Reinvestment Act of 2009 (ARRA). A direct response to the economic crisis, the ARRA has three immediate goals: 1) create new jobs as well as save e xisting ones, 2) spur economic activity and i nvest in long-term economic growth, and 3) foster unprecedented levels of accountability and transparency in government spending. To help achieve these goals, the ARRA provides supplemental funding to states for budget stabilization entitlement p rograms, an d other purposes. Th e ARRA sp ecifies th at fu nds be distributed ov er three years: 2009, 2010, an d 2011. In res ponse t o t his l egislation, t he Governor est ablished t he N orth Carolina O ffice of Eco nomic R ecovery an d Inve stment to coor dinate t he St ate’s han dling of ARRA funds and st ate-level econo mic reco very in itiatives. During th e 2010 fiscal year, th e State’s governmental activities recognize d $2.4 bi llion of AR RA funds (fede ral reco very funds ), which are included in operating grants and contributions (i.e., program revenues).
The following chart reflects th e dollar change in the revenues by source of governmental activities between fiscal years 2009 and 2010:
Dollar Change in Governmental Activities Revenues by Source Between Fiscal Years 2009 and 2010
Charges for services $(39)
Operating grants and contributions $1,832
Capital grants and contributions $(324)
Individual income tax $684
Corporate income tax $256
Sales and use tax $1,004
Highway use tax $(1)
Other revenues $100
$(1,000) $(450) $100 $650 $1,200 $1,750 $2,300 (dollars in millions)
For fiscal year 2010, s pending increases in the functional areas of health and human services and higher education were virtually offset by spending decreases in the State’s other functional areas. The growth in health and human services is related to increased spending for Medi caid (the State’s largest public assistance program ). The State experience d higher enrollment in the Medicaid program due to increased unemployment and additional consumption of Medicaid services. Also, as of July 1, 2009, the State assumed 100% of the county share of Medicai d, completing the phase-out of the co unty share. Because the State receives fede ral matching fund s for the Medicaid Program , there was also a corresponding increase in operating grants and contributions (i.e., program revenues).
Medicaid is a federal en titlement p rogram, wh ich m eans in dividuals fou nd elig ible fo r Med icaid have legal rights to recei ve services and c annot be denied coverage by the State. In North Carolina, Medicaid is administered by the State and counties and financed with federal and State funds. Medicaid serves as th e State’s safety n et p rogram f or elig ible indiv iduals who lo se jo bs and h ealth in surance coverage. As such, it is sensitiv e to eco nomic v olatility. Hi gher growth rates occur during years of economic distress and when major Medicaid expansions are enacted. Lower growth rates occur whe n the Medicaid eligible population is stable or declining.
B-9 State of North Carolina
The growth in higher education funding is related to unanticipated enrollment increases, particularly in the Community College System, and by larger distributions of higher education bond proceeds in fiscal year 2010. Als o, the increase can be attributed to operating costs of new buildings and increased financial ai d. Hi gher ed ucation e xpenses a re fi nanced primarily by St ate appr opriations. T he No rth Carolina State Constitution provides that “the benefits of the University North Carolina and other public institutions of higher edu cation, as far as practicab le, be extended to the p eople of t he State free of expense.”
The following chart reflects the dollar change in the functional expenses of governmental activities between fiscal years 2009 and 2010:
Dollar Change in Governmental Activities Functional Expenses Between Fiscal Years 2009 and 2010
General government $(320)
Primary and secondary education $(250)
Higher education $280
Health and human services $637
Economic development $80
Environment and natural resources $(153)
Public safety, corrections and regulation $(48)
Transportation $(194)
Agriculture $9
Interest on long-term debt $(8)
$(500) $(250) $— $250 $500 $750
(dollars in millions)
The 2007 Session of the Ge neral Assembly enacted legislation requ iring th e State t o assu me th e counties’ share of the nonfederal share of Medicaid costs over a three-year period, beginning October 1, 2007. To provide resources to assume these costs, th e legislation phases out the local sal es tax by one- half cent and makes a cor responding increase in the State sales tax rate. Below is a schedule of the Medicaid funding changes and the shift in local sales tax to the State:
Date Medicaid Funding Change Shift Local Sales Tax to State 10-01-07 State assumes 25% of counties’ share 7-01-08 State assumes 50% of counties’ share 10-01-08 50% of ½% local sales tax is shifted to State 7-01-09 State assumes 100% of counties’ share 10-01-09 Remaining 50% is shifted to State
B-10 State of North Carolina
The fo llowing ch art d epicts th e to tal ex penses and total p rogram rev enues of th e State’s governmental functions. This format identifies the extent to which each governmental function is self- financing through fees and intergovernmental aid or draws from the general revenues of the State.
Expenses - Governmental Activities Fiscal Year Ended June 30, 2010
Millions
$18,000 $17,000 $16,000 $15,000 $14,000 Expenses $13,000 $12,000 $11,000 Program Revenues (excluding Capital Grants) $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 — General Primary and Higher education Health and Economic Environment and Public safety, Transportation Agriculture Interest on long- government secondary human services development natural corrections, and term debt education resources regulation
Business-type Business-type activities reflect an overall decrease in net assets of $1.28 billion or 146%, primarily Activities because of the financial res ults of the Une mployment Compensation Fund. For fiscal year 2010, the Unemployment Compensation Fund had an operating loss (excess of operating expenses over operating revenues) of $4.523 billion. Du ring t he 2010 fiscal year, th e Un employment Co mpensation Fu nd recognized $2.65 billion in federal recovery funds to provide extended benefits to unemployed workers. The Unemployment Compensation Fund and the EPA Revolving Loan Fund comprise most of the total net assets of business-type activities. The N.C. State Lottery Fund has no net assets since its net profits are distributed to the State’s governmental activities, as required by statute. A more detailed discussion of th e State’s business-type en terprise activ ities is p rovided in t he fo llowing section (see En terprise Funds).
B-11 State of North Carolina
FINANCIAL ANALYSIS OF THE STATE’S FUNDS
The State uses fund acc ounting to e nsure a nd de monstrate compliance with fin ance-related legal requirements.
Governmental The focus of the State’s governm ental funds is to prov ide i nformation on near-term in flows, Funds outflows, and balances of spendable resources. As of the end of the fiscal year, the State’s governmental funds reported combined ending fund balances of $3.419 billion, an increase of 23 .51% from the prior fiscal year-end (as restated). The primary contributor to the increase was the General Fund, which had a $663.405 m illion n et ch ange in fu nd b alance in 20 10. Th e i mprovement in th e General Fun d is explained primarily by enacte d tax inc reases, agency allotment reductions (i.e., holdback of budgeted funds), and the receipt of federal recovery funds.
The major governmental funds are discussed individually below.
General Fund The General Fu nd is the ch ief op erating fund of t he State. Th e fund deficit o f th e Gen eral Fun d improved from negative $777.573 million at June 30, 2009 (as restated) to negative $114.168 million at June 30, 2010. For fiscal year 2010, total tax revenues increased by 13% due mostly to temporary tax increases enacted by t he Ge neral Assembly. An indi vidual i ncome t ax surc harge of 2% o r 3 % was imposed on t axpayers w ho meet cert ain incom e requi rements for t ax y ears begi nning on or a fter January 1, 200 9. A tem porary in crease i n th e g eneral sales tax f rom 4 .5% to 5.5% w as im posed effective September 1 , 2009. Ad ditionally, th e Department of Rev enue b egan an i nternet resolution program and a restaurant program to bring taxpayers into compliance in reporting and paying sales and use taxes. A corporate income tax surcharge of 3% was imposed on corporations subject to income tax for tax years beginning on or after January 1, 2009. The increase in corporate income tax collections in a down economy is due to efforts by the Department of Revenue to generate additional revenue through its Resolution Initiative Project that was co mpleted in Dece mber 2009. This project was d esigned to resolve all outstanding corporate and franchise tax issues for participating taxpayers.
During fiscal year 2 010, th e Gen eral Fu nd reco gnized $1 .961 b illion i n fed eral recov ery fu nds, provided under the American Recovery and Reinvestment Act of 2009 (ARRA). ARRA includes two key fundi ng s treams for sta tes, the State Fiscal Stabilization Fund (SFSF ) a nd increased fe deral participation in Medicaid (F MAP). The S FSF is a one -time federal appropria tion intended to help stabilize state and local government budgets in order to minimize layoffs and disruptions in education and other essential public services. The FMAP is a te mporary increase to states i n the federal share of Medicaid costs. Each state’s i ncrease in FMAP is based on the increase in unemployment percentages for each quarter. The federal recovery funds were used to avoid deeper reductions in spending.
Because of the economic volatility in the State and nation and the need to exercise fiscal constraint, the Governor on August 14, 2009 issued Executive Order No. 21, Reduce Monthly Budget Allotments for the 2009-10 Fiscal Year. It ordered the Office of State Budget and Management to reduce monthly allotments by 5% of eac h State agency’s certifie d budget. Special exceptio ns we re provided for constitutionally mandated or en titlement p rograms as well as u rgent situ ations related to d irect classroom instruction, economic development opportunities, law enfo rcement, health care, and public safety. The North Carolina State Constitution requires the Governor to affect th e necessary economies in expenditures to maintain a balanced budget.
One of the major budget drivers for the General Fund is the Medicaid Program. In fiscal year 2010, the Medicaid Program faced the c hallenges of a 6% inc rease in enrollment couple d with growing consumption by t hose i ndividuals co vered by M edicaid. I n response, program cha nges were implemented to impact costs of services without any negative impact on clinical outcomes. The specific changes i ncluded m odification o f drug p ricing t o p romote ge neric prescribing, c onsolidation of case management, elimination of certain mental health residential services, and selected policy ch anges to bring M edicaid practices i n l ine wi th c ommercial pl ans. Al l c hanges we re i mplemented t o e nsure continued access to quality services and compliance with federal maintenance of effort requirements.
B-12 State of North Carolina
During t he 2007 leg islative session , th e General Assembly en acted Session Law 20 07-323, a historical fiscal policy change that began a three-year phase-out of the financial participation of county governments in covering the cost of Medicaid.
General Fund Budget Variances The original General Fund budget, including state appropriations and appropriations supported by departmental receipts, serves as a starting point or plan for th e Governor to execu te the General Fund budget pursuant to the powers granted by the State Budget Act. At the state level in North Carolina, it is not unusual for the budget to change during th e fiscal year in relation to bu dget adjustments made to accommodate departmental r eceipts. The General Fund budget supported by st ate appropriation is a subset o f th e General Fund f inancial sched ule presented in th e CAFR as r equired su pplementary information. The current CAFR schedule reflects all spending re quired to s upport the State’s General Fund activ ities and th e fu nding to sup port those ac tivities, in cluding state tax and non-tax revenues, federal revenues, student tuition, and other fees, licenses, and fines.
Under cur rent st ate bud get management pract ice, particularly rel ated t o de partmental federal receipts, primary emphasis is placed on comparisons of the final authorized budget and actual spending.
At th e state le vel, bu dgetary cu ts related to state appropriations are im plemented by decreasi ng allowable act ual expe nditures, as opposed to decreasing the state appropriation through a form al legislative p rocess. Th e Governor and state ag encies main tain leg al au thority to spen d th e dollars originally appropriated to them; however, in recent years the actual spending has been limited by the collection of tax and nontax revenue. In extremely rare cases, th e General Assembly has held special sessions to formally amend the state appropriation budget.
The portion of the original budget comprising departmental receipts is not intende d to be the s ole controlling point to manage the State’s General Fund budget. Th e final budget includes amendments for departmental receipts collected during the fiscal year as allowed by law. General Fund departmental receipts a re t ypically authorized for e xpenditure within the activity that ge nerated the recei pt. Historically, final estim ated recei pts ha ve varied si gnificantly from the origi nal estim ate at the beginning of the fiscal year. State agencies by law must spend departmental receipts prior to spending tax and nontax supported appropriations. If departmental receipts are higher than expected, appropriated dollars may go unspent and be re-appropriated in a subsequent fiscal year.
Variances – Original and Final Budget In general, the variances between original and final budget are attributable to the timing and length of the budget preparation process and the budgeting of ARRA funds for the fiscal year. The original budget for fiscal year 2009-10 was prepared approximately 18 months prior to the final budget existing at June 30, 2010. Consequently, when the original budget is compared to th e final budget, it wo uld be expected that significant variances can occur.
Additional facto rs lead ing t o v ariances b etween original and final budg et in f iscal year 20 09-10 include the following:
1) Awarding of new un anticipated fed eral g rants and /or the awarding of unan ticipated increased or decreased amounts in long-standing federally supported programs. This also led to the necessity of budgeting unanticipated required state match. 2) Statewide encumbrance carry-forward budgeted amounts from fiscal year 2008-09 totaled $103.6 million. 3) Allocation of statewide reserves to age ncies and universities for t he purposes o f ret irement and hospitalization formula adjustments, contingency and emergency, information technology related programs, and various other budgeted statewide reserves. 4) Receipt and budgeting of over-r ealized receipts, prior y ear ear ned revenue s, and unanticipated donations and grants. 5) Inaccurate revenue and expenditure budget amounts entered by agencies during the continuation budget preparation process. 6) Budgeting of federal ARRA funds that increased the final revenue and expenditure budgets.
B-13 State of North Carolina
Variances - Final Budget and Actual Results Actual total revenue collected (both tax and non-tax) was slightly below budgeted amounts in fiscal year 2 009-10. W hile N orth Car olina’s revenue fo recast anticipated gradual econom ic im provement during the fis cal year, the econom ic rec overy pr oved s lower th an e xpected. Th e job ma rket, in particular, was very slow t o recover, resulting in a greater than expected decline in indiv idual income tax collections, North Carolina’s largest revenue source. Sales and use tax collections finished slightly behind budget as cons umers rem ained caut ious. C orporate collections excee ded expectations a s business profits improved and a settlement initiative yielded a significant revenue boost.
Departmental fede ral funds actually received by a gencies were less than t he fi nal authorize d budgeted federal fund revenues. A variance between the budget and actual federal funds occurs because actual fede ral fund receipts are reflective of the act ual e xpenditures. T herefore, if qualifying fe deral costs are not incurred by an agency, the actual receipt of federal funds could be significantly less than the budget.
The variance between the final budget and actual expenditures for primary and secondary education; health an d human serv ices; and public safety, co rrections and regu lation is primarily a resu lt of t he revenue shortfall during fiscal year 2009-10. Measures taken by the Governor to prevent expenditures that exceeded the tax and non-tax revenue collections included a significant reduction in the allotment of cash to all state agencies, universities, and institutions. Therefore, expenditures that are d ependent upon revenue generated by the state could not occur.
Highway Fund The Highway Fund dates back to 1921, which is when the N.C. General Assembly first imposed the gasoline tax. It accounts for most of the activities of the North Carolina Department of Transportation (NCDOT), i ncluding t he m aintenance an d co nstruction of t he St ate’s pri mary and secondary r oad systems, the Division of Motor Vehicles, the State Highway Patrol, t ransit, rail and ferry syste m. The primary revenue sources of the Highway Fund are federal funds, three-fourths of gasoline taxes, vehicle registration fees, and driver’s license fees.
The fund balance of the Highway Fund decreased from $1.025 billion at June 30, 2009 (as restated) to $8 48.599 million at June 3 0, 2010, a decrease of 17.18 %. To tal r evenues decreased by $2 97.39 million or 10.1% prim arily because of a decrease in federal fund rei mbursements. Howe ver, the decrease in fed eral funds was partially offset by an increase in revenue from the American Recovery and Reinvestment Act (ARRA) of 2009. Many factors have contributed to the decline in revenue for the trad itional fed eral aid p rogram at NCDOT. Th is in cludes sig nificant con tract sav ings on construction projects awa rded, staff conce ntration on inactiv e p roject an alysis, ti me intensive sm all project billings prior to close, large proj ects acco mplished by the gra nt anticipation revenue vehicle (GARVEE) bond program, and inflexibility of funding due to federal rescissions and other budgetary controls. Foc used del ivery efforts of state pr ojects ena bled NC DOT to meet ARRA maintenance of effort re quirements. The D epartment of Tran sportation expect s t o re ceive $7 35.5 m illion i n AR RA funds for highway infrastructure and an additional $103 million for public transportation initiatives. As of June 30, 2010, $728.1 mill ion in ARRA in frastructure funds had been allo cated to various Transportation Improvement Projects across the state and $293.344 million in federal reimbursement has been received. Additionally, in August 2010, the State issued $242.52 m illion in GARVEE bonds. This innovative financi ng tool was use d to accel erate the funding of tr ansportation im provement projects acr oss th e State b y lev eraging fu ture f ederal transportation revenues. At Ju ne 30 , 2010, $167.026 million of the GARVEE bond proceeds were unspent.
Transportation expenditures increased by $140.11 million or 5.33%. This was due to the increase in capital outlay, primarily contract construction expenditures. The first full year o f ARRA expenditures and additional funds from the latest GARVEE bond issuance contributed to this increase.
Population growth i s placing an i ncreasing dem and o n t he St ate’s t ransportation sy stem. Nort h Carolina’s population grew fro m 8.05 million in 2000 to 9.52 million in 2010, an increase of 18.26%. This growth i s expected to con tinue for the foreseeabl e future. The U.S. Ce nsus e stimates North
B-14 State of North Carolina
Carolina’s population growing to approximately 12.2 m illion by 2030, whic h would place the state as the seventh most populated state in the country. Ac cording to the 2008 Report on the Condition of the State Highway System prepared by the Division of Highways, over a 10 year period (1998 to 2007), the number of paved miles increased by almost 11% a nd the square footage of bridge deck area grew by over 23%. During this same 10 year period, vehicle miles traveled increased by over 26%. This rapid increase in vehicle miles traveled places a heavier burden on the existing infrastructure and accentuates the need for additional capacity, safety, and maintenance funding to address the deterioration in service created b y th e in crease in traffic. Fu rthermore, many o f th e State’s hig hways were built as farm -to- market roads and were not designed to handle the heavy traffic volumes of today and other highways such as the interstate highway system, which has celebrated its 50th anniversary, are nearing the end of their functional life.
Transportation is fu ndamental in continuing North Carolina’s prosperity and quality of life as th e state’s p opulation c ontinues to g row. T o a ddress t he g rowing dem and on t he t ransportation sy stem, increased co st o f su pplies, an d d eclining fu nding, NC DOT con tinues to seek inno vative so lutions to meet the growing stress on the transportation system. In response to declining motor fuels tax and the decreasing purchasing power of th e Highway Fun d, Sessio n Law 200 9-108 repealed t he ca p on the motor fuels tax and set the variable portion of the tax at 12.4 cents per gallon or 7% of the average wholesale price wh ichever is g reater, thus setting a fl oor of 29.9 cents per g allon. This will re main in place through June 30, 2011.
Highway Trust Fund Legislation creating the Highway Trust Fund was passed by the General Assembly in 1989. It was established to provide a dedicated funding mechanism to meet a speci fic set of highway construction needs in North Carolina. Additionally, the Highway Trust Fund provides supplemental allocations for secondary ro ad con struction, su pplemental assistan ce to municipalities for lo cal street p rojects, and pays the debt service on the State’s general obligation bonds issued for highway purposes.
The p rincipal reve nue so urces of t he Highway T rust F und are highway use t axes, one-fourth o f gasoline tax es, and various title an d registration fees. Th e en abling leg islation also specifies t hat a designated amount will b e transferred each year to the General Fund (see No te 10(B) to the financial statements). The am ounts transferred t o the Ge neral Fund for fiscal y ears 2 010 a nd 2 009 were $108.562 million and $147.53 million, respectively.
The fund balance deficit of the Highway Trust Fund improved from negative $194.005 million at June 30 , 2009 ( as r estated) to negative $2 0.137 m illion at Jun e 30, 2010. Total tr ansportation expenditures decrease d by $1 53.34 million or 23 .96%. Moving Ahead co nstruction e xpenditures decreased by $43 million as the program continues but nears completion. Secondary roads construction expenditures decreased by $49 million due to the completion of several projects including the connector route on NC 43 ($24 million decrease from FY09). Powell Bill expenditures were down by $5.2 million due to th e d ecrease i n Tr ust Fund revenues. Th e General Fun d tr ansfer was reduced as funds were transferred t o the NC T urnpike A uthority fo r de bt ser vice and other f inancing c ost of t he M onroe Connector/Bypass and the Mid-Currituck Bridge.
The 2008 Report on the Condition of the State Highway System also noted that since passage of the Highway Trust Fund in 1989, the Department of Transportation has paved over 10 thousand miles of unpaved secondary roads, leaving only 3,400 miles of secondary roads to be paved. In view of the fact that the paved secondary road system has not kept up with the demands of increased urbanization and traffic, the 2006 Session of the General Assembly approved changes in the General Statutes that govern the use of seco ndary road construction funds. House Bill 1 825, effective July 1, 2006 until June 30, 2010, allows th e use of th ese fu nds, orig inally d esignated to pave se condary ro ads, on the paved secondary ro ad syste m in o rder to im prove th eir fun ctionality th rough safety, m odernization, and condition improvements.
B-15 State of North Carolina
Enterprise The State’s en terprise funds or business-type activities provide the same type of information found Funds in th e go vernment-wide financial state ments, bu t in mo re detail. The major en terprise fun ds are discussed individually below.
Unemployment Compensation Fund The net asset s o f t he U nemployment C ompensation F und (T rust F und) dec reased from negat ive $299.281 million at June 3 0, 2009 (as restated ) to n egative $ 1.701 b illion at Jun e 30 , 20 10. This decrease is directly related to the decline in the state and national economies. The state’s unemployment rate was 10% in June 2010 compared to 11% in June 2009.
The T rust Fu nd’s operating m argin (o perating re venues l ess o perating e xpenses) was negative $4.523 billion this year co mpared to negative $2.177 billion in 2009. Unemployment benefit expenses increased 71.2% in fiscal year 2 010 to $5.569 billion. Because of depl eted cash bala nces, the Trust Fund borrowed fu nds f rom the U.S . Treas ury, be ginning i n Febr uary 2009, t o ens ure uni nterrupted payment of unemployment benefits. At June 30, 2010, the repayable advances from the State’s Federal Unemployment Account totaled $2.15 billion compared to $728.77 million at th e previous fiscal year- end. These advances will b e repaid with subsequent employer contributions. It is an ticipated that this borrowing will con tinue throu gh t he next fiscal y ear-end. Th e adv ances fro m th e U.S. Treasury are currently interest free through December 31, 2010. Currently, discussions are ta king place at t he national l evel regarding a t wo y ear ext ension o f t he i nterest f ree provision. A 20% surcharge on unemployment contributions, effective January 1, 2005 as required by statute, remained in effect during the current fiscal year. Th e surcharge is st ill in effect b ecause the balance in the Trust Fun d has not reached the trigger “off” level.
During this fiscal year, the federal government continued to provide various types of assistance to the unemployed. The multiple types of assistance are classified as nonoperating revenues and the dollar amounts are as follows: 1. The Emergency Unemployment Compensation program provided $2.486 billion in benefits. 2. Two pr ograms cont inued t his y ear un der t he Am erican R ecovery an d R einvestment Act an d provided the following benefits: a. The Federal Additional Compensation program provides for an ad ditional $25 a week to every benefit payment. This program totaled $448 million this fiscal year. b. The Extended B enefit (EB ) an d High Unemployment P eriod 100% p rograms p rovided payments that totaled $204 million this fiscal year.
N.C. State Lottery Fund The N.C. Educatio n Lo ttery (NCEL) first b egan selling game tickets in 2 006. As requ ired b y enabling legislation, net revenues of the NCEL are transferred four times a year t o the N.C. Education Lottery F und (a n onmajor g overnmental fu nd). The NCEL tran sferred $432.205 m illion to th e N.C. Education Lottery Fund in 2010 to support educational programs for the State. The amount transferred in 2009 was $413.929 million. At year end, th e net assets of the NCEL are zero. The NCEL has no changes in the net assets from year to year.
For fiscal year 2010, net ticket sales increased 10.61% from the previous fiscal year to $1.42 billion. Significant financial highlights include the following: a seco nd multi-state game, Mega Millions, was launched in January; the number of ret ailers increased to 6,267, re presenting a 4% increase over the prior year; and 42 new instant scratch-off games were created and released every two to four weeks.
The NCEL’s 2010-11 budget provides for a projected $441 million transfer to the N.C. Edu cation Lottery F und, re presenting a 5% i ncrease fr om t he previous year’s bu dget. As estab lished in th e enabling legislation, lottery funds are to be distributed for educational purposes as follows: 1. 50% to support reduction of class size in early grades and to support prekindergarten programs for at-risk fo ur-year-olds who wo uld otherwise not be served in h igh quality settings (Note: to date, these programs have been funded by the General Fund). 2. 40% for public school construction. 3. 10% to the State Education Assistance Authority to fund college and university scholarships.
B-16 State of North Carolina
N.C. Turnpike Authority Although the N.C. Turnpike Authority (NCTA) was created in 2002, financial activity started late in fiscal year 2004. Activities for fiscal year 20 10 were limited to salari es, personnel and con sultant service contract pay ments, boa rd per-diem, t ravel, an d other general ope rating e xpenses. M ajor accomplishments for the NCTA for fiscal year 2010 included the following: • Completed t he fi nancing of t he Tri angle E xpressway pr oject by i ssuing $6 22.758 m illion i n revenue bonds and securing a federal loan to borrow up to $386.66 million. • Broke ground on th e Triang le Ex pressway p roject, th e first to ll facility in N orth Carolina. Started c onstruction of t he Triangle Par kway sect ion in Au gust 2 009 and the Western Wake Freeway section in December 2009. This project is on schedule and within budget. • Awarded three toll system contracts in December 2009 to allow for electronic toll collection on the Triangle Expressway.
Funding for administrative expenses is being advanced as needed from the Highway Trust Fund to be repaid from NCTA revenue collections. Interest on the advances will begin to accrue one year afte r the NCTA begins collecting tolls on a completed turnpike project.
The high cost of building, operating and maintaining a major highway facility is typically more than the revenue a new road can generate through tolls. The gap between what tolling can pay for a nd the cost of the road requires additional support from the state, known as gap funding. In 2008, the General Assembly enacted legislation authorizing a nnual transfers from the Highway Trust Fund to the NCTA to pay debt service and fund required reserves on bonds issued to finance turnpike projects. In fiscal year 2010, $25 million was transferred from the Highway Trust Fund to service debt on bonds issued to finance the Triangle Expressway.
EPA Revolving Loan Fund The net assets of t he EPA Revolving Loan Fund increased by $81.546 million or 8.2% from the prior fi scal year-end. Ope rating income was $1 3.227 m illion (operating revenues less operating expenses). Net nonoperating revenues included $45.348 million in federal recovery funds, which were used to provide grants and loans for water infrastructure projects.
B-17 State of North Carolina
CAPITAL ASSET AND DEBT ADMINISTRATION
Capital As of Jun e 30, 201 0, th e St ate’s inv estment in capital assets was $37 .788 billion, an in crease of Assets 4.65% from the previous fiscal year-end (see table below).
Capital Assets as of June 30 (net of depreciation, dollars in thousands)
Governm e ntal Business-type Activities Activities Total 2009 2009 2009 2010 (as restated) 2010 (as restated) 2010 (as restated) Land and permanent easements...... $ 13,721,468 $ 13,186,390 $ 49,436 $ 3,453 $ 13,770,904 $ 13,189,843 Buildings...... 1,972,692 2,028,733 16,244 17,005 1,988,936 2,045,738 Machinery and equipment...... 603,644 661,096 3,838 3,985 607,482 665,081 Infrastructure: State highw ay system...... 18,804,142 18,032,847 — — 18,804,142 18,032,847 Other infrastructure...... 97,875 102,847 5,910 6,421 103,785 109,268 Computer softw are...... 23,242 19,928 — — 23,242 19,928 Art, literature, and other artifacts...... 85,239 67,184 — — 85,239 67,184 Construction in progress...... 2,135,400 1,936,220 260,694 43,060 2,396,094 1,979,280 Computer softw are in development.... 8,322 — — — 8,322 — Total...... $ 37,452,024 $ 36,035,245 $ 336,122 $ 73,924 $ 37,788,146 $ 36,109,169 Total percent change betw een fiscal years 2010 and 2009 3.93 % 354.69 % 4.65 %
The l argest c omponent of c apital asset s i s t he St ate highway sy stem. N orth C arolina has a 79 thousand mile highway system, making it t he second largest state- maintained highway syste m in the nation. The most rece nt report on t he condition of the Sta te highway syste m (December 2008) note d that while the system continues to grow, the traditional highway maintenance funds have increased, but not enough to keep up with inflation and system growth.
The major capital asset activity during the current fiscal year included the following: • The Department of Transportation (DOT) had construction outlays of $1.8 billion for the State highway system. Ad ditionally, th e N.C. Turnp ike Au thority (Au thority), a sep arate b usiness unit of DOT, had construction outlays of $259 million. The Authority’s largest project was for the Triangle Expressway, the State’s first modern toll road now under construction. • The Department of Correction had construction outlays of $102.3 million. The largest project was for the construction of a regional 120 bed medical center and a 2 16 bed mental health center at Cen tral Prison in Raleigh. At year-end, additions to construction in progress for th is project t otaled $60 m illion. T he e xpected p roject c ompletion dat e i s Jul y 2 011. T he Department o f Co rrection is u ndertaking co nstruction in itiatives to ad dress a prison cell shortfall and to allow for the implementation of sentencing reform. • The Green S quare C omplex i s bei ng co nstructed for t he Depa rtment of E nvironment an d Natural Resources (DENR), which will include office space for DENR employees, the Nature Research Center, and an underground parking deck. This project utilizes principles of green building an d s ustainable desi gn. At y ear-end, a dditions t o co nstruction i n progress for t his project totaled $32 million. This complex is scheduled to be completed in 2011. • The N .C. M useum of Art o pened a new building i n A pril 201 0 t o sh owcase i ts per manent collection. The total construction cost was $72 million.
As further detailed in Note 22(F) to the financial statements, the State h as commitments of $2.04 billion for the construction of highway infrastructure, which are expected to be financed by gasoline tax collections, motor vehicle fees, federal funds and debt proceeds. Other commitments of $660.73 million for the co nstruction an d imp rovement o f state go vernment facilities are exp ected to be financed primarily by debt proceeds, state appropriations, and federal funds.
More det ailed information about t he St ate’s capi tal asset s i s present ed i n N ote 5 t o t he fi nancial statements.
B-18 State of North Carolina
Long-term At year-end, the State had total long-term debt outstanding of $8.096 billion, an increase of 12.73% Debt from the previous fiscal year-end (see table below).
Outstanding Debt as of June 30 Bonds, Special Indebtedness, and Notes Payable (dollars in thousands)
Governm ental Bus ine s s -type Activities Activities Total 2009 2009 2010 (as restated) 2010 2009 2010 (as restated) General obligation bonds...... $ 5,270,660 $ 5,169,265 $ — $ — $ 5,270,660 $ 5,169,265 Special Indebtedness: Lease-purchase revenue bonds...... 215,045 225,045 — — 215,045 225,045 Certificates of participation...... 872,600 919,585 — — 872,600 919,585 Limited obligation bonds...... 580,705 600,000 — — 580,705 600,000 GARVEE bonds...... 434,825 241,820 — — 434,825 241,820 Revenue bonds...... — — 622,758 — 622,758 — Notes payable...... 30,642 26,331 68,800 — 99,442 26,331 Total ...... $ 7,404,477 $ 7,182,046 $ 691,558 $ — $ 8,096,035 $ 7,182,046
Total percent change betw een fiscal years 2010 and 2009 3.10 % N/A 12.73 %
During th e 2009-10 fiscal year, th e Stat e issu ed $487.7 m illion in general ob ligation pub lic improvement bonds and $242.52 million in grant anticipation revenue vehicle (GARVEE) bonds for its governmental activities. The proceeds of the public improvement bonds will be used to finance various capital pro jects for t he St ate pri mary gove rnment and t he Uni versity of No rth C arolina Sy stem, as specifically authorized by the No rth Caro lina Gen eral Assembly. Th e general obligation bonds were issued pu rsuant to the State’s two-thirds bo nd authorization p rovided b y the North Caro lina State Constitution (Article 5, Section 3). The proceed s of the GARVEE bonds will be used to accelerate funding of various transportation projects identified in the current State Transportation Improvement Plan. Add itionally, th e State issu ed $62 2.758 m illion in rev enue bo nds an d secu red a $ 68.8 millio n federal transportation loan for the N.C. Turnpike Authority, a business-type activity. The revenue bond and federal loan proceeds will be used to fi nance construction of the Triangle Expressway, a 19-mile toll road in Durham and Wake counties
The State refinanced $390.96 million of its existing debt in fiscal year 2010 to improve cash flow and to take advantage of lower in terest rates. By refinancing the debt, the State will reduce its fu ture debt service payments by approximately $26.7 million over the next eleven years.
The St ate i ssues t wo t ypes of t ax-supported de bt: ge neral obl igation b onds a nd various t ypes o f “special i ndebtedness” (i .e., debt not s ubject t o a vot e of t he pe ople). General o bligation b onds a re secured by the full faith, credit, and taxing power of the State and re quire approval by a m ajority of voters. The payments on special indebtedness are subject to appropriation by the General Assembly and may also be secured by a lien on facilities or equipment. The General Statutes (Chapter 142, Article 9) prohibits the issuance of special indebtedness except for projects specifically authorized by the General Assembly. D ifferent fo rms of sp ecial ind ebtedness, also known as appr opriation-supported d ebt, ar e authorized. One form , “financing co ntract i ndebtedness” i ncludes l ease-purchase re venue bonds an d certificates of part icipation and has bee n use d by t he St ate hi storically. The ot her f orm i s limited obligation bonds, which may be issued by the State directly rather than through the N.C. Infrastructure Finance C orporation, a c onduit i ssuer. T he use o f al ternative fi nancing m ethods p rovides fi nancing flexibility to t he State an d permits the State to tak e ad vantage of chan ging financial an d economic environments. The GARVEEs are a revenue bond-type debt instrument where the debt service is to be paid solely from federal transportation revenues.
The St ate’s t otal l ong-term debt ( bonds, s pecial i ndebtedness, an d n otes pay able) has i ncreased significantly in recent years, rising from $3.478 billion in 2002 to $8.096 billion in 2010, in part due to large issua nces for highe r educa tion cap ital p rojects. Prio r to 200 4, th e State o nly issu ed gen eral obligation debt. The following is a summary of recent debt authorizations.
B-19 State of North Carolina
Special Indebtedness The 2010-11 Session of the General Assembly authorized the issuance of special indebtedness of $120 million for repairs and renovations to State facilities and related infrastructure and $55 million for university projects.
The 2 009-10 Session of t he General As sembly reduce d speci al i ndebtedness a uthorizations fo r various projects by over $115 million to generate additional debt capacity and increased authorizations for guaranteed energy savings contracts by $400 million.
The 2008-09 Session of the General Assembly authorized the issuance of $734.03 million of special indebtedness as follows: $512.22 million for higher education projects, $109.09 million for correctional facilities, $50 million for acqui ring State park la nds and conservation areas , and $62.72 m illion for other State projects.
The 2007-08 Session of the General Assembly authorized the issuance of s pecial indebtedness as follows: $481.14 million for higher education projects and $188.01 million for other purposes.
The 2006-07 Session of the General Assembly authorized the issuance of $672.1 million of special indebtedness as fo llows: $4 29.3 for p sychiatric ho spitals and a pub lic h ealth lab oratory for t he Department of Health and Human Services, $132.2 million for m edical and mental health centers for the Department of Correction, and $110.6 million for other State and university projects.
Repair and Renovation Authorization The 2002-03 Session of the General Assembly authorized the issu ance of $300 million of special indebtedness to finance the repair and renovation of State facilities an d related infrastructure that are supported by the State’s General Fu nd. Of the $300 million, approximately $157 million was allocated to the University of North Carolina System. Each of the 16 constituent institutions of the UNC System received a portion of the proceed s for repairs and renovations. Th e remaining $143 mill ion of the proceeds was used to make repairs and renovations to various state facilities. The State has issued all of the authorized repair and renovation debt.
Higher Education Authorization The 19 99-00 Session o f th e Gen eral Assem bly au thorized th e issu ance o f $3 .1 b illion of h igher education improvement bonds, which were subsequently approved by the voters of the State. The $3.1 billion bond authorization represents the largest debt authorization in the State’s history. The proceeds of t hese general obl igation bonds were use d s olely t o co nstruct ne w buildings a nd t o re novate a nd modernize existing buildings on the State's 58 community college and 16 University of North Carolina campuses. These improvements were needed to meet enrollment demands and to ensure that the State’s college and university buildings meet modern code requirements and are equipped to prepare graduates for 21st century jobs. The bond legislation passed by the General Assembly specifies the amount of bond funding that flows to each community college and university campus. The State ha s issued all of the authorized higher education bonds.
Clean Water and Natural Gas Authorization The 1997-98 Session of the General Assembly authorized the issuance of $1 billion of clean water and natural gas general obligation bonds, which were subsequently approved by the voters of the State. The bonds proceeds were used to provide grants and loans to local governments for clean water projects ($800 million) and to provide grants and loans for construction of natural gas facilities to facilitate the expansion of natural gas service to unserved areas of the State ($200 million). The State has issued a ll of the authorized clean water and natural gas bonds.
Highway Bond Authorization The 1995-96 Session of t he General Assembly authorized the issuance of $950 million of highway general obligation bonds, which w ere sub sequently app roved b y t he voters of t he State. Th e bond proceeds were allo cated to pay capital costs for urban loops ($500 million), highways in the Intrastate System ($300 million), and for paving unpaved roads of the secondary highway system ($150 million). The State has issued all of the authorized highway bonds.
B-20 State of North Carolina
Debt Affordability Advisory Committee During th e 2003-04 Session , th e Gen eral Asse mbly created a Debt Affo rdability Ad visory Committee (Committee) to a nnually advise the Governor and the General Assembly on the estimated debt capacity of the State for the upcoming ten fiscal years. The Committee is responsible for preparing an annu al d ebt affo rdability study an d estab lishing guidelines fo r ev aluating th e State’s d ebt burden. The Committee is required to report its findings and recommendations to the Governor, the General Assembly, and the Fiscal Research Division of the General Assembly by February 1 of each year.
In February 2010, the State Treasurer completed the most recent Debt Affordability Study for North Carolina (Study). The Study p rovides the Go vernor an d th e General A ssembly with a basis for assessing the impact of fut ure debt iss uance on the St ate’s fiscal position and ena bles inform ed decision-making reg arding b oth financing proposals and cap ital sp ending priorities. A secon dary purpose of the Study is to provide a methodology for measuring, monitoring and managing the State’s debt levels, thereby protecting, and perhaps enhancing North Carolina’s bond ratings.
The Committee adopted the following target and ceiling guidelines as the preferred measure used to determine the amount of net tax-supported debt that can be prudently authorized by the State: − Net tax-supported debt service as a pe rcentage of general tax revenues should be targeted at no more than 4% and not exceed 4.75%; − Net tax-supported debt as a percentage of personal income should be targeted at no more than 2.5% and not exceed 3.0%; and − The amount of debt to be retired over the next ten years should be targeted at no less than 55% and not decline below 50%.
The definition of net tax-supported debt includes all outstanding and authorized but unissued general obligation bonds, special indebtedness, capital lease obligations, and any other such obligations that are payable from General Fund tax revenues. Net tax-supported debt excludes obligations of component units, Highway Fund debt paid from Highway Fund revenues, non tax-supported special indebtedness paid from non-General Fund supported trust funds, other self-supporting or non-tax supported debt such as revenue bonds, short term tax anticipation notes, and other postemployment benefits.
The Study concluded that North Carolina has substantially exhausted its General Fund debt capacity until 2012. North Carolina’s debt is considered manageable at current levels when compared to its peer group com posed of other st ates rat ed “t riple A” by all three rating agencies. Cre dit rating a gencies consider a debt afford ability stu dy as a positive fact or when ev aluating issu ers and assig ning cred it ratings.
Credit Ratings Credit ratings are the rating agencies’ assessment of a governmental entity’s ability and willingness to repay debt on a t imely basis. Credit ratings are an important factor i n the public credit markets and can influence interest rates a borrower must pay. The State’s general obligation bond credit ratings are as follows:
State of North Carolina General Obligation Bond Credit Ratings
Rating Agency Rating Outlook
Fitch Ratings AAA Stable Moody’s Investors Service Aaa Stable Standard & Poor’s Rating Services AAA Stable
These ratings are the highest attainable from all three rating age ncies. The State’s proactive responses and history of taking early action to mitigate the impact of revenue declines were recognized by the rating agencies. North Carolina remains one of only seven states to enjoy top-tier rankings from all three of the credit rating agencies.
B-21 State of North Carolina
Special indebtedness is not subject to a vote of the people and its repayment is based on the State’s annual debt service appropriation. For these reasons, special indebtedness is rated lower than the State’s general obligation bonds and typically carries a higher interest rate.
Limitations on Debt The Constitution of North Carolina (Article 5, Section 3) imposes limitations upon the in crease of certain state debt. It restricts the General Assembly from contracting debts secured by a pledge of the faith and c redit of the State, unless approved by a majority of the qualified voters of t he State, exce pt for the following purposes: 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 m eet e mergencies immediatel y th reatening th e pub lic h ealth o r safety, as c onclusively determined in writing by the Governor; and 6. For any other l awful p urpose, t o t he e xtent o f t wo-thirds of t he am ount by w hich the St ate’s outstanding indebtedness shall have been reduced during the preceding biennium.
More detailed in formation ab out th e State’s lon g-term l iabilities is p resented i n Note 8 to th e financial statements.
NEXT YEAR’S BUDGET AND RATES
In June 2010, the General Assembly enacted l egislation that amended the original 2010-11 fiscal year budget. The revised fiscal year 2010-11 budget made adjustments to the original budget (enacted in 2009) that closed a proj ected cumulative budget gap of $1.3 billion from the original budget. This expected gap arose on account of reduced forecasted revenues and unanticipated costs.
In t he rev ised b udget fo r fiscal year 2 010-11, approp riations were reduced fro m $ 19.6 b illion to $18.95 billion. The net cha nge in appropriations include d 1) repl acement of $563 mil lion in State Medicaid funds with additional federal recovery funds, 2) budget reductions totaling $906 million, and 3) in creased fu nding of $8 66 mill ion to ad dress un anticipated growth in Me dicaid costs, a dram atic increase in higher edu cation enro llment, an d econ omic d evelopment in itiatives. Th e un anticipated growth i n M edicaid resulted fr om i ncreased e nrollment due t o hi gher unemployment an d a dditional consumption of Medicaid services from program beneficiaries. The unanticipated enrollment increases in higher education were primarily for t he community college system . Community college enrollment increased by 34 thousand students, or 15%, because of g reater demand for worker training programs during the recession.
Temporary tax increases included by the General Assembly in the 2009-2011 biennium budget were as follows:
• A temporary increase i n the general state rate of sal es and use t ax from 4.5% t o 5.5%, effective September 1, 2009. The increase is scheduled to expire on July 1, 2011.
• An individual income tax surcharge of 2% or 3% is imposed on taxpayers who meet certain income requirements. The surcharge expires for taxable years on or after January 1, 2011.
• A corporate incom e tax surcharge of 3% i s imposed on corporations subject to income tax. The surcharge expires for taxable years on or after January 1, 2011.
B-22 State of North Carolina
CONDITIONS EXPECTED TO IMPACT FUTURE OPERATIONS
State Health Plan Impact of Federal Health Care Reform The State Health Plan (Plan) is in the process of evaluating the impacts of the Patient Protection and Affordable Care Act, and th e Healt h Care Edu cation an d Affordability Act (Fed eral Health Care Reform). Although various provisions of Federal Heath Care Reform become effective over the next several years, key components with near-term impacts are as follows:
The Early Retiree Reimbursement Program (ERRP) is designed to encourage employers to maintain their retiree health plans at least u ntil 2014, when the Health Insurance Exchanges become available. Under ERRP, plans can receive reimbursement for 80 % of expenses for claims between $15 thousa nd and $90 thousand for non-Medicare retirees, aged 55 to 64, who have incurred at least $15 thousand in paid medical and pharmacy claims in a b enefit year. A to tal of $5 billion in federal funding has been allocated for this program. The Plan estimates it will receive up to $90 million over the next five fiscal years if the funding does not run out first.
The Plan is also preparing to implement several provisions of Health Care Reform effective July 1, 2011, including expanding eligibility for coverage to age 26 regardless of student, dependent or marital status, and eliminating pre-existing condition exclusions for members up to age 19. The addition of new dependents up to age 26 is expect ed to cost ab out $16 million in fiscal year 2012. T he Plan does not expect a significant impact as a result of the elimin ation of pre-existing medical conditions exclusions for dependents.
Health Care Reform allows plans that existed prior to its passage in March 2010 to be exempt from certain requirements of the law, including new claims and appeals procedures and an expanded array of preventive benefits with no member-cost-sharing. Maintaining the exemption or “grandfathered status” limits the amount and type of changes to benefits and contribution rates that can be made. The Plan is currently analyzing the impacts of remaining a grandfathered plan or adopting the new requirements.
Recent Legislation The 2 009-10 sessi on of t he Ge neral Assem bly enact ed l egislation t hat est ablished a ne w Comprehensive W ellness Ini tiative (CWI). The CWI was de veloped t o enc ourage Plan m embers to make healthier lifesytle choices. It will provide support to Plan members by assisting them to quit using tobacco and to maintain a healthy weight. The CWI includes all covered dependents (the initiative does not apply to Medicare-primary members). The tobacco cessation component began on July 1, 2010. The weight management program begins on July 1, 2011. The Plan asks members to self-report tobacco use and height/weight f or t he cal culation of B ody M ass In dex (B MI). T hose members w ho do not use tobacco, or have a BMI less than 40, would be able to choose the PPO Standard 80/20 plan or the PPO Basic 70/30 plan. Tobacco users and members with a BMI 40 or higher would automatically be placed on the PPO Basic 70/30 plan. Beginning on July 1, 2012, members must have a BMI of less than 35 to enroll in the 80/20 Standard Plan.
During 200 9-10 leg islative session, th e Gen eral Assemb ly also g ave th e Plan th e au thority to conduct a Depen dent Eligibility Verification (DEV). Th e purpose of the DEV is to ensure all en rolled dependents are elig ible as leg islated, help maintain costs and protect benefits for eligible em ployees, retirees and their families. The audit began in August 2010 and will conclude in December 2010.
Three bills i mpacting t he St ate Health Plan were en acted du ring t he 2010-11 leg islative sho rt session: (1) a bill to cover hearing aids for individuals up to age 22, (2) a bill to expand coverage to dependents up to age 26 in cases where the dependent was covered through May 1, 2010, and (3) a bill to cover children in cases of court-ordered guardianship.
B-23 State of North Carolina
State Contributions to the Pension Fund The State p ension fu nd is div ersified an d in vested with a co nservative strateg y. Howev er, th e economic climate and volatility of the stock market has impacted the State’s finances across all lines of business, including the pension assets. The pension fund experienced losses of approximately 20% in calendar year 2008 which were partially offset by a 15 % return in 2009. How ever, the pension fund actuarial assumed rate of return is 7.25% per year. As a result, the funded status of the plan has declined to 96%
The economic crisis h as long term effects that will req uire increased contributions from the State over t he next several y ears i n order t o m aintain t he st rength of t he fund. F unding t he R etirement Systems is a s hared responsibility among employees, employers, and investment earnings. For the past several years, investment earnings of the Teachers’ and State Employees’ Retirement System (TSERS) have accounted for over 60% of funding. The investment earnings were high e nough in recent years to allow the General Assem bly to significantly reduce its an nual contributions to the TSERS b elow the normal rate of 6.3% of payroll. This is the State’s match to the employee contribution of 6%, which is authomatically deducted from th e monthly paycheck. Due to the loss of assets, th e General Assembly will need to i ncrease its c ontribution to t he TSERS back to the normal contribution amount, roughly $961 million in fiscal year 2011-2012.
Escheats Fund North Caro lina’s esch eat policies d ate b ack to 1 789 when th e North Carolina State Co nstitution called for transferring unclaimed property to the University of North Carolina System. Interest earned on the Escheats Fund’s investments underwrites college scholarships. Over time, the number and size of programs dep endent o n t he Fun d g rew a nd now t he S tate i s usi ng t he Fu nd’s principal t o m eet obligations. At the current rate of withdrawal, the Fund will have a negative balance in 2014.
Federal Recovery Funds The State e xpects to receive additional fede ral f unds u nder t he American Recove ry and Reinvestment Act of 2009 (ARRA). A total of $1.04 billion of ARRA funds is appropriated to supplant General Fund sp ending for fiscal year 2 010-11. Th ese fun ds will be u sed primarily fo r bu dget stabilization and increased federal participation in Medicaid.
REQUESTS FOR INFORMATION
This fi nancial rep ort i s desi gned t o provide ou r ci tizens, t axpayers, cu stomers, and i nvestors an d creditors with a general overview of the St ate’s finances and to demonstrate the Stat e’s accountability for the m oney it receives. If you have questi ons a bout this report or nee d a dditional fina ncial information, c ontact t he N orth C arolina Office o f t he State C ontroller, Accounting a nd Financial Reporting Sectio n, 141 0 Mail Serv ice Cen ter, Ralei gh, N.C. 276 99-1410. In add ition, th is fin ancial report is available on the Office of the State Cont roller’s internet home page a t http://www.osc.nc.gov/financial/index.html .
B-24 State of North Carolina STATEMENT OF NET ASSETS
June 30, 2010 Exhibit A-1 (Dollars in Thousands) Primary Government Governmental Business-type Component Activities Activities Total Units Assets Cash and cash equivalents (Note 3)...... $ 3,563,061 $ 401,223 $ 3,964,284 $ 2,287,502 Investments (Note 3)...... 256,929 103,434 360,363 1,705,902 Securities lending collateral (Note 3)...... 1,057,807 140,453 1,198,260 — Receivables, net (Note 4)...... 2,811,765 742,415 3,554,180 1,087,496 Due from component units (Note 19)...... 21,683 — 21,683 12,742 Due from primary government (Note 19)...... — — — 81,918 Internal balances...... 31,566 (31,566) — — Inventories...... 199,609 849 200,458 95,328 Prepaid items...... 1,131 2,781 3,912 44,639 Advances to component units ...... 21,742 — 21,742 — Notes receivable, net (Note 4)...... 324,767 782,434 1,107,201 6,196,806 Investment in joint venture...... — — — 9,692 Deferred charges...... — 26,670 26,670 52,658 Securities held in trust...... 47,090 — 47,090 — Pension assets (Note 12)...... 4,521 — 4,521 — Restricted/designated cash and cash equivalents (Note 3). 223,858 267,015 490,873 2,088,159 Restricted investments (Note 3)...... 814,197 254,288 1,068,485 4,225,493 Restricted due from primary government (Note 19)...... — — — 54,174 Restricted due from component units (Note 19)...... — — — 2,694 Deferred outflow of resources...... 49,903 — 49,903 57,792 Capital assets-nondepreciable (Note 5)...... 15,950,429 310,130 16,260,559 2,013,201 Capital assets-depreciable, net (Note 5)...... 21,501,595 25,992 21,527,587 10,545,105 Total Assets ...... 46,881,653 3,026,118 49,907,771 30,561,301 Liabilities Accounts payable and accrued liabilities...... 1,508,486 264,190 1,772,676 816,615 Medical claims payable...... 971,053 — 971,053 253,329 Unemployment benefits payable...... — 105,833 105,833 — Tax refunds payable...... 1,409,942 — 1,409,942 — Obligations under securities lending...... 1,089,277 145,136 1,234,413 — Interest payable...... 86,265 17,824 104,089 71,471 Short-term debt (Note 6)...... — — — 883,469 Due to component units (Note 19)...... 136,092 — 136,092 15,436 Due to primary government (Note 19)...... — — — 21,683 Unearned revenue...... 386,854 26,258 413,112 197,990 Advance from primary government ...... — — — 21,742 Deposits payable...... 316 40 356 12,555 Funds held for others...... 107,580 — 107,580 1,371,076 Hedging derivatives liability (Note 7)...... 49,903 — 49,903 57,792 Long-term liabilities (Note 8): Due within one year...... 585,929 802,544 1,388,473 1,188,002 Due in more than one year...... 8,345,758 2,068,696 10,414,454 8,322,142 Total Liabilities...... 14,677,455 3,430,521 18,107,976 13,233,302 Net Assets Invested in capital assets, net of related debt...... 35,452,614 158,556 35,611,170 8,936,814 Restricted for: Nonexpendable: Environment and natural resources...... 80,527 — 80,527 — Higher education...... 566 — 566 1,720,546 Expendable: Primary and secondary education...... 9,066 — 9,066 — Higher education...... 416,902 — 416,902 2,544,865 Health and human services...... 13,693 — 13,693 1,782 Economic development...... 16,966 — 16,966 778,505 Environment and natural resources...... 33,464 — 33,464 — Public safety, corrections, and regulation...... 20,807 — 20,807 — Transportation...... 7,190 — 7,190 — EPA revolving loan...... — 1,076,458 1,076,458 — Other purposes...... 105,531 2,231 107,762 — Unrestricted...... (3,953,128) (1,641,648) (5,594,776) 3,345,487 Total Net Assets...... $ 32,204,198 $ (404,403) $ 31,799,795 $ 17,327,999 The accompanying Notes to the Financial Statements are an integral part of this statement.
B-25 State of North Carolina STATEMENT OF ACTIVITIES
For the Fiscal Year Ended June 30, 2010 (Dollars in Thousands) Program Revenues Operating Capital Charges for Grants and Grants and Net (Expense) Functions/Programs Expenses Services Contributions Contributions Revenue Primary Government: Governmental Activities: General government...... $ 1,109,142 $ 356,602 $ 118,058 $ 19,036 $ (615,446) Primary and secondary education...... 9,830,182 15,272 1,865,950 — (7,948,960) Higher education...... 4,232,267 473 167,713 — (4,064,081) Health and human services...... 16,809,253 295,588 12,720,701 — (3,792,964) Economic development...... 716,205 30,321 429,329 40 (256,515) Environment and natural resources...... 564,771 143,331 105,596 18,086 (297,758) Public safety, corrections, and regulation...... 2,693,212 511,912 168,681 20,241 (1,992,378) Transportation...... 1,998,432 705,025 243,093 653,384 (396,930) Agriculture...... 119,494 17,219 18,893 646 (82,736) Interest on long-term debt...... 281,499 — — — (281,499) Total Governmental Activities...... 38,354,457 2,075,743 15,838,014 711,433 (19,729,267) Business-type Activities: Unemployment Compensation...... 5,568,561 1,045,288 3,138,838 — (1,384,435) N.C. State Lottery...... 994,168 1,424,458 2,915 — 433,205 EPA Revolving Loan...... 30,940 19,874 86,622 — 75,556 N.C. Turnpike Authority...... 4,990 — 11,419 7,715 14,144 Regulatory commissions...... 35,843 37,534 890 — 2,581 Insurance programs...... 13,284 16,320 9,999 — 13,035 North Carolina State Fair...... 12,794 12,639 278 — 123 Other business-type activities...... 9,374 8,678 148 56 (492) Total Business-type Activities...... 6,669,954 2,564,791 3,251,109 7,771 (846,283) Total Primary Government...... $ 45,024,411 $ 4,640,534 $ 19,089,123 $ 719,204 $ (20,575,550)
Component Units: The Golden LEAF, Inc...... $ 67,795 $ 5 $ 66,763 $ — $ (1,027) University of North Carolina System...... 8,538,407 5,124,400 1,175,741 356,072 (1,882,194) Community Colleges...... 2,023,795 316,177 803,447 185,331 (718,840) N.C. Housing Finance Agency...... 358,692 328,211 36,025 — 5,544 State Education Assistance Authority...... 412,604 114,460 282,160 — (15,984) State Health Plan...... 2,546,554 2,470,377 62,303 — (13,874) Other component units...... 288,777 66,653 163,680 83,198 24,754 Total Component Units...... $ 14,236,624 $ 8,420,283 $ 2,590,119 $ 624,601 $ (2,601,621)
The accompanying Notes to the Financial Statements are an integral part of this statement.
B-26 State of North Carolina
STATEMENT OF ACTIVITIES
For the Fiscal Year Ended June 30, 2010 Exhibit A-2 (Dollars in Thousands) 25XX...... Total Primary Government Governmental Business-type Component Activities Activities Total Units
Changes in Net Assets: Net (expense) revenue $ (19,729,267) $ (846,283) $ (20,575,550) $ (2,601,621)
General Revenues: Taxes: Individual income tax...... 9,345,441 — 9,345,441 — Corporate income tax...... 1,252,800 — 1,252,800 — Sales and use tax...... 5,916,119 — 5,916,119 — Gasoline tax...... 1,557,430 — 1,557,430 — Franchise tax...... 904,651 — 904,651 — Highway use tax...... 439,506 — 439,506 — Insurance tax...... 506,990 — 506,990 — Beverage tax...... 295,383 — 295,383 — Inheritance tax...... 71,731 — 71,731 — Tobacco products tax...... 278,406 — 278,406 — Other taxes...... 321,945 — 321,945 — Tobacco settlement...... 145,539 — 145,539 — Unrestricted investment earnings...... 28,645 — 28,645 — State aid...... — — — 3,567,722 Miscellaneous...... 44,354 — 44,354 2,152 Contributions to permanent funds...... 3,101 — 3,101 — Contributions to endowments...... — — — 68,280 Transfers...... 434,067 (434,067) — — Total general revenues, contributions, and transfers...... 21,546,108 (434,067) 21,112,041 3,638,154 Change in net assets...... 1,816,841 (1,280,350) 536,491 1,036,533 Net assets — July 1, as restated (Note 24)...... 30,387,357 875,947 31,263,304 16,291,466 Net assets — June 30...... $ 32,204,198 $ (404,403) $ 31,799,795 $ 17,327,999
B-27 State of North Carolina BALANCE SHEET GOVERNMENTAL FUNDS
June 30, 2010 Exhibit B-1 (Dollars in Thousands) Highway Other Total General Highway Trust Governmental Governmental Fund Fund Fund Funds Funds Assets Cash and cash equivalents (Note 3)...... $ 1,138,523 $ 887,433 $ — $ 1,420,276 $ 3,446,232 Investments (Note 3)...... 2,602 — — 218,430 221,032 Securities lending collateral (Note 3)...... 595,092 154,982 30,223 267,544 1,047,841 Receivables, net: (Note 4) Taxes receivable...... 1,369,427 108,545 36,946 2,243 1,517,161 Accounts receivable...... 265,779 8,006 83 22,466 296,334 Intergovernmental receivable...... 939,383 22,313 2,814 9,924 974,434 Interest receivable...... 487 1,161 144 4,662 6,454 Other receivables...... — 3,265 — — 3,265 Due from other funds (Note 10)...... 1,330 13,653 — 44,931 59,914 Due from component units (Note 19)...... 1,358 — — 19,430 20,788 Inventories...... 65,391 84,963 — 49,132 199,486 Advances to other funds (Note 10)...... — — 18,279 — 18,279 Advances to component units...... — — — 21,742 21,742 Notes receivable, net (Note 4)...... 21,830 1,035 81 301,821 324,767 Securities held in trust...... 424 2,645 — 44,021 47,090 Restricted/designated cash and cash equivalents (Note 3).. 11,131 — — 212,727 223,858 Restricted investments (Note 3)...... — 167,026 — 647,171 814,197 Total Assets...... $ 4,412,757 $ 1,455,027 $ 88,570 $ 3,286,520 $ 9,242,874
Liabilities and Fund Balances Liabilities: Accounts payable and accrued liabilities: Accounts payable...... $ 111,704 $ 258,817 $ 16,513 $ 65,634 $ 452,668 Accrued payroll...... 3,300 37,103 — 402 40,805 Intergovernmental payable...... 666,953 108,668 45,179 17,032 837,832 Claims payable...... — — — 36,253 36,253 Medical claims payable...... 971,053 — — — 971,053 Tax refunds payable...... 1,402,587 5,516 1,839 — 1,409,942 Obligations under securities lending...... 613,042 159,687 31,425 274,853 1,079,007 Due to fiduciary funds (Note 10)...... 64,235 — — 47 64,282 Due to other funds (Note 10)...... 25,069 6,365 13,653 24,883 69,970 Due to component units (Note 19)...... 55,018 — — 81,074 136,092 Deferred revenue...... 567,116 13,621 98 36,872 617,707 Deposits payable...... — — — 316 316 Funds held for others...... 46,848 16,651 — 44,081 107,580 Total Liabilities...... 4,526,925 606,428 108,707 581,447 5,823,507 Fund Balances: Reserved (Note 11)...... 224,358 283,707 18,360 892,351 1,418,776 Unreserved/Undesignated, reported in: General Fund...... (338,526) — — — (338,526) Special Revenue Funds...... — 564,892 (38,497) 1,795,270 2,321,665 Capital Projects Funds...... — — — 10,311 10,311 Permanent Funds...... — — — 7,141 7,141 Total Fund Balance...... (114,168) 848,599 (20,137) 2,705,073 3,419,367 Total Liabilities and Fund Balances...... $ 4,412,757 $ 1,455,027 $ 88,570 $ 3,286,520 $ 9,242,874
The accompanying Notes to the Financial Statements are an integral part of this statement.
B-28 State of North Carolina
RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS
June 30, 2010 Exhibit B-1a (Dollars in Thousands)
Total fund balances - governmental funds (see Exhibit B-1) $ 3,419,367
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 5). These consist of: Cost of capital assets (excluding internal service funds)...... $ 37,878,732 Less: Accumulated depreciation (excluding internal service funds)...... (543,752) Net capital assets...... 37,334,980
- 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. 238,919
Investment derivatives are not financial resources and, therefore, are not reported in the funds (see Note 7). 11,929
- 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 12). 4,521
- 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 8). Also, unamortized debt premiums, discounts, and losses on refundings are reported in the Statement of Net Assets but are not reported in the funds. These balances consist of: General obligation bonds payable...... (5,270,660) Lease-purchase revenue bonds payable...... (215,045) Certificates of participation payable...... (872,600) Limited obligation bonds payable...... (580,705) GARVEE bonds payable...... (434,825) Unamortized debt premiums (to be amortized as interest expense)...... 90,493 Less: Unamortized loss on refunding (to be amortized as interest expense)...... (353,147) Notes payable...... (30,642) Capital leases payable...... (22,815) Net long-term debt...... (7,689,946)
- Other liabilities not due and payable in the current period and, therefore, not reported in the funds (see Note 8 as applicable) consist of: Accrued interest payable...... (86,265) Compensated absences (excluding internal service funds)...... (414,382) Obligations for workers' compensation...... (82,150) Deferred death benefit payable...... (500) Pollution remediation payable...... (6,549) Court judgment payable...... (731,703) Negative investment derivatives...... (64,294) Net pension obligation...... (429) Total other liabilities...... (1,386,272)
- 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). 270,700
Total net assets - governmental activities (see Exhibit A-1) $ 32,204,198
The accompanying Notes to the Financial Statements are an integral part of this statement.
B-29 State of North Carolina STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES GOVERNMENTAL FUNDS For the Fiscal Year Ended June 30, 2010 Exhibit B-2 (Dollars in Thousands) Highway Other Total General Highway Trust Governmental Governmental Fund Fund Fund Funds Funds Revenues: Taxes: Individual income tax...... $ 9,343,303 $ — $ — $ 2,138 $ 9,345,441 Corporate income tax...... 1,245,515 — — — 1,245,515 Sales and use tax...... 5,871,166 — — 28,793 5,899,959 Gasoline tax...... — 1,146,104 382,740 27,758 1,556,602 Franchise tax...... 904,959 — — — 904,959 Highway use tax...... — — 439,506 — 439,506 Insurance tax...... 495,059 — — 11,931 506,990 Beverage tax...... 295,349 — — — 295,349 Inheritance tax...... 71,901 — — — 71,901 Tobacco products tax...... 278,296 — — — 278,296 Other taxes...... 169,135 — — 152,591 321,726 Federal funds...... 12,825,403 530,106 — 332,995 13,688,504 Local funds...... 153,234 30,043 3,038 31,847 218,162 Investment earnings...... 89,874 31,595 862 76,302 198,633 Interest earnings on loans...... 202 — — 4,341 4,543 Sales and services...... 97,439 1,116 — 164,455 263,010 Rental and lease of property...... 8,877 6,620 2,166 4,459 22,122 Fees, licenses, and fines...... 674,508 605,853 85,971 187,591 1,553,923 Tobacco settlement...... 146,358 — — — 146,358 Contributions, gifts, and grants...... 20,391 7,489 — 57,985 85,865 Funds escheated...... — — — 70,381 70,381 Federal recovery funds...... 1,961,425 293,344 — 137,082 2,391,851 Miscellaneous...... 140,765 6,903 599 16,418 164,685 Total revenues...... 34,793,159 2,659,173 914,882 1,307,067 39,674,281
Expenditures: Current: General government...... 909,279 — — 53,123 962,402 Primary and secondary education...... 9,547,910 — — 302,552 9,850,462 Higher education...... 3,728,849 — — 496,957 4,225,806 Health and human services...... 16,712,294 — — 103,805 16,816,099 Economic development...... 284,908 — — 430,130 715,038 Environment and natural resources...... 262,015 — — 292,613 554,628 Public safety, corrections, and regulation...... 2,221,098 — — 438,585 2,659,683 Transportation...... — 2,766,591 486,667 — 3,253,258 Agriculture...... 85,579 — — 27,323 112,902 Capital outlay...... — — — 341,058 341,058 Debt service: Principal retirement...... 391,926 49,515 55,634 1,488 498,563 Interest and fees...... 276,753 21,352 22,499 1,683 322,287 Debt issuance costs...... 623 421 133 133 1,310 Total expenditures...... 34,421,234 2,837,879 564,933 2,489,450 40,313,496 Excess revenues over (under) expenditures...... 371,925 (178,706) 349,949 (1,182,383) (639,215) Other Financing Sources (Uses): General obligation bonds issued...... — — — 487,700 487,700 GARVEE bonds issued...... — 242,520 — — 242,520 Refunding bonds issued...... 371,920 — — — 371,920 Other debt issued...... 9,098 — — — 9,098 Premium on debt issued...... 64,301 20,616 — 55,959 140,876 Payment to refunded bond escrow agent...... (435,870) — — — (435,870) Sale of capital assets...... 2,450 2,849 1,597 5,098 11,994 Insurance recoveries...... 480 6,449 — 485 7,414 Transfers in (Note 10)...... 713,024 39,741 — 1,578,051 2,330,816 Transfers out (Note 10)...... (433,923) (309,511) (177,678) (955,390) (1,876,502) Total other financing sources (uses)...... 291,480 2,664 (176,081) 1,171,903 1,289,966 Net change in fund balances...... 663,405 (176,042) 173,868 (10,480) 650,751 Fund balances — July 1, as restated (Note 24)...... (777,573) 1,024,641 (194,005) 2,715,553 2,768,616 Fund balances — June 30...... $ (114,168) $ 848,599 $ (20,137) $ 2,705,073 $ 3,419,367 The accompanying Notes to the Financial Statements are an integral part of this statement.
B-30 State of North Carolina
RECONCILIATION OF THE STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES OF GOVERNMENTAL FUNDS TO THE STATEMENT OF ACTIVITIES
For the Fiscal Year Ended June 30, 2010 Exhibit B-2a (Dollars in Thousands)
Net change in fund balances - total governmental funds (see Exhibit B-2) $ 650,751
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) ...... $ 2,223,330 Less: Depreciation expense (excluding internal service funds) ...... (662,557) Net capital outlay adjustment ...... 1,560,773 - 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 the sale is reported. This adjustment reduces the proceeds by the book value of the capital assets sold. (134,925)
- Donations of capital assets do not appear in the governmental funds because they are not financial resources, but increase net assets in the Statement of Activities. 379
- 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 or incurred: Bonds and similar debt issued ...... (739,318) Refunding bonds issued ...... (371,920) Premiums on debt issued ...... (140,876) Principal repayments: Bonds, notes, and similar debt ...... 497,586 Capital leases ...... 977 Payments to escrow agent for refundings ...... 435,870 Net debt adjustments ...... (317,681) - 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. 13,721
Changes in fair value of investment derivatives are not current financial resources in governmental funds but are recognized in the Statement of Activities (12,490)
- 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 ...... (4,644) Compensated absences (excluding internal service funds) ...... 4,068 Workers' compensation ...... (3,683) Arbitrage rebate ...... 911 Deferred death benefit ...... 30 Cost settlement ...... 15,000 Net pension obligation ...... 1,148 Pollution remediation ...... 139 Amortization of deferred amounts ...... 45,432 Net expense accruals ...... 58,401 - 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). (2,088)
Change in net assets - governmental activities (see Exhibit A-2) $ 1,816,841
The accompanying Notes to the Financial Statements are an integral part of this statement.
B-31 State of North Carolina STATEMENT OF NET ASSETS PROPRIETARY FUNDS
June 30, 2010 (Dollars in Thousands) Business-type Activities — Enterprise Funds Unemployment EPA N.C. State N.C. Compensation Revolving Loan Lottery Turnpike Fund Fund Fund Authority Assets Current Assets: Cash and cash equivalents (Note 3)...... $ 35,122 $ 291,033 $ 38,760 $ 938 Investments (Note 3)...... — — 2,150 — Securities lending collateral (Note 3)...... 6,012 57,388 7,806 52,178 Receivables: (Note 4) Accounts receivable, net...... 56,589 — 6,648 — Intergovernmental receivable...... 234,518 45 — 4,386 Interest receivable...... 39 5,266 110 — Premiums receivable...... — — — — Contributions receivable, net...... 362,268 — — — Notes receivable, net (Note 4)...... — 53,392 — — Due from other funds (Note 10)...... 5,007 — — — Due from component units (Note 19)...... — — — — Inventories...... — — 209 — Prepaid items...... — — 30 — Restricted/designated cash and cash equivalents (Note 3).. — — — — Total current assets...... 699,555 407,124 55,713 57,502 Noncurrent Assets: Investments (Note 3)...... — — 25,007 — Receivables: (Note 4) Contributions receivable, net...... 66,917 — — — Notes receivable, net (Note 4)...... — 729,042 — — Deferred charges...... — — 168 26,502 Restricted/designated cash and cash equivalents (Note 3)...... — — — 266,894 Restricted investments (Note 3)...... — — — 252,151 Capital assets-nondepreciable (Note 5)...... — — — 306,355 Capital assets-depreciable, net (Note 5) ...... — 116 1,238 35 Total noncurrent assets...... 66,917 729,158 26,413 851,937 Total Assets...... 766,472 1,136,282 82,126 909,439 Liabilities Current Liabilities: Accounts payable and accrued liabilities: Accounts payable...... 6,310 35 27,453 25,932 Accrued payroll...... — — 379 — Intergovernmental payable...... 181,678 — 10 — Claims payable...... — — — — Unemployment benefits payable...... 105,833 — — — Obligations under securities lending...... 6,168 59,183 7,889 54,245 Interest payable...... — — — 17,824 Due to other funds (Note 10)...... 45 17 18,127 3 Unearned revenue...... 17,980 — 18 — Deposits payable...... — — — — Annuity and life income payable (Note 8)...... — — 2,150 — Federal unemployment account advances (Note 8)...... 800,000 — — — Compensated absences (Note 8)...... — 23 65 10 Total current liabilities...... 1,118,014 59,258 56,091 98,014 Noncurrent Liabilities: Accounts payable...... — — — 4,416 Advances from other funds (Note 10)...... — — — 18,279 Annuity and life income payable (Note 8)...... — — 25,007 — Notes payable (Note 8)...... — — — 68,800 Bonds payable, net (Note 8)...... — — — 620,514 Federal unemployment account advances (Note 8)...... 1,349,524 — — — Compensated absences (Note 8)...... — 450 1,028 131 Total noncurrent liabilities...... 1,349,524 450 26,035 712,140 Total Liabilities...... 2,467,538 59,708 82,126 810,154 Net Assets Invested in capital assets, net of related debt...... — 116 1,238 128,824 Restricted for: Capital outlay...... — — — — Unrestricted...... (1,701,066) 1,076,458 (1,238) (29,539) Total Net Assets...... $ (1,701,066) $ 1,076,574 $ — $ 99,285 The accompanying Notes to the Financial Statements are an integral part of this statement.
B-32 State of North Carolina
Exhibit B-3
Governmental Activities — Other Total Internal Enterprise Enterprise Service Funds Funds Funds
$ 35,370 $ 401,223 $ 116,829 73,581 75,731 23,968 17,069 140,453 9,966
3,219 66,456 11,694 — 238,949 — 27 5,442 32 2,383 2,383 2,391 — 362,268 — — 53,392 — — 5,007 24,243 — — 895 640 849 123 2,751 2,781 1,131 121 121 — 135,161 1,355,055 191,272
2,696 27,703 —
— 66,917 — — 729,042 — — 26,670 —
— 266,894 — 2,137 254,288 — 3,775 310,130 3,539 24,603 25,992 113,505 33,211 1,707,636 117,044 168,372 3,062,691 308,316
1,715 61,445 9,831 89 468 744 — 181,688 — 16,173 16,173 1,777 — 105,833 — 17,651 145,136 10,270 — 17,824 — 102 18,294 900 8,260 26,258 8,066 40 40 — — 2,150 — — 800,000 — 296 394 537 44,326 1,375,703 32,125
— 4,416 — — 18,279 — — 25,007 — — 68,800 — — 620,514 — — 1,349,524 — 3,242 4,851 5,491 3,242 2,091,391 5,491 47,568 3,467,094 37,616
28,378 158,556 117,044
2,231 2,231 — 90,195 (565,190) 153,656 $ 120,804 $ (404,403) $ 270,700
B-33 State of North Carolina STATEMENT OF REVENUES, EXPENSES AND CHANGES IN FUND NET ASSETS PROPRIETARY FUNDS
For the Fiscal Year Ended June 30, 2010 (Dollars in Thousands) Business-type Activities — Enterprise Funds Unemployment EPA N.C. State N.C. Compensation Revolving Loan Lottery Turnpike Fund Fund Fund Authority Operating Revenues: Employer unemployment contributions...... $ 976,839 $ — $ — $ — Federal funds...... 68,449 — — — Sales and services...... — 2,352 1,419,599 — Interest earnings on loans...... — 17,522 — — Rental and lease earnings...... — — — — Fees, licenses, and fines...... — — 4,763 — Insurance premiums...... — — — — Miscellaneous...... — — 96 — Total operating revenues...... 1,045,288 19,874 1,424,458 — Operating Expenses: Personal services...... — 4,639 15,299 1,968 Supplies and materials...... — 37 138 23 Services...... — 1,248 139,921 892 Cost of goods sold...... — — — — Depreciation/amortization...... — 16 583 16 Lottery prizes...... — — 835,302 — Claims...... — — — — Unemployment benefits...... 5,568,533 — — — Insurance and bonding...... — — 8 — Other...... — 707 2,638 658 Total operating expenses...... 5,568,533 6,647 993,889 3,557 Operating income (loss)...... (4,523,245) 13,227 430,569 (3,557) Nonoperating Revenues (Expenses): Noncapital grants...... 487,455 32,325 — — Noncapital gifts...... — — — — Investment earnings...... 1,093 8,949 2,702 4,121 Interest and fees...... — — — (1,268) Insurance recoveries...... — — — — Grants, aid and subsidies...... — (24,111) — — Gain (loss) on sale of equipment...... — — (16) — Federal interest subsidy on debt...... — — — 7,298 Federal recovery funds...... 2,650,290 45,348 — — Miscellaneous...... (28) (182) (50) (165) Total nonoperating revenues (expenses).. 3,138,810 62,329 2,636 9,986 Income (loss) before contributions...... and transfers...... (1,384,435) 75,556 433,205 6,429 Capital contributions...... — — — 7,715 Transfers in (Note 10)...... — 6,419 — 34,391 Transfers out (Note 10)...... (17,350) (429) (433,205) — Change in net assets...... (1,401,785) 81,546 — 48,535 Net assets — July 1, as restated (Note 24)...... (299,281) 995,028 — 50,750 Net assets — June 30...... $ (1,701,066) $ 1,076,574 $ — $ 99,285
The accompanying Notes to the Financial Statements are an integral part of this statement.
B-34 State of North Carolina
Exhibit B-4
Governmental Activities — Other Total Internal Enterprise Enterprise Service Funds Funds Funds
$ — $ 976,839 $ — — 68,449 18 1,208 1,423,159 300,723 — 17,522 — 6,211 6,211 26 50,249 55,012 25 16,320 16,320 18,697 1,183 1,279 296 75,171 2,564,791 319,785
35,916 57,822 69,864 1,244 1,442 14,659 15,827 157,888 119,832 347 347 434 1,413 2,028 25,907 — 835,302 — 7,096 7,096 492 23 5,568,556 — 5,136 5,144 21,726 3,699 7,702 53,932 70,701 6,643,327 306,846 4,470 (4,078,536) 12,939
446 520,226 661 304 304 — 10,500 27,365 4,180 — (1,268) — — — 122 — (24,111) — — (16) (181) — 7,298 — 18 2,695,656 — (547) (972) 250 10,721 3,224,482 5,032
15,191 (854,054) 17,971 56 7,771 188 1,900 42,710 5,759 (25,793) (476,777) (26,006) (8,646) (1,280,350) (2,088) 129,450 875,947 272,788 $ 120,804 $ (404,403) $ 270,700
B-35 State of North Carolina STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Fiscal Year Ended June 30, 2010 (Dollars in Thousands)
Business-type Activities — Enterprise Funds Unemployment EPA N.C. State N.C. Compensation Revolving Loan Lottery Turnpike Fund Fund Fund Authority Cash Flows From Operating Activities: Receipts from customers...... $ 892,958 $ 2,352 $ 1,323,356 $ — Receipts from federal agencies...... 39,204 — — — Receipts from other funds...... — — — — Payments to suppliers...... — (1,335) (42,980) (4,267) Payments to employees...... — (4,621) (15,433) (1,991) Payments for prizes, benefits, and claims...... (5,300,231) — (839,959) — Payments to other funds...... — — — — Other receipts...... — — 213 — Other payments...... — (664) (199) — Net cash flows provided (used) by operating activities...... (4,368,069) (4,268) 424,998 (6,258)
Cash Provided From (Used For) Noncapital Financing Activities: Grant receipts ...... 407,321 32,350 — — Federal recovery funds...... 2,559,602 45,333 — — Subsidy to other governments...... — (24,111) — — Advances from federal unemployment account ...... 2,294,296 — — — Payments to federal unemployment account ...... (873,545) — — — Advances from other funds...... — — — 4,021 Transfers from other funds...... — 6,419 — — Transfers to other funds...... (17,350) (429) (420,465) — Gifts...... — — — — Total cash provided from (used for) noncapital financing activities...... 4,370,324 59,562 (420,465) 4,021
Cash Provided From (Used For) Capital and Related Financing Activities: Acquisition and construction of capital assets...... — (52) (528) (204,225) Proceeds from the sale of capital assets...... — — — — Proceeds from capital debt...... — — — 672,367 Transfers from other funds...... — — — 34,391 Capital grants...... — — — 7,420 Capital contributions...... — — — — Interest paid on capital debt...... — — — (15,051) Federal subsidy for interest on debt...... — — — 3,341 Insurance recoveries...... — — — — Debt issuance costs paid...... — — — (10,823) Total cash provided from (used for) capital and related financing activities...... — (52) (528) 487,420
Cash Provided From (Used For) Investment Activities: Proceeds from the sale/maturities of non-State Treasurer investments...... — — — 449,807 Purchase of non-State Treasurer investments...... — — — (675,428) Purchase into State Treasurer investment pool...... — — — — Loan issuances...... — (112,445) — — Loan repayments — interest...... — 16,163 — — Loan repayments — principal...... — 48,459 — — Investment earnings...... 698 4,370 1,512 7,368 Total cash provided from (used for) investment activities...... 698 (43,453) 1,512 (218,253) Net increase (decrease) in cash and cash equivalents...... 2,953 11,789 5,517 266,930 Cash and cash equivalents at July 1, as restated...... 32,169 279,244 33,243 902 Cash and cash equivalents at June 30...... $ 35,122 $ 291,033 $ 38,760 $ 267,832
The accompanying Notes to the Financial Statements are an integral part of this statement.
B-36 State of North Carolina
Exhibit B-5
Governmental Activities — Other Total Internal Enterprise Enterprise Service Funds Funds Funds
$ 74,478 $ 2,293,144 $ 51,323 — 39,204 18 — — 276,751 (22,659) (71,241) (187,039) (35,855) (57,900) (69,439) (6,627) (6,146,817) (708) — — (22,760) 1,446 1,659 582 (698) (1,561) (1,101) 10,085 (3,943,512) 47,627
446 440,117 661 18 2,604,953 — — (24,111) — — 2,294,296 — — (873,545) — — 4,021 — 1,900 8,319 5,759 (25,793) (464,037) (26,006) 305 305 —
(23,124) 3,990,318 (19,586)
(249) (205,054) (17,195) — — 2,183 — 672,367 — — 34,391 — — 7,420 — 56 56 — — (15,051) — — 3,341 — — — 122 — (10,823) —
(193) 486,647 (14,890)
446 450,253 — — (675,428) — (1,725) (1,725) — — (112,445) — — 16,163 — — 48,459 — 593 14,541 580
(686) (260,182) 580 (13,918) 273,271 13,731 49,409 394,967 103,098 $ 35,491 $ 668,238 $ 116,829
Continued
B-37 State of North Carolina STATEMENT OF CASH FLOWS PROPRIETARY FUNDS For the Fiscal Year Ended June 30, 2010 (Dollars in Thousands)
Business-type Activities — Enterprise Funds Unemployment EPA N.C. State N.C. Compensation Revolving Loan Lottery Turnpike Fund Fund Fund Authority Reconciliation of Operating Income to Net Cash Provided From (Used For) Operating Activities: Operating income (loss)...... $ (4,523,245) $ 13,227 $ 430,569 $ (3,557) Adjustments to reconcile operating income to net cash flows from operating activities: Depreciation/amortization...... — 16 583 16 Interest earnings on loans classified as investing activity...... — (17,522) — — Restatements and adjustments…...... — — — — Nonoperating miscellaneous income (expense)...... — — 14 — (Increases) decreases in assets: Receivables...... (88,632) — (1,729) — Due from other funds...... (2,007) — — — Due from fiduciary funds...... — — — — Due from component units...... — — — — Inventories...... — — 85 — Prepaid items...... — — (198) — Increases (decreases) in liabilities: Accounts payable and accrued liabilities...... 159,004 4 (4,112) (2,697) Due to other funds...... (30) (11) — 3 Unemployment benefits payable...... 84,939 — — — Pollution remediation payable...... — — — — Compensated absences...... — 18 (181) (23) Unearned revenue...... 1,902 — (33) — Deposits payable...... — — — — Total cash provided from (used for) operations...... $ (4,368,069) $ (4,268) $ 424,998 $ (6,258)
Noncash Investing, Capital, and Financing Activities: Noncash distributions from the State Treasurer Long-Term Investment Portfolio and/or other agents...... $ — $ — $ — $ — Amortization of bond related costs………………………………...... — — — 945 Donated or transferred assets ...... — — — — Change in construction in progress as a result of accrual of accounts payable...... — — — — Capital asset write-off...... — — (6) — Assets acquired through the assumption of a liability...... 6,012 57,388 7,806 52,178 Change in fair value of investments...... (156) (1,794) (83) (538)
B-38 State of North Carolina
Exhibit B-5
Governmental Activities — Other Total Internal Enterprise Enterprise Service Funds Funds Funds
$ 4,470 $ (4,078,536) $ 12,939
1,413 2,028 25,907 — (17,522) — 445 445 (44) 47 61 287
384 (89,977) 99 — (2,007) 4,197 — — 3 — — 80 (112) (27) 30 1,642 1,444 939
1,310 153,509 (618) 17 (21) (656) — 84,939 — (250) (250) — 76 (110) 197 646 2,515 4,267 (3) (3) —
$ 10,085 $ (3,943,512) $ 47,627
$ 3,714 $ 3,714 $ 1,319 — 945 — — — 188
— — 93 (532) (538) — 17,160 140,544 11,313 4,242 1,671 1,193
B-39 State of North Carolina
STATEMENT OF FIDUCIARY NET ASSETS FIDUCIARY FUNDS June 30, 2010 Exhibit B-6 (Dollars in Thousands)
Pension and Other Employee Private- Benefit Investment Purpose Trust Trust Trust Agency Funds Fund Funds Funds Assets Cash and cash equivalents (Note 3)...... $ 683,451 $ 19,663 $ 118,961 $ 3,990,163 Investments (Note 3): U.S. government and agency securities...... 702,254 — 1,121 — Mortgage pass throughs...... 204,335 — — — Collateralized mortgage obligations...... 67,375 — — — Government bonds...... 33,833 — — — Asset-backed securities...... 20,539 — — — Repurchase agreements...... 2,300 — — — Corporate bonds...... 366,482 — — 3,905 Corporate stocks...... — — — 2 Certificates of deposit...... 5,261 — 61,308 325 Mutual funds...... 127,329 — — — State Treasurer investment pool...... 65,982,056 675,964 — 24,009 Non-State Treasurer pooled investments...... 3,600,649 — — — Securities lending collateral (Note 3)...... 4,623,283 111,724 142 684,638 Receivables: Taxes receivable...... — — — 96,600 Accounts receivable...... 19,890 — — 9,168 Interest receivable...... 11,135 2,830 1 — Contributions receivable...... 114,940 — — — Due from other funds (Note 10)...... 46,462 — — 17,820 Due from component units...... 10,289 — — — Notes receivable...... 207,704 — — — Sureties...... — — 893,207 95,534 Total Assets...... 76,829,567 810,181 1,074,740 4,922,164
Liabilities Accounts payable and accrued liabilities: Accounts payable...... 54,546 — — 585 Intergovernmental payable...... — — — 468,264 Benefits payable...... 5,465 — — — Obligations under securities lending...... 4,753,056 115,197 147 705,999 Deposits payable...... — — — 1,845 Funds held for others...... — — — 3,745,471 Total Liabilities...... 4,813,067 115,197 147 4,922,164
Net Assets Held in trust for: Employees' pension and other benefits...... 72,016,500 — — — Pool participants...... — 694,984 — — Individuals, organizations, and other governments...... — — 1,074,593 — Total Net Assets...... $ 72,016,500 $ 694,984 $ 1,074,593 $ —
The accompanying Notes to the Financial Statements are an integral part of this statement.
B-40 State of North Carolina STATEMENT OF CHANGES IN FIDUCIARY NET ASSETS FIDUCIARY FUNDS
For the Fiscal Year Ended June 30, 2010 Exhibit B-7 (Dollars in Thousands)
Pension and Other Employee Private- Benefit Investment Purpose Trust Trust Trust Funds Fund Funds Additions: Contributions: Employer...... $ 1,729,259 $ — $ — Members...... 1,484,348 — — Trustee deposits...... — — 160,705 Other contributions...... 36,312 — — Total contributions...... 3,249,919 — 160,705 Investment income: Investment earnings (loss)...... 8,687,069 22,392 3,972 Less investment expenses...... (316,507) (620) — Net investment income (loss)...... 8,370,562 21,772 3,972 Pool share transactions: Reinvestment of dividends...... — 21,772 — Net share purchases/(redemptions)...... — 90,456 — Net pool share transactions...... — 112,228 — Other additions: Fees, licenses, and fines...... 4,343 — — Miscellaneous...... 3,287 — 12,800 Total other additions...... 7,630 — 12,800 Total additions...... 11,628,111 134,000 177,477
Deductions: Claims and benefits...... 4,415,805 — — Medical insurance premiums ...... 577,647 — — Refund of contributions...... 116,688 — — Distributions paid and payable...... — 21,772 — Payments in accordance with trust arrangements...... — — 145,182 Administrative expenses...... 21,268 — — Other deductions...... 3 — — Total deductions...... 5,131,411 21,772 145,182 Change in net assets...... 6,496,700 112,228 32,295 Net assets — July 1, as restated (Note 24)...... 65,519,800 582,756 1,042,298 Net assets — June 30...... $ 72,016,500 $ 694,984 $ 1,074,593
The accompanying Notes to the Financial Statements are an integral part of this statement.
B-41
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B-42 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Financial Reporting Entity Discretely Presented Component Units - Major
The acco mpanying govern ment-wide financi al state ments The Golden LEAF (Long-term Economic Advancement present the Sta te of North Ca rolina and its component unit s. Foundation), Inc. The State of North Carolina, as primary government, consists of The Golden LEAF, Inc. (Foundation) is a leg ally separate all organizations that make up its legal entity. All funds, organi- not-for-profit corporation ordered to be create d by the Conse nt zations, agencies, boards, commissions, and authorities that are Decree and Fin al Jud gment in the State of N orth Carolina v s. not legally separate are, for financial reporting purposes, part of Philip Morris, e t al. The Foundation wa s established to receiv e the pri mary govern ment. The pri mary govern ment ha s a and distrib ute 50 percent o f the tobacc o settle ment fu nds separately elected governing b ody (the General Asse mbly) and allocated to North Carolina, such funds to be used t o provi de the pri mary govern ment must be bot h leg ally separate a nd economic i mpact a ssistance to e conomically affected or fiscally indepe ndent. Co mponent units are legally separ ate tobacco-dependent regions of North Carolina. The Foundatio n entities for which the State is financi ally accountab le. is governed by a 15-member board, all of wh om are a ppointed Accountability is defined as the State's substantive appointment by either the Governor, President Pro Tempore of the Senate, or of a majority of the co mponent unit's governing boa rd. the Speaker of the Hou se. The State assign ed 50 percent of i ts Furthermore, to be financially account able, t he State must be share of the settlement to the Foundation, cre ating a finan cial able to i mpose its will upon th e component unit or there must benefit/burden relationship. be a po ssibility that th e co mponent u nit may provide sp ecific financial ben efits to, or i mpose spe cific finan cial burden s on , University of North Carolina System the State. Financial accou ntability also exists w hen an The Board of Governors of the consoli dated University of organization is fiscally dependent upon th e State. The State’ s North Carolina (UNC) Sys tem is a l egally s eparate b ody, defined benefit pension plans, deferred compensation plans, and composed of 3 2 members ele cted by the G eneral A ssembly. other e mployee benefit plan s, being fiduciary in nature, wer e The Board of Governors establishes system-wide administrative not evalu ated as pot ential component u nits but inst ead are policies while budgetary deci sions are exerc ised at the Sta te reported as fiduciary funds. level. W ithin the co nsolidated Sy stem are UN C-General Administration, which is the administrative arm of the Board of The State’s component unit s are either blended or Governors; the 16 constituent universities; a constituent hi gh discretely presented. The bl ended co mponent unit is so school; an d the University of North Carolina Health Care intertwined wit h the State that it is, in substa nce, the sa me as System (U NCHCS). Each of the 16 universities and th e hi gh the State and, therefore, is reporte d as if it was part of the State school, in turn, is governed by its own separate board of trustees primary govern ment. The “ Component Unit s” colu mn in th e that is resp onsible for the operations of th at ca mpus onl y. accompanying financial st atements in cludes the financial data UNCHCS i s governed by a separat e bo ard of directors. of the State’ s discretely presented component units. They ar e Funding for t he UN C Sy stem is acc omplished by State combined and reported in a separate column in the government- appropriations, tuition and fees, sal es a nd service s, fede ral wide financial statements to em phasize their legal separateness grants, state grants, and private donations and grants. from the State. Also i ncluded i n the Sy stem are the finan cial data of the universities’ significant fund-raising foundatio ns (and si milarly Blended Component Unit affiliated organization s). Although the uni versities do not control the timing or amount of receipts from their foundations, The North Carolina Infrastructure Finance Corporation the majority of resourc es (or inco me t hereon) that t he The North Carolina Infrastru cture Finan ce Corporation foundations hold and invest are restricted to the activities of the (Corporation) was created b y the General Asse mbly an d respective uni versities by the donors. Because the se re stricted organized a s a separat e not -for-profit corporation. It is resources held by the foundati ons can only be used by , or for managed by a three- member board a ppointed by the St ate the benefit of, the specific u niversities, the foundations a re Treasurer. The Corporation i s authorized t o i ssue tax-ex empt considered component units of the universities and are included debt to fin ance the acq uisition, constru ction, repair a nd in the univer sities’ financial statements. The foundation s ar e renovation of State facilitie s and relat ed inf rastructure. T he private not-for-profit organizat ions that re port under Financi al debt obligati ons are secured by lease-purch ase agreements or Accounting Standards Board pronouncements. As such, certain installment financing contract s with th e State, which constitute revenue recog nition criteria and present ation features are the imposition of a financial burden on the State. The substance different from that of the Govern mental Accounting Standards of the financing agreements is that the assets a nd debt are those Board. The foundation s’ financial stat ement form ats w ere of the State (lessee). The Corporation is reported with the modified to make th em co mpatible with the uni versities’ State’s governmental funds since it provides services entirely to financial statement formats. the State.
B-43 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
The following constitu ent inst itutions co mprise the UN C The following are the State’s 58 community colleges: System for financial reporting purposes: Alamance Comm. College Asheville-Buncombe Technical Comm. College UNC General Administration Beaufort County Comm. College Bladen Comm. College Appalachian State University Blue Ridge Comm. College Brunswick Comm. College East Carolina University Caldwell Comm. College and Tech. Institute Cape Fear Comm. College Elizabeth City State University Carteret Comm. College Catawba Valley Comm. College Fayetteville State University Central Carolina Comm. College Central Piedmont Comm. College North Carolina Agricultural and Technical State University Cleveland Comm. College Coastal Carolina Comm. College North Carolina Central University College of The Albemarle Craven Comm. College North Carolina State University Davidson County Comm. College Durham Technical Comm. College University of North Carolina at Asheville Edgecombe Comm. College Fayetteville Technical Comm. College University of North Carolina at Chapel Hill Forsyth Technical Comm. College Gaston College University of North Carolina at Charlotte Guilford Technical Comm. College Halifax Comm. College University of North Carolina at Greensboro University of North Carolina at Pembroke Haywood Comm. College Isothermal Comm. College University of North Carolina at Wilmington James Sprunt Comm. College Johnston Comm. College University of North Carolina School of the Arts Lenoir Comm. College Martin Comm. College Western Carolina University Mayland Comm. College McDowell Technical Comm. College Winston-Salem State University Mitchell Comm. College Montgomery Comm. College University of North Carolina Health Care System Nash Comm. College Pamlico Comm. College North Carolina School of Science and Mathematics Piedmont Comm. College Pitt Comm. College Randolph Comm. College Richmond Comm. College Community Colleges Roanoke-Chowan Comm. College Robeson Comm. College There are currently 58 co mmunity colleges loc ated Rockingham Comm. College Rowan-Cabarrus Comm. College throughout the State of North Carolina. Each is a separate com- Sampson Comm. College Sandhills Comm. College ponent unit of the reporting entity and is legally separate. Th e South Piedmont Comm. College Southeastern Comm. College State doe s n ot appoint a votin g majority of each community Southwestern Comm. College Stanly Comm. College college b oard of trustee s. H owever, the St ate is financial ly Surry Comm. College Tri-County Comm. College accountable for these instituti ons beca use the State Board of Vance-Granville Comm. College Wake Technical Comm. College Community Co lleges (th e Bo ard) approves the budgeti ng of Wayne Comm. College Western Piedmont Comm. College state and federal funds, the associated bu dget revisions, and the Wilkes Comm. College Wilson Comm. College selection of the chief administrative officer o f each individu al community college. The Boar d is co mprised of state official s or their ap pointees. Each c ommunity coll ege i s similar in North Carolina Housing Finance Agency nature and function to all of the others, and the operations of no The North Carolina Hou sing Finance Agency (Agency) is single community college are considered major in relation t o a legally sep arate organiz ation esta blished to ad minister the operations of all community colleges in t he system. There- programs to finance ho using opportunitie s for low an d fore, aggregated financial infor mation is present ed in thi s moderate inc ome i ndividuals. The Agency has a 1 3-member CAFR for all community colleges. board of directors, with 12 ap pointed by either the Governor or the General Assembly. The 13th member is elected by the other The aggreg ated financial in formation for co mmunity 12. The Agenc y’s mission is defined in its authorizing statute, colleges also i ncludes the financial dat a of the institutio ns’ which i s modified or expan ded fro m ti me to ti me by th e significant fun d-raising found ations. Althoug h the co mmunity General Assembly. The General Assembly also appropriat es colleges do not control the timing or a mount of receipts fro m funds that assi st the Agency in its mission to finance housi ng their foundations, the majority of resources (or income thereon) for very low income individuals and those with special needs. that the foundations hold an d invest are restricted to th e activities of the respectiv e co mmunity colleges by the dono rs. State Education Assistance Authority Because these restricted resources held by the foundations can The State Educ ation Assistance Authority (Authority) is a only be used by , or for the be nefit of, the sp ecific community legally separat e authority created to provi de a sy stem of colleges, the foundations are considered component units of the financial a ssistance, con sisting of grants, loa ns, work-study or community co lleges and are includ ed in the co mmunity other e mployment, and other aids, t o quali fied stud ents t o colleges’ financial statements. The foundation s are privat e not- obtain an educ ation beyond the high school l evel by attending for-profit organizations that report under Financial Acco unting public or priv ate educ ational institution s. The Authority is Standards Board pronounce ments. As such, certain revenu e governed by a seven-member board of direct ors, all of who m recognition criteria and presen tation features are different fro m are app ointed by the Gov ernor. The State provides progr am that of the Go vernmental A ccounting Sta ndards Board. The subsidies to the Authority; therefore, a financi al benefit/burden foundations’ financial statement formats were modified to make relationship exists between the State and the Authority. them co mpatible with the co mmunity colleges’ finan cial statement formats.
B-44 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
State Health Plan The North Carolina Partnership for Children, Inc. The State Health Plan (Plan) is a legally separate The North Carolina Partners hip for Children, Inc. organization established t o provide medical ben efits to (Partnership) is a legally sepa rate organizatio n establi shed to employees and retirees of the State, most of its co mponent develop and oversee a comprehensive long-range strategic plan units, and loca l boards of ed ucation that ar e not part of the for high-quality early childhood education and development. A reporting entity. The Plan is governed by a nine-member board 26-member board governs the Partnership. Certain elected state of trustees, all of whom are appointed by either the Governor or officials appoint 22 of the members, while three members serve the General A ssembly. Provi sions and contr ibution rates ar e ex officio by virtue of their state positions and one serves as the approved by the Ge neral A ssembly, with t he State making Director of the More at F our Pre-Kindergarten progra m. Th e significant contributions as an employer and through its funding State provides significant operating subsidies to the Partnership, of local boards of education. creating a financial benefit/burden relationship.
Discretely Presented Component Units - Other Regional Economic Development Commissions: North Carolina’s Northeast Commission North Carolina Global TransPark Authority North Carolina’s Northeast Commission (Commission) is a The North Carolina Glo bal TransP ark Authority legally separat e organiz ation created to fa cilitate e conomic (Authority) is a legally separate authority created to ad minister development in the 16 counti es in northea stern North Carolin a. the develop ment of the North Carolina Glob al TransPark. Of The Co mmission consi sts of 18 members, with six members the 20-member governing board, 19 are voting members. Seven appointed by the Gov ernor, six by the Spea ker of the Ho use, of the voting members are appointed by the Governor and six and six by the Preside nt Pro Te mpore of the Senat e. The are appointed by the General Assembly. The State has obligated Secretary of Co mmerce serve s as an e x-officio member. The itself to provid e significant funding to the Authority; therefore, State provides significant program and operating support to the a financial benefit/burden relationship exists between the St ate Commission, creating a financial benefit/burden relationship. and the Autho rity. Also incl uded in t he A uthority are th e financial dat a of its discret ely presented co mponent unit, the Southeastern North Carolina Regional Economic North Carolina Global TransPark Foundation. Development Commission The Southeast ern North Ca rolina Regiona l Econo mic North Carolina State Ports Authority Development Commission (Co mmission) is a legally sep arate The North Car olina State Port s Authority (Authority) is a organization created to build economic strength in southeastern legally separate authority established to op erate the State's port North Carolina. The Commission consists of 15 members, with facilities in Wil mington and Morehead City and in land three app ointed by the Go vernor, two b y the Lieuten ant terminals in Charlotte and Greensboro. It is governed by an 11- Governor, five by the Spe aker of the H ouse, and five by th e member board , all of whom are appointed by either th e President Pro Te mpore of the Senate. The State provide s Governor or th e Gen eral A ssembly. The State ha s o bligated significant prog ram and operat ing support to the Co mmission, itself to provid e significant funding to the Authority; therefore, creating a financial benefit/burden relationship. a financial benefit/burden relationship exists between the St ate and the Authority. Western North Carolina Regional Economic Development Commission North Carolina Railroad Company The Western North Carolina Regio nal Econo mic The North Carolina Railro ad Co mpany (Railroad) is a Development Commission (Co mmission) is a legally sep arate legally separat e, for-profit corporation own ed by the State f or organization c reated to i mprove econ omic opportunity in the purpose of pro moting tra de, industry , a nd transportati on western North Carolina with sensitivity to the resources of that within North Carolina and advancing the economic interests of region. The Co mmission con sists of 19 members, with seve n the State. The Railroad i s governed by a 13-m ember board, all appointed by the N.C. Hou se of Representatives, seven by the of who m are e lected by shares hel d by the State. A fina ncial N.C. Senate, th ree by the Gov ernor, and two by the Lieutena nt benefit/burden relationship ex ists between t he State and t he Governor. The State provides significant program and operating Railroad. Also, the State is financially accou ntable sin ce th e support to the Commission, creating a financi al benefit/burden State’s intent i n owning the Railroad’s stoc k is to directl y relationship. enhance the State’s ability to provide governmental services. North Carolina Health Insurance Risk Pool, Inc. North Carolina Agricultural Finance Authority The North Car olina Health I nsurance Ri sk Pool (Pool), The North Carolina Agric ultural Financ e Authority doing bu siness as Inclu sive Health, is a le gally separate non- (Authority) is a legally separate authority created to ad minister profit organiz ation creat ed to provide affordable h ealth the financing of loans to far mers and agribusiness at reasonable insurance cove rage for North Carolinian s w ho do not hav e terms and int erest rate s. The Authority is governed by a 10- access to a n e mployer he alth plan and fa ce higher in surance member board, one of wh om is a state official and nine of premiums b ecause of a pre-e xisting medical condition. Th e whom are appointed by either the Gov ernor or the Gen eral Pool is governed by a 12-member board. The Commissioner of Assembly. A financial be nefit/burden r elationship exists Insurance serves a s an ex-o fficio, nonvoting member, on e between the State and the Authority. member is app ointed by the Governor, two by the General Assembly, and eight by the Commissioner of Insuran ce. Th e
B-45 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
State ha s oblig ated it self to pr ovide significant funding to t he Complete financial st atements for the following Pool, creating a financial benefit/burden relationship. component un its c an b e obtained fro m the re spective administrative offices of those units listed below:
Rural Economic Development Center, Inc. The Rural Economic Development Center, Inc. (Center) is The Golden LEAF, Inc. NC Housing Finance Agency a legally separate organizatio n establi shed t o build econo mic 301 North Winstead Avenue P.O. Box 28066 strength in the State’s 85 rural counties, with a spe cial focus on Rocky Mount, NC 27804 Raleigh, NC 27611-8066 creating ec onomic opportunit ies for individ uals wit h low to State Education Assistance Authority North Carolina Railroad Company moderate incomes and communities with limited resources. The P.O. Box 14103 2809 Highwoods Boulevard, Suite 100 Center i s gov erned by a 50- member board of directors. Thre e Research Triangle Park, NC 27709-4103 Raleigh, NC 27604-1000 members are a ppointed by the Governor, thre e by the Spea ker of the Ho use, and three by the Presid ent Pro Te mpore of th e North Carolina’s Northeast Commission Southeastern NC Regional Economic Senate. The o ther members are elected by the board of 119 West Water Street Development Commission directors. The State ha s oblig ated it self to p rovide significant Edenton, NC 27932 P.O. Box 2556 funding to the Center, creatin g a financial b enefit/burden rela- Elizabethtown, NC 28337 tionship. Western NC Regional Economic Rural Economic Development Development Commission Center, Inc. North Carolina Biotechnology Center 134 Wright Brothers Way 4021 Carya Drive The North Carolina Bi otechnology Center ( Center) i s a Fletcher, NC 28732 Raleigh, NC 27610 legally sep arate nonprofit corporation cre ated to further economic development in No rth Carolina th rough educati on, North Carolina Biotechnology Center research, and c ommercial dev elopment in biotechnology. The P.O. Box 13547 Center is governed by a 38-member board. Twelve of the board Research Triangle Park, NC 27709-3547 members are a ppointed by the Governor or General Asse mbly; four serve as a result of their positions with the UNC System, a The North Carolina Infrastructure Finance Corporation component unit of the St ate; two serve e x officio by virtue of and the State Health Plan do not issue separate financial their state positions; and two serve ex officio by virtue of their statements. positions with private universities. The Presid ent of the Cent er serves as an ex officio member. The other members are elected by the board of directors. The State ha s provided signific ant funding to the Center since its inception; therefore, a financi al benefit/burden relationship ex ists between t he State and t he Center.
Availability of Financial Statements
Complete financial statements for the following component units can be o btained fro m t he Office of th e State Auditor, 2 South Sali sbury Street, 20601 Mail Service Center, Raleigh, N.C. 2769 9-0601 or c an b e accessed fro m the Office of t he State Auditor Internet home page at www.ncauditor.net.
Constituent institutions in the UNC System Community colleges North Carolina State Ports Authority The North Carolina Partnership for Children, Inc. North Carolina Agricultural Finance Authority North Carolina Global TransPark Authority North Carolina Health Insurance Risk Pool, Inc.
B-46 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
B. Basis of Presentation The state ment of activities demonstrates t he degree to which th e dire ct expe nses of a giv en functi on or identifia ble The acco mpanying financial state ments of t he State of activity are offset by progra m revenue s. Dir ect exp enses a re North Carolina financial reporting entity have been prepared in those th at are clearly asso ciated with a sp ecific function or accordance with generally accepted accounting principles in the identifiable activity. Certain charges to other funds or programs United St ates of A merica (“ GAAP”) as applicable to for “centralized” expenses also include an overhead markup that governments. The Governmental Accounting Standards Board is includ ed in direct expe nses. Progra m reve nues in clude ( a) (GASB) e stablishes sta ndards of financial accounting and charges t o cu stomers or app licants who p urchase, u se, or reporting for state and lo cal governmental entities. Priva te directly benefit from goods, services, or privileges provide d by sector standards of accounting and financial reporting issued on a given functio n or identifiable activity (including fees, fines or before November 30, 1989 generally are followed in both the and forfeitures and certain grants and contracts t hat ar e government-wide and propriet ary fund financial state ments to essentially co ntracts for services) an d (b) grants and the extent tho se pronoun cements do not conflict with or contributions t hat are re stricted to meeting the operatio nal or contradict GASB pronouncements. Governments also have the capital re quirements of a pa rticular progra m or ide ntifiable option of following subsequent private-sector guidance for their activity (including restricted i nvestment earn ings or losses) . business-type activities and enterprise fund s, subj ect to this Revenues that are not classified as program revenues, including same limitation. The State has elected not to follow subsequent all taxes, are presented a s general reve nues. Unre stricted private-sector g uidance. The fi nancial statements of the Nort h resources int ernally dedicated by the State’ s governing bo dy Carolina Railroad Company, a for-profit corporation, the Rural (General Assembly) are reported as general revenues rather than Economic D evelopment Center, Inc., and the North Carolina as progra m re venues. The S tate does not allocate general Biotechnology Center (di scretely presented component uni ts) government (indirect) expenses to other functions. have been prepared in accordance with FASB pronouncements. Fund Financial Statements The financial statements are presented a s of and for the fiscal y ear end ed Jun e 30, 2 010, except fo r the USS Nor th The fund finan cial stat ements provide infor mation abo ut Carolina Battleship Commission whose statements are as of and the State's fu nds, includin g its fiduciary funds. Separ ate for the fiscal year ended Sept ember 30, 2009, and the North statements for each fund category—governmental, proprietary, Carolina Deferred Compensation Plan, the 401(k) Supplemental and fiduciary —are pre sented. The e mphasis of fund fin ancial Retirement Inco me Plan, and the North Carolina Railroad statements i s on major govern mental an d major enterpr ise Company whose stat ements ar e as of and for the fiscal y ear funds, eac h di splayed in a separate c olumn. All re maining ended December 31, 2009. governmental and enterprise fu nds are aggrega ted and reported as nonmajor funds. The basic fina ncial state ments include both govern ment- wide (base d on the State as a whole) and fund financial The State reports the following major governmental funds: statements as follows: General Fund
Government-wide Financial Statements This is the Stat e’s pri mary operating fund. It account s for all financial resources of the general government, except those required to be accounted for in another fund. The statement of net asset s and the state ment of activities display infor mation on all t he nonfiduci ary activitie s of t he Highway Fund primary gover nment (the St ate) and it s c omponent units. This fund acc ounts for most of the activities of the Fiduciary activ ities are e xcluded fro m th e government-wide Department of Transportation , including the constructio n statements be cause they canno t be used to su pport the State’s and maintenance of the Stat e’s primary and secondary road own progra ms. As a general rule, the effect of interfu nd systems. I n a ddition, it sup ports ar eas su ch as the N.C. activity has been eli minated fro m the government-wide Ferry S ystem, the Divi sion of Motor Vehicles, public financial statements. Exc eptions t o thi s general rule are transportation, and railroad o perations. The fund provide s interfund services provided and used bet ween functions. revenue to other State agencies to support initiatives such as Elimination of these c harges would misstate both the expe nses the State Highway Patrol a nd driver’s ed ucation. The of the purcha sing function and the progra m revenue s of t he principal rev enues of the Highway Fund are motor fuel s selling functio n. These stat ements di stinguish betw een t he taxes, motor ve hicle regi stration fees, driver's licen se fe es, governmental and bu siness-type activities of the St ate. and federal ai d. A portion of the motor fuels taxe s i s Governmental activitie s gener ally are financed through tax es, distributed to municipalities for local street projects. intergovernmental revenue s, and other nonexch ange transactions. Business-type activities are financed in whole or in Highway Trust Fund part by fees ch arged to ext ernal parties. Like wise, the pri mary This fund was established by legislation (Chapter 692 of government is r eported separately from certain legally separate the 1989 S ession Laws) to p rovide a de dicated funding component un its for whi ch the pri mary govern ment is mechanism to meet highw ay constructi on ne eds for North financially accountable. Carolina. Tax es were i ncreased for the specific purpo se o f improving identified primary transportation corridors within the State and for the co mpletion of urba n loops around
B-47 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
seven major m etropolitan a reas. Addition ally, this fund of the State and its co mponent unit s, or to other provides su pplemental allocations for secondary road governments, on a cost-reimbursement basis. construction an d suppl emental assist ance to municipalities for local street projects. The fund also makes transfers to the Pension and Other Employee Benefits Trust Funds General Fund and the Highway Fund. The principal These fun ds ac count for re sources h eld in trust for th e revenues of the Highway Trust Fund are high way use taxes, members and beneficiaries of the State’s d efined benefit motor fuels taxes, and various title and registration fees. pension plans, Internal Revenue Code (IRC) Section 401(k) plan, IRC S ection 457 pl an, other defined contributio n The State reports the following major enterprise funds: plans, death benefit plan, disability income plan, and retiree health benefit fund. Unemployment Compensation Fund This fund a ccounts for th e State’s une mployment Investment Trust Fund insurance prog ram, which i s part of a national sy stem This fund a ccounts for th e external p ortion of the established to provide te mporary benefit pay ments to Investment Po ol spon sored by the Departm ent of State eligible un employed workers. The une mployment ben efits Treasurer and individual in vestment acc ounts held by the are financed p rimarily by State une mployment insuran ce Department of State Treasurer for public hospitals that are taxes, di stributions of federa l une mployment insuran ce not part of the State reporting entity. taxes, and federal funding for t he unemployment benefits of civilian and military employees. During fiscal year 2010, the Private-purpose Trust Funds unemployment benefits were also fina nced by repay able These fu nds a ccount for re sources held in trust for advances fro m the F ederal Unemployment Acc ount and insurance car riers, desig nated ben eficiaries by the federal recover y funds. The une mployment t axes collected Administrative Office of the Courts, and other depart mental from employers are transferred to the United States Treasury trust funds in which the principal and in come benefit and depo sited into North Carolina’s Unemployment individuals, private organizations, or other governments. Insurance Trust Fund. Agency Funds N.C. State Lottery Fund These fund s ac count for sales tax collection s held on This fund accounts for th e activitie s of the N. C. behalf of loc al govern ments, resourc es held by the Education Lottery Commission. The net profits of the fund Administrative Office of th e Court s for distribution to are transferred periodically to the Education L ottery Fund, a designated be neficiaries, the Investment Po ol’s se curities nonmajor special revenue fund. lending assets and li abilities allo cated to participating component uni ts, insuranc e c ompany receiv ership a ssets, EPA Revolving Loan Fund and other re sources held by the State i n a purely custodial This fund acco unts for the activities of the State’s clea n capacity for i ndividuals, private organizati ons, or other water and drin king water rev olving loan pr ograms, whic h governments. Insurance co mpany receivership assets are provide low co st loans to unit s of local go vernment for th e held by the Commissioner of Insurance excl usively in hi s construction of wa stewater f acilities and d rinking wat er capacity as Receiver. These assets b elong to insuranc e infrastructure. These programs are finance d pri marily by companies and other entities in receivership and are not the federal capit alization grant s fro m th e United Stat es property of the State. Environmental Protection Age ncy (EPA), interest earning s on loans, loan repay ments, and State fun ds (i.e., bond proceeds and State appropriations). C. Measurement Focus and Basis of Accounting North Carolina Turnpike Authority
This fund ac counts for the activitie s of the North Government-wide, Proprietary, and Fiduciary Fund Carolina Turnpike Authority (Authority), which was created Financial Statements to study , design, plan, construct, finance, and operate a
system of toll roads, bridge s, and/or tunnels supplementing The govern ment-wide, proprietary , and fid uciary fund the traditional non-toll transportation serving the citizens of financial statements are reported using the economic resources the State. Effective July 2009, the Gener al Asse mbly measurement focus and the accrual basis of a ccounting, except enacted le gislation that transfe rred the functions and fund s for agency fun ds which do n ot have a measurement focu s. of the Authority to the Department of Transportation. Revenues are recorded whe n earned and expe nses are record ed Additionally, the State reports the following fund types: at the ti me liab ilities are incur red, regardless of the ti ming o f related cash flows. Internal Service Funds These funds account for workers compensation and state Lottery games are sold to the public by contracted retailers. property fire insurance coverages, motor fleet management For Powerball, revenue i s recognized at the ti me of sal e. Fo r services, mail s ervices, tem porary s taffing s ervices, instant games, revenue is re cognized at th e ti me a pac k of computing and teleco mmunication servi ces, and surplu s tickets i s settled. For Powerb all, prize expen se is recorded at property services provided to other depart ments or agencie s fifty percent of s ales. For in stant ga mes, prize exp ense is accrued based on the final production prize structure percentage
B-48 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
provided by the gaming vendor for each game and recorded on rebate liabiliti es, which are re cognized a s ex penditures wh en the value of packs settl ed. For instant ga mes with prize ticke ts, payment i s due . Pension c ontributions to cost-sharing pen sion the final prize structure percent age used is adjusted to eliminate plans are recognized as expenditures in the period to which the the value of the prize tickets. payment relates, even if payment is not due until the subsequent period. Nonexchange transactions, in which the State receives (or gives) value without directly giving (or receiv ing) equal value D. Cash and Cash Equivalents in exchang e, include tax es; fines and fo rfeitures; grant s, entitlements, a nd si milar ite ms; an d don ations. Recogniti on standards are based on the char acteristics and classe s of This cl assification inclu des u ndeposited re ceipts; petty nonexchange transactions. Income taxes, sales taxes, and other cash; deposits held by the St ate Treasurer i n the Short-ter m similar tax es o n earning s or consumption are recogni zed as Investment por tfolio (see No te 3); a nd d emand and ti me revenues, net of estimated refunds and uncollectible amounts, in deposits with private financial instit utions, excludi ng the acc ounting period w hen the u nderlying exchan ge certificates of deposit. Th e S hort-term Inv estment portfoli o transaction has occurred. Franchise taxes, other taxes, and fines maintained by the State Treasurer has the general characteristics and forfeitures are recognize d as revenu es, net of esti mated of a de mand d eposit acc ount in that participants may depo sit refunds and uncollectible a mounts, in the accounting p eriod additional cash at any time and also may withdraw cash at any when an enforceable legal claim to the assets arises and the use time without prior notice or penalty.
of resources is required or is firs t per mitted. Grants , entitlements, and donations are recognized as revenues, net of E. Investments estimated unco llectible am ounts, as soon as all eligibili ty requirements i mposed by the provider ha ve been met, if This classificat ion includes d eposits held b y the State probable of c ollection. A mounts receiv ed b efore all eligibilit y Treasurer in ce rtain investment portfolios (se e Note 3) as w ell requirements have been met are reported as deferred revenues. as inve stments held separat ely by the State and its co mponent Grants and similar aid to other organization s are recognize d as units. Investments are generally reported at fair value. Land a nd expenses a s soon a s re cipients have met all eli gibility other real esta te held as invest ments by endow ments a re requirements. Amounts paid before all eli gibility requirements reported at fai r value, co nsistent with how inve stments a re have been met are reported as prepaid items. generally reported. Additional investment valuation information is provide d in Note 3. The n et increase (decr ease) in the fai r Governmental Fund Financial Statements value of inve stments i s re cognized a s a co mponent of investment income. Governmental funds are r eported u sing the current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current F. Securities Lending assets and liabilities are generally included on the balance sheet. The operating state ment presents increases (re venues and oth er Cash received as collatera l on securities lendin g financing sources) a nd de creases (ex penditures an d oth er transactions are reported a s assets in th e acco mpanying financing use s) in spendable r esources. Gen eral capital asset financial stat ements. A corre sponding liabili ty is also reported acquisitions ar e reported as expenditures and proceed s of for the a mount owed to the broker at the t ermination of t he general long-term debt are reported as other financing sources. agreement. Inv estments purch ased with ca sh collateral ar e generally measured at fair value. Certain component units of the Under the modified accrual ba sis of accounti ng, revenues State deposit funds with the State Treasurer’s Investment Pool, are recognized when both measurable and available. Generally, which particip ates in secur ities lending activities. The the State considers revenues reported in the governmental funds component uni ts’ po sition in the pool and related securities to be available if they are collected within 31 days after year- lending a ssets and liabilitie s are reported in an agency fund. end. Exceptions are individual i ncome tax revenues and federal Additional disc losures ab out t he State Treasurer’s securitie s and county funds accrued for the matching share of medicaid lending transactions are provided in Note 3. claims payable, which the State considers to be available if they are collected within 12 months after y ear-end. Furthermore, in the circu mstance where underpayments ex ceed overpay ments, G. Receivables and Payables individual income tax revenues are recogniz ed to the extent of estimated ov erpayments (i.e., refunds payable and applie d Receivables in all funds represent amounts that have arisen refunds). Princi pal reven ue sources con sidered su sceptible t o in the ordinary course of b usiness and ar e shown net of accrual include taxes, federal funds, local funds, and investment allowances for uncollectible amounts. earnings. Oth er revenue s are c onsidered to be measurable an d available only when cash is received by the State. Activity betw een fund s th at are repre sentative of lending/borrowing arrange ments out standing at the end of th e Expenditures are recorded when the related fund liability is fiscal y ear are referred to as either “ due to/due fro m ot her incurred, except for principal a nd interest on g eneral long-term funds” (i.e., current portion o f interfund loa ns) or “ advances debt, claims and judgments, compensated absences, obligations to/from other f unds” (i.e., the non-current portion of interfu nd for workers’ compensation, pollution remediation, and arbitrage loans). All other outstanding balances between funds related to
B-49 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
services provid ed and used, re imbursements, and transfers ar e The State highway network constructed prior to July 1, 2001 is classified as “ due to/du e fro m other fund s.” Any residu al recorded at estimated hi storical co st. Since July 1, 2001 t he balances outstanding bet ween the gov ernmental activiti es an d State highway network is recorded at cost. The initial estimated business-type activities are re ported in the government-wide historical c ost of the netw ork is ba sed on con struction financial statements as “internal balances.” expenditures reported by the Department of Transportation less amounts esti mated for the c ost of right-of-way s and lan d In the fund fin ancial statements, adva nces be tween fun ds improvements. The cost of norm al maintenance and repairs that (and to co mponent units) and notes receivab le are offset by a do not add t o the value of th e asset or materially extend i ts reserve ac count in applicable governmental funds to indi cate useful life are not capitali zed. Donated c apital asset s ar e that they are not available for appropriation and are not recorded at their estimated fair value at the date of donation. expendable available financial resources. Generally, capital asset s are defined by the State an d component unit s as a ssets with an initial val ue or cost grea ter H. Inventories and Prepaid Items than or equal to $5,000 and an esti mated useful life of two or more y ears, ex cept for internally generated co mputer softwa re The inventorie s of th e Stat e and component units are and other int angible a ssets, which are capi talized w hen t he valued at co st using either th e first-in, first-out, last inv oice value or co st i s gre ater tha n or equal to $ 1 million and $1 00 cost, or a verage co st method. These i nventories c onsist of thousand, respectively. general supplies and materials. Institutions of the UNC System and co mmunity college s al so use the se v aluations alon g wit h The value of asset s constructed by th e State an d it s the retail inventory method for some bookstore operations. The component units for their own use include s a ll material dire ct State High way Fund (sp ecial revenue fund) account s for i ts and indirect construction costs that are increased as a re sult of maintenance and construction inventories using the average cost the con struction. In proprieta ry funds and component uni ts, method. interest costs incurred (if material) are c apitalized during t he period of construction. Inventories of governmental funds, proprietary funds, and component units are recorded as expen ditures when consu med The depreciati on methods a nd esti mated useful live s rather than when purchased. In the fund fin ancial stat ements, generally used by the State and its co mponent units are as inventories are offset by a fund balan ce re serve a ccount in follows: applicable gov ernmental fund s to indicate t hat they are n ot available for a ppropriation an d are not expendable available Estimated financial resources. Asset Class Method Useful Life Buildings ...... Straight-line 10-100 years In govern mental fund s, prep aid ite ms are recorded a s Machinery and expenditures when purchased and balances of prepaid items are Equipment ...... Straight-line 2-30 years not reported as assets. Units of output for motor vehicles 90,000 miles Art, literature, and I. Restricted/Designated Assets other artifacts ...... Straight-line 2-25 years General infrastructure ...... Straight-line 10-75 years In the govern ment-wide and enterprise fu nd financial State highway network ...... Composite 50 years statements, c ertain resourc es are reported as restricted a ssets Computer software ...... Straight-line 2-30 years because restrictions on asset use chang e the nature or nor mal Other intangible assets ...... Straight-line 2-100 years understanding of the av ailability of the asse t. The followin g resources are not availa ble for current operations and a re For the State hi ghway network, depreciation i s based on a reported a s r estricted asset s: 1) re sources re stricted or weighted average of the e stimated u seful li ves of di ssimilar designated for t he acquisition/construction of t he government’s assets in th e n etwork (e.g., subsurface foun dations, roadw ay own capit al a ssets, 2) re sources l egally se gregated for t he surfaces, bridges, traffic control device s, gua rdrails, markings, payment of principal and interest as required by debt covenants, signage, etc.). 3) te mporarily investe d debt p roceeds, and 4) nonexpend able resources of permanent funds. K. Tax Refund Liabilities
J. Capital Assets Tax refund liab ilities consist primarily of accrued inco me and sales an d use t ax refund s du e to t axpayers. During t he Capital a ssets, which in clude property, plant, equip ment; calendar y ear, the State coll ects e mployee withholding s a nd easements; an d infrastructur e asset s (e.g., State hig hway taxpayers’ pay ments for i ncome taxe s. At June 30, th e St ate network, utility systems, and similar items), are reported in t he estimates the amount it ow es taxp ayers for inco me ta x government-wide financial st atements and t he fund finan cial overpayments during the prec eding six months. Sale s and use statements for proprietary funds. Purch ased or con structed tax refund liab ilities are al so esti mated at June 30. The se capital a ssets are reported at cost or e stimated historic al co st. liabilities are recorded as “Tax refunds payable.”
B-50 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
L. Compensated Absences In the fund fin ancial statements, governmental fund ty pes recognize debt premiums, as well as debt issuance costs, during Employees of the State and component units are permitted the current period. The face a mount of the debt issue d and to accu mulate earned but unu sed va cation p ay benefits. All premiums rece ived are reported as other financing source s. vacation pay is accrued when incurred in the govern ment-wide Issuance co sts, whether or not withheld from the actu al and proprietar y fund financial statements. Al so, whe n proceeds received, are reported as debt service expenditures. determining th e vacation p ay liability due within one y ear, leave is considered taken on a last in, first out (LIFO) basis. In N. Sureties governmental funds, a liabilit y for these a mounts i s report ed
only as payments come due each period upon the occurrence of Sureties inclu de various a ssets, including securities fro m relevant events such as e mployee resignations and retire ments. insurance companies and bail bondsmen doing business within The State’s policy provides for a maxi mum accu mulation of North Carolina , that have bee n placed in safekeeping with a unused vacation leave of 30 days which can be carried forward financial in stitution or the State Treasurer, as required by each January 1 or for which an e mployee c an be paid upon applicable general statutes. termination of e mployment. Also, any accumul ated vac ation
leave in excess of 30 days at year end is converted to sick leave. O. Net Assets/Fund Balance In addition t o the va cation leave described abov e, compensated absences include the ac cumulated unused portio n Net asset s are reported as restricted wh en constraint s of the spe cial annual lea ve bonuses a warded by the North placed on the m are either e xternally impo sed by creditors, Carolina General Asse mbly. The bonu s leave bal ance on grantors, cont ributors, or laws or regul ations of oth er December 31 is retained by employees and tra nsferred into th e governments o r are i mposed by law throu gh con stitutional next calend ar y ear. It is not part of the 30 day m aximum provisions. Co nstraints place d on net a sset use by enabli ng applicable to regular vacatio n leave and i s not subj ect to legislation are not reported as net asset restri ctions si nce su ch conversion to sick leave. constraints are not legally e nforceable. Legal enforceabil ity means th at the State can be co mpelled by an external par ty, There is n o li ability for unpaid acc umulated sick leav e such as citizens, public interest groups, or the judiciary to use because the State has no obliga tion to pay s ick leave upon resources created by enabling legislation only for the purposes employee term ination or retire ment. Ho wever, additio nal specified by the legislation. Situations where the State’s internal service credit for retire ment pensio n bene fits is giv en for governing bod y (General Asse mbly) place s restriction s o n accumulated sick leave upon retirement. existing resources or ear marks e xisting rev enue sources a re considered to b e con straints th at are internall y imposed. Suc h internally dedicated net assets are presented as unrestricted. M. Long-Term Liabilities Under so me pr ograms, the St ate has the opt ion of using In the go vernment-wide fin ancial statements, long-ter m either restricte d or unrestric ted resourc es to make c ertain debt and other long-term obligations are reported as liabilities in payments. W hen both re stricted and unrestricted resources are the colu mns for govern mental a ctivities, bu siness-type available for use, generally it is the State’s policy to use receipts activities, and co mponent u nits. The se amounts are also first (which inc lude restricted and unrestrict ed resources), then reported a s lia bilities in the fund financia l state ments for State appropria tions a s nece ssary. Receipts a re defined as a ll proprietary funds. If material, debt pre miums of the State ar e funds coll ected by an agency or institution other than Stat e deferred and a mortized over the life of the debt u sing th e appropriations. The decision to use re stricted or unre stricted effective interest method. Losse s on t he State’s refundings are receipts t o fun d a pay ment i s tran sactional-based within t he deferred and amortized over the remaining life of the ol d debt departmental management system in pl ace at th e a gency or or the life of the ne w debt, whichever is shorter, using t he institution. For proj ects funde d by tax-exe mpt debt procee ds effective inter est method. If m aterial, debt prem iums, and other sources, the debt proceeds are always used first. discounts, and l osses on refundings of the University of North Carolina Sy stem (co mponent unit) are gener ally deferred and In the fund financial statements, governmental funds report amortized u sing the straight-l ine method. Long-ter m d ebt is reservations of fund balance fo r amounts that are (a) externall y reported net of the applicabl e debt pre mium, discount, and/ or restricted for a specific use, (b) not available for appropriation deferred loss o n refunding. D ebt issuance costs of the State ’s or expenditure because the un derlying asset i s not an avail able governmental activities and th e University of North Carolina financial resource, or (c) for encumbrances, which repre sent System (co mponent unit) ar e generally expensed. De bt commitments related to unperformed contracts for service s and issuance co sts of the N.C. H ousing Financ e Agency and t he undelivered go ods (Se e N ote 11, Fund Ba lance Reserves). State Educ ation A ssistance Authority (com ponent units) are Designations o f fund balance represent tent ative management deferred and a mortized over the life of the debt u sing th e plans that are subject to change; however since unreserved fund straight-line method. balance in th e General Fund i s negativ e, no design ations are reported in the current year.
B-51 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
P. Revenues and Expenses
Proprietary fu nds di stinguish operating revenue s and expenses fro m nonoperating items and c apital contribution s. Operating rev enues and ex penses generally result fro m providing serv ices and prod ucing and deli vering goods in connection wi th a proprietary fund’s principal ongoin g operations. Proprietary fund operating reve nues re sult fro m exchange transactions a ssociated with the principal activity of the fund. Exc hange transactions are those in which each party receives an d gi ves up essentially equal val ues. Nono perating revenues, such as nonc apital grants and in vestment earnings, result fro m no nexchange tran sactions or an cillary activities. Capital contributions are reported separately, after nonoperating revenues and expenses.
Q. Food and Nutrition Services
In accordanc e with GAS B St atement No. 24 , Accounting and Financial Reporting for Certain Grants and Other Financial Assistance, the State recognizes distributions of food and nutrition services be nefits as revenue an d expenditure s in the General F und. Revenu es and expe nditures are reco gnized based o n the fair market v alue at the ti me the benefits a re distributed to the individ ual recipient s. In North Carolina, benefits are di stributed in electronic for m, thus distributi on takes place when the individual recipients use the benefits.
B-52 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 2: STEWARDSHIP, COMPLIANCE, AND ACCOUNTABILITY
A. Fund Balance / Net Assets Deficit reduced the holdings that would have oth erwise been included within the fiv e percent Alte rnative allocati on. The State Treasurer cont inues t o monitor the retire ment holdin gs to Primary Government proactively respond to changing market conditions.
At June 30, 2010, the following enterprise fund reported a Component Units net assets deficit: State Banking Commission, $974 thousand. Chatham Hospital, Inc (the Hospital) which is a part of the At June 30, 2 010, the following internal service fund University of North Carolin a System, issued $30.54 million of reported a net assets d eficit: Mail Servi ce Cent er, $54 FHA Ins ured North Carolina M edical Care Comm ission thousand. Mortgage Rev enue Bond s, Series 2007 on Fe bruary 8, 2007. The issue d bo nds are subj ect to mandatory sinking fu nd requirements p rior to their due dat es. There are c ertain B. Material Violations of Legal or Contractual covenants a ssociated wit h th e Series 2007 bonds t hat a re Provisions outlined in the master trust i ndenture, loan agreem ent, and regulatory agreement. The most restricti ve of these c ovenants requires maintenance of a long term debt service coverage ratio, Primary Government as defined, of greater than 1.2. Management acknowledges that the Ho spital was i n violati on of certain covena nts and requirements o f those agre ements at Jun e 30, 2010. In The State Trea surer did not comply with t he st atutory accordance with the agre ements, the Ho spital is in th e process requirement li miting the North Carolin a Retirem ent Sy stems’ of complying with su ch covenants and requirements by taking holdings within the Alternative allocation to fi ve percent of th e corrective action. The Ho spital eng aged a con sultant wi th pension fund’s market value as per General Statute 147-69.2(9). Critical Access Hospital expertise to assist in preparation of the As of June 3 0, 2010, the Retirement Sy stems’ Alterna tive Medicare and Medicaid cost report. In addition, the Hospital is investment holdings were app roximately 5.15% of the Pension consulting with expert p ersonnel within t he UNC Health Car e Fund’s market value. System to i mprove operatio ns. Manag ement believe s these actions will produce results to bring the Hospital in compliance The 2009 legislative session authorized two new with the covenants. Accordingly, the debt is c lassified as long- allocations wit hin the North Carolina Retirem ent Sy stems, the term liabilities (Note 8) at June 30, 2010. Credit allocation and Inflation Protection allocation. During the fiscal y ear 201 0, following an internal and external review of the existi ng Alternative p ortfolio, certain assets were reclassified int o these tw o new alloc ations. Also, whi le complying with existing co ntracts that require additio nal investments, th e State Treasurer has tak en st eps to prud ently redeem holdings within Alternative assets. These efforts have
B-53 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 3: DEPOSITS AND INVESTMENTS
A. Deposits and Investments with State Highway Fund s. Other participants incl ude the re maining Treasurer portfolios liste d below, univ ersities a nd v arious board s, commissions, community colleges, and school administrative
units that make voluntary deposits with the State Treasurer. Unless sp ecifically exe mpt, e very agency of the State and certain component units are required by General Statute 147-77 to Long-term Investment deposit moneys receive d wit h the State Treasurer or wi th a – This portfolio m ay hold the fixed- depository institution in the nam e of the State Treasurer. Certain income investments authorized by General Statutes 147-69. 1 local govern mental units that are not part of the reporting e ntity and 147-69.2. Since the deposits in this fund are typically not are al so allo wed to deposit money with th e State Treasu rer. needed for d ay-to-day operations, the in vestment vehi cles Expenditures for the pri mary government and certain co mponent used generally have a longer ter m and hig her return than units are made by warrants issued by the ag encies and dra wn on those held in the Short-ter m Invest ment p ortfolio. The the State Treasurer. The Stat e Treasurer processes these warrants primary partici pants of the p ortfolio are th e pen sion tru st each day when presented by the Federal Reserve Bank. Ge neral funds. Statute 147-69 .1 authorizes the State Treasurer to invest all deposits in obligations of or fully guaranteed by the United States; Fixed Income Investment – This portfolio holds collateralized obligations of certain feder al agenci es; specified repur chase mortgage obl igations, a sset-backed an d co mmercial agreements; o bligations of th e State of N orth Carolina; t ime mortgage-backed securities. The State’s pe nsion trust funds deposits with specified financial instituti ons; pri me quality are the sole participants in the portfolio. commercial paper with specified ratings; specified bills of exchange or ti me drafts; asset-backed securities wit h speci fied Equity Investment – This po rtfolio holds a n equity -based ratings; and corporate bonds and notes with specified ratings. trust. The State’s pension trust funds are the sole participants in the portfolio. General St atute 147-69.2 aut horizes t he St ate Treasurer to invest the deposits of certain special fund s, including the pension Real Estate Investment – This portfolio holds invest ments in trust funds, the State Health P lan, the Disabil ity Income Pla n of real estat e-based trust funds and group an nuity contracts. N.C., the Esch eat Fund, the Public School Insurance Fu nd, the The State's pension trust funds are the sole participants in the State Educatio n Assist ance A uthority, Local Govern ment Other portfolio. Post-Employment Benefit s (O PEB) Fund, an d trust fund s o f the University of North Carol ina Sy stem, i n the invest ments Alternative Investment – This portfolio holds invest ments in authorized in General Statut e 147-69.1; general obligatio ns of limited partner ships and equi ties receiv ed in the for m of other state s; general obliga tions of North Carolina l ocal distributions fro m it s pri mary invest ments. The State’s governments; asset-backed securities bearing specific ratings; and pension trust funds are the sole participants in the portfolio. obligations of any co mpany i ncorporated wi thin or outside the United States bearing specific ratings. The deposits of the pension Credit Investment - This portfolio may hold invest ments in trust funds may be invested in all of the above plu s cer tain debt-related strategies a s defi ned by Genera l Statutes 147- insurance co ntracts; grou p trusts; indiv idual, co mmon or 69.2(b)(6c). The State’s pension trust fun ds are the sole collective tru sts of banks a nd trust co mpanies; real estate participants in the portfolio. investment tru sts; li mited part nership i nterest in li mited liab ility partnerships or limited liability companies; and certain stocks and Inflation Protection Investment - This portfolio may hold mutual funds. investments in asset s that a re acquired for the pri mary purpose of pro viding protection against risks associated with External Investment Pool inflation. The State’s p ension trust fund s are the sole participants in the portfolio. To ensure t hat these and other legal and regulatory limitations are met, all c ash d eposited wit h t he State Trea surer, OPEB Equity Investment – T his portfolio holds an eq uity- except for the UNC H ospitals, Public Hospit als, Esche at Fu nd, based trust. Pu rsuant to General Statute 14 7-69.4, the State and bond proc eeds inve stment accounts, is maintained in the Treasurer manages t he tru st’s assets and is r esponsible f or Investment Pool. This pool, a governmental external investment making inve stment deci sions. This fund is establi shed fo r pool, consists of the following individual investment portfolios: local govern ments, public aut horities, any entity eligible to participate in t he State’s Loc al Govern mental E mployees’ Short-term Investment – This portfolio may hold any of the Retirement Sy stem, and lo cal scho ol ad ministrative u nits. investments authorized by Ge neral Statute 1 47-69.1. The Eligible participants make voluntary contributions to the fund Short-term In vestment portfolio is the pri mary cash for the purpo se of dep ositing and investing all or part of the management account for th e State and is managed in such a contribution from their oth er post-employment benefit plans. manner as to b e readily convertible into cash. The primary As of June 30, 2010, the fund had twelve participants. participants of this portfolio are the G eneral Fund an d the
B-54 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
All of the ab ove inv estment portfolios operate like The external portion of the In vestment Pool is present ed individual investment pools, except that an investment portfolio in the State’ s financial statements as an i nvestment trust fund . may hold shares in other inve stment portfolios at the discreti on Each fund and component unit’s share of the internal equity in of the State Treasurer and subject to the legal li mitations the Invest ment Pool is reported in the State’s financi al discussed above. To this extent, the deposits are co mmingled; statements a s an a sset of th ose fun ds or component uni ts. and therefore, the State Tre asurer con siders all inv estment Equity in the Short-ter m Inv estment portfolio is reported as portfolios to be part of a single pool, the Invest ment Pool. Th e cash and ca sh equival ents while eq uity in the Long-te rm Investment Poo l contain s depo sits fro m fund s and co mponent Investment, Equity Invest ment, Real Estate Inve stment, units of the reporting entity (internal portion) as well as deposits External Fixed Income Investment, Credit Investment , Inflation from certain legally separate organizations outside the reporting Protection Invest ment, Alte rnative Invest ment, and OPEB entity (external portion). This pool is not registered with t he Investment portfolios is report ed as inve stments. The internal Securities and Exchange Commission and is not subject to any equity of the pool differs from the amount of assets reported b y formal oversight other than that of the legislative body. the funds a nd co mponent units due to the ty pical banker/customer outstanding and in-transit items. Additionally, At y ear-end, the cond ensed fi nancial statements for th e each fund repo rts its sh are of the a ssets and liabilitie s arisi ng Investment Pool m aintained by the State Treasurer were as from securities lending transactions. The State reports the assets follows (dollars in thousands): and liabilities arising fro m securities lendi ng transaction s f or component units as part of the State's agen cy funds, rather tha n Statement of Net Assets allocate them to the component units. June 30, 2010 Assets: Investments i n nonparticip ating contract s, such as nonnegotiable certificates of deposit, are reported at cost. Other Cash and cash equivalents...... $ 144,101 investments he ld in the Shor t-term Inv estment portfolio a re Other assets...... 352,427 reported at a mortized cost, whi ch approximates fair value. All Investments...... 83,085,783 other invest ments are reporte d at fair value. Fair values a re Total assets...... 83,582,311 determined da ily for the Long-term Invest ment, Equ ity Liabilities: Investment, an d OPEB Equ ity Invest ment portfolios a nd Other payables...... 214,861 quarterly for the Real Estate Inv estment, Alternative Obligations under securities lending...... 6,537,301 Investment, Credit Invest ment and Inflation Protecti on Total liabilities...... 6,752,162 Investment portfolios. The fair value of fixed income securities is ba sed on fut ure principal a nd interest p ayments di scounted Net Assets: using current yields for similar instruments. Investments in real Internal: estate trusts, limited partnerships, and the equity trust are valued Primary government...... 72,755,998 using market p rices provid ed by the third pa rty professional s. Component units...... 3,431,952 Participants’ sh ares sold and redeemed are d etermined in the External...... 642,199 same manner a s is used to report invest ments, and the State Total net assets...... $ 76,830,149 Treasurer does not provide or obtain legally binding guarantees to support share values. Statement of Operations and Changes in Net Assets For the Fiscal Year Ended June 30, 2010 Net investment income earned by the Invest ment Pool i s generally distr ibuted on a pro rata ba sis. Howev er, in Revenues: accordance with legal requirements, the General Fund receives Investment income...... $ 8,286,625 all investment income earned by funds created for purposes of Expenses: meeting a ppropriations. For the fiscal y ear ended June 30, Securities lending...... 21,225 2010, $12 million of invest ment inco me a ssociated with oth er Investment management...... 320,475 funds was credited to the General Fund. Total expenses...... 341,700 Net increase in net assets resulting from operations...... 7,944,925 Distributions to participants: Distributions paid and payable...... (7,944,925) Share transactions: Reinvestment of distributions...... 7,948,684 Net share redemptions...... (1,427,521) Total increase in net assets...... 6,521,163 Net assets: Beginning of year...... 70,308,986 End of year...... $ 76,830,149
B-55 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Deposits Custodial Credit Risk. For deposits, custodial credit risk is the risk that in the event of a bank failure, the State’s deposits may not be recovered. At year-end, the Investment Pool’s deposits were not exposed to custodial credit risk.
The State Treasurer’s depo sit policy for custodial credit risk is li mited to co mplying with the collateraliz ation rules of the North Carolina Administrative Code (Chapter 20 N CAC 7). Depo sits to the Inve stment P ool may be made in any bank, sav ings an d lo an association or trust co mpany in the State as approved by the St ate Treasurer. The North Carolina Ad ministrative Code require s depositories to collateralize all balances that are not insured. The depositor ies must maintain specified security types in a third party escrow account established by the St ate Treasurer. The securities collateral must be governmental in origin (e.g., U.S. Treasu ry, U.S. agency, or state and local government obligations) or the highest grade commercial paper and bankers' acceptances. The market value of the collateral must not be less than the v alue of the unin sured deposits. The depositories may elect to coll ateralize deposits separately (dedicated method) or incl ude depo sits of th e North Caroli na loc al go vernment u nits in a collateral po ol with the State and cer tain component units (pooling method).
Investments At year-end, the Investment Pool maintained by the State Treasurer had the following investments and maturities (dollars in thousands):
Inves tm ent Maturities (in Years ) Carrying Less More Inves tm ent Type Am ount Than 1 1 to 5 6 to 10 Than 10
Debt securities: U.S. Treas uries ...... $ 10,411,670 $ 3,662,489 $ 564,199 $ 2,966,951 $ 3,218,031 U.S. agencies ...... 8,291,866 183,327 5,902,068 1,446,962 759,509 Mortgage pas s -throughs ...... 6,366,648 — — 2,597 6,364,051 Collateralized m ortgage obligations ...... 430,043 81,744 — — 348,299 As s et-backed s ecurities ...... 553,891 278,417 49,772 101,376 124,326 Repurchas e agreem ents ...... 1,350,000 1,350,000 — — — Com m ercial m ortgage-backed s ecurities ...... 466,914 106,772 — 4,717 355,425 Money m arket fund ...... 236,738 236,738 — — — Dom es tic corporate bonds ...... 9,659,740 53,237 868,399 4,916,040 3,822,064 Foreign governm ent bonds ...... 10,788 — — 10,788 — Securities purchased with cash collateral under securities lending program: As s et-backed s ecurities ...... 2,595,768 2,595,768 — — — Repurchas e agreem ents ...... 912,889 912,889 — — — Dom es tic corporate bonds ...... 2,699,169 2,699,169 — — — 43,986,124$ 12,160,550 $ 7,384,438 $ 9,449,431 $ 14,991,705 Other securities: Equity bas ed trus t - dom es tic ...... 20,696,570 Equity bas ed trus t - international ...... 10,538,762 OPEB equity bas ed trus t- dom es tic ...... 18,832 OPEB equity bas ed trus t- international ...... 6,161 Alternative investments: Hedge funds ...... 621,945 Private equity inves tm ent partners hips ...... 2,723,357 Stock dis tributions ...... 9,535 Real es tate trus t funds ...... 2,902,010 Credit inves tm ents ...... 832,105 Inflation protection inves tm ents ...... 708,782 Total inves tm ent s ecurities ...... $ 83,044,183
In addition to the above amount, certificates of deposit in the amount of $41.6 million are reported as investments in the Condensed Statement of Net Assets presented previously.
B-56 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Also, the major investment classifications of the Investment Pool had the following attributes at year-end (dollars in thousands):
Principal Range of Investment Classification Amount Interest Rates
U .S . Tre a s u rie s ...... $ 8 ,9 5 6 ,3 3 6 0.875%-8.875% U .S . a g e n cie s ...... 8 ,0 9 4 ,3 1 9 0 .4 5 % -7 .1 2 5 % Mo rtg a g e p a s s -th ro u g h s ...... 5 ,9 0 9 ,8 2 7 4 .5 % -9 .0 % Collateralized m ortgage obligations ...... 5 3 2 ,8 9 8 0 .3 1 % -7 .2 7 % Com m ercial mortgage-backed securities . 4,610,280 0.01%-8.35% As s e t-b a cke d s e cu ritie s ...... 6 1 4 ,4 2 4 0 .3 7 % -9 .5 % Dom estic corporate bonds ...... 8 ,8 5 1 ,8 0 7 1 .3 7 5 % -1 0 .7 5 % Foreign government bonds ...... 10,000 5.125%-5.125% Repurchase agreements ...... 1 ,3 5 0 ,0 0 0 0 .0 5 % -0 .1 0 % Money market fund ...... 2 3 6 ,7 3 8 2 .9 2 % S e cu ritie s p u rch a s e d w ith ca s h co lla te ra l under securities lending program : As s e t-b a cke d s e cu ritie s ...... 2 ,8 5 0 ,1 9 0 0 .3 6 % -0 .8 0 % R e p u rch a s e a g re e m e n ts ...... 9 1 2 ,8 8 9 0 .0 1 % -0 .3 7 % Dom estic corporate bonds ...... 2,774,500 0%-0.99% E q u ity-b a s e d tru s t - d o m e s tic ...... n /a n /a E q u ity-b a s e d tru s t - in te rn a tio n a l ...... n /a n /a
Equity-based Trust - The St ate Treasurer ha s contract ed equivalents of the major governmental and enterprise funds are with an externa l party (Trustee) to create the “ Treasurer of the invested in this portfolio. State of North Carolina Equity Investment Fund Pooled Trust” (the Trust). The State’s pe nsion trust fun ds are the onl y The asset s of the Long-term Inve stment portfolio are depositors in the Trust. The State Treasurer e mploys primarily invested in securitie s with maturities longer than five investment managers to manage the assets, p rimarily in equity years. The lon ger maturity range i s more sensitive to inter est and equity -based securities i n accordance with the General rate cha nges; however, th e l onger duratio n structure of t he Statutes and parameters pro vided by the State Trea surer. portfolio provides a better match to the long duration Derivative instru ments are also held within t he Tru st characteristics of the retirem ent sy stems’ liabilities. At y ear- consisting of U.S. dollar and foreign equity futures contracts end, pensions and other e mployee benefit pla ns owned 96% of (see Note 7). The Trustee maintains custody of the underly ing the Long-term Investment portfolio. securities in th e nam e of the Tr ust, services the securities, engages in securities len ding transactions, and maintains all The Long-term Investment portfolio holds inv estments in related accounting records. T he Trustee also invest s re sidual Government National Mor tgage Association (GNMA) cash in a cash sweep fund and may be temporarily employed as mortgage pa ss-through pool s. Critical to the pricing of the se an invest ment manager. The State Treasurer maintains securities are t he sp ecific feat ures of th e ca sh flows fro m t he beneficial inter est in the Trust and no direct ownershi p of the interest a nd pri ncipal pay ments of the underl ying mortgages. securities. Therefore, these valuations are very sensitive to the potential of principal prepa yments by mortgagees in peri ods of declinin g OPEB Equity-based Trust - The State Tr easurer has interest rates. Also, included within the Long-ter m Investment contracted with an external par ty (Trustee) to create the “ North portfolio are U.S. govern ment agencie s and corporate bond s Carolina Lo cal Govern ment Other Pos t-Employment Benefits which carry call options in wh ich the issuer h as the option t o Fund Trust” (the Trust). T he State Treasurer e mploys an prepay the principal at certain dates over the life of the security. investment m anager to m anage the asset s, pri marily in equity As su ch, these ty pes of securities are more sensitiv e to the and equity -based securities i n accordance with the General decline in long-term interest r ates as similar securities without Statutes and pa rameters provi ded by the Sta te Treasurer. The call options. trustee maintains cu stody of the underly ing securitie s in t he name of the Tr ust, engag es in securitie s len ding transa ctions, In addition to the corporate bonds with call option s and maintains all relat ed accounting reco rds. The Sta te mentioned in the preceding paragraph, there are corporate Treasurer maintains beneficial interest in the Trust and no direct bonds with var iable coup on rates th at reset on spe cific dat es. ownership of the securities. Also, the ca sh collateral recei ved fro m secur ities lending h as also b een inv ested i n corp orate bond s a nd asset-ba cked Interest Rate Risk. Although there is no formally adopted securities with floating rates. Critical to the pricing of these investment poli cy, as a means of managing i nterest rat e risk, securities are the changes in in terest rates. The State Trea surer fixed income assets of th e Short-term Investment portfolio are considers the maturity for int erest rate ris k purposes to be the invested in a laddered maturity approach that focuses on short length of ti me to the next reset d ate rath er than the stated maturity securities with a mple liquidity . The Short-ter m maturity. Investment por tfolio had a w eighted a verage maturity of 1.6 years as of June 30, 2010. Most of the cash and c ash
B-57 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
The externall y m anaged Fixed Inco me Invest ment principal prepa yments by mortgagees in peri ods of declinin g portfolio holds inve stments i n asset-backed sec urities an d interest rates. collateralized mortgage oblig ations. The foc us is on fix ed and floating rate, sh ort duration securities with an average duration Credit Risk. G eneral Statute 147-69.1 specifies the cash of less than 2.5 years. Securities must carry an investment grade investment opt ions for the S hort-term Inve stment portfoli o. rating to be purchase d for t he portfolio. The short durati on The statute li mits credit risk by restricting the portfolio’ s nature of the assets limits interest rate risk. For the asset-backed corporate obli gations, a sset-backed securities, and commercial securities with floating rate, th e State Treasur er con siders th e paper to sec urities that be ar the highe st rating of at least one maturity for int erest rate risk p urposes to be t he length of tim e nationally reco gnized rati ng service a nd do not bear a rati ng to the next reset date rather than stated maturity. below the high est by any nationally recognized rating servic e. General Statute 147-69.2 speci fies the cash invest ment options Also, included within the Fixed Inco me p ortfolio are for the Long-t erm Inve stment portfolio. T he st atute li mits commercial mortgage-backed se curities wi th a foc us o n credit risk by restricting th e portfolio’s asset- backed securities structures with fixed rates and average life of less t han six and corporate obligations to securities that bear one of the fou r years. Securities must carry an invest ment g rade rating at t he highest ratings of at lea st o ne nation ally recogniz ed ratin g time of purchase. service. In the Long-ter m In vestment portfolio, all holdin gs were rate d BBB (or equi valent) or high er at th e ti me of Critical to the pricing of asset-backed a nd mortgage- purchase by at least one of t he nation ally recogniz ed ratin g backed securiti es are the spe cific features of cash flows from agencies. the intere st an d principal payments of the u nderlying asset s. Therefore, valuations are v ery sensitive to the potential of
At y ear-end, t he Invest ment Pool had the f ollowing credit quality distribution for secur ities with cre dit exposure (dol lars in thousands): Carrying Amount by Credit Rating - Moody's/S&P/Fitch Ba/BB Investment Type Aaa/AAA Aa/AA A Baa/BBB and Below Unrated
U.S. agencies ...... $ 8,178,099 $ — $ 113,767 $ — $ — $ — Collateralized mortgage obligations ...... 37,691 43,483 26,309 63,192 259,368 — Commercial mortgage-backed securities ... 114,728 46,522 138,060 159,150 8,454 — Asset-backed securities ...... 102,401 100,139 97,056 210,582 43,713 — Repurchase agreements ...... 1,350,000 — — — — — Money market fund ...... — — — — — 236,738 Domestic corporate bonds ...... 491,835 706,969 4,919,753 3,236,391 304,792 — Foreign government bonds ...... — — 10,788 — — — Securities purchased with cash collateral under securities lending program: Asset-backed securities ...... 1,797,812 242,626 49,804 47,395 458,131 — Repurchase agreements ...... — — — — — 912,889 Domestic corporate bonds ...... — 1,105,799 1,574,845 — 18,525 — Total ...... $ 12,072,566 $ 2,245,538 $ 6,930,382 $ 3,716,710 $ 1,092,983 $ 1,149,627
Custodial Credit Risk. For an invest ment, custodial credit risk is th e risk th at in the eve nt of the failure of the counterpa rty, the State Treasurer will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. At year-end, the investments purchased with cash collateral under the securities lending program of $6.2 billion were exposed to custodial credit risk since the securities were held by the counterparty and were not registered in the na me of the State Treasurer. A s required by contractual agreements, a thir d party agent h olds these assets for the be nefit of a dedic ated Treasurer’s a ccount. This a greement fully indemnifies the Treasurer for any third party defaults or losse s. All oth er invest ments of the Inve stment Pool were not expo sed t o custodial credit risk at year-end and no custodial credit risk policy has been adopted for these investment types.
B-58 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Foreign Currency Risk. At year-end, the Investment Pool’s exposure to foreign currency risk was as follows (dollars in thousands):
Carrying Value by Investment Type Equity Alternative Investment - Real-Estate OPEB Equity Based Trust - Private Equity Trust Funds Based Trust- Currency International Investment Partnerships International Total
Euro ...... $ 2,230,489 $ 316,463 $ 87,642 $ 1,368 $ 2,635,962 Japanese Yen ...... 1,529,743 — 26,849 915 1,557,507 Pound Sterling ...... 1,349,148 — 32,280 834 1,382,262 Hong Kong Dollar ...... 596,913 — 46,925 406 644,244 Swiss Franc ...... 447,496 — 2,469 359 450,324 Australian Dollar ...... 352,901 — 21,525 277 374,703 South Korean Won ...... 185,297 — — 204 185,501 Brazil Cruzeiro Real ...... 152,988 — 1,537 210 154,735 Swedish Krona ...... 122,865 — 1,343 124 124,332 New Taiwan Dollar ...... 124,707 — — 134 124,841 Indian Rupee ...... 116,221 — — 95 116,316 Canadian Dollar ...... 114,925 — 4,031 455 119,411 Other Currencies ...... 525,344 — 10,332 686 536,362 Total ...... $ 7,849,037 $ 316,463 $ 234,933 $ 6,067 $ 8,406,500
Although there is no for mally adopted in vestment policy, At y ear-end, the State Trea surer had no credit risk the State Treasurer’s inve stment policy per mits up to 20% o f exposure to borrowers because the amounts the Treasurer owed the retirem ent sy stems’ invest ed assets to be in international the borrower s exceeded th e a mounts the b orrowers o wed t he securities. At y ear-end, the retirem ent sy stems had State. The securities cu stodian is contractu ally obligated to approximately 12.8% invested in international securities. indemnify the Treasurer for certain conditio ns, the two most important are default on the part of the borrow ers and failure to Securities Lending maintain the daily mark-to-market on the loans. Based on the a uthority provid ed in General Statute 147- During the market crisis of lat e 2008, t here was a default 69.3(e), the State Treasurer lends securities from its Investment in a Leh man Brothers flo ating rate note i n which securities Pool to broker-dealers and other entities (borrowers) for lending collater al had been in vested. Since that ti me, se veral collateral th at will be return ed for the same securities i n t he other securities with pot ential losses were i dentified. The Sta te future. The Treasurer’s securities c ustodian manages t he Treasurer directed that all securities lending revenues would be securities len ding program fo r the internally managed fixed deposited into a separate account. These funds are invested into income portfolios. During the y ear the custodian lent U.S. a money market fund, and are i ncluded on the Statement of Net government an d agency secur ities, GN MAs, corporate bon ds Assets. The p urpose of th e separate a ccount is to provi de a and notes for collateral. The custodi an is p ermitted to recei ve reserve account to offset expected losses. At year-end, the State cash, U.S. gov ernment a nd a gency se curities, or irrevoca ble Treasurer had an unrealiz ed loss in the S ecurities Lendi ng letters of cred it as coll ateral for the sec urities lent. Th e Collateral pool of $329.5 m illion, and had accrued $141 .2 collateral is initially pledged at 102% of the market value of the million in the separate account. securities lent, and additional collateral i s required if its val ue falls to less than 100% of the market value of the securities lent. There are no restriction s on t he a mount of loans that c an be Interest Rate Risk and Credit Risk. The policies for made. Substantially all secu rity loans can be ter minated on investments purchased with cash collateral un der the se curities demand by eit her the St ate T reasurer or t he borrower. T he lending program are set forth in the contract with the securities State Treasurer cannot pledge or sell the collateral securiti es custodian. Con tractually, asset-backed securities must bear the received unless the borrower defaults. highest ratin g of at least o ne nationally recognized rati ng service. The expected maturity shall not exce ed five years and The ca sh collateral receiv ed i s inve sted by the cu stodian securities having a final maturity greater than two years will be agent and h eld in a separat e account in th e na me of the St ate in floating rate instruments with interest rate resets occurring at Treasurer. T he wei ghted a verage maturities of the cash no greater tha n 90-day intervals to minimize the effect of collateral inve stments are more than the w eighted avera ge interest rat e fl uctuations on their valuatio ns. The securities maturities of th e securities lent . While cash can be invested i n pledged a s coll ateral for repurchase agree ments are li mited to securities rangi ng fro m overni ght to five y ears, the custodian securities i ssued or guara nteed by the U.S. govern ment or its agent is not p ermitted to make investments where the weighted agencies, or specified b ank or corporate obligation s. A s average maturity of all invest ments exceeds 30 days. At y ear- directed by the State Treasurer, repurchase counterpartie s are end, the weig hted averag e maturity of invest ments was limited to speci fic counterparties with sp ecific dollar li mits per approximately 24 days. counterparty. Corporate bon ds and note s, including ba nk holding co mpany obligations, rated AA must hav e a fin al
B-59 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
maturity no gr eater tha n thre e y ears. Securities rat ed A must At y ear-end, the UN C H ospitals in vestment acc ount have a final maturity no greater than two y ears. No more than maintained by the State Treasurer had the followi ng five percent of the cash collateral may be inv ested in a single investments (settled transactions) (dollars in thousands): issue. Carrying Investment Type Amount Bond Proceeds Investment Accounts Other securities: The State Trea surer ha s established separate inve stment Equity based trust - domestic $ 196,469 accounts for e ach State bond issu e to co mply with Internal Equity based trust - international 65,890 Revenue Servi ce regulation s on bond arbitrage. A private Total inves tm ent s ecurities ...... $ 262,359 investment co mpany under contract with the State Treasu rer manages these separate accounts. The investments are valued at amortized co st, which approxi mates fair valu e. In the State’s financial statements, each fu nd’s e quity in the se accounts i s Foreign Currency Risk. There is no formally adopted reported as investments. investment policy to limit foreign currency exposure. At year- end, the UNC Hospitals investment account’s exposure to foreign currency was as follows (dollars in thousands): At y ear-end, the bond proceed s inve stment ac counts h ad the following investments and maturities (dollars in thousands): Carrying Value by Weighted Inves tm ent Type Carrying Average Equity Bas ed Trus t- Investment Type Amount Maturity (Days) Currency International Debt securities: State and local government ... $ 24,705 7 Euro ...... $ 14,630 Repurchase agreements ...... 508,951 1 Japanes e Yen ...... 9,787 Total investm ents ...... $ 533,656 Pound Sterling ...... 8,924
Canadian Dollar ...... 4,866 Interest Rate Risk and Credit Risk. As e stablished in the Hong Kong Dollar ...... 4,338 contract with the private invest ment co mpany, all b ond Swis s Franc ...... 3,841 proceeds are managed in compliance with General Statute 147- Aus tralian Dollar ...... 2,959 69.1, which li mits credit ri sk as described above, and can onl y be invested in short-term maturities with th e averag e maturity Brazil Cruzeiro Real ... 2,245 ranging between overnight to six months based on the liquidi ty South Korean Won .... 2,180 needs of the in vestment accou nts. At year-end, Standard and New Taiwan Dollar .... 1,428 Poor’s rated investments in state and local government bonds as Swedis h Krona ...... 1,330 A-1. Indian Rupee ...... 1,020 Singapore Dollar ...... 1,017
Norwegian Krone ...... 943 Custodial Credit Risk. Invest ments purchased with bond proceeds were exposed to custodial credi t risk sinc e t he South African Rand .... 871 securities were held by the counterparty and were not registered Rus s ian Rouble ...... 864 in the name of the State Treasurer. There is no custodial policy Mexican New Peso .... 748 related to these securities. Other Currencies ...... 2,902 Total ...... $ 64,893
University of North Carolina (UNC) Hospitals Investment Account Note: The totals in this table do not agree to the totals disclosed in the investment table above because this foreign The State Treasurer has contra cted with an ex ternal party currency table includes equities based on trade date while (Trustee) to create the University of North Carolina Hospitals at the investment table is reported on settle date. Chapel Hill Trust (Trust). T he U NC Ho spitals are th e on ly depositor in the Trust. However, the Trust is a participant of a Public Hospitals Investment Account commingled equity investment fund. The Tru stee manages the assets, pri marily in equity and equity -based sec urities i n The State Treasurer has contra cted with an ex ternal party accordance with the General Statutes. The Trustee mai ntains (Trustee) to cr eate the Public Hospitals inv estment ac count. custody of the underlying sec urities in the n ame of the Trust, The inve stment accou nt curr ently consi sts of Margaret R. services th e securities, an d maintains all r elated accounting Pardee Hospital Trust, New Hanover Region al Medical Center records. The invest ments are valued at fair mark et value u sing Trust and Colu mbus Regional Healthcare Trust. These Trust s market prices provided by third party professionals. are part of a co mmingled equity investment fund. The Trustee manages the assets, pri marily in equity and equity -based securities in accordance with the General Statutes. The Trustee
B-60 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS maintains c ustody of the un derlying securitie s in the na me of Escheat Investment Account the Trust, serv ices t he securities, and maintains all related accounting records. The inv estments are valued at fair market Pursuant to G eneral Stat ute 147-69.2(b)(12), the Stat e value using market prices provided by third party professionals. Treasurer ha s established a separate in vestment ac count on behalf of the E scheat Fund. The inve stments are valued at fair At y ear-end, the Public Ho spitals in vestment acco unts market value using market prices provid ed by third party maintained by the State Treasurer had the followi ng professionals. At y ear-end, the Esche at in vestment acc ount investments (settled transactions) (dollars in thousands): maintained by the State Treasurer had the followi ng investments (dollars in thousands): Carrying Investment Type Amount Carrying Debt securities: Investment Type Amount Money market fund ...... $ 1 Other securities: Other securities: Real estate trust funds ...... $ 12,982 Equity bas ed trus t - dom es tic ...... 38,766 Private equity investment partnerships .. 34,642 Equity based trust - international .. 14,019 Public equities - dom es tic ...... 27,788 Total inves tm ent s ecurities ...... $ 52,786 Public equities - international ...... 6,060 Total inves tm ent s ecurities ...... $ 81,472 Foreign Currency Risk. There is no formally adopted investment policy to limit foreign currency exposure. At year- end, the Public Hospitals investment account’s exposure to foreign currency was as follows (dollars in thousands): Foreign Currency Risk. The re is no for mally adopted investment policy to li mit foreign currency exposure. At year- Carrying Value by end, the trust’s exposure to foreign currency risk was as follows Investment Type (dollars in thousands): Equity Based Trust- Currency International Carrying Value by Investment Type Euro ...... $ 3,113 Public Equities - Japanes e Yen ...... 2,082 Currency International Pound Sterling ...... 1,899 Canadian Dollar ...... 1,035 Euro ...... $ 1,606 Hong Kong Dollar ...... 923 Pound Sterling ...... 857 Swis s Franc ...... 817 Japanese Yen ...... 787 Aus tralian Dollar ...... 630 Hong Kong Dollar ...... 426 Brazil Cruzeiro Real ...... 478 Swis s Franc ...... 353 South Korean Won ...... 464 Canadian Dollar ...... 303 New Taiwan Dollar ...... 304 Singapore Dollar ...... 264 Swedis h Krona ...... 283 Brazil Cruzeiro Real ...... 149 Indian Rupee ...... 217 South Korean Won ...... 129 Singapore Dollar ...... 216 Aus tralian Dollar ...... 119 Norwegian Krone 201 New Taiwan Dollar ...... 114 South African Rand ...... 185 South African Rand ...... 93 Rus s ian Rouble ...... 184 Swedis h Krona ...... 71 Mexican New Pes o ...... 159 Mexican New Pes o ...... 65 Russian Rouble ...... 57 Other Currencies ...... 617 Other Currencies ...... 667 Total ...... $ 13,807 Total ...... $ 6,060
Note: The totals in this table do not agree to the totals disclosed in the investment table above because this foreign currency table includes equities based on trade date while the investment table is reported on settle date.
B-61 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
B. Deposits Outside the State Treasurer The State Education Assistance Authority does not have a deposit policy for custodi al credit risk. At y ear-end, the ban k In addition to t he pooled deposits maintained by the State balances maintained outsi de t he State Treasurer by the State Treasurer, other deposits are maintained o utside the Sta te Education A ssistance Author ity were exposed to c ustodial Treasurer by t he pri mary govern ment and certain co mponent credit risk as follows (dollars in thousands): units. As a general rule, th ese deposits are not covered by the rules in Ch apter 20 N CAC 7 requiring c ollateralization of Uninsured and collateral held by pledging bank ...... $ 123,782 uninsured deposits. Total ...... $ 123,782
Primary Government C. Investments Outside the State Treasurer The majority of deposits held outside the State Treasurer were maintained by the variou s clerk s of superior court. The Investments in participating investment contracts, external clerks of su perior court do not have a de posit policy for investment po ols, open-end mutual fund s, debt sec urities, custodial credit risk. At year-end, the bank balances maintained equity securiti es, and all investments of the Deferre d outside the Sta te Treasurer by the prim ary govern ment we re Compensation Plan are report ed at fair value . Invest ments in exposed to c ustodial cre dit risk as foll ows (dollar s in certificates of d eposit, investment agreements, bank inve stment thousands): contracts, real estate, real e state invest ment t rusts, and li mited partnerships ar e reported at cost. Detail ed disclosures abo ut Unins ured and uncollateralized ...... $ 14,441 investments h eld outside the State Treasur er are present ed Total ...... $ 14,441 below.
Primary Government Component Units At y ear-end, 7 0% of invest ments held out side the State (University of North Carolina System, The Golden LEAF, Treasurer w ere maintained b y the Supple mental Retirement Inc. and State Education Assistance Authority) Income Plan of North Carolina.
The University of North Carolina (UNC) System does not Supplemental Retirement Income Plan of North Carolina have a deposit policy for custodial credit risk. At y ear-end, the bank balan ces mai ntained o utside the Stat e Treasurer by th e The Gen eral Statute s pl ace no specif ic inve stment UNC Sy stem were e xposed t o cu stodial cre dit risk as follo ws restrictions on the Suppl emental Retire ment Income Pla n o f (dollars in thousands): North Carolina (the Plan). H owever, in the absence of specific legislation, the form of governance over the i nvestments would Unins ured and uncollateralized ...... $ 144,011 be the prud ent-person or prud ent-expert rule. These rule s a re Uninsured and collateral held by pledging bank's trust department or agent but not in State's name .. 17,533 broad st atements of inte nt, generally requiring inve stment Total ...... $ 161,544 selection and management to be made wit h prudent, discr eet, and intellige nt judgment a nd care. The Pla n does not ha ve The Golden LEAF, Inc. does not have a deposit policy for formal inv estment polici es that addre ss interest rat e risk, custodial credit risk. At year-end, the bank balances maintained custodial credit risk, con centration of cre dit risk, or forei gn outside the Sta te Treasurer b y the Golden LEAF, Inc. were currency risk. exposed to c ustodial cre dit risk as foll ows (dollar s in thousands):
Unins ured and uncollateralized ...... $ 2,600 Total ...... $ 2,600
B-62 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
At December 31, 2009, the Su pplemental Retirement Income Plan of North Carolina had the following i nvestments and maturities that were maintained outside the State Treasurer (dollars in thousands):
Investment Maturities (in Years) Carrying Less More Investment Type Amount Than 1 1 to 5 6 to 10 Than 10
Debt securities: U.S. Treas uries ...... $ 216,543 $ 92,997 $ 70,554 $ 25,418 $ 27,574 U.S. Treas uries STRIPS ...... 1,228 — 1,228 — — U.S. agencies ...... 389,971 19,030 79,807 22,535 268,599 Mortgage pas s -throughs ...... 199,708 44,739 411 9,475 145,083 Collateralized mortgage obligations ...... 49,768 6,018 4,432 — 39,318 State and local governm ent ...... 6,559 — 3,991 1,835 733 As s et-backed s ecurities ...... 9,322 536 4,868 3,673 245 Negotiable certificates of deposit ...... 4,409 4,409 — — — Pooled bond funds ...... 133,160 — — 133,160 — Mutual bond funds ...... 7,902 — 7,902 — — Dom es tic corporate bonds ...... 267,025 8,532 159,598 69,060 29,835 Foreign corporate bonds ...... 63,690 6,829 37,697 12,320 6,844 Foreign governm ent bonds ...... 23,407 — 17,540 2,710 3,157 1,372,692 $ 183,090 $ 388,028 $ 280,186 $ 521,388 Other securities: State Street Securities Lending Quality Trust ...... 274,587 Balanced m utual funds ...... 237 International m utual funds ...... 16,609 Other m utual funds ...... 70,974 Non-State Treasurer pooled investments ...... 2,965,607 Total inves tm ent s ecurities ...... $ 4,700,706
Interest Rate Risk. Collateralized mortgage obligation (CMOs) securities generate a return based upon either the payment of interest or principal on mortgages in an underlying pool. The relat ionship between interest rate s and prepayments make the fai r value h ighly sensitive to changes in interest rates. In falling interest rate en vironments, the underlying mortgages are subject to a higher propensity of prepayments. In a rising interest rate environment, the opposite is true. Commercial mortgage-backed securities, which are included in CMOs, are a sset-backed securities whose cash flows are b acked by the principal and int erest pay ments of commercial or multifamily property mortgage loans. The sensiti vity to changes in interest is considered lower as the se types of securities are usually collateralized by fixed-rate mortgages that often contain lockout provisions for prepayment or are subject to prepayment penalties.
Credit Risk. T he Plan’s investment policy requires t hat debt securities, at the time of purc hase, shall have a minimum Standard & Poor’s rating of BBB-. Any security downgraded below BBB- by Standard & Poor’s will b e liquidated within six months. At year-end, the Plan inv estments maintained outsi de the State Treasurer ha d the follo wing credit qu ality distribution for securitie s with c redit exposure (dollars in thousands): Carrying Amount by Credit Rating - Moody's/S&P/Fitch Ba/BB Investment Type Aaa/AAA Aa/AA A Baa/BBB and Below Unrated
U.S. agencies ...... $ 370,356 $ — $ — $ — $ — $ — Mortgage pass-throughs ...... 167,373 — — — — — Collateralized mortgage obligations ...... 45,458 4,310 — — — — State and local government ...... 245 757 4,519 1,038 — — Asset-backed securities ...... 9,322 — — — — — Negotiable certificates of deposit ...... — — 2,800 — — 1,609 Pooled bond funds ...... — 133,160 — — — — Mutual bond funds ...... — 7,902 — — — — Domestic corporate bonds ...... 2,038 30,521 143,237 86,180 3,845 1,204 Foreign corporate bonds ...... — 14,029 22,380 26,424 857 — Foreign government bonds ...... 1,243 4,760 4,838 12,566 — — Total ...... $ 596,035 $ 195,439 $ 177,774 $ 126,208 $ 4,702 $ 2,813
B-63 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Custodial Credit Risk. For an inve stment, custodial enters into loan contracts with borrowers on b ehalf of the Plan credit risk is t he risk that in the event of the failure of the whereby the b orrowers of th e se curities ag ree to tran sfer to counterparty, the Plan will not be able to rec over the valu e of State Street either ca sh col lateral or sec urities i ssued or its investments or collateral securities that are i n the possession guaranteed by the U. S. go vernment or it s agencies with a f air of an outside p arty. The Plan does not ha ve a formal policy to value of 102% of the value of t he securities lent. The borrowers limit cu stodial credit risk. At Dece mber 31, 2009, t he of the securitie s si multaneously agree to retu rn the borrowe d investments of the Supple mental Retire ment Inco me Plan of securities in exchange for the collateral at a later date. North Carolina maintained o utside th e Stat e Treasurer w ere exposed to c ustodial cre dit risk as foll ows (dollar s in As of Dece mber 2009, State St reet lent U.S. Treasuries, thousands): U.S. agencies, U.S. Treasury STRIPS, mortgage pass-throughs, Carrying Amount domestic corporate bonds, foreign corporate b onds, and foreign Investment Type Held by Counterparty governmental bonds. Cash collateral i s inv ested in th e St ate U.S. Treasuries ...... $ 216,543 Street Securities Lending pooled fund, which at December 2009 U.S. Treas ury STRIPS ...... 1,228 had a weighted average maturity of 40 days. U.S. agencies ...... 389,971 Mortgage pass-throughs ...... 199,708 The Plan has no credit risk exposure to borrowers because Collateralized mortgage obligations ..... 49,768 the a mounts th e Plan owes th e borrowers ex ceed the a mounts State and local government ...... 6,559 the borrowers owe the system. The contra ct with State Str eet Ass et-backed s ecurities ...... 9,322 requires State Street to ind emnify the Plan if borrowers fail to Negotiable certificates of deposit ...... 4,409 return securities.
Domestic corporate bonds ...... 267,025 Other Primary Government Investments Foreign corporate bonds ...... 63,690
Foreign government bonds ...... 23,407 The other primary govern ment inve stments h eld out side Total ...... $ 1,231,630 the State Tre asurer con sisted al most entirely of balanc es
Concentration of Credit Risk. Concentration o f cred it maintained by the North Carolina Public Employee Deferred risk is th e risk of lo ss attrib uted to t he magnitude of a Compensation Plan (the Plan) and separate investment accounts government’s investment in a single issuer. The Plan places held by trustee s for sp ecial o bligation d ebt issues to co mply with IRS regulations on bond arbitrage. no l imit on t he am ount t hat may be i nvested i n a ny o ne issuer. More than 5% of the Plan's investments are in Federal General Statut e 143B-426.2 4(j) allows th e Deferred National Mortg age Association. Th ese invest ments to taled Compensation Plan Board to acquire investment vehicles from $301.714 m illion an d com prise 6 .8% o f th e Plan's any company authorized to co nduct such business in this Sta te investments. These i nvestments are classi fied as m ortgage or may establi sh, alter, a mend and modify, to the e xtent it pass-throughs and U.S. agencies. deems necessary or desirable, a trust for the purpose of facilitating the administration, invest ment an d maintenance of Securities Lending assets acquired by the invest ment of deferred funds. All asset s of the Plan, including all defer red amounts, property and rights The Plan has a securities lending contract with State Street purchased with deferred a mounts, and all i ncome attribut ed Bank a nd Trust Co mpany (“ State Street”) as ag ent to le nd thereto shall be held in trust for the exclusive benefit of the Plan available securities to broker-dealers and other entities participants and their beneficiaries. (borrowers) in accordan ce w ith the agre ement. State Stre et
B-64 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
At year-end, the other pri mary government investments maintained outside the State Trea surer had the foll owing investments and maturities (dollars in thousands):
Inves tm ent Maturities (in Years ) Carrying Less More Investment Type Amount Than 1 1 to 5 6 to 10 Than 10
Debt s ecurities : U.S. Treas uries ...... $ 12,567 $ 10,684 $ 1,553 $ 330 $ — U.S. Treas ury STRIPS ...... 946 324 556 66 — U.S. agencies ...... 179,068 9,999 108,330 6,847 53,892 Mortgage pas s -throughs ...... 4,938 1,417 271 37 3,213 Collateralized m ortgage obligations ...... 17,629 2,153 2,375 6,725 6,376 State and local governm ent ...... 25,431 24,731 692 8 — As s et-backed s ecurities ...... 11,277 1,059 1,898 1,574 6,746 Repurchas e agreem ents ...... 707,860 707,860 — — — Negotiable certificates of depos it ...... 852 302 550 — — Com m ercial paper ...... 45,892 45,892 — — — Pooled bond funds ...... 139,760 — — 139,760 — Annuity contracts ...... 27,157 2,150 10,750 10,750 3,507 Money m arket m utual funds ...... 53,280 53,280 — — — Mutual bond funds ...... 3,188 6 54 3,116 12 Dom es tic corporate bonds ...... 88,193 1,784 83,121 3,256 32 Foreign corporate bonds ...... 8,798 762 7,120 912 4 Foreign governm ent bonds ...... 3,194 — 3,033 161 — 1,330,030 $ 862,403 $ 220,303 $ 173,542 $ 73,782
Other securities: Balanced m utual funds ...... 1,370 International m utual funds ...... 4,223 Other m utual funds ...... 22,978 Real es tate inves tm ent trus ts ...... 12,982 Lim ited partners hips ...... 34,642 Non-State Treasurer pooled investments ... 362,122 Dom es tic s tocks ...... 74,773 Foreign s tocks ...... 6,060 Other ...... 1,697 Total inves tm ent s ecurities ...... $ 1,850,877
Interest Rate Risk and Credit Risk. The spe cial obligati on debt proce eds are generally i nvested in repu rchase agreements. A s established in the debt covenants, repurchase agreements with respect to government obligations can only be entered into with 1) a dealer recognized as a primary dealer by a Federal Reserve Bank with a short-term rating not l ess than P-1 fro m Moody’s Investors Serv ice (Moody’s) and not less than A-1 from Standard & Poor’s (S&P) and Fitch Ratings (Fitch); or 2) any commercial bank, trust company, or national banking associati on r ated A or b etter by Moody’s, S&P and Fitc h, the depo sits of which are i nsured by the Fed eral Depo sit Insurance Corporation. There are no for mally adopted inve stment policies or debt cove nants for sp ecial obligation debt proceeds that address interest rate risk.
B-65 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
At y ear-end, th e other pri mary govern ment invest ments maintained outsid e the State Treasu rer had the foll owing credit quality distribution for securities with credit exposure (dollars in thousands):
Carrying Amount by Credit Rating - Moody's/S&P/Fitch Ba/BB Investment Type Aaa/AAA Aa/AA A Baa/BBB and Below Unrated
U.S. agencies ...... $ 173,118 $ — $ — 37$ $ — $ — Mortgage pass-throughs ...... 311 1,414 — — — — Collateralized mortgage obligations .. 17,368 7 — — — 254 State and local government ...... 24,710 16 682 23 — — Asset-backed securities ...... 8,802 — — 726 1,749 — Repurchase agreements ...... 167,026 — 2,300 — — — Negotiable certificates of deposit .... — — 852 — — — Commercial paper ...... — 45,892 — — — — Annuity contracts ...... — 27,157 — — — — Money market mutual funds ...... 50,972 — — 60 — 2,248 Pooled bond funds ...... — 139,760 — — — — Mutual bond funds ...... 12 3,041 19 33 60 23 Domestic corporate bonds ...... 63,636 2,597 15,085 6,875 — — Foreign corporate bonds ...... 752 3,650 2,651 1,745 — — Foreign government bonds ...... 3 870 665 1,656 — — Total ...... $ 506,710 $ 224,404 $ 22,254 11,155$ 1,809$ $ 2,525
Custodial Credit Risk. For an invest ment, custodial credit risk is t he risk t hat in the e vent of the failure of the counterp arty, the primary government will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. There were no form ally adopted polici es that addre ss custodial credit risk of other p rimary government investments outside the State Treasurer. At year-end, the other primary government investments maintained outside the State Treasurer were exposed to custodial credit risk as follows (dollars in thousands):
Carrying Amount Held by Investment Type Counterparty
U.S. Treas uries ...... $ 12,184 U.S. agencies ...... 82,433 Mortgage pass-throughs ...... 4,938 Collateralized mortgage obligations ..... 17,629 State and local government ...... 705 As s et-backed s ecurities ...... 11,277 Repurchase agreements ...... 2,300 Negotiable certificates of deposit ...... 852 Domestic corporate bonds ...... 27,189 Foreign corporate bonds ...... 8,798 Foreign government bonds ...... 3,194 Total ...... $ 171,499
Foreign Currency Risk. Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair market value of an investment. At year-end, there were no formally adopted policies that address foreign currency risk of other primary government investments outside the State Treasurer.
Concentration of Credit Risk. The North Carolina Public Employee Deferred Compensation Plan (the Plan) places no limit on the amount that may be i nvested in any one issuer. More than 5% o f the Plan's investments are i n Federal National Mortgage Association and Federal Home Loan M ortgage Corporation. These investments totaled $43.010 million and $39.556 million and comprise 6.1% and 5.6%, respectively, of the Plan's investments.
B-66 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Component Units (University of North Carolina System, State Education Assistance Authority and The Golden LEAF, Inc.)
University of North Carolina System
The Gen eral St atutes plac e n o sp ecific in vestment re strictions on the Uni versity of North Carolina Sy stem (t he UNC S ystem). However, in the abse nce of specific legislation, the form of governance over these investments would be the prudent-person or prudent- expert rule. T hese rules are broad st atements of inte nt, ge nerally requiring inve stment selection and management to b e made wi th prudent, discre et, and intellig ent j udgment and care. The University of North Carolina at Chap el Hill (the Universit y) operate s an Investment Fun d, which is a govern mental external invest ment pool. The University operates the Inve stment Fund fo r charitable, nonprofit foundations, associations, trusts, endowments and funds that are organized and operated primarily to support the University and other institutions within the UNC System. Separate financial statements for the Investment Fund may be obtained from the University.
At y ear-end, the UN C Sy stem had the follo wing inve stments an d maturities that were maintained out side th e State Treasurer (dollars in thousands): Investment Maturities (in Years) Carrying Less More Investment Type Amount Than 1 1 to 5 6 to 10 Than 10 Debt s ecurities : U.S. Treas uries ...... $ 118,591 $ 17,309 $ 87,778 $ 8,544 $ 4,960 U.S. agencies ...... 161,724 31,305 62,832 6,008 61,579 Mortgage pass-throughs ...... 15,162 — 3,286 2,348 9,528 Collateralized mortgage obligations ...... 77,016 13,578 1,319 2,098 60,021 State and local government ...... 174 60 — — 114 As s et-backed s ecurities ...... 11,322 3,563 44 54 7,661 Annuity contracts ...... 88 — — — 88 Money market mutual funds ...... 160,830 160,830 — — — Mutual bond funds ...... 65,818 1,054 25,412 33,475 5,877 Domestic corporate bonds ...... 35,705 8,595 19,595 4,695 2,820 Foreign corporate bonds ...... 146 — 28 56 62 Foreign governm ent bonds ...... 34 — — — 34 646,610 $ 236,294 $ 200,294 $ 57,278 $ 152,744
Other securities: Balanced mutual fund ...... 475 International mutual funds ...... 73,633 Other m utual funds ...... 203,674 Inves tm ents in real es tate ...... 35,649 Real es tate inves tm ent trus ts ...... 464 Hedge funds ...... 1,266,257 Lim ited partners hips ...... 1,113,333 Pooled inves tm ents ...... 283 Dom es tic s tocks ...... 132,636 Foreign s tocks ...... 8,902 Other ...... 55,506 Total inves tm ent s ecurities ...... $ 3,537,422
Limited Partnerships – The limited partnership positions are primarily held by the University of North Carolina at Chapel Hill. The University uses various external money managers to identify specific investment funds and limited partnerships that meet asset allocation and investment management objectives. The University invests in these funds and partnerships to in crease the y ield and r eturn on its investment port folio given the available alternative inve stment opportuniti es an d to diver sify its asset h oldings. The se inves tments generally include equity and bond funds. Certain investment funds expose the University to significant amounts of market risk by trading or holding derivative securities and by leveraging the securities in the fund. The University limits the amount of funds managed by any single asset manager and also limits the amount of funds to be invested in particular security classes.
B-67 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Interest Rate Risk and Credit Risk. The constituent institutions of the UNC System generally do not have formal investment policies that address interest rate risk o r credit risk. A t year-end, the UNC System’s investments maintained outside the State Treasur er had the following credit quality distribution for securities with credit exposure (dollars in thousands):
Carrying Amount by Credit Rating - Moody's/S&P/Fitch Ba/BB Investment Type Aaa/AAA Aa/AA A Baa/BBB and Below Unrated
U.S. agencies ...... $ 2,220 $ — $ — $ — $ — $ 143,611 Mortgage pass-throughs ...... 393 19 3 — — 14,728 Collateralized mortgage obligations . 7,251 3,177 7,612 2,333 34,960 21,683 State and local government ...... — — 77 37 — 60 Asset-backed securities ...... 39 2,716 39 — 8,528 — Annuity contracts ...... — — — — — 88 Money market mutual funds ...... 159,989 — 16 — — 825 Mutual bond funds ...... 10,323 44,029 6,735 2,099 769 1,863 Domestic corporate bonds ...... 4,021 3,696 25,164 1,793 1,031 — Foreign corporate bonds ...... 45 39 — 62 — — Foreign government bonds ...... — — 34 — — — Total ...... $ 184,281 $ 53,676 $ 39,680 $ 6,324 45,288$ $ 182,858
Custodial Credit Risk. The constituent institutions of the UNC System generally do not have formal investment policies that address custodial credit ri sk. At year-end, the U NC System’s investments maintained outside the State Treasurer were exposed to custodial credit risk as follows (dollars in thousands):
Carrying Amount Held by Counterparty's Trust Held by Dept. or Agent but Investment Type Counterparty not in State's Name
U.S. Treas uries ...... $ 15,658 $ 820 U.S. agencies ...... 15,930 — Mortgage pass-throughs ...... 14,728 — Collateralized mortgage obligations ..... 4,422 — As s et-backed s ecurities ...... 44 — Domestic corporate bonds ...... 8,898 — Dom es tic s tocks ...... 10,484 44 Foreign s tocks ...... — 11 Total ...... $ 70,164 $ 875
Foreign Currency Risk. The constituent institutions of the UNC System do not have formal investment policies that address foreign currency risk. At year-end, the UNC System’s investments maintained outside the State Treasurer were exposed to foreign currency risk as follows (dollars in thousands):
Carrying Amount Foreign Hedge Limited Currency Stocks Funds Partnerships
Euro ...... $ — 6,613$ $ 57,429 Pound Sterling ...... — — 6,547 Australian Dollar ...... — — 2,230 Canadian Dollar ...... 175 — 1,554 Total ...... $ 175 6,613$ $ 67,760
B-68 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
The State Education Assistance Authority
The State Education Assistance Authority (the Auth ority) is authorized by the Uni versity of North Carolina Board of Governors pursuant to G eneral Statute 1 16-36.2 to inve st its special f unds in the same manner a s the State Treasurer is required to inves t, as discussed in Section A of this note.
Investments. I n accordance with bond re solutions, bond proceeds and debt service funds are invested in o bligations that will by their terms mature on or before the date funds are expected to be required for expenditure or withdrawal.
Interest Rate Risk. The Authority does not have a for mal investment policy that addresses interest rate risk . The following table presents th e fa ir value of inv estments by type and inve stments su bject to intere st rate risk at June 30, 2010, for t he Aut hority's investments (dollars in thousands):
Investment Maturities (in Years) Carrying Less More Investment Type Amount Than 1 1 to 5 6 to 10 Than 10
Debt securities: Money m arket m utual funds ...... $ 123,142 $ 123,142 $ — $ — $ — Annuity contracts ...... 3,273 3,273 — — — 126,415$ 126,415 $ — $ — $ —
Other securities: Inves tm ent agreem ents ...... 53,276 Other m utual funds ...... 431,591 Dom es tic s tocks ...... 34,140 Total inves tm ent s ecurities ...... $ 645,422
Credit Risk. The Authority has form ally adopted Custodial Credit Risk. The Authority does not have a investment policies for credit risk stating that certain investment formal policy that addresses cust odial credit risk. The obligations shall bear o ne o f the two hig hest rati ngs b y Authority's investments were exposed to cu stodial credit risk as nationally recognized rating services. A s of June 30, 2010, the follows (dollars in thousands): Authority's inv estments were rated as follows (dollars i n thousands): Carrying Amount Held by Counterparty's Trus t Carrying Amount by Credit Rating - S&P Dept. or Agent but Inves tm ent Type not in State's Nam e
Investment Type Unrated Dom es tic s tocks ...... $ 34,140 Money market mutual funds ...... $ 123,142 Total ...... $ 34,140 Annuity contracts ...... 3,273 Total ...... $ 126,415
B-69 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
The Golden LEAF, Inc. The General S tatutes pla ce n o specific inve stment restricti ons on The G olden LEAF, Inc (Foundation ). The Foundation i s authorized by its Board of Directors to invest i n any of the following broad asset classes: do mestic equities, real estate, mutual funds, foreign equities, fixed income securities, cash equivalents, and alternatives.
Interest Rate Risk. Interest rate risk is the risk that changes in interest rates will adversely affect the fair v alue of an investment. The Foundatio n monitors the interest rate risk inherent in its portfolio by m easuring th e effective dur ation of its po rtfolio. The Foundation has no specific limitations with respect to duration. At year-end, the Foundation had the following investments and durations that were maintained outside the State Treasurer (dollars in thousands): Carrying Effective Duration Investment Type Amount (in years) Debt securities: U.S. Treas uries ...... $ 29,246 4.48 Money market mutual funds ...... 9,028 0.08 Mutual bond funds ...... 53,765 3.48 92,039
Other securities: International mutual funds ...... 101,599 Other mutual funds ...... 53,031 Real es tate inves tm ent trus ts ...... 24,518 Hedge funds ...... 155,791 Lim ited partners hips ...... 119,402 Dom es tic s tocks ...... 91,842 Total inves tm ent s ecurities ...... $ 638,222
Credit Risk. Credit risk is the risk that an issuer of an invest ment will not fulfill its obligation. Credit risk is measured by the assignment of a rating by a n ationally recognized st atistical rating organiz ation. The Foundation inve stment policy has no sp ecific limitations with respect to credit quality, but p rovides that approximately 50% of the fixe d income allocation will be allocated to U.S. Treasury strategies. As of June 30, 2010, the Foundation's investments were rated as follows (dollars in thousands):
Carrying Amount by Credit Rating - Moody's/S&P/Fitch
Investment Type Aaa/AAA Aa/AA A
Money market mutual funds ...... $ 9,028 $ — $ — Mutual bond funds ...... 8,729 15,805 29,231 Total ...... $ 17,757 $ 15,805 $ 29,231
Foreign Currency Risk. Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair market value of an investment. The Foundation’s investment policy does not limit the amount invested in foreign currency–denominated investments.
B-70 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 4: RECEIVABLES
Receivables at year-end are reported net of allowances for doubtful accounts as follows (dollars in thousands):
Governmental Activities: Highw ay Other Inter nal Highw ay Trust Governmental Service General Fund Fund Fund Funds Funds(1) Total
Receivables, gross (excluding notes)..$ 3,295,596 $ 153,078 $ 39,987 $ 39,331 $ 14,129 $ 3,542,121 Allow ance for doubtful accounts...... (720,520) (9,788) — (36) (12) (730,356) Receivables, net...... $ 2,575,076 $ 143,290 $ 39,987 $ 39,295 $ 14,117 $ 2,811,765
Notes receivable, gross...... $ 21,830 $ 1,035 $ 81 $ 301,821 $ — $ 324,767 Notes receivable, net...... $ 21,830 $ 1,035 $ 81 $ 301,821 $ — $ 324,767
(1) Includes balances due from fiduciary funds.
Within governmental activities, the significant receivables not expected to be coll ected within one year are $205.188 million of notes recei vable in other governmental funds and, in t he General Fund, $24.239 million of accounts, in tergovernmental and notes receivable.
Business-Type Activities:
Unemployment EPA N.C. State Other Compensation Revolving Lottery N.C. Turnpike Enterprise Fund Loan Fund Fund Authority Funds Total
Receivables, gross (excluding notes)..$ 792,522 $ 5,311 $ 6,758 $ 4,386 $ 5,636 $ 814,613 Allow ance for doubtful accounts...... (72,191) — — — (7) (72,198) Receivables, net...... $ 720,331 $ 5,311 $ 6,758 $ 4,386 $ 5,629 $ 742,415
Notes receivable, gross...... $ — $ 782,434 $ — $ — $ — $ 782,434 Notes receivable, net...... $ — $ 782,434 $ — $ — $ — $ 782,434
Within business-type activities, the significant receivables not expected to be collected within one year are $729.042 million of notes recei vable i n the EPA Re volving Loan Fund a nd $66.917 m illion of contri butions receivable in t he Unemployment Compensation Fund. Revenues of other enterprise funds are net of uncollectible amounts.
B-71 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 5: CAPITAL ASSETS
Primary Government. A s ummary of changes in capital assets for the year ended June 30, 2010 is presented below (dollars in thousands).
Governmental Activities: Balance July 1, 2009 Balance (as restated) Additions Deductions June 30, 2010 Capital Assets, nondepreciable: Land and permanent easements ...... $ 13,186,390 $ 539,550 $ (4,472) $ 13,721,468 Art, literature, and other artifacts ...... 67,184 18,055 — 85,239 Construction in progress ...... 1,936,220 1,564,766 (1,365,586) 2,135,400 Computer software in development ...... — 8,322 — 8,322 Total capital assets-nondepreciable ...... 15,189,794 2,130,693 (1,370,058) 15,950,429
Capital Assets, depreciable: Buildings ...... 2,806,023 107,733 (113,746) 2,800,010 Machinery and equipment ...... 1,589,909 71,726 (82,092) 1,579,543 General infrastructure ...... 184,816 1,739 (3,092) 183,463 State highway system ...... 24,816,978 1,293,505 (67,280) 26,043,203 Computer software ...... 23,158 4,142 — 27,300 Total capital assets-depreciable ...... 29,420,884 1,478,845 (266,210) 30,633,519
Less accumulated depreciation/amortization for: Buildings ...... (777,290) (52,932) 2,904 (827,318) Machinery and equipment ...... (928,813) (109,055) 61,969 (975,899) General infrastructure ...... (81,969) (4,798) 1,179 (85,588) State highway system ...... (6,784,131) (520,864) 65,934 (7,239,061) Computer software ...... (3,230) (828) — (4,058) Total accumulated depreciation/amortization ...... (8,575,433) (688,477) 131,986 (9,131,924) Total capital assets-depreciable, net ...... 20,845,451 790,368 (134,224) 21,501,595 Governmental activities capital assets, net ...... $ 36,035,245 $ 2,921,061 $ (1,504,282) $ 37,452,024
B-72 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Business-type Activities: Balance July 1, 2009 Balance (as restated) Additions Deductions June 30, 2010 Capital Assets, nondepreciable: Land and permanent easements ...... $ 3,453 $ 45,983 $ — $ 49,436 Construction in progress ...... 43,060 218,166 (532) 260,694 Total capital assets-nondepreciable ...... 46,513 264,149 (532) 310,130
Capital Assets, depreciable: Buildings ...... 35,417 — (1,419) 33,998 Machinery and equipment ...... 7,468 723 (1,158) 7,033 General infrastructure ...... 15,752 — (98) 15,654 Total capital assets-depreciable ...... 58,637 723 (2,675) 56,685
Less accumulated depreciation for: Buildings ...... (18,412) (760) 1,418 (17,754) Machinery and equipment ...... (3,483) (757) 1,045 (3,195) General infrastructure ...... (9,331) (511) 98 (9,744) Total accumulated depreciation ...... (31,226) (2,028) 2,561 (30,693) Total capital assets-depreciable, net ...... 27,411 (1,305) (114) 25,992 Business-type activities capital assets, net ...... $ 73,924 $ 262,844 $ (646) $ 336,122
Depreciation expense was charged to functions/programs of the primary government as follows (dollars in thousands): Governmental activities: General government ...... $ 37,120 Primary and secondary education ...... 662 Higher education ...... 51 Health and human services ...... 11,468 Economic development ...... 827 Environment and natural resources ...... 12,060 Public safety, corrections, and regulation ...... 50,596 Transportation ...... 572,128 Agriculture ...... 3,565 Total depreciation expense ...... $ 688,477
Business-type activities: N.C. State Fair ...... $ 629 USS North Carolina Battleship Commission ...... 108 Agricultural Farmers Market ...... 315 EPA Revolving Loan Fund ...... 16 State Banking Commission ...... 4 ABC Commission ...... 114 Utilities Commission ...... 6 N.C. State Lottery ...... 583 N.C. Turnpike Authority ...... 16 Other business-type activities ...... 237 Total depreciation expense ...... $ 2,028
B-73 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Component Units (University of North Carolina System and community colleges). Capital asset activity for the University of North Carolina System and community colleges for the fiscal year ended June 30, 2010, was as follows (dollars in thousands):
University of North Carolina System: Balance July 1, 2009 Balance (as restated) Additions Deductions June 30, 2010 Capital Assets, nondepreciable: Land and permanent easements ...... $ 259,702 $ 60,188 $ (2,219) $ 317,671 Art, literature, and other artifacts ...... 129,939 9,549 (4) 139,484 Construction in progress ...... 1,202,051 554,539 (841,534) 915,056 Computer software in development ...... 32,823 20,503 — 53,326 Other intangible assets ...... 1,009 — (9) 1,000 Total capital assets-nondepreciable ...... 1,625,524 644,779 (843,766) 1,426,537
Capital Assets, depreciable: Buildings ...... 8,108,208 728,478 (27,422) 8,809,264 Machinery and equipment ...... 1,608,331 182,057 (68,455) 1,721,933 Art, literature, and other artifacts ...... 2,524 — (2,312) 212 General infrastructure ...... 1,055,383 324,540 (3,795) 1,376,128 Computer software ...... 38,664 9,344 (2,785) 45,223
Total capital assets-depreciable ...... 10,813,110 1,244,419 (104,769) 11,952,760
Less accumulated depreciation/amortization for: Buildings ...... (2,155,090) (213,725) 19,854 (2,348,961) Machinery and equipment ...... (994,132) (117,269) 57,028 (1,054,373) Art, literature, and other artifacts ...... (127) (18) 62 (83) General infrastructure ...... (376,908) (34,333) 3,184 (408,057) Computer software ...... (21,935) (2,510) 74 (24,371) Total accumulated depreciation/amortization ...... (3,548,192) (367,855) 80,202 (3,835,845) Total capital assets-depreciable, net ...... 7,264,918 876,564 (24,567) 8,116,915
University of North Carolina System capital assets, net ...... $ 8,890,442 $ 1,521,343 $ (868,333) $ 9,543,452
Capital assets of nongovernmental component units of t he University of North Carolina System are excl uded from the above amounts. At June 30, 2010, nongovernmental component unit foundations and similarly affiliated organizations of the University of North Car olina Syste m h ad non depreciable cap ital assets o f $32.038 m illion and net d epreciable cap ital assets o f $136.418 million.
B-74 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Community Colleges: Balance July 1, 2009 Balance (as restated) Additions Deductions June 30, 2010 Capital Assets, nondepreciable: Land and permanent easements ...... $ 145,940 $ 7,070 $ (810) $ 152,200 Art, literature, and other artifacts ...... 345 — — 345 Construction in progress ...... 160,978 116,099 (164,612) 112,465 Total capital assets-nondepreciable ...... 307,263 123,169 (165,422) 265,010
Capital Assets, depreciable: Buildings ...... 1,956,444 193,976 (4,406) 2,146,014 Machinery and equipment ...... 252,602 33,329 (10,601) 275,330 Art, literature, and other artifacts ...... 451 84 — 535 General infrastructure ...... 123,410 16,307 (102) 139,615 Computer software ...... 1,207 — — 1,207
Total capital assets-depreciable ...... 2,334,114 243,696 (15,109) 2,562,701
Less accumulated depreciation/amortization for: Buildings ...... (474,935) (41,726) 481 (516,180) Machinery and equipment ...... (104,841) (16,745) 6,450 (115,136) Art, literature, and other artifacts ...... (52) (14) — (66) General infrastructure ...... (30,981) (3,739) 9 (34,711) Computer software ...... (131) (121) — (252) Total accumulated depreciation/amortization ...... (610,940) (62,345) 6,940 (666,345)
Total capital assets-depreciable, net ...... 1,723,174 181,351 (8,169) 1,896,356 Community Colleges capital assets, net ...... $ 2,030,437 $ 304,520 $ (173,591) $ 2,161,366
Capital assets of nongovernmental component units of community colleges are excluded from the above amounts. At June 30, 2010, nongovernm ental component unit foundations and sim ilarly affiliated organizations of community colleges had nondepreciable capital assets of $3.580 million and net depreciable capital assets of $7.077 million.
B-75 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 6: SHORT-TERM DEBT
Component Units
University of North Carolina System
At the University of North Carolina at Chapel Hill, commercial paper was issued from the University of North Carolina General Revenue B onds, Seri es 2 002A, t o p rovide i nterim fi nancing for t he co nstruction o f capi tal pro jects. The am ount of outstanding commercial paper as of June 30, 2010 was $59.784 million.
North Carolina State Uni versity has availabl e commercial paper program financing for short-term credit up to $100 million to finance capital construction projects. Th e University’s available funds are pledged to the commercial paper program financing with the ant icipation o f co nverting t o ge neral r evenue bond f inancing in t he fut ure. As of J une 30, 2 010, no c ommericial paper was outstanding.
The University of North Carolina at Wilmington engaged in interim financing in anticipation of the issuance of Recreation Center Bonds to finance the construction of an addition to the recreation center facility. As o f June 30, 2010, no anticipation note was outstanding.
At North Carolina Central University, a bond anticipation note of $3.5 million was issued to finance pre-construction expenses for a dormitory, parking deck and renovation of a building. At June 30, 2010, no anticipation note was outstanding.
State Education Assistance Authority
The State Education As sistance Authority obt ained a lin e of credit under the Loan Participation Purchase Program, through the United States Department of Education (the Department), to finance Federal Family Education Loan Program (FFELP) student loans for the 2009-2010 academic year. At June 30, 2010, the total obligation related to these participation interests was $823.685 million. The Au thority co nsummated th e sale o f it s in terests in th e p articipated stu dent lo ans o n Sep tember 1 3, 20 10. In g eneral, th e Authority as th e “Sponsor” transferred title to the loans to an unrelated entity called the “Custodian”. Upon transfer, th e loans were placed in a “participation fac ility” under the control of the Custodia n. In exchange for that transfer, th e Custodian sold, on behalf of the Sponsor, participation interests in the loans to the Department. The Department bought those participation interests by providing the Custodian with funds equal to the disbursed amount of the loans. The Custodian then provided those funds to the Sponsor, thus providing liquidity to the Authority for the FFELP loans for the 2009-2010 academic year. The program ended June 30, 2010.
The Golden LEAF (Long-term Economic Advancement Foundation), Inc.
On October 15, 2008, the Golden LEAF, Inc. (Foundation) borrowed $100 million through a short-term unsecured, non-revolving credit facility. The proceeds of the loan were placed in escrow to support the const ruction of new ae rospace facilities at the Global TransPark in Lenoir County, North Carolina, in accordance with a grant awarded to the North Carolina Global TransPark Authority in May 2008. Proceeds from the Master Settlement Agreement (MSA) payment were used to make a partial principal repayment of $85 million o n A pril 30 , 2 009. On April 3 0, 2009, t he t erms of t he l oan we re m odified. Under t he modified t erms, the out standing principal amount of $15 million plus any accrued interest became due on May 1, 2010. There remains no outstanding payable at June 30, 2010.
Short-term debt activity for the University of North Carolina System, the State Education Assistance Authority, and the Gol den LEAF, Inc. for the fiscal year ended June 30, 2010, are as follows (dollars in thousands):
Balance Balance July 1, 2009 Draw s Repaym ents June 30, 2010 University of North Carolina System Commercial Paper Program...... $ 168,291 $ 43,000 $ (151,507) $ 59,784 A nticipation Notes...... 6,700 — (6,700) — State Education Assistance Authority Line of Credit...... — 868,174 (44,489) 823,685 Golde n LEAF, Inc. Line of Credit...... 15,000 — (15,000) —
B-76 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 7: DERIVATIVE INSTRUMENTS
A. Summary Information
A summary of derivative instrument activity during the fiscal year and balances at year-end, classified by type, are as follows (dollars in thousands):
Changes in Fair Value Fair Value at June 30, 2010 Increase Asset Type Classification (Decrease) Classification (Liability) Notional Primary Government Governmental Activities Cash flow hedges: Pay-fix ed interest rate swaps Deferred outflow of resources$ (15,167) Hedging derivatives liability$ (49,903) $ 499,870 Investment derivatives: Swaptions Unrestricted inv estment earnings (16,553) Accounts payable (64,294) 675,955 Basis swaps Unrestricted inv estment earnings 4,063 Inv estments 11,929 675,955 Fiduciary Funds Investment derivatives: U.S. dollar equity futures Investment earnings$ (2,611) State Treasurer Investment Pool$ 45,891 $ 48,501 Foreign equity futures* Investment earnings (1,197) State Treasurer Investment Pool 36,848 40,429 Component Units University of North Carolina System Cash flow hedges: Pay -fix ed interest rate sw aps: UNC at Chapel Hill Deferred outflow of resources$ (6,784) Hedging derivatives liability$ (20,543) $ 119,900 N.C. State Univ ersity Deferred outflow of resources (4,307) Hedging derivatives liability (10,396) 74,655 N.C. Central University Deferred outflow of resources (367) Hedging derivatives liability (1,052) 7,976 UNC Hospitals Deferred outflow of resources (5,597) Hedging derivatives liability (18,810) 136,620 Total $ (17,055) $ (50,801) $ 339,151 N.C. Housing Finance Agency Cash flow hedges: Pay-fix ed interest rate swaps: Deferred outflow of resources$ (2,031) Hedging derivatives liability$ (6,698) $ 72,370
* The notional amount for foreign equity futures is reported in Canadian dollars.
For the pri mary govern ment, the fair value s of derivativ e spot rates i mplied by the c urrent y ield c urve for Lond on instruments were mea sured using mark et prices except as Interbank Offered Rate (LIBO R) due on the date of each future follows. The fair values of interest rate swaps, swa ptions, a nd net settle ment on the swa p. The m ethod used by their basis swaps were estimated by the counterpar ties using a mid- counterparty calculated the pre sent value of all expected futur e market rate method which u ses mid-market rate quotation s t o payments on the swap ba sed o n forward curves disc ounted a t develop m athematically m odeled approxi mations of the current market rates. amounts that would be paid for similar replacement transactions at a given point in time. The fair value of the int erest rate swap at N.C. Central University wa s deter mined by the co unterparty using For co mponent units, t he fair values of int erest rate swap s mathematical a pproximations of market val ues ba sed on a were measured using market prices except as follows. The fair function of long-term swap rates. The swap was discounted due values of interest rate swaps at the University of North Carolina to the expectation for lower LIBOR rates in the future. (UNC) at Chap el Hill were provided either b y their financial advisor or by the co unterparty. The method used by th eir financial advisor calculated th e future net settle ment payments required by the sw ap assuming that the current forward rates implied by th e y ield curve correctly anticipate future sp ot interest rate s. These p ayments were then di scounted u sing th e
B-77 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
The fair value s of the intere st rate swaps at UNC Hospitals The fair values of the inter est rate swap s at the N.C. were es timated by the count erparty us ing the zero-coupon Housing Finance Agency were estimated using the zero-coupon method. This method calculates the present value of th e future method. This method cal culates the futur e net settl ement net settlement payments required by the swap assuming that the payments requi red by the swa p, assu ming th e current forwa rd current forward rates i mplied by the yield curve correc tly rates implied by the yield curve correctly anticipate future sp ot anticipate futur e spot int erest rates. These p ayments are th en interest rate s. These pay ments are then di scounted u sing t he discounted u sing the spot rat es i mplied by the current y ield spot rat es i mplied by the current y ield curve for hy pothetical curve for LIBOR due on the d ate of each futu re net settle ment zero-coupon bonds due on the date of each future net settlement on the swap. on the swap.
B. Hedging Derivative Instruments
Primary Government
The following table displays the objectives and terms of the primary government’s hedging derivative instruments outstanding at June 30, 2010 (dollars in thousands): N otional Effectiv e M aturity Ty pe O bjectiv e Amount Date Date Terms Pay -fix ed interest rate sw ap H edge changes in cash flow s on G.O. $ 230,635 12/12/02 6/1/19 Pay 3.283% ; receiv e 64% 2002B-F Series refunding bonds LIBOR Pay -fix ed interest rate sw ap H edge changes in cash flow s on G.O. 269,235 12/12/02 6/1/17 Pay 3.089% ; receiv e 64% 2002B-F Series refunding bonds LIBOR
The pri mary g overnment’s hedging derivativ e instru ments cause the value of the swap s t o increase and likewise as rates are expo sed to the followi ng risks that could give ri se to fall, the value s of the swap s will declin e. Becau se rate s ha ve financial loss: declined since the effective date of the swap s, both interest rate swaps have negative valuations at June 30, 2010. Credit risk. At year-end, the State was not exposed to credit risk on its inter est rate swap s becau se the swaps had n egative Basis risk. The State’s pay -fixed receiv e va riable interest fair values. T o mitigate the potential for credit risk, if t he rate swaps expose the State to basis risk based on the potentially counterparty’s credit quality falls to a spec ified rating, the changeable rel ationship betw een the LIBO R index which t he counterparty w ill be req uired to collat eralize a p ortion (up to State rec eives ( 64% of LIBO R) and th e intere st rate s t hat th e 100%) of the fair value. For Swap 1, if the counterparty’s credit State pay s on i ts variable-rate debt which i s repriced wee kly. quality falls to A1 as det ermined by Moody’s Investors Service The effect of this differenc e in b asis i s indicated by the (Moody’s) or A+ a s det ermined by either Standard & P oor’s difference between the intended synthetic rates of 3.28% (Sw ap (S&P) or Fitch Rati ngs (Fitch ) and th eir ex posure exceeds $5 1) and 3.09% (Swap 2) and t he synthetic rates as of June 30, million, then the swap will be collateralized by the counterparty 2010 of 3.26% (Swap 1) and 3.07% (Swap 2). As of June 30, with cash, U. S. govern ment or agency securities, or other 2010, the avera ge rate on the State’s variable rate bonds wa s collateral a cceptable to th e State. For Swa p 1, although the 0.2%, whereas 64% of LIBOR was 0.223%. counterparty’s S&P and Fitch ratings have fallen to A+, the valuation expo sure thre shold has not b een met to req uire the Termination risk. The St ate or it s counterparties may counterparty to post any coll ateral. For Swa p 2, if the cre dit terminate a d erivative instru ment if the ot her party fails to quality falls to Aa1 (M oody’s) or AA+ (S&P) and their perform under the terms of th e contract. The State’s p ay-fixed exposure exce eds $10 million, then the swap will be receive variabl e interest rate swap s may be ter minated by the collateralized b y the counterpa rty with cash, U.S. govern ment State with 15 day s notice a nd the counter parties ca n on ly or agency securities, or other collateral accept able to the Stat e. terminate the swaps if the Stat e’s credit rating falls below Ba a1 For Swap 2, al though the co unterparty’s Mo ody’s rating has (Moody’s), or BBB+ (S&P or Fitch) for Swap 1, and on Swap fallen to Aa1, the valuation exposure threshold has not been met 2, below Baa3 (Moody’s) or BBB- (S&P or Fi tch), or an Event to require the c ounterparty to post coll ateral. The State is n ever of Default occurs. An additional termination event occurs if the required to post collateral. counterparty fails to maintain: for Swap 1, at least two ratin gs of at least Baa1 (Moody’s) or BBB+ (S&P and Fitch); for Swap Interest rate risk. The State is expose d to int erest rate risk 2, at least one rating of at l east Baa3 (Mo ody’s) or BBB- on its pay -fixed receive varia ble interest rat e swap s. As t he (S&P). If at the ti me of t ermination a he dging derivati ve LIBOR swap i ndex decre ases, the State’s n et pay ment on t he instrument is in a liability position, the State w ould be liable to swap increa ses. The fair val ues of the se swaps are highly the counterparty for a payment equal to the liability. sensitive to interest rate changes. An ascending yield curve will
B-78 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Component Units
University of North Carolina System
The following table display s the objectives and terms of the University of North Carolina System’s hedging derivative instru ments outstanding at June 30, 2010 (dollars in thousands):
N otional Effectiv e Maturity Type Objective Amount Date Date Terms
UNC at Chapel Hill Pay-fixed interest rate swap Hedge changes in cash flows on General $ 19,900 10/3/00 11/1/25 Pay 5.24% ; receive Rev enue 2001B Series bonds SIFMA Swap index Pay-fixed interest rate swap Hedge changes in cash flows on General 100,000 12/1/07 12/1/36 Pay 3.314% ; receiv e 67% Revenue 2001B&C and 2002A Series bonds LIBOR N.C. State University Pay-fixed interest rate swap Hedge changes in cash flows on General 24,655 6/20/03 10/1/27 Pay 3.54% ; receive 75% Rev enue 2003B Series bonds LIBOR Pay-fixed interest rate swap Hedge changes in cash flows on General 50,000 9/1/08 10/1/26 Pay 3.862% ; receiv e Rev enue 2008A Series bonds SIFMA Swap index N.C. Central University Pay-fixed interest rate swap Hedge changes in cash flows on Revenue 7,976 4/1/04 10/1/24 Pay 3.52% ; receive 70% 2003A Series bonds LIBOR UNC Hospitals Pay-fixed interest rate swap Hedge changes in cash flows on Revenue 94,600 2/13/03 2/1/29 Pay 3.48% ; receive 67% 2003A&B Series bonds LIBOR Pay-fixed interest rate swap Hedge changes in cash flows on Revenue 42,020 2/12/09 2/1/24 Pay 3.601% ; receiv e 67% 2009A Series bonds LIBOR
The Universit y of North Carolina Sy stem’s hedging fair value increases. The fair values are the calculated values as derivative in struments are exp osed to th e following risk s th at of June 30, 20 10. As the y ield curve rise s, the val ue of t he could give rise to financial loss: swaps will increase and as rates fall, the fair value of the sw aps will decrease. UNC at Chapel Hill Basis risk. The University is exposed to basis risk on the Credit risk. At year-end, UNC at Chapel Hill (University) swaps w hen it s bond s b egin to trade at a y ield above t he was not exposed to credit risk on its interest r ate swaps because referenced index rate. For the firs t swap, basis risk also exists the swaps had negative fair values. During fiscal year 2009, the since swap payments are re ceived semi-annually while bo nd counterparty for swap 1, Leh man Broth ers Special Fin ancing, payments are made monthly. With the alternative tax structure Inc., filed for bankruptcy and no longer disbu rses the variabl e of the swap, a change in tax l aw would trigger the swap b eing payment scheduled under the agreement to t he Univer sity. To converted from a SIFMA swap to a percentage of LIBOR swap. account for thi s c onsideration and as allo wed under the swap documents, the Univer sity ne ts it s scheduled fixed payment Termination risk. The swap agree ments use the against th at pa yment that sho uld be receive d fro m Leh man International Swaps and Derivatives A ssociation (ISDA) Brothers Spe cial Financing, Inc., based upo n the Securities Master Agreement, which includes standard termination events, Industry and Financial Markets A ssociation Swap Ind ex such as failure to pay and bankruptcy. Termination could result (SIFMA). in the University being requ ired to make an unanticipat ed termination payment. The swap may terminate if the University Interest rate risk. The Universi ty is exposed to interest rate or the counterparty fails to perform under terms of the contract. risk on its in terest rate sw aps. The fair values of th ese instruments ar e highly sen sitive to interest rate changes. Rollover risk. The University is not exposed to rollover risk Because rate s have c hanged since the effec tive date s of t he for the first sw ap based solel y upon the maturity date of t he swaps, both of the swaps have a negati ve fair value a s of June bonds since th e ter mination date of the swap, Nove mber 1, 30, 2010. Th e neg ative fair value may be countere d by a 2025, is prior to the maturity date of th e hedg ed bo nds, reduction in total interest payments required under the variable- December 1, 2 025. Howe ver, since the u nderlying hedge d rate bonds, creating lower synthetic interest rates. Because the variable rate debt is in the form of variable rate demand bonds, coupons on th e Univ ersity’s variable-rate bonds adj ust t o the University is subj ect to rollover risk in the event that t he changing int erest rates, the bo nds do not hav e correspondi ng bonds are t endered a nd cannot b e re marketed by th e
B-79 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
remarketing agent. The U niversity is ex posed to rollov er ri sk the swap ha s a negativ e fair value, the Uni versity would be for the sec ond swap ba sed upon the maturity date of the liable to the counterparty for that amount. underlying debt and due to the form of the deb t as variable rate demand bonds. Rollover risk. By definition, the Univer sity is expo sed to rollover risk b ecause the swap related to t he 2008A bonds Future swaps. The University has al so entered into a future terminates October 1, 2026, two y ears before the related bond s dated interest rate swap agreem ent for $15 0 million to b e mature on October 1, 2028. It is not the intent of the University effective December 1, 2011 on variable rate bonds. at this time to re-hedge the bonds.
N.C. State University Future swaps. The University has al so entered into a future dated intere st rate swa p agree ment for $22.38 million to b e Credit risk. At year-end, N.C. State University (University) effective March 1, 2017, on the General Reven ue Series 2008A was not exposed to credit risk on its interest r ate swaps because bonds. the swap s ha d negativ e fair value s. The swap agree ments require ter mination should the U niversity’s or the N.C. Central University counterparty’s credit rating fall below either Baa2 as issued by Moody’s or BBB as issued b y S&P or Fitch. Also, under t he Interest Rate Risk. The University is exposed to interest rate terms of the swap agreements, sho uld on e party beco me risk on its inter est rate swap. The fair value of this instru ment insolvent or otherwise d efault on its obligat ions, provisio ns is highly sensitive to interest ra te changes. Because rates ha ve permit th e non defaulting part y to accelerate and ter minate all decreased since the effectiv e date of the swap, the sw ap has a outstanding transactio ns. To m itigate the p otential for credit negative fair value as of June 30, 2010. The negative fair value risk, if the counterparty’s credit quality fa lls bel ow A3 as is countered by a reduction in total interest pa yments required determined by Moody’s or A- as deter mined by S&P, the swap under the variable-rate bond s. Bec ause the coupon s o n t he will be collat eralized by the counterp arty with ca sh, U.S. University’s v ariable-rate bo nds adj ust to changing inter est government or agency securities. If the counterparty is required rates, the bonds do not have corresponding fair value increases. to collateralize, then the collat eral will be po sted with a third party custodian or sec ured party. The swap ag reements entered Basis risk. The sw aps expo se the Found ation to ba sis risk into by the University are held with separate counterparties. All when the variable payment received is based on an in dex other the counterparties are rated A or better. than SIFMA. Should the re lationship between LIBO R an d SIFMA converge, the synthetic rates on the debt would change. Interest rate risk. The Universi ty is exposed to interest rate The Foundation receives 70% of a one- month LIBOR from the risk on its in terest rate sw aps. The fair values of th ese counterparty and pays a floati ng rate to it s bondholders set by instruments ar e highly sen sitive to interest rate changes. the Remarketing Agent. The Foundation inc urs basis risk when Because rate s have c hanged since the effec tive date s of t he its bond s trad e at a y ield above 70% of LIBOR. If the swaps, both of the swaps have a negati ve fair value a s of June relationship of the Foundation’s bonds trade t o a percentag e of 30, 2010. Th e neg ative fair value may be countere d by a LIBOR great er than 70%, the Foundation wi ll experience an reduction in total interest payments required under the variable- increase in debt service above the fixed rate on the swap. rate bonds, crea ting lower sy nthetic interest rates. Bec ause the coupons on th e Univ ersity’s variable-rate bonds adj ust t o Termination risk. The swap co ntract uses the ISDA Master changing int erest rates, the bo nds do not hav e correspondi ng Agreement, which includes standard termination events, such as fair value increases. The fair values are the market values as of failure to pay and bankruptcy . Ter mination could result i n t he June 30, 2010. Both of the sw aps outstanding have termination Foundation being required to make an unanticipated termination dates greater than 15 years. As the yield curve rises, the value of payment. A s of June 30, 2 010 no ter mination eve nts h ad the swaps will increase and as rates fall, the v alue of the swaps occurred an d t here wa s no known dat e wh en the d erivative decrease. instrument may be ter minated. The sw ap agree ment is terminated if the Foundation or the counterparty fails to perform Basis risk. The University is exposed to basis risk on the under the co ntract. There were no o ut-of-the ordinary swaps when the variable payment received is based on an index termination events as of June 30, 2010. other than SIFMA. Should the relationship between LIBOR and SIFMA move t o conv ergence, the e xpected c ost savings may Rollover risk. The Foundati on is exposed t o rollover risk not be realized. The current o utstanding swaps and the related when the swap matures on October 1, 2024. When the swa ps bonds reset rates weekly and pay monthly. As of June 30, 2010, mature, the int erest rate on th e underlying debt will return t o a the SIFMA ra te was 0.25%, whereas 7 5% of LIBOR w as variable rate. The bonds mature on October 1, 2034. 0.26%. UNC Hospitals Termination risk. The University or the counterparty m ay terminate any of the swap s if the other p arty fails to perfor m Credit risk. At year-end, UNC Hospitals (Hospitals) was not under the ter ms of th e c ontract. If any of the swaps are exposed to cre dit risk on its interest rate swaps b ecause t he terminated, the associate d variable-rate bonds would no longe r swaps had negative fair valu es. However, should interest rates carry synthetic interest rates. Also, if at the ti me of termination change a nd the fair value of the swa p beco mes po sitive, t he
B-80 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Hospitals would be exposed t o credit risk in the a mount of the creating lower synthetic interest rates. Because the coupons on derivative's fair value. UNC Hospitals has a policy of requiring the Hospitals’ variable-rate b onds adj ust to changing int erest collateral to su pport hedging derivative in struments subject to rates, the bonds do not have c orresponding fair value increases. credit risk. T his poli cy stat es th at at such ti me th at th e As the y ield curve rises, the value of the swaps will incre ase counterparty’s ratings fall belo w A3 for Moo dy’s or below A- and as rates fall, the value of the swaps will decrease. for S&P, the c ounterparty will be required to collateralize a portion of their exposure (u p to 100%). The following Basis risk. The Ho spitals re ceives 67% o f one- month instruments can serve as eligible collateral: Cash, U.S. Treasury LIBOR Index from the counterparty and pay s a floating rate t o Obligations, U .S. Govern ment Agency Fixed Rat e Fixed its bon dholders set by the Remarketing Agent. The Ho spitals Maturity Secur ities, U.S. Go vernment Agency Single Class incurs basis risk when it s bonds trade at a y ield above 67% of Mortgage-Backed Securities, U.S. Treasury STRIPS, and other one-month LIBOR Index. If t he relation ship of the Ho spitals’ U.S. Government Agency Mortgage-Backed Securities. Posted bonds trade to a perce ntage of LIBOR greate r than 67%, th e collateral received will be entered in one or more accounts with Hospitals will e xperience an increase in d ebt service abov e the a do mestic off ice of a co mmercial ban k, trust co mpany, or fixed rate on the swap. financial in stitution organi zed under t he l aws of the United States (or any state or a political su bdivision thereof). The Termination risk. The derivat ive co ntract u ses t he ISD A Hospitals entered into a master agreem ent with the IS DA in Master Agreement, which includes standard termination events, January 2003. In this agreement, master nett ing arrange ments such as failure to pay and bankruptcy. The Hospitals or t he were established between the c ontractual parties. All derivati ve counterparty may terminate the swap if the other party fails to instruments held by Hospitals are subject to this agreement. perform und er the ter ms of the contract. If the swap is terminated, the associate d variable-rate bonds would no longe r Interest rate risk. T he Ho spitals i s exposed to inter est r ate carry synthetic interest rates. Also, if at the ti me of termination risk on its in terest rate sw aps. The fair values of th ese the swap has a negative fair value, the Hospitals would be liable instruments are sensitive to interest rate changes. Because rates to the counterparty for that amount. Termination could result in have changed since the effective dates of the swaps, both of the the Ho spitals being requir ed to make an una nticipated swaps h ave a negative fair v alue a s of June 30, 2010. T he termination payment. negative fair v alue may be c ountered by a reduction in to tal interest pay ments required under the var iable-rate bon ds,
N.C. Housing Finance Agency
The following table displays the objectives and terms of the N.C. Housing Finance Agency’s (Agency) hedging derivative instruments outstanding at June 30, 2010 (dollars in thousands):
N otional Effectiv e M aturity Ty pe O bjectiv e Amount Date Date Terms P ay -fix ed interest rate sw ap H edge changes in cash flow s on $ 16,015 5/8/03 7/1/32 Pay 3.508% ; receiv e 63% Rev enue 15C Series bonds LIBOR plus 0.30% P ay -fix ed interest rate sw ap H edge changes in cash flow s on 16,355 9/16/03 7/1/32 Pay 3.81% ; receiv e 63% Rev enue 16C Series bonds LIBOR plus 0.30% Pay -fix ed interest rate sw ap H edge changes in cash flow s on 20,000 12/11/03 7/1/32 Pay 3.725% ; receiv e 63% Rev enue 17C Series bonds LIBOR plus 0.30% Pay -fix ed interest rate sw ap H edge changes in cash flow s on 20,000 4/20/04 1/1/35 Pay 3.288% ; receiv e 63% Rev enue 18C Series bonds LIBOR plus 0.30%
The Agency’s hedging derivative instruments are exposed to Basis risk. The sw aps ex pose th e Agency to ba sis risk the following risks that could give rise to financial loss: should th e relationship between LI BOR an d SIFMA converge, changing the synthetic ra te o n th e b onds. T he Credit risk. At y ear-end, the Agency was n ot expose d to swap co ntracts for the Agency utili ze a compound for mula credit risk on its interest swaps because the sw aps had negative for th e flo ating ra te in dex to re duce this risk. During the fair values. For a ll swaps, co llateral t hresholds ha ve bee n accounting per iod, th e Ag ency realized a be nefit of 15.67 established if th e counterparty’s r atings r each A2 for basis points due to th e floating rat e fo rmula for its swap Moody’s o r A f or S &P. The Agency has no master netting contracts when c ompared to t he f loating rat e on t he arrangement. respective bonds.
B-81 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Termination risk. Series 16C, 17C and 18C swaps may be terminated if the counterparty’s or t he Agency’s rating falls below Baa2 as issued by Moody’s or BBB as issued by S&P. Series 15C swap may be terminated if the counterparty’s or the Agency’s rating falls below Baa3 as issued by Moody’s and BBB- as issued by S&P. To date, no termination events have occurred.
Information o n de bt service requ irements on lo ng-term debt of the primary government and component units and net cash flo ws on assoc iated he dging d erivative i nstruments i s presented in Note 8E.
C. Investment Derivative Instruments
Primary Government
The pri mary govern ment’s swaptions and basi s swaps, which are repo rted as inve stment derivati ve instru ments, are exposed to t he following risks that coul d give rise to financial loss:
Credit risk. At y ear-end, the State had no n et exposure to credit risk be cause the aggregate fair value s of the basi s swap and swa ptions wer e negativ e. For the basis swaps an d swaptions, if t he co unterparty’s credit qual ity is rated lo wer than Baa1 (Moody’s), BBB+ (S&P), or BBB+ (Fitch) by two of the three rating agencie s, then the swa p will need to b e collateralized b y the counterpa rty with cash, U.S. govern ment or agency securities, or other collateral acceptable to th e State (Fitch credit r atings only apply to counter party 1). If th e counterparty is required to collateralize a portion of t he derivative, then the collateral will be posted ( net of the effect of applicable netting arrangements) with a third party custodian or secured party. The State i s not required to p ost collateral. The State has entere d into a master netting agree ment with each o f the three ba sis swap and swaption counterparties which allows the party by who m the l arger aggregat e a mount woul d ha ve been pay able t o pay the othe r party the excess of the larg er amount over the smaller amount as due on a given date.
The following table su mmarizes, for basis swaps, the State ’s maximum e xposure to cre dit risk at y ear-end reduced b y liabilities included in netting arrangements: Fair Counterparty Credit Ratings Deriv ativ e Instrument Value Counterparty S&P/Fitch Moody 's Basis swap, G.O. Series 2003A, 2003B, and 2004A$ 5,835 Counterparty 1 — / AA- Aa2 Basis swap, G.O. Series 2003A, 2003B, and 2004A 3,774 Counterparty 2 A / A+ A2 Basis swap, G.O. Series 2003A, 2003B, and 2004A 2,320 Counterparty 3 AA– / AA– Aa1 Total* $ 11,929 Less: Netting arrangement liability — Swaption (33,075) Counterparty 1 Less: Netting arrangement liability — Swaption (18,710) Counterparty 2 Less: Netting arrangement liability — Swaption (12,509) Counterparty 3 Net exposure to credit risk $ (52,365)
* The fair value total represents the maximum risk of loss that would be recognized at the reporting date if all counterparties failed to perform as contracted, without respect to any netting arrangements. The State has no net exposure to credit risk since the netting arrangement liabilities for the swaptions ex ceed the total fair value of the basis swaps.
B-82 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
An additional termination event for the basis swaps occurs if Rygel Short Duration Bond Fund. The fair value of t he counterparty 1 or 3 has one or more issues of rated, unsecure d, securities covered by the contracts as of D ecember 31, 2009, is unenhanced senior debt or lo ng-term deposits out standing a nd $919.41 million and the contract value is $892.76 million. none of such issues has at le ast two ratin gs of at le ast Baa2 or higher as d etermined by Moody ’s, or BBB or hig her a s In the North Carolina Public E mployee Deferred determined by S&P or Fitch. For counterparty 2, an additional Compensation Plan, 457 Plan, employees are able to participate termination event occurs if it has one or more issues of rate d, in SGICs. The SGICs wit h P rudential In surance Company of unsecured, une nhanced senior debt out standing and none of America, whic h are fully b enefit respon sive, provided an such issue s h as at lea st t wo rating s of Ba a2 or higher average credit rating y ield of 5.08% for the Prudential Co re (Moody’s), BBB or higher (S&P) or counterparty 2 fails to have Conservative Bond Fund and 2.96% for the PIMCO Core Plus a rating on long-term, unsecured, unenhanced senior debt. Bond Fu nd an d the Pay den and Ry gel Sho rt Duration Bo nd Fund. The fair value of the se curities covered by the contracts The basi s sw aps an d sw aptions may b e optionally as of December 31, 2009, is $205.97 million and th e contr act terminated by the State with t wo days notice for counterparties value is $199.96 million. 1 and 2 or wi th five day s notice for count erparty 3. The counterparties can only terminate if the State, at any time during Both the Sup plemental Retirement Inco me Plan and the the ter m of the swap transacti on, fails to mai ntain by at lea st Deferred Co mpensation Plan h ave ent ered int o wrap contracts two rating age ncies, rating s of at least Ba a2 or higher a s with Prudential Insurance Co mpany of Am erica (Prudential) determined by Moody ’s, or BBB or high er as deter mined b y and Great-W est Life and Annuity Co mpany (Great-W est) to S&P or Fitch (Fitch does not apply to counterparty 2). assure that the crediting rate on participant investments will not be less than zer o. However, the wrap contract s with Prudenti al Interest rate risk. The State is expose d to int erest rate risk and Great-W est were deter mined to have n o fair value. The on its b asis s waps. T he f air value s of the basi s s waps are wrap contacts have strict li mits as to the a mount of funds that sensitive to int erest rate chan ges. A s the rel ationship betw een can be withdrawn, and these limits allow Prudential and Great- LIBOR and SI FMA change, the net basi s swap cash flow w ill West to collapse the wrap contracts and provide market value to be affected. An increase in the LIBOR rate greater than in the participants. SIFMA rate wi ll have a po sitive i mpact on net cash flow an d likewise an in crease in th e SIFMA rate gr eater than in t he LIBOR rate will have a n egative impact on net cash flow. The State is al so exposed to int erest rate risk on it s swaptions. The valuations of t hese in struments are highly sensitive to int erest rate chan ges. The sw aption valuations refl ect a d ecline in interest rates from the prior fiscal y ear. A repl acement transaction wo uld generate a net present value savin gs approximately equal to these valuation amounts. The State pays SIFMA and re ceives 70% of LIBOR plus 69 ba sis point s (2 8 basis points re late to swapti ons) on a not ional a mount of $675.95 million. On June 3 0, 2010, SIFMA wa s 0.25% and 70% of LIBOR was 0.24%.
The Investment Pool maintained by the State Treasurer has investments i n U.S. dollar equity futures a nd foreign equ ity futures. The invest ment discl osures for these derivative s a re included a s pa rt of the equity based trust portfolio which is included in th e Invest ment Pool. More de tailed infor mation about the Investment Pool is presented in Note 3A.
D. Synthetic Guaranteed Investment Contracts
Primary Government
In the Supple mental Retire ment Inco me Plan of North Carolina, 401( k) plan, e mployees are able to participate i n synthetic guaranteed investment contracts (SGICs). The SG ICs with Prudential Insurance Company of America, which are fully benefit respon sive, provided an average credi t rating y ield o f 4.86% for the Prudential Core Con servative Bond Fund and 3.6% for the PIMCO Core Plu s Bond Fund and the Payden and
B-83 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 8: LONG-TERM LIABILITIES
A. Changes in Long-Term Liabilities
Primary Government. Long-term liability activity for the year ended June 30, 2010, was as follows (dollars in thousands):
Balance Amounts July 1, 2009 Balance Due Within (as restated) Increases Decreases June 30, 2010 One Year Governmental activities: Bonds and similar debt payable: General obligation bonds ...... $ 5,169,265 $ 859,620 $ (758,225) $ 5,270,660 $ 379,325 Special indebtedness: Lease-purchase revenue bonds ...... 225,045 — (10,000) 215,045 10,000 Certificates of participation ...... 919,585 — (46,985) 872,600 47,740 Limited obligation bonds ...... 600,000 — (19,295) 580,705 19,960 GARVEE bonds ...... 241,820 242,520 (49,515) 434,825 61,745 Less deferred amounts: On refunding ...... (63,011) (44,910) 17,428 (90,493) — Add issuance premium ...... 275,131 140,876 (62,860) 353,147 — Total bonds and similar debt payable ...... 7,367,835 1,198,106 (929,452) 7,636,489 518,770 Notes payable ...... 26,331 8,837 (4,526) 30,642 5,501 Capital leases payable ...... 23,531 261 (977) 22,815 1,347 Arbitrage rebate payable ...... 911 — (911) — — Compensated absences ...... 424,281 258,832 (262,703) 420,410 34,785 Net pension obligation ...... 474 10,035 (10,080) 429 — Workers' compensation ...... 78,467 17,711 (14,028) 82,150 24,715 Deferred death benefit payable ...... 530 — (30) 500 300 Pollution remediation payable ...... 6,688 177 (316) 6,549 511 Court judgment payable ...... 731,703 — — 731,703 — Cost settlement payable ...... 15,000 — (15,000) — — Governmental activity long-term liabilities ...... $ 8,675,751 $ 1,493,959 $ (1,238,023) $ 8,931,687 $ 585,929 Business-type activities: Bonds payable: Revenue bonds ...... $ — $ 622,758 $ — $ 622,758 $ — Less deferred amounts: For issuance discounts ...... — (2,351) 107 (2,244) — Total bonds payable ...... — 620,407 107 620,514 — Notes payable ...... — 68,800 — 68,800 — Annuity and life income payable ...... 13,518 14,789 (1,150) 27,157 2,150 Federal unemployment account advances ...... 728,773 2,294,296 (873,545) 2,149,524 800,000 Pollution remediation payable ...... 250 — (250) — — Compensated absences ...... 5,533 3,405 (3,693) 5,245 394 Business-type activity long-term liabilities ...... $ 748,074 $ 3,001,697 $ (878,531) $ 2,871,240 $ 802,544
For governmental activities, the compensated absences, net pension obligation, workers’ compensation, and cost settlement liabilities are generally liquidated by the General Fu nd. Pollution re mediation payable is ge nerally liquidated by the Highway Fund. Arbi trage rebate pay able is gen erally liquidated by oth er govern mental funds . A po rtion of co mpensated ab sences is also li quidated by th e Highway Fund. Internal servi ce funds pred ominantly serve the govern mental funds. Acc ordingly, long-t erm liabiliti es f or the m a re included as p art of the abov e totals for gov ernmental a ctivities. At y ear-end, $6.028 million of internal service fun ds compensated absences are included in the above amounts.
B-84 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Component Units (University of North Carolina System, North Carolina Housing Finance Agency, and the State Education Assistance Authority). Long-term liability activity for the year ended June 30, 2010, was as follows (dollars in thousands):
Balance Amounts July 1, 2009 Balance Due Within (as restated) Increases Decreases June 30, 2010 One Year University of North Carolina System: Bonds payable: Revenue bonds ...... $ 2,395,149 $ 653,820 $ (174,084) $ 2,874,885 $ 156,244 Certificates of participation ...... 31,125 — (2,075) 29,050 2,150 Less deferred amounts: For issuance discounts ...... (34,749) (525) 9,510 (25,764) — On refunding ...... (25,389) (7,154) 2,440 (30,103) — Add issuance premium ...... 47,639 22,937 (4,086) 66,490 — Total bonds payable ...... 2,413,775 669,078 (168,295) 2,914,558 158,394 Notes payable ...... 54,282 132,809 (27,013) 160,078 9,144 Capital leases payable ...... 202,494 30,483 (8,566) 224,411 12,956 Arbitrage rebate payable ...... 406 — (9) 397 128 Annuity and life income payable ...... 17,165 917 (1,130) 16,952 1,527 Compensated absences ...... 331,615 232,168 (238,059) 325,724 34,203 Pollution remediation payable ...... 83 30 (83) 30 30 Liability insurance trust fund payable ...... 45,214 8,084 (5,006) 48,292 12,771 Total long-term liabilities ...... $ 3,065,034 $ 1,073,569 $ (448,161) $ 3,690,442 $ 229,153
Long-term liabilities of nongo vernmental component units of the Universit y of North Carolina Sy stem are excluded from the above amounts. At June 30, 2010, nongovern mental co mponent u nit foundatio ns and si milarly affiliated organ izations of the University of North Carolina System had total long-term liabilities of $445.674 million, of which $12.884 million was due within one year and $432.79 million was due in more than one year.
Balance Amounts July 1, 2009 Balance Due Within (as restated) Increases Decreases June 30, 2010 One Year North Carolina Housing Finance Agency: Bonds payable: Revenue bonds ...... $ 1,517,785 $ 135,000 $ (182,615) $ 1,470,170 $ 171,615 Arbitrage rebate payable ...... 1,498 — (394) 1,104 694 Compensated absences ...... 919 460 (382) 997 127 Total long-term liabilities ...... $ 1,520,202 $ 135,460 $ (183,391) $ 1,472,271 $ 172,436
Amounts Balance Balance Due Within July 1, 2009 Increases Decreases June 30, 2010 One Year State Education Assistance Authority: Bonds payable: Revenue bonds ...... $ 3,994,462 $ — $ (1,880,812) $ 2,113,650 $ 637,200 Notes payable — 1,577,156 (16,631) 1,560,525 120,500 Arbitrage rebate payable ...... 2,575 — (1,887) 688 655 Compensated absences ...... 359 6 (11) 354 11 Total long-term liabilities ...... $ 3,997,396 $ 1,577,162 $ (1,899,341) $ 3,675,217 $ 758,366
B-85 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
B. Bonds, Special Indebtedness, and Notes Payable
Bonds, special indebtedness, and notes payable at June 30, 2010 were as follows (dollars in thousands):
Maturing Original Interest Through Issue Outstanding Rates Year Amount Balance Primary Government: Governmental activities General obligation bonds...... 0.18% - 5.50%* 2030$ 7,557,335 $ 5,270,660 Special indebtedness: Lease-purchase revenue bonds...... 3.00% - 5.25% 2024 272,045 215,045 Certificates of participation...... 3.00% - 5.25% 2028 1,064,840 872,600 Limited obligation bonds...... 2.00% - 5.25% 2029 600,000 580,705 GARVEE Bonds...... 2.00% - 5.21% 2021 530,085 434,825 Notes payable...... 1.95% - 4.00% 2018 42,576 30,642 Business-type activities Revenue bonds**...... 4.50% - 7.10% 2039$ 622,758 $ 622,758 Notes payable...... 4.25% 2047 68,800 68,800 Component Units: University of North Carolina System Revenue bonds**...... 0.15% - 10.00%* 2039$ 3,345,033 $ 2,874,885 Certificates of participation...... 3.13% - 5.00% 2036 38,745 29,050 Notes payable**...... 0.85% - 8.75%* 2030 246,854 160,078 North Carolina Housing Finance Agency Revenue bonds...... 3.10% - 6.40%* 2039$ 3,724,241 $ 1,470,170 State Education Assistance Authority Revenue bonds...... 0.33% - 4.00%* 2037$ 3,681,505 $ 2,113,650 Notes payable...... 0.36%* 2014 1,577,000 1,560,525
* For variable rate debt, interest rates in effect at June 30, 2010 are included. For variable rate debt w ith interest rate sw aps, the synthetic fixed rates are included.
** The issuer has elected to treat a portion of these obligations as federally taxable "Build America Bonds" for purposes of the American Recovery and Reinvestment Act and to receive a cash subsidy from the U.S. Treasury equal to 35% of the interest payable on these obligations. The outstanding balance of "Build America Bonds" w as $352.68 million for the primary government and $301.77 million for component units. For these bonds, the interest rate included is the taxable rate, w hich does not factor in the cash subsidy from the U.S. Treasury.
General obligation bonds are secured by the full faith, credit, and taxing po wer of the State. The payments on spe cial indebtedness; which inclu de lease-purc hase revenue bo nds, certificate s of par ticipation (COP s), and li mited obli gation bond s; are subj ect to appropriation b y the General Assembly. Special indebt edness may al so be secure d by a lien on equi pment or facilities, or by lea se payments made by the State. Other long-term debts of the State and its component units are payable solely from certain resources of the funds to which they relate.
C. Bonds Authorized but Unissued In 2005, the N.C. General Assembly ena cted Gen eral Statute 136-18 (12b) providing for the issuance of Gra nt Anticipation Revenue Vehicle Bond s (GA RVEEs), which are The amount of authorized but unissued special indebtedness payable fro m revenue s consisting pri marily of federal of the pri mary govern ment at June 30, 201 0 totaled $ 2.026 transportation f unds, with th e proceed s to finance fed eral-aid billion as follows: university projects $902 million, psychiatric highway projects. The GARVEEs are limited obligations of t he hospital $253 million, corr ectional fa cilities $ 118 million, State pay able solely fro m th ese fundin g sources. The tot al guaranteed e nergy savings co ntracts $438 million, parks an d amount of GARVEEs that may be issu ed is subject to land $40 million, State and other proj ects $115 million, and limitations contained in the authorizing legi slation tied to th e repairs and renovations $160 million. historic and future level of federal transportation funds the State has or is expected to receive.
B-86 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
D. Demand Bonds adjustable rate tied to the prime rate or federal funds rate with a maximum of 18%. Upon re marketing of Ban k Bonds and th e receipt of the sales price by the Bank, su ch bonds are no lon ger Included in bonds payable are several variable rate demand considered Bank Bonds. Payment of interest to the Bank is d ue bond issues. Demand bonds are securities that contain a “ put” quarterly for each period in which Bank Bonds are outstanding. feature that all ows bondholders to de mand payment before the maturity of the debt upon proper notice to the i ssuer’s Included in the agree ments i s a tak e-out pro vision, in t he remarketing or paying agents. event the Remarketing Agent is unable to re sell any bonds th at are "put" within 180 days of the purchase date. In this situation, Primary Government the State is re quired to redee m the Bank Bonds hel d by the Liquidity Facility . The agreem ents allow th e State to redeem With regard to the follo wing demand bond s, the St ate h as Bank Bo nds in equal quarterl y install ments of principal pl us entered into ta ke out agreements, whi ch w ould con vert t he accrued intere st. The principal pay ments will co mmence wit h demand bonds not successfully remarketed into another form of the first busin ess day of any such month (January, April, July , long-term debt. October) that i s at least 180 day s followin g the applicab le purchase date of the Bank Bond and end no later than th e fifth Governmental Activities anniversary of such purc hase date. If the take out agree ment were to be e xercised because the e ntire outstanding $3 55 State of North Carolina Variable Rate General Obligation million of vari able rate bond s was "put" an d not resold, the Bonds, Series D, E, F, and G State would be required to pay $71 million a year for five years under the in stallment loan agreement with the Liquidit y On May 1, 20 02 the State issued tax-exe mpt variable rate Provider plus interest at the Bank Bond Rate. The Bank Bon d general obligation bonds, ($88.75 million, series D through G) Rate wo uld be based on the Base Rat e as shown in the ta ble in the total a mount of $355 m illion th at ha ve a final maturity below. At June 30, 2010, there were no Bank Bonds held under date of May 1, 2021. Each serie s of bo nds is subject to the liquidity facility by the Bank. mandatory sinking fund rede mption that will begin on May 1, 2013. The bo nds repre sent a consolid ation of Public Scho ols Days Bank Bonds Base Rate Bank Maximum Buildings Bonds, Cl ean W ater Bon ds and Higher Educ ation held by Liquidity (Defined) Bond Rate Bonds. The bonds currently bear intere st at a weekly rate, a nd Provider Rate the bonds are subject to purch ase at a pric e equal to princi pal 0 – 30 Days Higher of Prime Base 18% plus interest on demand with seven days notice and deli very to +3%, Fed Funds Rate the Tender Agent, US Bank National Association. + 5% 31 – 90 Days Higher of Prime Base 18% The State’s Re marketing Agent s, Ba nc of A merica +3%, Fed Funds Rate + Securities (series 2002D), JP Morgan Securities (series 2002E), +5% 1% Goldman S achs (serie s 200 2F) and W ells Fargo & Co mpany 90 – 360 Days Higher of Prime Base 18% (series 2 002G) have a greed t o exerci se thei r best efforts t o + 3%, Fed Funds Rate + remarket bond s for which a notice of purchase ha s be en +5% or 8% after 2% received. The quarterly re marketing fee i s p ayable in arrea rs 180 Days and is equal to 0.05% per ann um of the out standing princip al > 360 Days Higher of Prime Base 18% + 3%, Fed Funds Rate + amount of the bonds assigned to each agent. + 5% or 8% 4%
Under four se parate standby bond purcha se agreements (“agreements”) betwe en th e State and Lan desbank H essen- The current expiration dat e of the amended agreements i s Thuringen Giro zentrale (“ the Bank”), a Liqu idity Facility h as December 31, 2015. The Ba nk has th e option to ter minate its been established for each seri es for the Tend er Agent to dra w commitment on December 31, 2012 and 2014 and July 15, 2015 amounts suffic ient to pay the purcha se pri ce and accrued by providing adequate notice of its intention. The bonds are not interest on bonds delivered for purchase when remarketing subject to mandatory tender for purcha se as a re sult of proceeds or other funds are not available. The State is required immediate ter mination of the liquidity agree ments. Failure b y to pay the Bank a commitment fee quarterly in arrears, until the the State to purchase bonds tendered for purchase results in the expiration date or the ter mination date of the agreements. For bonds bearin g interest at a flo ating rate inde xed to un secured the 2009-10 fi scal y ear, the commitment fe e wa s 0.1% p er commercial p aper for 75 da ys continuing thereafter at a n annum. Under an amended agreement, which was entered into interest rate of 12%. on March 11, 2010, a new c ommitment fee of 0.35% wa s scheduled to begin on July 15, 2010.
Under the agree ments, any bonds purch ased through the Liquidity Facility become Bank Bonds and shall, from the date of such purchase and while they are Bank Bonds, bear int erest at the bank bond interest rate. The Bank Bond interest rate is an
B-87 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
State of North Carolina Variable Rate General Obligation Refunding Bonds, Series B, C, D, E, and F
On December 5, 2002, the Sta te issued tax-exempt variable rate general obligation bonds, ($100 million, series B through E and $99.87 million, series F) in the total a mount of $499.87 million that ha ve final maturity dates of June 1, 2019. Ea ch series of bonds is subject to mandatory sinking fund redemption that will begi n on Jun e 1, 2 012. The bond s were i ssued to refund certain general obligation bonds of the State. The bonds currently bear interest at a w eekly rate, and the bonds are subject to purchase at a price equal to principal plus interest on demand with seven day s n otice and d elivery to the Tender Agent, US Bank National Association.
The State’s Remarketing Agents, Wachovia Bank N. A. (a division of W ells Fargo) (series 2002 B), Citigroup (seri es 2002C), W achovia Bank N. A. (series 200 2D), RBC C apital Markets ( series 2002E) and BB&T Capital Mark ets (seri es 2002F) hav e a greed to exerci se th eir be st efforts to re market bonds for whic h a notice of purchase h as be en received. The quarterly remarketing fee is p ayable in arrears and is eq ual to 0.05% per annu m of the o utstanding princip al a mount of t he bonds assigned to each agent.
Under sep arate standby bond purchase agree ments (agreements) between the St ate and W achovia Bank N. A. (series 2002B), Bay erische Landesbank (series 200 2C), Landesbank Baden-Wurttemberg (serie s 2 002D), Bay erische Landesbank (series 2002E) and Branch Bankin g & Trust Company (series 200 2F), (collectively, “the Banks”), liquidit y facility agreements have be en established for the Tender Age nt to draw a mounts sufficient t o pay the purchase price an d accrued intere st on bond s delivered fo r purcha se when remarketing pr oceeds or othe r funds are not available. The State is required to pay the banks a commitment fee quarterly in arrears until the expiration date or the term ination date of the agreements. On Septe mber 24, 2009 the State ent ered into amendments to the original liquidity facility agreem ents and these amended rates are as follows:
Series Liquidity Facility Amended Agreement Optional Base Rate Defined: Bank Bond Rate Provider Rate Expiration Termination Higher Of 2002B W achovia Bank, 0.70% 10/1/2011 None Prime + 2% or Fed 1-30 days: Base Rate N.A. (a division Funds +3% 31-180 days: Base +1% of Wells Fargo) >180 days: Base + 2% 2002C Bay erische 0.75% 11/30/2015 Oct 1, 2011, Prime +3%, Fed 1-30 days: Base Rate Landesbank 2013 & 2015 Funds + 5% or 31-90 days: Base + 1% LIBOR + 3% >90 days: Base + 2% 2002D Landesb ank 0.75% 11/30/2015 Oct 1, 2011, Prime +3%, Fed 1-30 days: Base Rate Baden 2013 & 2015 Funds + 5% or 31-90 days: Base + 1% Wurttemberg LIBOR + 3% >90 days: Base + 2% 2002E Bay uerische 0.75% 11/30/2015 Oct 1, 2011, Prime +3%, Fed 1-30 days: Base Rate Landesbank 2013 & 2015 Funds + 5% or 31-90 days: Base + 1% LIBOR + 3% >90 days: Base + 2% 2002F Branch Banking 0.45% 10/1/2011 None LIBOR + 2.75% or > 1-180 days: Base Rate & Trust Company 4% >180 days: LIBOR + 3.25%, Total > 4%
B-88 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Under the agree ments, any bonds purch ased through the Component Units Liquidity Facility become Bank Bonds and shall, from the date of such purchase and while they are Bank Bonds, bear int erest University of North Carolina System at the Bank Bond interest rate. The Bank Bond interest rate i s an adjustable rate tied to the prime rate, federal funds or LIBOR The University of North Carolina at Chapel Hill rate with a maximum of 20%. Upon remarketing of Bank Bonds and the receipt of the sales price by the Banks, such bonds are With regards to the following de mand bonds, the issu er has no longer con sidered Ba nk Bonds. Pay ment of interest to t he not entered into take out agreements, which would convert the Banks is due quarterly for each period in which Bank Bonds are demand bonds not successfully remarketed into another form of outstanding. long-term debt.
Included in the agree ments i s a tak e-out pro vision, in t he General Revenue, Series 2001B and 2001C event the Remarketing Agent is unable to re sell any bonds th at are "put" within 180 days of the purchase date. In this situation, In 2001 the University issue d two series o f variable rate the State is re quired to redee m the Bank Bonds hel d by the demand bon ds in the a mount of $54.97 million (2001B) an d Liquidity Facility . The agreem ents allow th e State to redeem $54.97 million (2001C) that e ach ha s a final maturity date of Bank Bo nds in equal quarterl y install ments of principal pl us December 1, 2025. The bonds are subject to mandatory sinking accrued intere st. The pay ments will co mmence with the fir st fund redemption on the interest payment date on or immediately business day of any such month (January, April, July, October) preceding each Dece mber thr oughout th e te rm of th e bon ds. that is at lea st 180 days following the appli cable purchase date The proceeds o f these issuanc es were used to provide funds t o of the Bank Bo nd and end no later than the fifth anniversary of refund in a dvance of their maturity the following i ssues: such purc hase date. If the take out agre ement were to be Ambulatory Care Clinic, Series 1990; Athletic Facilities, Series exercised bec ause the e ntire outstandin g $ 499.9 million of 1998; Carolina Inn, Series 1994; School of Dentistry , Seri es variable rate bonds wa s "put" an d not r esold, un der t he 1995; Kenan Stadium, Series 1996; and Parking System, Series installment loa n agree ments, the State woul d be required to 1997C. W hile bearing intere st at a w eekly rate, the bond s are repay the loans over a five year period for Series C – F and over subject to purc hase on de mand with seven day s notice a nd a three y ear period for Series B plus interest at the Bank Bond delivery to the University 's rem arketing ag ents J.P. Morgan rate. At June 30, 2010 there were no Bank Bonds held under the Chase (2001B) and Bank of America, N.A. (2001C). Effective Liquidity Facilities. September 23, 2008, J.P. Morgan Cha se replaced Leh man Brothers, Inc. The bonds are not subject to mandatory tender for purchase as a result of immediate termination of the liquidity agreements. The University entered into a new line of credit agreem ent Failure by the State to purcha se b onds ten dered for purcha se in the amount of $300 million with Wachovia Bank, N.A. (“the results in the bonds bearing interest at a floating rate indexed to Bank”) o n Sep tember 21, 200 6. Under the n ew line of cre dit unsecured c ommercial pa per f or 75 day s continuing there after agreement, the University is entitled to draw amounts sufficient at an interest rate of 12%. to pay the principal and accrued interest o n Variable Rate Demand Bonds (or Co mmercial Paper Bo nds) delivered f or purchase. Und er the n ew l ine of credit agree ment, t he University may request that the Bank increase the co mmitment by increments of $25 million for a total co mmitment of up to $400 million. A reque st for increase is subject to the Bank’s sole di scretion, and the Uni versity cannot be in default und er the agreement at the time of the request. During the fiscal y ear 2009, W ells Fargo purcha sed Wachovia Ba nk, N.A., but the line of credit agree ment remains in place und er original ter ms and conditions.
The University is required to p ay a quarterly facility fee for the line of credit in the amount of .08% per annum based on the size of the co mmitment. If a l ong-term debt rating assigned by Standard & Po or’s (S&P), Fitch Rati ngs (Fit ch), or Moody ’s Investors Serv ice ( Moody’s) is lowered, the facility fe e assigned to the lowest rating in the below table shall apply:
Facility S&P Fitch Moody 's Fee AA AA Aa2 0.10% AA- AA- Aa3 0.11% A+ A+ A1 0.14% A A A2 0.18%
B-89 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
In the event that the Bank increase s the availabl e expired on Oct ober 15, 2006. The LOC may be extended by commitment prior to the due d ate for pay ment of a facility fee, request from the Foundation by delivering a notice of exten sion upon reque st by the University as referenced in the prior to the Trustee with a new expiration date . The LOC wa s paragraph, the University must pay a supplemental fee based on subsequently extended until August 31, 2010. At June 30, 2010, the facility fee applied to the amount of the increase at the time the LOC rate f or the bonds was 1.5% and no a mounts we re of co mmitment to increase. The University will also pay an drawn on it. accrued interest fee equal to t he amount of a ccrued interest, at the time of purchase of the bonds, multiplied by the prim e rate The Foundatio n paid W achovia Ban k, N.A. a co mmitment multiplied by the ratio of the number of day s from the dat e of fee of $109 thousan d for the letter of credit on the date t he purchase of the bonds u ntil the date of pay ment of the accrue d bonds w ere issued. If the Foundation ter minates the lett er of interest to 365 days. credit on or before August 3 1, 2010, then the Foundation must pay a termination fee of $25 thousand. The Bonds are not under Under the line of credit agreement, draws to purchase bonds a take-out agreement; h owever, in the eve nt of ter mination will accrue i nterest at th e pr ime rate pay able on the same 100% of the unpaid principal will be due and payable plus any interest date as provided in the Trust Agreement for the original unpaid and accrued interest. bonds. The University is required to begin making a series of 10 fully amortizing semi-annual principal payments on bonds held Under the L OC agree ment, t he procee ds of each drawing by the Bank six months after the date of purch ase. Commercial under the LOC to pay the portion of the purchase price of Series paper bonds held by the Bank may be rolled over for a period of 2003 bond s al locable to pri ncipal will c onstitute a t ender 180 days and must be reduced by 1/10th of t he original amount advance and must be reimbursed as provided in the a greement. of the Co mmercial paper bo nds for a peri od of up to 10 The Foundati on is req uired t o repay each tender adv ance to rollovers. All outstan ding principal and acc rued but unpaid Wachovia Ban k, N.A. plus a n intere st rate of pri me plu s 1%. interest is due in full at the maturity of the line of credit. According to the Reimbursement Agreement Amendment dated May 2008, the a mount of any tender advance made is rep aid The line of credit agree ment expires on September 21, 2011 based o n the e arliest to occur of the date the credit provid er and is subject to covena nts cu stomary to this ty pe of bonds purchased pursu ant t o suc h tend er advance s are transaction, inc luding a defa ult provision in t he event t hat t he remarketed, the close of busin ess on the date that is 366 day s University’s lo ng-term bo nd ratings w ere lo wered to belo w a after the tender was made, and/or the termination date. BBB- for S&P, BBB- for Fitch, and Baa3 for Moody’s. The Student H ousing Faciliti es Revenue D emand Bon ds North Carolina Central University (Series 2003) has a remarketing fee. The re marketing fee i s an upfront charge to reset the inte rest rates on a weekly basis. The With regards to the following de mand bonds, the issu er has Remarketing A gent is W achovia Ba nk, N.A . for the Series not entered int o take out agree ments which would convert the 2003A Bond s. At June 3 0, 2010, the re marketing fee rate for demand bonds not successfully remarketed into another form of the bonds was 0.28%. long-term debt. North Carolina State University Revenue Bonds Series 2003A With reg ard to th e fo llowing d emand bo nds, th e issuer In October of 2003, the North Carolin a Capital Faciliti es has entered into take out agreements, which would convert Finance Agency issued Stude nt Hou sing F acilities Revenue the demand bonds not successfully remarketed into another Demand Bonds ($21.48 million Variable Rate Revenue form of long-term debt. Demand Bonds, Series 2003A ) that have a m aturity date of October 1, 2 034. The issue r, the North Carolina Capital General Revenue Bonds, Series 2003B Facilities Fi nance Agen cy, loaned the proceeds of the Series 2003 Bon ds to the North Ca rolina Central University Rea l On June 20, 2003 the University issued tax-exempt variable Estate Foundation, Inc. (Found ation). The Fou ndation used the rate revenue demand bonds in the amount of $45.66 million that proceeds to fi nance th e co sts of building a stud ent hou sing have a fin al maturity date of October 1, 202 7. The bond s are facility at Nort h Carolina Ce ntral Universit y, to fund a d ebt subject to mandatory sinking fund rede mption that bega n o n service reserve fund for the 2 003A Bonds, to pay a portion o f October 1, 200 4. The Univer sity's proceed s of this issua nce the interest on the bonds during construction of the project, and were used to pay a portion of t he costs of certain improvements to pay certain costs of issuance of the bonds. The 2003A Bonds on the ca mpus of the Uni versity, to refund certain d ebt are subj ect to mandatory sinking fund rede mption at the previously inc urred for that purpose, and to pay the costs principal amount on the interest payment dates. incurred in connection with the issuance of the 2003B bonds.
The Student H ousing Faciliti es Revenue D emand Bon ds While bearing interest at a weekly rate, the bonds ar e (Series 2003) has an Irrevocable Letter of Credit (LOC) f or subject to purc hase on de mand with seven day s notice a nd $21.82 million. The LOC is to secure the payment of th e delivery to the pay ing agent, The Bank of N ew York Mello n. principal and purchase price of interest on the Series 2003 Upon notice fro m the pay ing agent, the Re marketing Age nt, Bonds. The LOC w as i ssued by Wachovia Bank, N.A. a nd Wachovia Bank, N.A., has ag reed to ex ercise its be st efforts to
B-90 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
remarket the bonds for which a notic e of p urchase ha s be en Citigroup Glo bal Market s Inc, has agre ed to exercise it s be st received. efforts to remarket the bonds for which a notice of purchase has been received. Under a Stand by Bond Purch ase A greement (Agree ment) between the Board of Gov ernors of the Un iversity of North Under a Stand by Bond Purch ase A greement (Agree ment) Carolina and Bay erische Land esbank, a Liqui dity Facility ha s between the Board of Gov ernors of the Un iversity of North been e stablished for the Tru stee (The Ban k of New Yo rk Carolina and Bank of A merica, N.A., a Liqu idity Facility h as Mellon) to dra w a mounts sufficient to pay t he purch ase pri ce been e stablished for the Tru stee (The Ban k of New Yo rk and accrued in terest on bond s delivered for purchase wh en Mellon) to dra w a mounts sufficient to pay t he purch ase pri ce remarketing pr oceeds or othe r funds are not available. This and accrued in terest on bond s delivered for purchase wh en Agreement req uires a co mmitment fee equ al to 0.13% of the remarketing pr oceeds or othe r funds are not available. This available commitment, pay able quarterly in arrears, beginni ng Agreement req uires a co mmitment fee equal to 0.2% of th e on July 1, 2003 and on ea ch October 1, January 1, April 1, a nd available commitment, pay able quarterly in arrears, beginni ng July 1 thereafter until the expiration date or the termination date on October 1, 2008 and on e ach October 1, January 1, April 1 of the Agreement. and July 1 thereafter until the expiration date or the termination date of the Agreement. Under the A greement, any b onds purc hased through the Liquidity Facility become Liquidity Provider Bond s and shall, Under the A greement, any b onds purc hased through the from th e d ate of suc h purc hase and while t hey are Liquid ity Liquidity Facility become Bank Bonds and shall, from the date Provider Bonds, bear interest at the Liquidity Provider rate (the of such purchase and while they are Bank Bonds, bear int erest greater of the bank pri me commercial lending rate and federal at the Ba se Rate (the greater of the bank pr ime commercial funds rate plus 0.5%). Upon re marketing of Liquidity Provider lending rate an d federal funds rate plus 3%) for 30 day s. F or Bonds and the receipt of th e sal es price by the Liquidity the period of 31 through 60 day s after pu rchase, the Bank Provider, such bonds are n o longer considered Liquidity Bonds b ear i nterest at th e Ba se Rate plus 1%. U pon Provider Bo nds. Pay ment o f the intere st on the Liqui dity remarketing of Bank Bonds and the receipt of the sales price by Provider Bonds is due the first business day of each month in the Liquidity Provider, such bonds are no l onger con sidered which Liquidity Provider Bon ds are out standing. At Ju ne 30, Bank Bonds. Payment of the interest on the Bank Bonds is due 2010, there were no Liqui dity Provider Bonds held by the the first bu siness day of eac h month in which Bank Bonds are Liquidity Facility . The origin al Liquidity F acility expiration outstanding. At June 30, 2010 , there were no Bank Bonds held date has been extended and is scheduled to expire on November by the Liquidity Facility. The Liquidity Facility is scheduled to 30, 2015, unle ss otherwise extended based on the ter ms of t he expire on July 10, 2011, unless otherwise extended based on the Agreement. terms of the Agreement.
Upon e xpiration or ter mination of the Ag reement, th e After the purc hase of the Bank Bon ds, or expiration or University is required to redee m (purc hase) the Liquidity termination of the Agreem ent, the Universi ty is required to Provider Bo nds held by the Li quidity Facility in 12 quarterl y redeem (purch ase) the Bank Bond s held by the Liquidity installments, beginning the first busine ss day of January, April, Facility in six se mi-annual i nstallments, be ginning the first July, or Octob er, whichever f irst occur s on or following th e business day of the month which next occurs on or following 61 Purchase Dat e along with a ccrued intere st at the Liquid ity days after the Purchase D ate along with accru ed interest at th e Provider rate. In the ev ent the entire issue of $43.73 million of Bank Bond rate plus 2%. In the eve nt the entire issue of demand bonds was “put” and not resold, th e University would $66.61million of de mand bon ds wa s “ put” and not resold, the be required to pay $15 million a year for three y ears under this University would be required to pay $24 million a year for three agreement assuming a 3.25% interest rate. years under this agreement assuming a 5.25% interest rate.
General Revenue Bonds, Series 2008A University of North Carolina Hospitals at Chapel Hill
On July 10, 20 08 the University issued tax-exempt variable With regard to the following de mand bonds, the issu er has rate revenue demand bonds in the amount of $66.61 million that entered into ta ke out agreements, whi ch w ould con vert t he have a fin al maturity date of October 1, 202 8. The bond s are demand bonds not successfully remarketed into another form of subject to mandatory sinking fund rede mption that begin s o n long-term de bt, with the exce ption of Series 2009A Rev enue October 1, 2014. The U niversity’s procee ds of this issua nce Refunding bon ds, for which t he Univ ersity of North Carolina were used to pay a portion of t he costs of certain improvements Hospitals acts as its own liquidity facility. on the ca mpus of the Uni versity, to refund certain d ebt previously inc urred for that purpose, and to pay the costs Revenue Bonds, Series 2001A and Series 2001B incurred in connection with the issuance of the 2008A bonds. On January 31, 2001, the Ho spitals issued two series of tax- While bearing interest at a weekly rate, the bonds ar e exempt variabl e rate de mand bonds in the a mount of $5 5 subject to purc hase on de mand with seven day s notice a nd million (20 01A) and $55 million (2001B) th at have a fin al delivery to the pay ing agent, The Bank of N ew York Mello n. maturity date o f February 15, 2031. The bon ds are su bject to Upon notice fro m the pay ing agent, the Re marketing Age nt, mandatory sinking fund redemption that began on February 15,
B-91 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
2002. A portion of the proceeds w as u sed to rei mburse the business day of January , April, July and October. The Hospitals for $75 million spent allowin g t he Univer sity of payments will commence wit h the first bu siness day of an y North Carolina (UNC) Health Care Sys tem to acquire such month th at is at lea st 9 0 day s followi ng the applic able controlling interest in Rex H ealthcare Inc. The rem aining Purchase Date of the Bank Bo nd and end no later than the fifth proceeds were used for the renovation of space vacated after the anniversary of such Purchase Date. If the take out agree ment opening of th e North Carol ina W omen’s Hospital, No rth were to be e xercised b ecause the entire o utstanding $99 .6 Carolina Children’s Hospit al, and associated support servic es. million of dem and bon ds was "put" an d not resold, the While initially bearing int erest in a daily mode, the mode o n Hospitals wo uld be required to pay $21.66 million a y ear for these bonds may change to a weekly rate, a unit pricing rat e, a five y ears und er the in stallment loan agree ment a ssuming a n term rate or a fixed rate. 3.25% prime interest rate.
While in dail y mode, the bond s are subj ect to purchase o n The current ex piration date of the Agree ments is December any business day upon demand by telephonic notice of tender to 31, 2015. The Liquidity Provider has the opti on to terminate its the Remarketing Agent on the purchase date and delivery to the commitment o n Octo ber 11, 2011, or Oct ober 11, 2 014 by bond Tend er Agent, W achovia Bank, N. A. The Ho spitals’ providing adequate notice of i ts intention. The Ho spitals may Remarketing A gents, Merrill Lynch, Pierce, Fenner & S mith request a dditional exten sions of at least o ne y ear fro m the Incorporated (S eries 2 001A) and Banc of A merica Se curities previous ter mination date. Extension s are at the discretion of LLC (Series 2001B) have agreed to exercise their best efforts to Liquidity Provider. remarket bond s for which a notice of purchase ha s be en received. The quarterly re marketing fee i s p ayable in arrea rs Revenue Refunding Bonds, Series 2003A and Series 2003B and is equal to 0.05% of the outstanding principal amount of the bonds assigned to each agent. On February 13, 2003, the Hospital s issued two serie s of tax-exempt variable rate demand bonds in the amount of $63.77 Under separate Standby Bond Purchase Agreements for th e million (20 03A) and $34.25 million (2003B) that have a final Series 2 001A and Serie s 2 001B (A greements) bet ween t he maturity date of February 1 , 2 029. The bonds are subj ect t o Hospitals and Landesbank H essen-Thuringen Girozentrale, a mandatory sinking fund rede mption that bega n on February 1, Liquidity Facility has been est ablished for the Tender Agent to 2004. The proceed s were u sed to adv ance refund $88.33 draw amounts sufficient to pay the purchase p rice and accrue d million of th e Series 1996 Bonds. W hile initially beari ng interest on bonds delivered for purchase when remarketing interest in a weekly mode, the mode on these bonds may change proceeds or oth er funds are n ot available. Th ese Agreements to a daily rate, a unit pricing rate, a term rate or a fixed rate. require an adj ustable facility fee based on the long-term rating of the bonds, which is calculated a s a percentage of the While in the weekly mode, the bonds are subject to purchase available commitment. Payments are made quarterly in arrears, on demand wit h seven day s’ notice to the Re marketing Agent on the first bu siness day of e ach July, October, January , and and delivery to the bond Tender Agent, Wells Fargo Bank, N.A. April thereafter until the expiration date or the ter mination date The Hospital s’ Rem arketing Agents, Banc of A merica of the Agree ments. For the past fiscal year the percentage was Securities LLC (Series 2003 A) and W ells Fargo Ban k, N.A. 0.25% with the long-ter m a greement that b ecame effective o n (Series 2003 B) have a greed t o exerci se thei r best efforts t o July 11, 2005. This agreement has been extended to October 11, remarket bond s for which a notice of purchase ha s be en 2014. received. The quarterly re marketing fee i s p ayable in arrea rs and is equal to 0.08% of the outstanding principal amount of the Under the Agr eements, any b onds p urchased through the bonds assigned to the Remarketing Agent for Series 2003A and Liquidity Facility become Bank Bonds and shall, from the date is equ al to 0.0 7% of the out standing princi pal a mount of t he of such purchase and while they are Bank Bonds, bear int erest bonds assigned to the Remarketing Agent for Series 2003B. at the for mula rate (base rate equal to the hi gher of the prime rate for such day or the sum of 0.5% plus the federal funds rate) Under separate Standby Bond Purchase Agreements for th e subject to a m aximum rate as per mitted by law. Up on Series 2 003A and Serie s 2 003B (A greements) bet ween t he remarketing of Bank Bonds and the receipt of the sales price by Hospitals and Bank of America, N.A. (Series 2003A) and Wells the Liquidity Provider, such bonds are no l onger con sidered Fargo Ban k, National Association (Series 2003B) Liquid ity Bank Bonds. Payment of the interest on the Bank Bonds is due Facilities have been est ablished for the Tend er Agent to draw quarterly (the first busin ess day of January , April, July and amounts sufficient to pay the purchase price on bonds delivered October) for each period in which Bank Bonds are outstanding. for purchase w hen remarketing proceeds or other funds are n ot At Ju ne 30, 2 010 there were no Bank Bo nds h eld by t he available. Liquidity Facility. The 2003A Ag reement with Bank of A merica, N.A. was Included in the Agreements is a take-out provision, in case amended on Ju ne 9, 201 0 an d requires a fa cility fee equal t o the Re marketing Agent i s una ble to resell an y bonds that ar e 0.58% of the available co mmitment for Series 2003A payable "put" withi n 9 0 day s of th e "put" dat e. In this situation, the quarterly in arrears, begi nning on A ugust 1, 2 010, and on each Hospitals i s re quired to red eem t he Bank Bonds held by t he November 1, February 1, May 1, and August 1, thereafter until Liquidity Facility . The agre ements all ow the Hospit als t o the expiration date or the ter mination dat e of the Agree ment. redeem Bank Bonds in equal quarterly installments, on the first The facility fee remains in effect over the life of the Agree ment
B-92 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
so long as the rating assigne d to Parity D ebt assigned by effect over the life of the Agree ment so long as the ratin g Moody’s and S&P is A1/A+ or higher. If the rating assigned to assigned to Pa rity Debt assi gned by S&P and Moody ’s is Parity Debt by either Moody’s or S&P is downgraded below A1 A+/A1 or higher. If the rating a ssigned to Parity Debt by either or A+, respecti vely, the Co mmitment Rat e assigned to such S&P or Moody’s is downgraded below A+ or A1, respectivel y, lower rating as set forth belo w shall apply , effective as of the the adj usted U NCH Co mmitment Rate (lo west rating to be public announcement of the rating: used) a ssigned to such lower rating as set forth below sh all apply, effective as of the public announcement of the rating: S&P Moody’s Commitment Rate A A2 0.78% Adjusted UN C Hospital s Commitment Rate (lowest rating A- or lower A3 or lower 0.98% to be used):
Under the 2 003A Agreement, any bonds purc hased through S&P Moody’s Commitment Rate the Liquidity Facility become Bank Bonds and shall, fro m the A A2 0.75% date of such p urchase an d w hile they are Bank Bo nds, bear A- A3 0.90% interest at the Bank Bond Interest Rat e equal to the greater of BBB+ Baa1 1.10% the Prime rate plus 1.50% or the Federal Funds Rate plus 3.0%, BBB+ Baa2 1.35% the Base Rate, for the first 90 day s and then t he Base Rate plus BBB- Baa3 1.65% 0.50% from the 91st day to the 367th day following the date of Below Below purchase an d t he Base Rate plus 1.0% fro m t he 3 68th d ay investment grade investment grade 2.65% following such date of purch ase and there after subj ect to a maximum rate as permitted by law. Upon remarketing of Bank Under the 2003B Agreement, any bonds p urchased through Bonds and the receipt of th e sal es price by the Liquidity the Liquidity Facility become Bank Bonds and shall, fro m the Provider, such bonds are no longer consid ered Bank Bonds. date of such p urchase an d w hile they are Bank Bo nds, bear Payment of the interest on t he Bank Bonds is on the first interest at the Bank Bond Interest Rat e equal to the greater of business day o f each cal endar month follo wing the d ate on the Prime rate plus 1.00%; the Federal Funds Rate plus 2.0% or which such Bank Bond became a Bank Bond. At June 30, 2010, 7.00%, the Ba se Rat e, plus 2 % subj ect to a maximum rate as there were no Bank Bond s held by the 2003A Liquidity permitted by law. Upon re marketing of Bank Bonds and th e Facility. receipt of the sales price by the Liquidity Provider, such bon ds are no longer c onsidered Bank Bonds. At Jun e 30, 2010, the re Included in the 2003A Agreement is a take out provision, in were no Bank Bonds held by the 2003B Liquidity Facility. case the Remarketing Agent is unable to resell any bonds th at are “put” within the earlier of the termination date and 367 days Included in the 2003B Agre ement is a take out provision, in of the “ put” date. In this situ ation, the Ho spitals is required to case the Remarketing Agent is unable to resell any bonds th at redeem the Bank Bond s held by the Liquid ity Facility. The are "put" by the termination date. In this situation, the Hospitals Series 2003A Agreement allows the Hospitals to rede em bank is required t o redee m th e Bank Bond s h eld by the Liquidity bonds in si x c onsecutive, eq ual se mi-annual install ments of Facility. The S eries 2003B Agreement allows the Ho spitals to principal beginning on the first busi ness day of the month that redeem b ank bonds in 1 1 equal q uarterly install ments of occurs at least five and not more than six months following the principal, on the first busine ss day of each February , May , termination date, until fully paid. In any event, all principal and August and November, beginning on the first of such dates that accrued and unpaid interest shall be due and payable on the date occurs at l east 90 day s after the Purcha se D ate of suc h Ba nk the sixth in stallment is due. If the take out a greement were to Bonds. The Ho spitals shall pay interest in arr ears on each date be exerci sed b ecause th e enti re outsta nding $61.53 million of that woul d be an Interest Pay ment Dat e for the Serie s 200 3B demand bonds was “put” and not resold, the Hospitals would be Bonds, beginning on the first Interest Payment Date that occurs required to pa y $23.39 million, $22.57 million and $21.3 9 after the Loan Date. If th e t ake out agreem ent w ere to be million i n y ears one, two and three resp ectively following the exercised bec ause the e ntire outstandin g $ 33.07 million of termination date under the installment loan agreement assuming demand bonds was “put” and not resold, the Hospitals would be a Base Rate of 4.75% (Prime plus 1.5%). required to pa y $11.09 million, $13.87 million and $12. 79 million i n y ears one, two and three resp ectively following the The current ex piration date of the Series 2003A Agreement purchase date of the Bank Bonds assuming a Base Rate of 7%. is July 1, 2 011. The Hospital s may request ad ditional extensions, w hich are ap proved at th e di scretion of th e The current ex piration date of the Serie s 2003B Agreement Liquidity Provider. is July 31, 2 011. The Hospitals may request additi onal extensions, w hich are ap proved at th e di scretion of th e The 2003B Ag reement with Wells Fargo Bank, National Liquidity Provider. Association wa s a mended on June 30, 2010 and requires a facility fee equal to 0.60% of the available commitment fo r Revenue Refunding Bonds-Series 2009A Series 2003B pay able qu arterly in arrears, begin ning on November 1, 2010, and on each February 1, May 1, Augu st 1, On February 1 2, 2009, the Hospital s issued series 20 09A and Nov ember 1 thereafter until the expir ation date or t he tax-exempt variable rate demand bonds in the amount of $44.29 termination date of the Agreement. The facil ity fee re mains in million that have a final maturity date of February 1, 2024. The
B-93 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS bonds are su bject to mandatory sinking fund rede mption t hat operating fund, and pay issuance costs. While bearing intere st began on February 1, 2010. The proceeds were used to advance at a weekly rate, the bonds ar e subject to purchase on de mand refund $43.51 million of the Series 1999 Bonds. While initially with seven day’s notice to the Tender Agent. bearing intere st in a weekly mode, the mode on the se bon ds may change to a daily rate, a u nit pricing rate, a ter m rate or a Series 2008-3. In Nove mber 2008, the Au thority issued fixed rate. Guaranteed Student Loan Revenue an d Refunding Bon ds, Series 2008-3. Of the original principal, $105.9 in two tranches While in the weekly mode, the bonds are subject to purchase of tax-exe mpt bonds re mains outst anding at Jun e 30, 2 010. on demand upon delivering irrevocable written notice of ten der Series A1 in the amount of $30 million matures on July 1, 2027. or irrevocable t elephonic notice of tender to the Re marketing Series A2 in the amount of 75.9 million matures on September Agent not later than 4:00 p.m. on a Business Day not less than 1, 2035. The proceeds of this issuanc e wer e used to finan ce seven days before the Purchase Date and upo n delivering su ch student loans, refund the Authority’s outstanding Series 1997E Series 2009A bonds to the bond Tender Agent, U.S Bank, N.A., and 2005A bonds, make deposits into the reserve fund, make a no later than 12:00 noon on such Purchase Date. The Hospitals’ deposit into the operating fund , and pay issuance costs. W hile Remarketing A gents, Banc of A merica Se curities LLC h as bearing int erest at a we ekly rate, the bonds are subj ect to agreed to exercise their best efforts to remarket bonds for which purchase on d emand wit h se ven day ’s noti ce to the Te nder a notice of p urchase has b een receiv ed. The quarterly Agent. remarketing fee is pay able in arrears and i s equal to 0.09% o f the weighte d a verage daily principal a mount of Series 200 9A Series 2008-5. In De cember 2008, the Au thority issue d Bonds outsta nding during su ch periods in which the Series Guaranteed Student Loan Revenue an d Refunding Bon ds, 2009A bonds are Variable Rate Bonds. Series 2008-5. Of the original principal, $159.9 million in on e tranche of tax-exe mpt bond s remains out standing at June 30, Under a separate Liquidity Agree ment with the Trustee, 2010. This series of bonds matures on September 1, 2035. The UNC H ospitals has establi shed itself as Liq uidity Facility for proceeds of thi s issuan ce wer e used to fin ance stud ent loan s, the Tender Agent to draw a mounts suffic ient to pay th e refund the Authority’s outstanding Series 2005-A bonds, make purchase price on bonds delivered for purchase w hen deposits into t he reserve fu nds, make a deposit int o t he remarketing pr oceeds or other funds are not available. Up on operating fund, and pay issuance costs. While bearing intere st receipt of any notice from the Remarketing Agent that there is a at a weekly rate, the bonds ar e subject to purchase on de mand Projected Funding A mount on the Busine ss Day prior to each with seven day’s notice to the Tender Agent. Purchase Date or Mandatory Purchase Date, and upon receipt of written demand for payment from the Tender Agent by noon on Each of the 2 008 variable r ate de mand bo nds de scribed each Purc hase Date or Mandatory Purchase Date, U NC herein are being re marketed pursuant to re marketing Hospitals sh all wire to the Tender Ag ent, in i mmediately agreements, and each is backed by an irrevocable letter of credit available fund s, an amount equal to th e Actual Fundi ng in favor of The Bank of Ne w York Mello n as bond trustee. Amount, which shall be equal to the Purchase Price of all Series Three different banks i ssued t he letters of cr edit (RBC Ban k, 2009A bonds t endered or dee med tendered, l ess the aggreg ate Bank of America, N.A., and BB&T Corp.). There have be en no amount of re marketing procee ds receiv ed by the Re marketing draws on t he l etters of credit , but there are “ Facility Fees” Agent, by not later than 2:00 p. m. on the Purchase Date o r payable to the issuing banks set at 0.9%. Mandatory Purchase Date.
State Education Assistance Authority
Guaranteed Student Loan Revenue and Refunding Bonds
With regards to the following de mand bonds, the issu er has not entered into take out agreements, which would convert the demand bonds not successfully remarketed into another form of long-term debt.
Series 2008-2. In Oct ober 2008, the Aut hority issue d Guaranteed Student Loan Revenue an d Refunding Bon ds, Series 2008-2. Of the original principal, $309.9 million in tw o tranches of tax -exempt bond s remains out standing at Ju ne 3 0, 2010. Series A1 in the a mount of $150 million matures on July 1, 2036, but $2 5 million must be retired by mandatory sinking fund redemption on July 1, 20 16. Series A2 in the a mount of $159.9 matures on Se ptember 1, 2035. Th e proceed s of th is issuance were used to fina nce stud ent l oans, refund t he Authority’s outstanding Series 2006Q and 2005A bonds, make deposits into t he reserve fu nds, make a deposit int o t he
B-94 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
E. Debt Service Requirements
The following sched ules show the debt servic e requirements for the pri mary government (governmental activities and bu siness-type activities) and component units (University of North Carolina System, North Carolina Housing Finance Agency, and the State Education Assistance Authority). The debt service requirements of variable rate debt and net swap payments are based on rates as of June 30, 2010 and assume that current intere st rates re main the same for th eir term. As rates vary, variable-rate bond int erest payments and net swap payments will vary.
Annual debt service requirements to maturity for general obligation bonds, special indebtedness, GARVEE bonds, revenue bonds, and notes payable are as follows (dollars in thousands).
Primary Government
Governmental Activities Lease-Purchase General Obligation Bonds Certificates of Participation Revenue Bonds Fiscal Year Interest Rate Ending June 30 Principal Interest Sw aps, Net Principal Interest Principal Interest 2011 $ 379,325 $ 216,261 14,774$ 47,740$ 42,393$ 10,000$ $ 10,154 2012 379,940 196,236 14,774 48,550 40,092 10,000 9,687 2013 391,490 178,177 14,127 49,395 37,889 10,000 9,220 2014 391,685 162,375 12,562 50,290 35,515 10,000 8,749 2015 390,955 146,664 11,013 51,245 33,089 10,000 8,257 2016-2020 1,925,530 509,968 26,877 273,440 126,158 64,000 33,574 2021-2025 1,167,665 197,541 — 269,080 56,738 101,045 10,182 2026-2030 244,070 25,591 — 82,860 6,526 — — Total $ 5,270,660 $ 1,632,813 $ 94,127 872,600$ 378,400$ 215,045$ $ 89,823
Governmental Activities Limited Obligation Bonds GARVEE Bonds Notes Payable Fiscal Year Ending June 30 Principal Interest Principal Interest Principal Interest 2011 $ 19,960 $ 26,967 $ 61,745 $ 20,251 $ 5,501 $ 962 2012 20,710 26,219 40,535 17,570 5,250 772 2013 21,565 25,425 42,375 15,786 4,926 636 2014 22,440 24,552 42,520 13,803 2,972 524 2015 23,390 23,603 34,290 11,816 3,041 426 2016-2020 134,110 100,742 182,805 33,790 8,952 694 2021-2025 169,840 66,066 30,555 1,490 — — 2026-2030 168,690 20,614 — — — — Total $ 580,705 $ 314,188 $ 434,825 $ 114,506 $ 30,642 $ 4,014
The general obligation bonds include $355 million of variable rate debt without interest rate swaps. For this debt, the variable interest rates change on a weekly basis and are ba sed on the rate p aid by each bank. The banks base their rate on w hat they perceive to be the market (seven-day) for debt o f this ty pe given the credit st anding of the un it of govern ment. The general obligation bon ds also include $499.87 million of variable rate debt with interest rate swaps (see Note 7).
B-95 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Business-type Activities Revenue Bonds Notes Payable Fiscal Year Ending June 30 Principal Interest Principal Interest 2011 $ — $ 35,649 $ — $ — 2012 — 35,649 — — 2013 — 35,649 — — 2014 — 35,649 — — 2015 — 35,649 — 1,172 2016-2020 32,829 176,555 — 14,456 2021-2025 99,825 160,691 93 14,775 2026-2030 173,912 124,984 3,920 14,225 2031-2035 176,848 131,448 10,494 13,132 2036-2040 139,344 90,641 20,688 10,202 2041-2045 — — 33,605 3,279 Total $ 622,758 $ 862,564 $ 68,800 $ 71,241
Component Units
University of North Carolina System Revenue Bonds Certificates of Participation Notes Payable Fiscal Year Interest Rate Ending June 30 Principal Interest Sw aps, Net Principal Interest Principal Interest 2011 $ 88,335 $ 114,260 $ 8,342 $ 2,150 $ 1,270 $ 9,144 $ 2,787 2012 99,390 110,146 8,234 2,230 1,192 37,755 5,261 2013 100,660 106,891 8,104 2,335 1,086 47,532 2,099 2014 102,645 103,243 7,917 2,420 999 32,747 1,990 2015 103,025 99,655 7,779 585 903 3,897 1,640 2016-2020 504,565 445,095 32,767 3,305 4,143 10,084 6,171 2021-2025 514,065 360,003 18,558 4,085 3,358 8,845 3,794 2026-2030 469,120 268,112 3,021 5,095 2,344 10,074 1,495 2031-2035 693,340 147,762 — 6,435 1,008 — — 2036-2040 199,740 18,067 — 410 18 — — Total $ 2,874,885 $ 1,773,234 $ 94,722 $ 29,050 $ 16,321 $ 160,078 $ 25,237
North Carolina Housing Finance Agency State Education Assistance Authority Revenue Bonds Revenue Bonds Notes Payable Fiscal Year Interest Rate Ending June 30 Principal Interest Sw aps, Net Principal Interest Principal Interest 2011 $ 171,615 $ 63,662 $ 2,201 $ 84,800 $ 36,010 $ 120,500 $ 5,754 2012 38,260 62,036 2,155 — 36,010 120,500 5,754 2013 41,085 60,362 2,110 — 36,010 120,500 5,754 2014 42,190 58,515 2,067 — 36,010 1,199,025 3,117 2015 43,995 56,558 2,027 — 36,010 — — 2016-2020 200,400 252,762 9,447 300,000 179,855 — — 2021-2025 192,055 207,323 7,983 — 168,379 — — 2026-2030 297,345 151,003 5,343 27,900 167,977 — — 2031-2035 299,725 75,315 1,650 1,176,450 91,591 — — 2036-2040 143,500 14,061 — 524,500 1,794 — — Total $ 1,470,170 $ 1,001,597 $ 34,983 $ 2,113,650 $ 789,646 $ 1,560,525 $ 20,379
For revenue bonds of the University of Nort h Carolina System and the State Education Assistance Authority, the fisc al year 2011 principal requirements exclude demand bonds classified as current liabilities (see Note 8D).
B-96 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
F. Bond Defeasances from the state ment of net assets. This adva nce refunding wa s undertaken to reduce tot al d ebt service pa yments by $1. 66 million over the next 15 y ears and resulted in an econo mic gain The State and its component units hav e de feased certai n of $1.25 million. At June 30, 2010, the outstanding balance was bonds through current and/or adva nce refun dings. N ew de bt $14.49 million for the University of No rth Carolin a at proceeds from current refundings may be used to repay the old Greensboro, Series 2001A, General Revenue Bonds and $10.05 debt i mmediately while new debt proceed s fro m advan ce million for the University of North Carolin a at Greensb oro, refundings are placed into an irrevocable trust with an escro w Series 2001B, General Revenue Bonds. agent to provi de for all future debt service payments on t he defeased bond s. Since these bonds are c onsidered to be University of North Carolina at Charlotte defeased, the l iabilities for th ese bo nds have been rem oved On March 31, 2010, the University issued $13.77 million in from the government-wide statement of net assets. The University of North Carolina Sy stem Pool Revenue Bonds, Series 2010B-1 refunding bonds with an average interest rate of Primary Government 4.46%. The b onds were i ssued to advanc e refund $13.36 million of outstanding The U niversity of N orth Carolina at On October 20 , 2009, the State of North Carolina issu ed Charlotte 2002A General Revenue Promissory Note bonds with $371.92 million in General Obligation Refunding Bonds, Series an average int erest rate of 5.21%. The net proceeds of t he 2009A with an average interest rate of 4.99% and a true intere st refunding bond s, along with other resourc es, were used t o cost of 2.26%. The bonds are dated October 20, 2009 and w ill purchase U.S. govern ment securities. The se sec urities were bear interest from that date. The bonds will mature from March deposited in an irrevocable trust to provide for all future debt 1, 2010 throug h 2020 inclu sive. The bonds were issued t o service on th e refunded bond s. As a result, th e refunded bon ds advance refund $18.5 million of out standing Public Scho ol are considered to be defeased and the liability has been removed Bonds, Series 1999 with an average cou pon interest rate of from the statement of net a ssets. Thi s adva nce refunding was 4.6%; $99.46 million of o utstanding Pub lic I mprovement undertaken to reduce tot al d ebt service pa yments by $8 00 Bonds, Series 2001A with an average co upon interest rate of thousand over the next 15 y ears and re sulted in an ec onomic 4.75%; $173 million of Hig hway Bond s, Seri es 2 003 with an gain of $4 48 thousand. At June 30, 20 10, the out standing average coupon interest rate of 4.83%; $40 million of Highway balance was $13.36 million for the defea sed The University of Bonds, Series 2004 with an average coupon interest rate of 5%; North Carolin a at Charlot te 2002A G eneral Rev enue and $60 million of Higher Education Bonds, Series 2006A with Promissory Note bonds. an average c oupon interest rat e of 5%. The n et proceeds of the refunding bon ds w ere u sed to purcha se U.S. govern ment University of North Carolina at Wilmington securities. These securities w ere depo sited i n an irrevocab le On March 31, 2010 the University issued $11.01 million in trust to provide for all future debt service on the refunded 2010C refu nding bond s wit h an av erage interest rat e of bonds. A s a re sult, the refund ed bond s are c onsidered to b e 4.59%. The bo nds were issu ed to advance refund $10.8 1 defeased and the liability has been removed from the statement million of outst anding General Revenue 2003A bonds with an of net assets. This advance refunding was undertaken to reduce average int erest rate of 5. 25%. The net proceed s of the total debt service pay ments by $26.7 million over the next 11 refunding bon ds alon g with other resourc es w ere used to years and re sulted in an econ omic gain of $ 22.1 million. At purchase U.S. govern ment securities. These securitie s w ere June 30, 2010, the outstanding balance was $372.46 million for deposited in an irrevocable trust to provide for all future debt the defeased bonds. service on the refunded bo nds. As a result, th e refunded bo nds
Component Units are considered to be defeased and the liability has been removed from the statement of net a ssets. This a dvance refunding was
University of North Carolina System undertaken to reduce tot al d ebt service pa yments by $5 85 thousand over the next 12 y ears and re sulted in an ec onomic University of North Carolina at Greensboro gain of $4 54 thousand. At June 30, 20 10, the out standing On March 31, 2010, the University of Nort h Carolina at balance was $10.81 million for the defeased General Reven ue Greensboro issued $23.78 million in The University of North 2003A bonds. Carolina System P ooled Re venue Bonds, Series 2010 B-2, refunding bon ds with an aver age intere st rat e of 4.79%. The State Education Assistance Authority bonds w ere issued to ad vance refund $14 .49 million of During the year ended June 30, 2010, the Authority entered outstanding University of North Carolina at G reensboro, Series into funding note purchase agr eements in the a mount of $745 2001A, General Revenue Bonds with an average interest rate of million with an initial interest rate of 0.232% and $832 million 4.97% and $10.05 million of outstan ding Un iversity of North with an initia l interest rate of 0.277%. The refunding Carolina at Greensboro, Series 2001B, General Revenue Bonds component of these agre ements w as u sed for a current with an average interest rate of 5.08%. The net proceeds of the refunding of $1.49 billion of outstanding Tax-Exe mpt Stud ent refunding bond s (along with other resource s) were used t o Loan Revenu e Bonds with a n averag e intere st rate of 2.26 %. purchase U.S. govern ment securities. The se sec urities were The refunding was undertak en to redu ce t otal debt service deposited in an irrevocable trust to provide for all future debt payments by $765.66 million over the next 27 y ears a nd service on the refunded bonds. As a re sult, the refunded bon ds resulted in an economic gain of $107.36 million. are considered to be defeased and the liability has been removed
B-97 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Prior Year Defeasances Resources a ssigns a h ealth ri sk b ased score to e ach incide nt. Incidents with a site score ov er a set criteria are identified as During prior years, the State and certain co mponent unit s high priority si tes and are req uired to be rem ediated. At year- defeased certain general oblig ation and other bonds. For those end, DOT had 36 high priority sites. For sites und er the set defeasances in volving adv ance refundings, t he proceed s a nd criteria, cleanup is optional. Currently, DOT i s not working on any securities purchased with the proceeds were placed in an low priority sites. irrevocable trust with an escro w agent in an a mount sufficient to provide for a ll future debt service pay ments on the refun ded The N.C. Depa rtment of Cultural Resource s i s resp onsible bonds. Accordingly, the trust account assets and the liability for for cleaning u p hazardou s substances at t he following t wo the defeased bonds are not included in the govern ment-wide properties, the North Carolina Mariti me Museum H arborside statement of n et asset s. At June 30, 20 10, the out standing Property (Harborside Prope rty) and the Try on Palace balance of prio r year defeased bonds was $372 million for t he Boatworks Site (Boatworks Site). As a res ult of a U.S. primary government and $105.35 million for t he University of Environmental Protection Age ncy Superfund assessm ent, the North Carolina System (component unit). Harborside Pro perty has been placed und er the j urisdiction of the Inactive Hazardous Sites Branch of the N.C. Depart ment of Environment and Natural Resources (DENR). The N.C. G. Bond Redemptions Department of Cultural Resources has agreed upon a re medial action plan wi th the Hazard ous Site s Bran ch of DENR to The bond serie s resolutions for the North Car olina Housing voluntarily clean up the Boatworks Site. Finance Ag ency provide for various methods of rede mption. Bonds are redeemed at par from prepayments of mortgage loans At y ear-end, th e State recogni zed a pollution re mediation securing th e issue s, fro m une xpended b ond proceeds of the liability of $6.549 million, of which $5.571 million wa s for issues, or fro m funds rele ased via the rel ated decrea ses in t he leaking underground fuel tanks at DOT and $9 78 thousand was respective debt service re serve require ments. Various bo nd for the two pol luted site s at t he N.C. Depart ment of Cultur al issues are re deemable at th e option of t he Ag ency wi th Resources. The liability was measured using the expected cash premiums ranging up to 0.5% for up to 12 y ears after the dat e flow technique. The liability could chang e over ti me du e to of issue. changes in cost of goods and services, changes in re mediation technology, or change s in law s and regulatio ns go verning t he remediation effort. H. Federal Unemployment Account Advances Business-type Activities
During fiscal year 2010, th e State recei ved repay able The Department of Agriculture and Con sumer Services ha d advances fro m the Federal Un employment A ccount (FU A) i n electrical tran sformers recondit ioned or repair ed at the for mer the amount of $2.29 billion to continue finan cing the operati ng Ward Transformers industrial site in Wake County, a Superfund deficit in the State’s u nemployment compensation fu nd. site, and wa s named by the U.S. Environm ental Prote ction Proceeds fro m the advances were use d to p ay st ate Agency as a respon sible party for rem ediation expenses. The unemployment benefits. The repay able advan ces are currentl y electrical tran sformers had be en use d by the N.C. State Fa ir. interest free through Dece mber 31, 2010. The total a mount Based on an approved settlement, the St ate recogniz ed a collected from unemployment tax contributions that was used to pollution re mediation lia bility of $250 thou sand at the end of pay down the principal on the repayable advances was $873.54 the previous fi scal y ear. At June 30, 2010, this liability was million. At y ear-end, the outstandin g balan ce of the FUA zero. advances was $2.15 billion. Currently , the re payable advances are pay able so lely fro m the une mployment tax contributions Component Units and these cont ributions will be u sed specifically for pay ing down the debt until it is settled. Meanwhile, the state University of North Carolina System unemployment benefits will continue to be paid fro m the repayable advances. Fayetteville S tate Univ ersity recognized a pollution remediation li ability of $30 thou sand for the volu ntary I. Pollution Remediation Payable commencement of a sbestos re moval a nd un derground storage tank removal at a c ampus building. The a mount of the liability was derived fr om the estimated co sts of the abate ments an d Primary Government removals.
Governmental Activities
The N.C. De partment of Transportation (DOT ) has several equipment y ards a cross the state with ol d underground fu el storage tanks. State law requires leaks from tanks to be assessed for rem ediation. The Departm ent of Environ ment and Nat ural
B-98 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 9: LEASE OBLIGATIONS—OPERATING AND CAPITAL
The State and it s component units have entered into various o perating and capital leases for office space and for communications, computer, and other equipment. Any operating leases with scheduled rent increases are c onsidered immaterial to th e future minimum lease payments and current rental expenditures. Operating l ease payments are recorded as expenditures or expenses of the related funds when incurred. For the year ended June 30, 2010, total operating lease e xpenditures we re $80.91 million for Prim ary Govern ment, $54.81 million for the University of North Carolina Sy stem, and $7.14 million for Co mmunity Colle ges. Future minimum l ease commitments for noncancelable operating leases and capital leases as of June 30, 2010 are as follows (dollars in thousands):
Operating Leases Capital Leases
Component Units Component Units
University University of North of North Primary Carolina Community Governmental Carolina Community Fiscal Year Government System Colleges Activities System Colleges
2011 $ 55,860 $ 35,134 $ 5,594 $ 2,177 $ 21,638 $ 2,719 2012 37,259 24,864 4,631 2,018 16,575 2,734 2013 24,687 19,845 3,726 2,012 15,258 2,645 2014 18,103 13,270 2,698 2,014 13,828 2,354 2015 13,018 8,226 1,972 1,959 12,372 2,316 2016 - 2020 21,845 31,484 7,716 9,784 63,432 11,001 2021 - 2025 8,082 21,502 3,930 9,584 68,599 11,001 2026 - 2030 8,082 11,768 2,185 — 69,168 10,818 2031 - 2035 8,082 86 610 — 71,703 — 2036 - 2040 8,082 75 — — 35,123 — 2041 - 2045 8,082 24 — — — — 2046 - 2050 8,082 24 — — — — 2051 - 2055 3,233 24 — — — — 2056 - 2060 — 24 — — — — Total Future Minimum Lease Payments...... $ 222,497 $ 166,350 $ 33,062 29,548 387,696 45,588
Less: Amounts Representing Interest (6,733) (163,285) (20,258)
Present Value of Future Minimum Lease Payments $ 22,815 $ 224,411 $ 25,330
At June 30, 2010, capital assets acquired under capital leases are as follows (dollars in thousands): Primary
Government Component Units University of North Governmental Carolina Community Activities System Colleges
Buildings...... $ 26,051 $ 218,447 $ 29,265 Machinery and Equipment...... 737 26,802 2,483 Other...... — 1,253 — Less: Accumulated Depreciation...... — (34,299) (1,839)
Total Capital Assets...... $ 26,788 $ 212,203 $ 29,909
B-99 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 10: INTERFUND BALANCES AND TRANSFERS
A. Interfund Balances
Due To/From Fiduciary Funds
The General Fund balance of $64.235 million due to fiduciary funds is composed primarily of $17.773 million related to local sales taxes collected in the general fund and due to the agency fund, as well as $46.462 million related to retirement contributions payable to retirement systems at year end. The ot her balances due to fiduciary funds are related to balances held on be half of patients at the State’s mental health facilities.
The other balances due from fiduciary funds are primarily for services provided to pension and other employee benefit trust funds. Amounts payable to or receivable from fiduciary funds are considered interfund balances in the fund financial statements, but are not reported as internal balances in the government-wide statement of net assets.
Due To/From Other Funds
Balances due to/from other funds at June 30, 2010, consisted of the following (dollars in thousands): Due From Other Funds Other Unemployment Internal General Highway Governmental Compensation Service Fund Fund Funds Fund Funds Total
Due To Other Funds General Fund...... $ — $ — $ 6,262 $ — $ 18,807 $ 25,069 Highway Fund...... — — 3,772 — 2,593 6,365 Highway Trust Fund...... — 13,653 — — — 13,653 Other Governmental Funds...... 1,330 — 16,791 5,007 1,755 24,883 Unemployment Compensation Fund.... — — 45 — — 45 EPA Revolving Loan Fund...... — — — — 17 17 NC State Lottery Fund...... — — 18,058 — 69 18,127 NC Turnpike Authority...... — — — — 3 3 Nonmajor Enterprise Funds...... — — — — 102 102 Internal Service Funds...... — — 3 — 897 900 Total...... $ 1,330 $ 13,653 $ 44,931 $ 5,007 $ 24,243 $ 89,164
These balances resulted primarily fro m the time lag between the dates that ( 1) interfund goods and services are provided or reimbursable e xpenditures occur, (2 ) t ransactions are rec orded in the ac counting system , and (3 ) pa yments between funds are made. Am ounts reported in t he funds as i nterfund receivables and payables were elim inated in t he governmental and business- type activities colum ns of the gove rnment-wide statem ent of net asse ts, except fo r the net residual am ounts due betwee n governmental and business-type activities, which were presented as internal balances.
Advances To/From Other Funds
The balance of $18.279 million advance to the North Carolina Turnpike Authority from the Highway Trust Fund is related to startup operating costs.
B-100 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
B. Interfund Transfers
Transfers in/out of other funds for the fiscal year ended June 30, 2010 consisted of the following (dollars in thousands):
Transfers In EPA NC Other Revolving Turnpike Other Internal General Highw ay Governmental Loan Authority Enterprise Service Fund Fund Funds Fund Fund Funds Funds Total Transfers Out General Fund...... $ — $ 1,689 $ 423,843 $ 6,419 $ — $ 1,900 72$ $ 433,923 Highw ay Fund...... 63,330 — 237,210 — 8,971 — — 309,511 Highw ay Trust Fund...... 108,842 36,131 7,285 — 25,420 — — 177,678 Other Governmental Funds...... 494,248 1,921 457,873 — — — 1,348 955,390 Unemployment Compensation Fund — — 17,350 — — — — 17,350 EPA Revolving Loan Fund...... 429 — — — — — — 429 NC State Lottery Fund...... — — 433,205 — — — — 433,205 Other Enterprise Funds...... 24,508 — 1,285 — — — — 25,793 Internal Service Funds...... 21,667 — — — — — 4,339 26,006 Total...... $ 713,024 $ 39,741 $ 1,578,051 $ 6,419 $ 34,391 1,900$ $ 5,759 $ 2,379,285
Transfers are primarily used to (1) transfer revenues and bond proceeds from the fund requi red by State statute or budget to collect the revenue t o the fund required by State statute or budget to expend them , (2) provide unrestricted revenues collected in the ge neral fund t o finance operating a nd capital programs accounted for in other funds in accordance with budgetary authorizations, and (3) reflect reversions of State funds from other funds to the General Fund in accordance with Office of State Budget and Management requirements.
When the Highway Trust Fund was created in 1989, the revenue from the sales tax on motor vehicles was transferred from the General Fund to the Highway Trust Fund. To offset a portion of this revenue loss in the General Fund, the Highway Trust Fund is required to transfer funds to the General Fund each year. The total transfer for this fiscal year was $108.562 million.
House Bill 2 436 [Session Law 20 08-107], amends the law th at created the Highway Trust Fund. The amendment decreased the amount directed to be transferred to the General Fund by $99 million, phased in over a three year period, beginning in fiscal year 2008-09. The amendment further directs that these funds are to be transferred to the N.C. Turnpike Authority (NCTA) to pay debt serv ice or r elated financing exp enses on revenue bonds or notes issued fo r th e following t oll road con struction pro jects: Triangle Expressway, Monroe Connector/Bypass, Mid-Currituck Bridge, and Garden Parkway. As of June 30, 2010 debt had been issued for the Triangle Expressway, and $25 million was transferred to the NCTA.
In compliance with the North Carolina State Lottery Act, House Bill 1023 [Session Law 2005], all “Net Revenues” of the NC State Lottery Fund are required to be tra nsferred to the Ed ucation Lo ttery Fun d (o ther gov ernmental fun ds) fo r ed ucational purposes. The total transfer for this fiscal year was $432.205 million, as set forth in General Statute 18C-164.
B-101 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 11: FUND BALANCE RESERVES
Reserved Fund Balance. The State’s reserved fund balances represent those portions of th e fund balances that are either (a ) externally restricted for a s pecific use, (b) not available for appropriation or e xpenditure because the underlying asset is not an available fina ncial resource for current a ppropriation o r expe nditure, or (c) fo r enc umbrances, w hich re present com mitments related to unperformed contracts for services and undelivered goods. The reserved fund balances at June 30, 2010, are (dollars in thousands):
Governmental Funds Other Total General Highway Highway Trust Governmental Governmental Fund Fund Fund Funds Funds Specific encumbrances...... $ 63,745 $ 10,818 $ — $ — $ 74,563 Inventories...... 65,391 84,963 — 49,132 199,486 Permanent investments...... — — — 84,766 84,766 Notes receivable...... 21,830 1,035 81 301,821 324,767 Compensated absences charged to federal projects...... — 28,177 — — 28,177 Capital projects commitments...... — — — 179,956 179,956 GARVEE Bonds...... — 156,077 — — 156,077 Advance to component unit...... — — — 21,742 21,742 Loan and grant commitments...... — 2,637 — 254,934 257,571 Advance to other funds...... — — 18,279 — 18,279 General government...... 12,652 — — — 12,652 Primary and secondary education...... 9,066 — — — 9,066 Higher education...... 2,941 — — — 2,941 Health and human services...... 13,593 — — — 13,593 Economic development...... 14,907 — — — 14,907 Environment and natural resources...... 360 — — — 360 Public safety, corrections and regulation...... 19,873 — — — 19,873 Total reserved fund balance...... $ 224,358 $ 283,707 $ 18,360 $ 892,351 $ 1,418,776
B-102 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 12: RETIREMENT PLANS
The State reports ten retirement plans as pension trust funds. Section A of this note describes the eight defined benefit public employee retirement plans and one defined contribution plan administered by the State. The remaining plans, described in Note 13, are defined contribution plans administered by a third party under the auspices of the Stat e. The State may or may not make supplementary contributions to these plans. Al though the assets of the a dministered plans are c ommingled for investment purposes, each plan’s assets may be used only for payment of benefits to the members of that plan and for administrative costs in accordance with the term s of the pl an. The plans in this note do not issue separate financial statements, nor are they reported as part of other entities. Th e fin ancial statemen ts an d other req uired disclosures are presented i n Note 16 and in th e Required Supplementary Information sectio n of th is CAFR. The State also provides a n optiona l retirem ent p lan fo r certain u niversity employees and a special separation allowance for eligible sworn law enforcement officers.
A. Plan Descriptions and Contribution Information 2. CONSOLIDATED JUDICIAL RETIREMENT SYSTEM
1. TEACHERS' AND STATE EMPLOYEES’ RETIREMENT This pl an is a si ngle-employer, defi ned b enefit pl an SYSTEM established by the State of North Carolina to provide pension benefits fo r employees of t he State Judicial System. This plan is a cost-sharing, multiple-employer, defined Membership is com prised of judges, di strict attorney s, benefit plan e stablished by the State of N orth Carolina to public defenders a nd clerks of c ourt. T he plan provi des provide pen sion benefits for e mployees o f the State, i ts retirement, d isability an d d eath b enefits. Ben efits an d component uni ts, Local Education Age ncies (LEAs), and administrative expenses are funded by member contributions miscellaneous educational un its not i n the reporting enti ty. of 6% of c ompensation, i nvestment i ncome, an d by Membership i s co mprised of e mployees of the State ( state employer contributions. For the fiscal year ended June 30, agencies and i nstitutions), un iversities, co mmunity col leges, 2010, the State made a st atutory contribution of 15.11% of and certain pro prietary co mponent units alo ng with the LEAs covered payroll. Thi s al so e qualed t he act uarially re quired and miscellaneous educ ational units. At June 30, 2010, the contribution. Benefit and co ntribution p rovisions are number of participating employers was 243 as shown below: established by General Statutes 135-57, 135-58, 135-68 and LEAs and miscellaneous units...... 163 135-69 a nd m ay be am ended o nly by t he No rth C arolina Community Colleges...... 58 General Assembly. University of North Carolina System...... 19 Proprietary component units...... 3 Actual p ayments made in relation to the required contributions for the State are shown in Section D of thi s note and in the Required Supplementary Information section of this
report. Benefits and administrative expenses are funded by mem- ber contribu tions of 6% of co mpensation, in vestment inco me, The plan do es not provide for auto matic post -retirement and by an act uarially based required e mployer contribution benefit increases. Increases are contingent up on actuarial gains established by legislation. For the fiscal year ended June 30, of the plan. 2010, t he St ate m ade a st atutory co ntribution of 3.57% of covered payroll. Thi s al so e qualed t he act uarially re quired contribution. Ben efit and contribution provision s are established by General St atutes 13 5-5 and 13 5-8 and may b e amended only by the North Carolina General Assembly.
Actual p ayments made in relation to the required contributions for the State are shown in Section D of thi s note and in the Required Supplementary Information section of this report.
The plan do es not provide for auto matic post -retirement benefit increases. Increases are contingent up on actuarial gains of the plan.
B-103 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
3. LEGISLATIVE RETIREMENT SYSTEM 5. NORTH CAROLINA NATIONAL GUARD PENSION FUND This plan i s a single-e mployer, defined benefit plan This plan is a defined benefit plan established by the State established by the State of Nort h Carolina to provide retirement of North Carolina to provide pension be nefits for m embers o f and disability benefits for members of the General Assembly. the North Carolina national guard. This also is a special funding situation be cause the State is not the e mployer, but is legally The b enefit will n ot b e p ayable wh ile th e retiree is obligated to contribute to the plan. employed in a position making him eligible to participate in either the Tea chers' and State E mployees' Retirement Sys- Benefits and a dministrative expenses are fu nded by an tem or Consolidated Judicial Retirement System. actuarially based state appropriation (see section D) and invest-
Benefits an d adm inistrative expe nses are fu nded by ment inco me. Benefit an d contribu tion provisions a re member c ontributions of 7% of c ompensation, i nvestment established by General Statute 127A-40 and m ay be a mended only by the North Carolina General Assembly. income, an d by act uarially base d em ployer co ntributions.
For t he fiscal year ende d June 30, 2010, the re was no 6. REGISTERS OF DEEDS’ SUPPLEMENTAL PENSION actuarially based required contribution. FUND Benefit and actu arially b ased co ntribution provisions are established by General Statutes 120-4.21, 120-4.19 and This plan i s a cost-sharing, multiple-employer, defined 120-4.20 an d may b e a mended on ly b y th e N orth Car olina benefit pl an estab lished by the State of N orth Carolin a t o General Assembly. Actual payments made in relation to the provide suppl emental pen sion benefits for all eligible, retired required contributions for the State are shown in Section D of county registers of deeds. Membership is composed of registers this note a nd in the Required Supplementary Information of deeds who are retired fro m the Loca l Govern mental section of this report. Employees’ Retirement System or an equival ent local plan a nd have met the statutory eligibility requirem ents. At June 3 0, The plan do es not provide for auto matic post -retirement 2010, there we re 80 individua ls receivin g be nefits in the plan benefit increases. Increases are contingent up on actuarial gains with all 100 counties participating. An individual’s benefits for of the plan. the year are calculated a s a sh are of accu mulated contributions available for benefits for that year, subj ect to certain statutory OTHER STATE ADMINISTERED SYSTEMS limits. An individual’s eligibility is based on minimum years of service a s a register of dee ds with the i ndividual’s share The State also ad ministers the following pension and increasing with years of service. Because of the statutory limits retirement plans for persons who are not necessarily considered noted abo ve, n ot all contribut ions av ailable for benefits ar e employees of the State or its component units. distributed. The State Treasurer administers th e pla n a nd Section B of this note describes the accounting and investing for 4. FIREMEN’S AND RESCUE SQUAD WORKERS’ the plan. The State’s only cost in the plan is administration.
PENSION FUND Benefits and ad ministrative expen ses are funded by investment income and 1.5% of the receipt s collected by each This plan is a defined benefit p ension plan established by County Co mmission under Ar ticle 1 of Ch apter 161 of th e the State of No rth Carolina to provide pension benefits for a ll North Ca rolina G eneral S tatutes. The statutory c ontribution eligible fire men and resc ue squad worker s. Me mbership i s currently has no relation ship to the actuary’s required composed of b oth volunteer a nd locally employed firemen and contribution. The actuarially required contribution this year and emergency medical personnel who elect membership. At Ju ne in the foreseea ble future is z ero. Regi sters of deed s do n ot 30, 2010, there were 1,934 participating fire and rescue unit s. contribute. The actuarially required contribution and percentage This i s a sp ecial funding situ ation in that t he State is not t he of that contri bution act ually made is i n the Required employer but is legally obligated to contribute to the plan. Supplementary Information section of this report. All benefit and contributi on provisio ns are est ablished b y General Stat ute Benefits and administrative expenses are funded by a ten 161-50 and may be a mended only b y the North Caroli na dollar monthly contribution by the member, investment income General Assembly. and an actu arially based state appropriation ( see section D for the a mount). Benefit and contributio n provisions are established by General Statute 58-86 and may be amended only by the North Carolina General Assembly.
B-104 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
7. SHERIFFS’ SUPPLEMENTAL PENSION FUND 8. LOCAL GOVERNMENTAL EMPLOYEES’ RETIREMENT SYSTEM This plan is a defined c ontribution pl an establishe d by the State of North Carolin a t o provide supp lemental pen sion This plan is a cost-sharing, multiple-employer, defined benefits for all eligible, retired county sheriffs. Me mbership is benefit plan e stablished by the State of Nor th Car olina for comprised of sheriffs w ho are retired from the Lo cal employees of l ocal governments. Me mbership is co mprised of Governmental Employees’ Retirement System and beneficiaries general e mployees and lo cal law enforcement officers of that meet the statutory eligibility requirem ents. At June 3 0, participating local governmental entities. 2010, there w ere 83 sh eriffs and four benefic iaries enrolled in the plan with all 1 00 of t he State’ s counties eligible to At Jun e 30, 2010, the nu mber of partic ipating local participate. governments was 892, as shown below:
An individual’s benefits for the y ear are calculated as a Cities ...... 419 Counties ...... 100 share of accu mulated contri butions av ailable for benefits for Special districts ...... 373 that y ear, subj ect to c ertain statutory li mits. An indi vidual’s
eligibility is b ased on minimum y ears of service as a sheriff The plan provi des retire ment bene fits nearly iden tical to with the indivi dual’s sh are incr easing wit h y ears of service. the benefits that accrue to members of the Teachers' and St ate Because of t he statutory li mits noted above, not a ll Employees' Re tirement Sy stem. This pl an also provi des contributions available for b enefits are distributed. The North disability bene fits for members who become t otally and Carolina Department of Ju stice ad ministers t he plan. If the permanently disabled from performing their usual job. Benefits plan purcha ses any invest ments, they are held as part of the and ad ministrative exp enses are fun ded by e mployee State Treasurer ’s Invest ment Pool. Section B of this note contributions of 6% and actuarially based em ployer contribu- describes the accounting and investing for the plan. The tions. The annual require d contribution (ARC) for all State’s only cost in the plan is administration. employers wa s 4.71% of covered pay roll for law en forcement
officers an d 4. 24% for gen eral e mployees an d fire men. T he Receipts c ollected by each c ounty’s Clerk of Superior actual co ntributions w ere 5.27 % for law enforcem ent officers Court und er General St atutes 7 A-304(a)(3a), along wi th and 4.80% for general employees. In addition, employers with investment in come, suppor t the pl an’s benefit s an d an unfunded liability, established when the government initially administrative expenses. Sheriffs do not cont ribute to the pla n. enters the system, must make additional contr ibutions towards For the fi scal year ended June 30, 20 10, th e Cl erks re mitted that liability. The State's responsibility is a dministrative only. $1.207 million. All b enefit and contributi on provisio ns are Benefit and contribution provisions are established by General established by Chapter 143, Article 12H of the General Statutes Statutes 12 8-27 and 128-30 an d may be a mended only by the and may be a mended only by the North Carolina G eneral North Carolina General Assembly. Assembly.
The plan do es not provide for auto matic post -retirement benefit increases. Increases are contingent upon actuarial gains.
The following table summarizes membership information by plan at the actuarial valuation date:
North Teachers' Firemen's Carolina Registers Local and State and Rescue National of Govern- Employees' Judicial Legislative Squad Guard Deeds' mental Employee Groups Retirees and beneficiaries currently receiving benefits ...... 156,791 529 270 10,911 3,677 84 46,557
Terminated employees entitled to benefits but not yet receiving them ...... 97,474 52 83 140 4,625 - 38,076
Active plan mem bers ...... 323,580 559 169 37,288 6,203 100 123,398
Total ...... 577,845 1,140 522 48,339 14,505 184 208,031
Date of valuation ...... 12-31-09 12-31-09 12-31-09 6-30-09 12-31-09 12-31-09 12-31-09
B-105 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
B. SUMMARY OF SIGNIFICANT ACCOUNTING systems. The State Treasur er maintains v arious inve stment portfolios in its Invest ment Po ol. The pensio n trust funds a re POLICIES AND PLAN ASSET MATTERS the primary participants in the Long-term Investment portfolio and the sole participants in the Equity Investment, Real Estate BASIS OF ACCOUNTING Investment, Alternative Inve stment, Credit Investment, and Inflation Protection Investment portfolios. The financial statements of these plans are prepared using the accrual basis of accounting. Plan member contributions are The invest ment balance of each pen sion trust fund recognized in t he period in w hich the contri butions are du e. represents its share of the fai r value of the net asset s of t he Employer contributions are recogniz ed whe n due and the various portfolios within the pool. Detailed descriptions of how employer has made a for mal co mmitment to provid e t he the fair value is deter mined in the various portfolios are contributions. Benefits an d re funds are reco gnized when d ue presented in Note 3. Additionally , the securitie s lendi ng and payable in accordance with the terms of each plan. balance repre sents a ssets oc curring fro m securitie s lendi ng transactions that result fro m t he sy stems’ p articipation in t he INVESTMENTS /SECURITIES LENDING pool. The invest ments of th e State Treasur er and securiti es lending are fully discussed in Note 3. Pursuant t o N orth Carolin a General St atutes, the St ate Treasurer is th e custo dian an d ad ministrator of the retirement
C. Actuarial Methods and Assumptions The latest actuarial valuations are dated December 31, 2009 (June 30, 2009, for the Firemen’s and Rescue Squad Workers’ Fund). The actuarial accrued liability and th e schedule of funding progress for t he past six years a re presented by syste m in the Required Supplementary Information section of thi s report . Act uarial valuations i nvolve est imates o f reported a mounts a nd assumptions about the probability of the occurrence of events. The actuarial value of assets for all systems is based on a five-year smoothed market value. Under this method, realized and unrealized gains and losses on investments are smoothed over five years. Below are list ed th e various actu arial m ethods and sign ificant assu mptions for th ese valuations th at will b e u sed to d etermine future annual required contributions.
Actuarial Assumptions Actuarial Remaining Asset Investment Projected Valuation Cost Amortization Amortization Period Valuation Rate Salary Retirement System Date M ethod M ethod Period Open/Closed M ethod of Return Increase
Teachers' and State Employees' 12/31/09 Entry age Level dollar 9 years Closed 5 year smoothed 7.25% 4.25%-9.10% with 80%/120% corridor Consolidated Projected Level Judicial 12/31/09 unit credit dollar 9 years Closed 5 year smoothed 7.25% 5.00%-5.95% with 80%/120% corridor Projected Legislative 12/31/09 unit credit Level dollar 8 years Open 5 year smoothed 7.25% 7.50%
Firemen's and Rescue Squad 6/30/09 Entry age Level dollar 9 years Open 5 year smoothed 7.25% N/A
N orth C arolina National Guard 12/31/09 Entry age Level dollar 9 years Closed 5 year smoothed 7.25% N/A with 80%/120% corridor
Registers of Deeds' 12/31/09 Entry age Level dollar N/A Closed 5 year smoothed 5.75% 4.25%-7.75% with 80%/120% corridor Local Governmental Frozen Level Employees' 12/31/09 entry age percentage Various Closed 5 year smoothed 7.25% 4.25%-8.55% with 80%/120% corridor N/A-Not applicable
B-106 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Only minor t echnical adjustments for the respectiv e were de veloped fro m variou s prior y ear v aluations. Th e systems were adopted a nd e nacted by the North Caroli na Teachers’ and State E mployees’, Local Govern mental General A ssembly effective July 1, 2010. No cost of living Employees’, Con solidated Judicial, and National Gu ard increases were adopted for any of the systems. systems’ valu ations were a s of Dece mber 31, 2007, th e Legislative system was valued at Dece mber 31, 2008, and the As of this va luation, the unfunded actu arial accrue d Firemen’s and Rescue Squad W orker’s Fund was valued a t liability for the Regi sters of Deed s’ sy stem, when am ortized June 30, 2008. These valuatio ns used amortization periods of over 30 y ears i s less th an zero. This situ ation, which i s n ot eight y ears for Legislative a nd nine y ears for all the othe r allowable u nder generally accepted ac counting principle s, is systems. R egisters of Dee ds’ was valued a t Dece mber 31 , redefined by the actuary to effectively mean there is no liability 2007, but effec tively had no l iability to be a mortized. The to be amortized. Local Govern mental E mployees’ sy stem i s an aggregate of numerous employers, and conse quently, has vario us The proj ected investment retu rns and proj ected salarie s amortization periods. The r ate of inv estment return and for a ll s ystems, e xcept th e Legislative a nd Firem en’s an d projected salar y increase s u sed in th ese va luations a ssumed Rescue Squad Workers, include a 3% inflationary factor within essentially the same increases as in the most current valuations the act uarial assumption. The assu mption fo r the Legi slative reported on the prior page. system does not identify an inflationary factor. The assumption For the fiscal year ended Ju ne 30, 2010, ret irees in th e for the Firemen’s and Rescue Squad Workers’ includes a 3.75% Local Governmental Employee system received a 0.1% cost of inflationary factor. The funding status of each of the State ’s living adj ustment. This benefit enh ancement reflects various pl ans o n t he dat e of t he m ost rece nt act uarial legislation enacted by the North Carolina General Assembly or valuation is presented in section E of this note. actions taken by the Board of Trustees effective July 1, 2009 . This enhan cement wa s either reflected a s a liability in the CURRENT FISCAL YEAR ASSUMPTIONS valuations de scribed above or paid for with the sy stem’s Unless ot herwise not ed i n this f ootnote or i n t he actuarial gains. required sup plementary sche dules, th e actu arial v alues, methods and significant assumptions for the current year’s required contributions are the same as those presented in the table sho wn on t he prior page. The annual required contributions ( ARC) for the fiscal y ear ende d Ju ne 3 0, 201 0,
D. Annual Pension Cost and Net Pension Obligation
The annual pension costs and net pension obligations for the State’s single-employer and special funding defined benefit plans for the current fiscal year are as follows (dollars in thousands):
Fir e m e n's and North Rescue Carolina Consolidated Squad National Judicial Legislative Workers' Guard Retirement Retirement Pension Pension System System Fund Fund
Annual required contribution...... $ 10,248 $ — $ 10,074 $ 5,682 Interes t on net pens ion obligation...... (202) (13) 34 (32) Adjus tm ent to annual required contribution...... 359 45 (73) 66 Annual pens ion cos t...... 10,405 32 10,035 5,716 Les s : Contributions m ade...... 10,248 — 10,080 7,008 Increas e (decreas e) in net pens ion obligation...... 157 32 (45) (1,292) Net pens ion (as s et) obligation beginning of year.... (2,791) (183) 474 (444) Net pens ion (as s et) obligation end of year...... $ (2,634) $ (151) $ 429 $ (1,736)
B-107 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
The following t able presents the required three year trend of pensio n costs for the State’s single-em ployer and s pecial funding defined benefit plans and the annual required contributions (ARC) the State made to the Teachers’ and State Employees’ Retirement System (the Sy stem), a co st-sharing, multiple-employer plan. Except for (A) below, the State’s statutory annual contribution to the System equals its total annual payment to the System and equals the State’s pension cost in these financial statements. The State does not make any contributions to the Local Governmental Employees' System; therefore, it has no related pension cost.
State of North Carolina's Annual Pension Cost (APC) and Annual Required Contributions (ARC) as an Employer For the Years Ended June 30, 2008 through June 30, 2010 (dollars in thousands) .
North Teachers' Firemen's Carolina and State and Rescue National Employees' Judicial Legislative Squad Guard
Primary Government: 2010 $ 120,935 $ 10,405 $ 32 $ 10,035 $ 5,716
2009 127,152 8,510 38 9,714 6,316 2008 (A) 143,500 8,145 2 8,687 6,239
Component units: Universities: 2010 $ 66,935 2009 54,869 2008 54,765
Community Colleges: 2010 $ 27,444
2009 26,092
2008 22,474 Proprietary Funds: 2010 $ 722 2009 715 2008 651
Total Primary Government and Component Units: 2010 $ 216,036 $ 10,405 $ 32 $ 10,035 $ 5,716
2009 208,828 8,510 38 9,714 6,316 2008 221,390 8,145 2 8,687 6,239 Percentage of APC Contributed: 2010 99% 0% 100% 123% 2009 104% 0% 100% 93% 2008 133% 10,450% 100% 112%
Percentage of ARC Contributed: 2010 100% 2009 100% 2008 100%
Net Pension (Asset) Obligation: 2010 $ (2,634) $ (151) $ 429 $ (1,736) 2009 (2,791) (183) 474 (444) 2008 (2,438) (221) 522 (868)
(A) - The State's contributions/pension cost for the Teachers’ and State Employees’ equals the statutorily required contribution plus $42 million for prior year actuarial deficits.
B-108 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
E. Funding Status and Funding Progress The funding status of eac h of the State’s various plans at the m ost recent actuarial valuation is presented below. These schedules were de veloped from act uarial m ethods a nd assumptions i dentified i n Section C of t his n ote. M ultiyear trend information on fund ing progress is presen ted in t he Required Supplementary Information (RSI) sectio n of th is C AFR. Th ese schedules indicate whether the actua rial values of plan assets are i ncreasing or decreasing over time in relation to the actuarial accrued liabilities. (dollars in thousands)
Unfunded UAAL as a Actuarial Actuarial AAL Funded Annual Percentage of Valuation Value of Accrued (UAAL) Ratio Covered Covered Payroll Retirement System Date Assets Liability (AAL) (b) - (a) (a) / (b) Payroll ((b-a)/c) (a) (b) (c) Teachers' and State Employees' 12-31-09$ 55,818,099 $ 58,178,272 $ 2,360,173 95.9% $ 13,253,030 17.8%
Consolidated Judicial 12-31-09 $ 439,987 $ 474,949 $ 34,962 92.6% $ 66,171 52.8%
$ 223 Legislative 12-31-09 $ 29,792 $ 23,511 $ (6,281) 126.7% $ 3,622 (173.4)%
Firemen's and Rescue Squad Workers' 6-30-09 $ 315,697 $ 351,324 $ 35,627 89.9% N/A N/A
North Carolina National Guard 12-31-09 $ 81,371 $ 121,855 $ 40,484 66.8% N/A N/A
Registers of Deeds' 12-31-09 $ 38,913 $ 21,840 $ (17,073) 178.2% $ 6,092 (280.3)%
Local Governm ental Employees' 12-31-09$ 17,723,253 $ 17,804,791 $ 81,538 99.5% $ 5,184,128 1.6%
F. Optional Retirement Plan The partici pant choo ses hi s/her own i nvestment product s with the company of choice. The Optional Retire ment Program (Program) is a de fined contribution ret irement plan t hat provides re tirement ben efits G. Special Separation Allowance with optio ns for pay ments to beneficiaries in the event of t he participant's d eath. Faculty and ad ministrators with facult y The State provides a special separation allowance (SSA), rank in instituti ons of the UN C System may j oin the Program an agent multiple-employer, defined benefit pension plan, for instead of the Teachers' an d State E mployees' Retire ment sworn law e nforcement officers as d efined by General Statut es System. At June 30, 2010, the Plan had 13,238 participants. 135-1(11b) or General Stat utes 143-1 66.30(a)(4) that were employed by State agencies and component units and retired on Benefits are pr ovided by means of co ntracts issued a nd a ba sic service retire ment u nder the provisions of G eneral administered by the privately -operated Teachers' Insurance and Statutes 135-5( a). To qualify for the allowance, ea ch retire d Annuity Association and t he College Retirement Equities F und officer must: (1) have completed 30 or more years of creditable (TIAA/CREF), Valic, Fidel ity Invest ments and Lin coln service or have attained 55 y ears of age and co mpleted five or National Life I nsurance Company. Participan ts' eligibility and more y ears of creditable service; and (2) not have attaine d 62 contributory re quirements are estab lished in General Statut es years of age; and (3) ha ve completed at le ast five y ears of 135-5.1. Parti cipants contribute 6% of co mpensation and t he continuous ser vice as a law enforcement of ficer i mmediately university con tributes 6.84%. There is no li ability other than preceding a service retire ment. Each eligible officer is paid an the uni versities' required co ntributions. The universiti es annual separation allowance equal to .85% of the officer's most contributed $90 .8 million for the fiscal year ended J une 30, recent ba se rat e of co mpensation for eac h y ear of credit able 2010. Annual covered pay roll was $1.3 billion and e mployer service. For t he fi scal y ear ended J une 30, 2 010, the Sta te contributions e xpressed a s a percentage of annual cover ed and its c omponent units paid $12.9 million for 891 retired la w payroll were the required 6.84% for the period. Employee enforcement of ficers. These benefits are fu nded on a pay -as- contributions e xpressed a s a percentage of annual cover ed you-go basis wi th each e mployer (the State or co mponent unit) payroll were the require d 6%, with actual e mployee responsible for the benefits to their former employees. There is contributions o f $79.7 million for the fiscal year ende d June no statewide administration of the SSA and there is no actuarial 30, 2010. valuation performed. Funds for this allowanc e are appropriated annually in the budget of eac h affected state agency or pai d Participants are vested after fi ve years of service, but th e from the co mponent unit’s operations. These b enefits are company must return the value of the instituti ons' contributions established in General Statute 143-166.41 and may be amended to the St ate if t ermination occurs prior to five y ears of service. only by the General Assembly.
B-109 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 13: DEFERRED COMPENSATION PLANS
IRC Section 457 Plan – General Statute 1 43B-426.24 The Plan is a defined cont ribution pension plan with direct authorized t he creation of t he Board of Trustees of the North administration delegated to a third party contractor. Financia l Carolina Publi c E mployee D eferred Co mpensation Plan (t he statements are based on t he P lan’s fiscal y ear. The audite d Board). The Board was e stablished as an agency of the State to statements for the year ended December 31, 2009, are presented offer the State’s per manent e mployees, univ ersity e mployees, in this financial report as a pension and other employee benefit and the employees of certain other component units, a uniform trust fund. In a defined c ontribution plan, benefits d epend Deferred Compensation Plan (t he Plan) in acc ordance with I n- solely on a mounts c ontributed to the plan plus i nvestment ternal Rev enue Code (IRC) Section 457. Effective July 1, earnings. The Plan’s financi al state ments a re prepared usi ng 2008, the Board of Trustee s of the N orth Carolina Publ ic the accrual basis of accounting. Investments are reported at fair Employee Defe rred Co mpensation Plan was c onsolidated wit h value. Securities and mutual funds are based on publishe d the Supplemental Retirement Income Plan’s Board to for m the quotations whi le bank inve stment contract s are stat ed at North Carolina Supplemental Retirement Board of Trustees (the contract value. Notes re ceivable represent loans to participants Board). At th at ti me, the Board began administering th ese and are re ported at out standing principal balances. Prudential independent p lans. The Pla n per mits ea ch participatin g Retirement Services (a subsidi ary of Prudential) provides thi rd employee to d efer a portion of his or her salary until future party ad ministration of the Plan. The Plan’s finan cial years by having the funds invested in variou s instruments that statements are available by contacting the Supplemental Re- make up t he North Caroli na Public E mployee Deferred tirement Income Plan of North Carolina, 150 Fayetteville Street Compensation Trust Fund. This fund is held in trust by the Plan Mall, Suite 980, Raleigh, NC 27601. for the exclu sive benefit of p articipating e mployees and t heir beneficiaries. The deferred co mpensation is av ailable to In addition to the volunt ary contribution crit eria abov e, employees upo n separa tion fro m service, death, disabilit y, General Statut e 143-166.30 requires st ate co ntributions to t he retirement or financial hardships if approved by the Board. The Plan to provide benefits fo r all law enforce ment officers Board has delegated the general administration of the Plan t o a employed by the State and its component units. General Statute third party but has retained all statutory authority and fiduciary 143-166.50 req uires loc al go vernmental units with law e n- responsibility for major decisions of the Plan. The Plan is forcement offic ers to al so c ontribute at lea st as much a s t he reported as a pension and other employee benefit trust fund and State. Particip ation begin s at the date of e mployment. St ate also di scloses a related party transa ction in Note 2 1 of t his agencies and component units are required to contribute CAFR. All co sts of ad ministering and fun ding the Plan are th e monthly to the individual a ccounts of p articipants an a mount responsibility of the plan participants. The Plan’s financial equal to 5% of each officer's monthly salary. The State is also statements are available by contacting th e N.C. Department of required to con tribute to the individual acc ounts of all officers State Treasurer at 325 North Salisbury Stre et, Raleigh, NC on a per capita basis in eq ual shares. State law enforce ment 27603-1385. officers receive $.50 for eac h court cost assessed and collected under Ge neral Statute 7 A-304, while $1.25 of this asse ssment IRC Section 401(k) Plan - Effective Janu ary 1, 1985, goes to local law enforcem ent officers. Gen eral Statutes allow Chapter 135, Article 5 of th e General St atutes aut horized the law enforcement officers to vol untarily contribute up to 10% of creation of the Supple mental Retirement Income Plan of North their co mpensation within a ny calendar y ear, but curre nt Carolina (the Plan) in acc ordance with Internal Revenue Code Internal Reven ue Code provi sions define the actual volunta ry (IRC) Sectio n 401(k). Effective July 1, 20 08, the Board of contribution a law enforce ment officer can make. All Trustees of th e North Carolina Public E mployee Deferre d contributions a re i mmediately vested in the na me of eac h Compensation Plan wa s con solidated with t he Sup plemental participant. A t Dec ember 31, 2009, 52 st ate ag encies and Retirement In come Plan’s Bo ard to form the North Carolina component units along with 469 local govern mental uni ts Supplemental Retirement Board of Trustees (the Board). At outside our rep orting entity contributed the required 5%. In that ti me, the Board beg an a dministering th ese ind ependent addition, 5 state agencies and 443 local government employers plans. Subj ect to the e mployer’s election to participate in th e contributed to the Plan on a voluntary basis. Plan, all members of th e Teacher s' and State E mployees' Retirement Sy stem, Co nsolidated Judi cial Re tirement Sy stem, The Plan also d iscloses a related party transaction in Note Legislative Retirement S ystem, Local Govern mental 21 of this CAFR. Through an agree ment with the Pla n, as Employees' Retireme nt Sy stem and Uni versity Option al directed by t he Bo ard, Prudential Retirement Servi ces Retirement Pr ogram an d r etirement and pen sion plans provides investment management services along with the third sponsored by p olitical subdivi sions of the St ate that qualif y party administration referred to above. The Plan’s inve stment under Section 401(a) of the IRC are eligible to enroll in the Plan risks are described in Note 3. and may contribute up to 80% (limited to an Internal Revenue maximum dollar amount) of their compensation during the plan The Plan also reported total member contributions of fiscal y ear. Me mbers of the Plan may receive their benefit s $264.816 million. The pay rolls for law enforcement office rs, upon retirement, disability, termination, hardship, or death. All on whic h the required co ntributions were b ased for th e y ear contributions a nd co sts of a dministering t he Plan are t he ended December 31, 2009, a mounted to $179.2 million for the responsibility of the participants. State, $15 million for universities, and $3 million fo r
B-110 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS community colleges and other miscellaneous component units. contributions, m ade throu gh salary reductio n agree ments, are The required 5% e mployer’s contribution w as made by the exempt fro m federal and state i ncome taxe s until the State for $9 m illion, by universities for $752 thousa nd, and by accumulated b alances are re ceived or th e contributions a re the re maining component uni ts and co mmunity colleges for withdrawn. Effective Jan uary 1, 1989, contributions may be $159.3 thou sand. In ad dition, the Stat e contributed $5 18 withdrawn by e mployees onl y upon separat ion fro m servi ce, thousand for required court cost assessments. death, disability, reaching ag e 59 1/2 or ag e 55 with qualify ing retirement, or due to certain financial hardships. Currently , IRC Section 403(b) Plans - Employees of t he University there is no restriction on the withdrawal of the value of annuity of North Carolina Sy stem and co mmunity colleges can contracts. Custodial account s established as of Dece mber 3 1, participate in tax-sheltered a nnuity contract s and custodial 1988 can be wi thdrawn only in respect to har dship established accounts cre ated under Intern al Rev enue Code (IRC) Se ction as of December 31, 1988. The se plans are exclusively for e m- 403(b). Genera lly all e mployees are eligible, but the IRC do es ployees of public educati onal organizati ons and c ertain allow the establishment of a minimum contribution of $200 and charitable and other non-profit institu tions as defined by the the exclusion from participation of certain classes of employees. IRC. Sinc e all contribut ions are made voluntarily by Each institutio n may exclude one or more of these cla sses if employees, all costs are borne by the plans' participant s. No every employee within the inst itution meeting the class criter ia direct costs are incurred by the State. is ex cluded fro m particip ation. The e mployees' eligib le
B-111 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 14: OTHER POSTEMPLOYMENT BENEFITS
The State ad ministers two postemployment benefit plans, (LEAs), miscellaneous educational units, and some select local the Retiree Health Benefit Fund and the Disability Income Plan, governments th at are not part of the financial reporting entity as pen sion and other e mployee benefit trust funds. Althou gh also participate. At June 30, 2 010, the nu mber of participating the asset s of the ad ministered plans are co mmingled f or employers was 258 as shown below: investment pur poses, each plan’s asset s may be use d only for payment of b enefits to members of that plan and fo r State of North Carolina...... 1 administrative costs in ac cordance with the t erms of the pl an. LEAs and miscellaneous units...... 163 The plans in this note do not issue separate financial statements. Community Colleges...... 58 The financial statements and other req uired disclosures are University of North Carolina System...... 19 presented in Note 16 and in the Required Supplementary Proprietary component units...... 3
Information section of this CAFR. Local governments...... 14
A. SUMMARY OF SIGNIFICANT ACCOUNTING The Plan is re ported as a major co mponent unit. It is POLICIES AND PLAN ASSET MATTERS administered b y the Executive Ad ministrator and Board of Trustees of the Plan, which establishes premium rates except as may be e stablished by t he G eneral Assembly in an BASIS OF ACCOUNTING appropriation act. Plan benefits received by retired e mployees and disabl ed e mployees are other post e mployment ben efits The financial statements of these plans are prepared using (OPEB). The healthcare benefi ts for retir ed and disable d the accru al ba sis of ac counting. E mployer contributions a re employees are the same as for active e mployees as described in recognized wh en due a nd th e e mployer ha s made a for mal Note 15, exce pt that the coverage beco mes secondary when commitment t o provide th e contribution s. Ben efits a re former employees become eligible for Medicare. recognized when due and p ayable in accordance with the ter ms of each plan. Those for mer e mployees who are eligi ble to receiv e medical ben efits are long-term di sability beneficiaries of th e INVESTMENTS /SECURITIES LENDING Disability Income Plan of North Carolina (DIPNC) and retirees of the Teach ers' and State Employees' Re tirement Sy stem Pursuant t o N orth Carolin a General St atutes, the St ate (TSERS), the Consolidated Judicial Retirement System (CJRS), Treasurer is the custodi an and ad ministrator of the oth er the Legi slative Retire ment System (LRS), the U niversity postemployment benefits funds. The State Treasurer maintains Employees' Op tional Retire ment Progra m (UEORP), and a various in vestment portfoli os in it s I nvestment Po ol. small number of local governm ents, with five or m ore years of Investments are reported at fair value, which is based on quote d contributory membership serv ice in their retire ment sy stem market prices. The investment balance of the Disability Income prior to disa bility or retire ment, with the follo wing exceptions: Plan represents its share of the fair value of the net assets of the various portfolios within the pool. The Retir ee Health Benefit for e mployees first hired on or after O ctober 1, 2006, and Fund currently does not have investments. members of the General Assembly first taking office on or after February 1, 2007, future cov erage a s retire d e mployees a nd Additionally, the securitie s l ending balan ce represent s retired members of the G eneral Asse mbly is su bject to the assets occurring from securities lending transactions that result requirement th at the future r etiree hav e 20 or more y ears of from the funds’ participation i n the pool. Th e inve stments of retirement serv ice credit in o rder to receive coverage on a the State Treasurer and sec urities lending are fully discussed in noncontributory basi s. E mployees first hired on or afte r Note 3. October 1, 200 6 and members of the Gen eral Asse mbly first taking office on or after February 1, 2007 with 10 but less tha n 20 years of retirement service credit are eligible for coverage on B. Plan Descriptions and Contribution a partially contributory basis. For such future retirees, the State Information will pay 50% of the Stat e H eath Pla n’s tot al nonc ontributory premium. Ther e is no i mpact of this l egislation in th e current 1. HEALTH BENEFITS fiscal year.
Pursuant t o N orth Carolin a General St atutes, the St ate The Plan’s b enefit and co ntribution pro visions ar e makes available the North Carolina Stat e Health Plan for established by Chapter 135- 7, Article 1, and Cha pter 1 35, Teachers and S tate E mployees, referred to as the State Health Article 3A of the General Statutes and may be amended only by Plan (the Plan), a cos t-sharing multiple-employer defined the North Car olina General Assembly. The plan doe s not benefit healthcare plan, exclusively for the benefit of employees provide for automatic post-retirement benefit increases. and for mer e mployees of the State, the University of North Carolina Sy stem, co mmunity colleg es, an d certain oth er By General St atute, a Retiree He alth Benefit Fund (the component uni ts. In addition, Local Education Ag encies Fund) ha s bee n est ablished a s a fund in w hich ac cumulated
B-112 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
contributions fro m e mployers and a ny earnings on tho se (5) the e mployee must not be eligible t o receive an unreduced contributions shall be use d to provide health benefits to retired retirement benefit from the TSERS; and (6) the e mployee must and disabled employees and their applicable beneficiaries. By terminate employment as a permanent, full-time employee. An statute, the Fund is administered by the Board of Trustees of the employee is eli gible to receive an unreduced retire ment benefit Teachers’ an d State E mployees’ Retire ment Sy stem a nd from the TSERS after (1) reaching the age of 65 and completing contributions to the Fund are irrevocable. Also by law, Fund five y ears of creditable servic e, or (2) reaching the age of 60 assets are dedicated to providing benefits to retired and disabled and completing 25 years of creditable service, or (3) completing employees and their applicable beneficiaries and are not subject 30 years of creditable service, at any age. to the claims of creditors of the employers making contributions to the Fund. H owever, Fund a ssets may be u sed for reasona ble The monthly long-term disability benefit is equal to 65% expenses to administer th e F und, includin g cost s t o co nduct of one-twelfth of an e mployee's annual base rate of required actu arial valuatio ns of State-supported reti red compensation last payable to the participant or beneficiary prior employees’ he alth benefit s. Contribution ra tes to th e Fun d, to the beginning of the short-term disability period, plus the like which are int ended to fina nce be nefits and ad ministrative percentage of one twelfth of the annual lon gevity pay ment to expenses on a pay -as-you-go basi s, are de termined by the which the parti cipant or benef iciary would be eligible. The General Assembly in the Appropriations Bill. monthly benefi ts are su bject to a maximum of $3,900 p er month redu ced by any pri mary Social Se curity disabilit y For the current fiscal y ear, the State an d the other benefits and by monthly payments for W orkers' Compensation employers con tributed the le gislatively mandated 4.5% of to which the participant or b eneficiary may be entitled, but the active employee salaries. The Fund is reported as an employee benefits payable shall be no less than $10 a month. When an benefit trust fund. The State’s total pay ments are shown in the employee qua lifies for an unreduced service retire ment table on the fol lowing page. Actuarially required contributions allowance from the TSERS, th e benefits pay able from DIPNC and the percentage received from all employers can be found in will cease, and the em ployee will co mmence retirement under the Required Supplementary Information section of this report. the Teach ers' a nd State E mployees' Retire ment Sy stem or the University Employees' Optional Retirement Program. 2. DISABILITY INCOME Although t he DIPNC oper ates on a cal endar y ear, As discusse d in Note 15, short-ter m a nd long-ter m disability income benefits are funded by actuarially determined disability benef its are provid ed through the Disability Inco me employer co ntributions t hat are e stablished in t he Plan of North Carolina (DI PNC), a cost-sharing, multiple- Appropriations Bill by the General Assembly and coincide with employer defined benefit pl an, to the eligible members of th e the state fiscal year. For the fiscal year ended June 30, 2010, Teachers' and State E mployees' Retire ment Sy stem wh ich the State and th e other employers made a statutory contribution includes e mployees of the State, the Uni versity of North of .52% of c overed p ayroll. This was greater than t he Carolina system, co mmunity colleges, cert ain participatin g actuarially req uired contributi on of .49%. The State’s tot al proprietary compo nent unit s and Local Education A gencies payments are shown in th e following t able. Actu arially (LEAs) which are not part of the reporting entity , and t he required contri butions an d the percentag e received fro m all University E mployees' Optio nal Retire ment Progra m. Lo ng- employers ca n be found in the Required Supplementary term disability benefits are payable as an other postemployment Information of this CAFR. benefit fro m DIPNC after t he conclu sion of the short-te rm disability perio d or after salar y continuation payments cease, The contributions cann ot be separat ed b etween th e whichever is la ter, for as long as an e mployee is disabl ed. An amounts that relate to other poste mployment benefit s a nd employee is eligible to rec eive long-ter m d isability benefi ts employment b enefits for active e mployees. Those individu als provided the following requirements are met: (1) the employee who are receiving extende d short-ter m disability bene fit has five or more y ears of contributing membership service i n payments can not be sep arated fro m the nu mber of members the Teacher s' and State Employees' Retire ment Sy stem currently eligi ble to receive disability benefits as an ot her (TSERS) or the Univer sity Em ployees' Opti onal Retire ment postemployment benefit. Program, earned within 96 months prior to the end of the short- term di sability period or cessation of sal ary continuation Benefit an d co ntribution prov isions are e stablished by payments, whi chever i s lat er; (2) the e mployee must make Chapter 135, Article 6, of t he G eneral Statutes and may be application to receive lo ng-term benefits within 180 day s after amended only by the North Carolina G eneral Asse mbly. By the conclusion of the short-term disability period or after salary statute, the DIPNC is administered by the De partment of Sta te continuation p ayments c ease or after monthly pay ments for Treasurer and t he Board of Truste es of th e Teachers’ and St ate Workers' Compensation cease (excluding monthly payments for Employees’ Retirement System. permanent partial benefits), whichever is later; (3) the employee must be c ertified by the Me dical Bo ard to be mentally or The plan doe s not provide for auto matic p ost-retirement physically disabled for the further performance of his/her usual benefit increases. occupation; (4) the disability must have been continuous, likely to be permanent, and incurred at the time of active employment;
B-113 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
The following table presents the three year trend of the contractually required contributions for the Retiree Health Benefit Plan and the annual required contributions (ARC) for the Disa bility Income Plan for th e State and it s component units made to the pl ans required by GASB 45. For the Retiree Health Benefit Plan, the contractually required contribution is determined by the General Assembly and does not reflect the actuary-based ARC. For the Disability Income Plan, the ARC equals the State’s OPEB cost as an employer.
State of North Carolina's Required Contributions as an Employer For the Years Ended June 30, 2008 through June 30, 2010 (dollars in thousands)
Retiree Health Disability Benefit Inc ome Primary Government: 2010$ 152,440 $ 17,615 2009 155,156 19,678 2008 135,051 17,128
Component units: Universities: 2010 $ 140,450 $ 16,230 2009 120,128 15,236 2008 120,871 15,330
Community Colleges: 2010 $ 34,593 $ 3,997 2009 31,838 4,038 2008 30,015 3,807
Proprietary Funds: 2010 $ 910 $ 105 2009 873 111 2008 870 110
Total Primary Government and Component Units: 2010 $ 328,393 $ 37,947 2009 307,995 39,063 2008 286,807 36,375
Percentage Contributed: 2010 100% 100% 2009 100% 100% 2008 100% 100%
The following table summarizes membership information by plan at the actuarial valuation date:
Retiree Disability Health Benefit Income Employee Groups Retirees and beneficiaries currently receiving benefits ...... 164,286 n/a Disabled members receiving long term disability benefits ...... n/a 6,089 Terminated employees entitled to benefits but not yet receiving them ...... 33,572 - Active plan members ...... 346,766 329,993
Total ...... 544,624 336,082
Date of valuation ...... 12/31/09 12/31/09
B-114 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
The funded status of each plan as of the most recent actuarial valuation date is as follows (dollars in thousands):
Actuarial UAAL as a Actuarial Accrued Unfunded Percentage of Actuarial Value of Liability AAL Funded Covered Covered Valuation Assets (AAL) (UAAL) Ratio Payroll Payroll Date (a) (b) (b-a) (a/b) (c) ([b-a]/c) (3) Re tir e e He alth (1) 12/31/09$ 556,303 $ 33,321,784 $ 32,765,481 1.7%$ 15,131,146 216.5%
Disability Income (2) 12/31/09$ 352,628 $ 492,731 $ 140,103 71.6%$ 14,534,661 1.0%
(1) The AAL has been prepared using the projected unit credit cost method. (2) The AAL has been prepared using the entry age actuarial cost method. The information presented is intended to approximate the funding progress of the plan as required by GASB Statements 43 and 45. (3) Buck Consulting reported the unadjusted covered payroll for the DIPNC long-term disability benefits. Aon Consulting reported the adjusted, annualized payroll for postemployment health benefits.
C. Actuarial Methods and Assumptions are ba sed on t he most rec ent experien ce study prepared a s of December 31, 2009 and adopted beginning with the December Actuarial valuations of the pla ns involve estimates of th e 31, 2009 pension valuation. The discount rate used for Reti ree value of reported a mounts and assu mptions about t he Health reflects a pay-as-you-go approach. probability of occurrence o f events far into the future. Examples i nclude a ssumptions ab out futu re e mployment, Projections of benefits for financial reporting purposes of mortality, and the healthcare cost trend. Actu arially determined the plan s are base d on th e sub stantive p lan (the plan as amounts are su bject to continual revision as actual result s a re understood by the employer and plan members) and include the compared to p ast expe ctations and new e stimates are made types of benefits provided at the time of each valuation and the about the future. The latest actuarial valu ation for Retiree historical patte rn of sharing of benefit c osts bet ween the Health is d ated Dece mber 31, 2009. The latest actu arial employer and plan members to that point. Historically , the valuation for DIPNC is dat ed Dece mber 31, 2009. The benefits fun ded solely by e mployer cont ributions a pplied schedules of funding pr ogress, prese nted a s requ ired equally to all r etirees. Currently, as describ ed earlier in th e supplementary information following the notes to th e financial note, benefits are dependent on membership requirements. statements, pre sent multiyear trend infor mation about whet her the actuarial va lues of plan a ssets are increa sing or decreasin g The actu arial methods an d a ssumptions used for DIPNC over time relative to the actuarial accrued liabilities for benefits. include t echniques t hat are de signed to red uce the effect s of short-term v olatility in actuarial accrued li abilities an d the The actuarial assumptions u sed for the Ret iree Healt h actuarial v alue of asset s, c onsistent with the long-ter m Benefit are consistent with t hose u sed to value the pension perspective of the calculations. benefits of the TSERS where appropriate. These assumptions
B-115 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Below are listed the actuarial methods and significant assumptions for these valuations that will be used to determine future annual required contributions.
Re tir e e He alth Be ne fit Disability Income
Valuation Date 12/31/09 12/31/09
Actuarial Cost Method Projected Unit Credit Aggregate
Amortization Method Level percent of pay Level percent of pay
Remaining Amortization Period 30 years (1)
Period Open/Closed Open (1)
Asset Valuation Method Market Value of Assets 5 year smoothed w ith 80%/120% corridor Actuarial Assumptions: Investment Rate of Return (2) 4.25% 5.75% Healthcare Cost Trend Rate (2) (3) 9% initial N/A 5% ultimate Projected Salary Increases (4) (5) N/A 4.3%-9.1%
(1) The aggregate cost method does not identify or separately amortize unfunded liabilities, thus information about the plan's funded status and funding progress has been prepared using the entry age actuarial cost method. The information presented is intended to approximate the funding progress of the plan.
(2) For the Retiree Health Benefit, the investment rate of return includes an inflation and productivity rate of 3.50%. For the DIPNC, the investment rate of return includes only inflation of 3.00%. For the Retiree Health Benefit, effective w ith the December 31, 2009 valuation, the assumed annual rate of inflation has been reduced from 3.75% to 3.50%, resulting in an increase in the amortization of the UAL of $40 million. The current 3.50% annual rate of inflation is comprised of 3.00% inflation and .50% productivity.
(3) Trend rates apply to both Medicare eligible and pre-Medicare-eligible members.
(4) Aon Consulting used the projected unit credit method w hich does not include salaries, thus salary increases are not applicable for FY2010.
(5) For the DIPNC, the projected salary increases include an inflation and productivity rate of 3.50%. N/A Not Applicable
B-116 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 15: RISK MANAGEMENT AND INSURANCE
A. Public Entity Risk Pool The following schedule shows the changes in the reported liability for the past two years (dollars in thousands): Public School Insurance Fund The Public Sch ool Insurance F und (the Fund) is a public Fiscal Year entity risk pool reported wi thin the enter prise fund s. In 2010 2009 accordance with Ch apter 11 5C, Article 38, of the General Unpaid claims at beginning of year ...$ 457 $ 292 Statutes, th e p urpose of the Fund i s to i nsure th e Loc al Incurred claims: Education Agencies (LEAs), in order to safe guard the prop erty Provision for insured events investments made in the public schools of North Carolina. Th e of the current year ...... 1030 2,408 community col leges, w hich a re co mponent units, ca n al so Increases (decreases) in provision acquire insurance through the Fund as stated in General Statute for insured events of prior years .... (181) 106 115D-58.11(c). The bo ard of each LEA and the board of Total incurred claims ...... 849 2,514 trustees of each community college are require d to insure thei r Payments: buildings and contents on a replacement cost basis, as suggested Claims attributable to insured by the Fund. The Fund is financed by premiums collected from events of the current year ...... 373 1,746 the LEAs and the community colleges and interest is earned on Claims attributable to insured the Fund's cash balance. Each board has to give notice of its events of the prior years ...... 403 603 election to in sure in the Fun d at least 30 d ays prior to su ch Total payments ...... 776 2,349 insurance be coming effectiv e and shall furni sh to the Fund a Total unpaid claims at end detailed list of all school buildings, contents and other insurable of the year ...... 530$ $ 457 school property. While policies remain in effect, the Fund shall act as insurer of the properties covered by such insurance. The Fund currently insure s 91 out of 115 LEAs a nd 29 out of 5 8 With the coll ection of prem iums fro m t he in sured educational community colleges. units, payment of valid claims becomes the responsibility of the Claim liabilities are based on esti mates of the ulti mate Fund. All cl aims great er than $10 million p er occurrenc e a re cost of losses that have been reported but not settled. There are covered by reinsurance contracts. Maximum recoverable from no salvage clai ms since any salvage i s adjusted in th e cl aim reinsurance for any one cata strophic event is $45.5 million per settlement. There are no subr ogation clai ms pending. Since occurrence. Losses in excess of the reinsurance limit would be claims are revi ewed by adjusters and the act ual loss proj ection paid by the Fund fro m long-t erm inve stments, subj ect to the is computed in a short time after the claim is reported, the claim maximum amount of avail able funds. Annual aggregate limits adjustment exp ense a ssociated with the unpa id clai m li ability of $15 million apply separat ely with respect to flood and will be reflected in the current period. The Fund does con sider earthquake. Coverage appli es to "all risk" p erils. Boiler and investment in come in deter mining if a pre mium deficiency machinery coverage is pro vided under separat e contract exists. underwritten by the Fund. Incurred losse s are redu ced by estimated a mounts rec overable under the F und’s rein surance The only acqui sition costs are related to pro posal co sts policies. and inspection costs for in sured members. Si nce the Fund can only insure th e LEAs and the co mmunity colleges, n ew B. Employee Benefit Plans contracts are immaterial. Si nce existing contracts are renewed once a y ear, t he Fund's cost s are for poli cy m aintenance. Therefore, acquisition costs do not need to be amortized. 1. State Health Plan In accordance with Chapter 135, Article 3A, Part 3, of the General Statutes, the State e stablished the North Carolina St ate Health Pla n for Teachers and State E mployees, referred to a s the State He alth Plan (th e Plan). Th e Plan provi des comprehensive healthcare benefits for employees and retirees of the State and its participating component units, as well as their qualified dependents on a contributory basis. This care is also extended to e mployees and retirees of the Local Education
Agencies (LEAs), and other employing units allowed by statute, which are not part of the State's reporting entity. Coverage is self-funded by contributions to t he Plan, whic h is reported as a major co mponent unit. Contributions for employee and retiree cov erage are made by the State, its participating component units, LEAs, and other qualifi ed
B-117 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
employing unit s. Contributions for dependent cov erage are Changes in the aggregate liabilities for claims for the past made by e mployees and retirees. As de scribed in Note 1 4, two fiscal years are as follows (dollars in thousands): coverage i s al so extend ed to certain individ uals a s a n oth er postemployment benefit. The Plan has c ontracted with thi rd Current-Year parties to process claims. Beginning of Claims and Balance Fiscal Year Changes in Claim at Fiscal The Plan pays most expenses that are medically necessary Liability Estimates Payments Year-End and eligible f or coverage b ased o n a mounts for Preferred 2008-09$ 4,181 $ 38,072 $ (38,993) $ 3,260 Provider Organization (PPO) plan members. Claims are subject 2009-10 3,260 42,040 (41,861) 3,439 to specifie d an nual dedu ctible and co-pay ment require ments. The Plan provides an unli mited lifeti me benefit for t he Preferred Provider Organization (PPO) plans. The authority for the PPO plans is provided in General Statute 135-39.5B. 3. Disability Income Plan of North Carolina Claim liabilities are based on esti mates of the ulti mate cost of clai ms that have be en incurred (b oth reported a nd Short-term and long-term disability benefits are provided unreported). Claim li abilities do not inclu de noni ncremental through the Disability Income Plan of North Carolina (DIPNC), claims adjustment expenses. a pension and o ther employee benefit trust fund, to the eligible members of th e Teachers’ a nd State E mployees’ Retire ment Changes in th e Plan's aggregate liabilitie s for clai ms for System w hich i ncludes e mployees of the Stat e, the Universit y the past two fiscal years are as follows (dollars in thousands): of North Carolina Sy stem, co mmunity colleges, certain Current-Year participating pr oprietary co mponent unit s an d the Univ ersity Beginning of Claims and Balance Employees’ Optional Retirement Program. Employees of Local Fiscal Year Changes in Claim at Fiscal Liability Estimates Payments Year-End Education Age ncies (LEAs) and miscellaneous edu cational 2008-09$ 263,242 $ 2,458,583 $ (2,463,675) $ 258,150 units which are not part of the reporting entity are also included. 2009-10 258,150 2,381,897 (2,386,718) 253,329 Short-term b enefits are payable after a waiting period of 60 continuous cal endar day s fro m the onset of d isability. The 60 day waiting period is deter mined fro m th e l ast actual day of 2. Death Benefit Plan of North Carolina service, the da y of the disabling event if the disablin g eve nt occurred on a day other than a nor mal workday, or the day Term life in surance (de ath be nefits) is provided through succeeding at l east 3 65 cal endar day s after service as a St ate the Deat h Be nefit Plan, a pension and oth er e mployee b enefit teacher or Stat e e mployee, whichever is l ater. Short-te rm trust fund, to all members of the Teachers' and State Employees' benefits are pr ovided to curr ently active employees a nd the Retirement System who have completed at least 12 consecutive related liability is not measurable. As discu ssed in Note 1 4, months of membership in th e Sy stem. Mem bership inclu des long-term disability benefits are payable as an other employees of the State, the University of North Carolina postemployment benefit from DIPNC after the conclu sion of System, co mmunity colleg es, and certain participati ng the short-ter m disability period or after salary continuation proprietary co mponent unit s. Em ployees o f Local Education payments cease, whichever i s later, for as lon g as a n employee Agencies (LEAs) and miscellaneous educat ional units whi ch is di sabled. T hese benefits a re establi shed by Chapter 13 5, are not part of the reporting entity are also included. Th e Article 6, of th e General Statutes and may be amended only by benefit payment is equ al to th e greater of (1) the co mpensation the North Carolina General Assembly. on whi ch c ontributions were made by the member during t he calendar year preceding the y ear in which his/ her death occur s or (2) the member's highest 12 month's salary in a ro w during the 24 months prior to his/her death. The benefit is subject to a minimum of $25,000 and to a maximum of $50,000. For the period July 1, 2009 to Ju ne 30, 2010, deat h benefits were funded by actuarially based e mployer contributions that are establish ed in the biennial appropriatio n bill by the General Assem bly. The State, the University of North Carolin a Sy stem, co mmunity colleges, participati ng proprietary com ponent u nits, LEAs and ot her miscellaneous educational uni ts contributed 0.16% of covered pay roll (a s defined in Note 14) to fund the Death Be nefit Plan for t he period July 2009 to June 2010. These benefits are established by General Statute 135-5(1) and may be a mended only by the North Carolina G eneral Assembly. Cl aims liabilities ar e based on esti mates of the ultimate cost o f clai ms that have been incurr ed (both reported and unreported).
B-118 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
C. Other Risk Management and Insurance approval; or when a lo ss occurs and ca n be re asonably Activities estimated. Changes in the balances of claims liabilities for the past two 1. Automobile, Fire and Other Property fiscal years are as follows (dollars in thousands): Losses The State is re quired by Chapter 58, Article 31, Part 50, Current-Year of the General Statutes to pro vide liability insurance on ev ery Beginning of Claims and Balance at state-owned motor vehicle, which includes vehicles held by the Fiscal Year Changes in Claim Fiscal State's participating component units. The State is self-in sured Liability Estimates Payments Year-End for the first $1 m illion of any loss through a retrospective rated 2008-09$ 2,076 $ 1,785 $ (1,771) $ 2,090 plan. The pla n purchases excess insurance through a priva te 2009-10 2,090 492 (805) 1,777 insurer to cover losses greater than $1 million up to $10 million per occurrenc e. Covered losses incl ude tho se that occ ur wi th vehicles th at ar e not on a st ationary track or rail, and federa l vehicles when the Governor calls out the National Guard. Agencies of th e State and par ticipating component u nits using state cars are charged pr emiums to cover the cost of the excess in surance and to pay for those losses falling under t he self-insured retention. Premiums charged are also based on the projected losse s to be i ncurred. The private insurer proce sses all claims and sets up a reserve for amounts expected to be paid for claims. Claims are paid by the private insurer after they are approved by the Attorney General's Office. Settled claims have not exceeded coverage in any of the past three fiscal years.
The State Prop erty Fire Insurance Fund (the Fund), an internal service fund of the St ate, was create d by Chapter 58, Article 31, of the General St atutes. The F und insure s St ate owned buildings and contents for fire, extended covera ge, and other property losses. The Fund does not char ge premiums for fire insuranc e for operation s t hat are supported by the State 's General Fund. Those operatio ns that are not supported by the State's General Fund are charged for fire coverage. Agencies of the State can p urchase exte nded cov erage and other prop erty coverage such as sprinkl er leakage, bu siness interrupti on, vandalism, t heft, and "all risk" for buildi ngs an d conte nts through the Fu nd. For those that elect t o re ceive any of th is other cov erage, the F und charges pre miums discounted fro m industry manual rates. The Fund insure s l osses u p to $2 .5 million per oc currence. All losses cov ered by the Fund a re subject to a $5,000 per o ccurrence deductible. However, some agencies h ave chosen a higher deductible fo r a reduction i n premium. The Fund pu rchases e xcess insuran ce fro m private insurers to cover losses over t he amounts insured by the Fu nd. If aggregate un insured losses sustained by the Fund, in exc ess of $50,000 per loss, other than flood and earthquake losses and wind lo sses by na med st orms, reach $5 million in any on e annual period, the Fund’s d eductible for the remainder of t he annual period i s $100,000 per occurrence. Se ttled claims have not exceeded coverage in any of the past three fiscal years. Claims of $10,000 or higher are paid when the Council of State ap proves the requ est for pay ment. Claims le ss th an $10,000 are paid without Cou ncil of State a pproval. Cl aims costs are recognized when they are approved by the Council of State and are o utstanding for payment; when known estimates of losses are waiting to be submitted to the Council of State for
B-119 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
2. Medical Malpractice Protection participants. The Trust Fund i s exempt from federal and st ate a. Professional Liability Insurance for State Medical income taxe s, and is not sub ject to regulation by the North Personnel Carolina Department of Insura nce. Cov erage is self-funded b y contributions fro m participa nts and inv estment inc ome. All ag encies o f the Stat e a nd participati ng co mponent Contributions a re based on the actuarially deter mined fundin g units are insured for tort claim s up to $1 m illion un der the level for a given plan year. authority of the State Tort Clai ms Act, Chapter 143, Article 31, of the General Statutes. Organization s wit hin the reporting For the periods ending June 30, 2009 and June 30, 2010, entity carry excess commercial liability insurance to supplement the Trust Fund provided coverage on an occurrence basis of $3 the coverage provided by the State Tort Clai ms Act; however, million per individual and $7 million in the aggregate per claim. claims invol ving medical malpractice are ge nerally exclude d Excess reinsurance coverage was not p urchased for t he policy from this coverage. The University of North Carolina at Chapel years ending June 30, 2009 a nd June 30, 20 10, as the Trust Hill Medical School an d U NC H ospitals participate in t he Fund ch ose t o retain 100 % of the liab ility. In lieu of Liability Insurance Trust Fun d, which is described in det ail reinsurance, th e participa nts contributed $10 million in t he below. All other universities purchase co mmercial liabilit y aggregate into the Reimbursement Fund during previous fiscal insurance. Ch apter 237, Sect ion 11.33, of t he 1999 Session years for future losses. Addi tionally, in fisc al y ear 2010, t he Laws of North Carolina a uthorized the D epartment of Hea lth participants c ontributed an additional $ 1.006 million to and Hu man S ervices, th e D epartment of Environment a nd replenish th e Rei mbursement Fund to its original $10 million Natural Resources, and the Department of Correction to provide level. medical liabilit y coverage on behalf of em ployees licen sed to For the fiscal y ear ending June 30, 2010, th e Trust Fund practice medicine or denti stry; all licen sed physicians who are purchased a direct insuranc e policy to cover the first $1 million faculty members of the Univer sity of North Carolina who wo rk per occurrenc e and $3 million annual agg regate li mits of on contract for the Divisio n o f Mental H ealth, Develop mental coverage. In th e event the Trust Fund has insufficient funds to Disabilities, a nd Sub stance A buse Service s for incident s t hat pay existing an d future clai ms, it has the authority to borro w occur in Division programs; and on behalf of medical residents necessary a mounts up to $30 million. Any such borrowi ng from the Univ ersity of North Carolina wh o a re in training at would be repa id fro m the a ssets an d reve nues of progra m institutions o perated by the Department of H ealth and H uman participants. No borrowing s have b een made und er t his Services. The extent of cover age is a maximum of $1 million authority to date. The Trust Fund council b elieves adequ ate for each i ndividual in cident and does no t affect c urrent funds are on d eposit in the Tru st Fund to meet estimated losses coverage under the Stat e Tort Claims Act. The De partment of based upon the results of the independent actuary’s report. Health and H uman Service s, the Depart ment of Environ ment and Natural Resource s, and the Dep artment of Correctio n The Trust F und e stablishes claim lia bilities b ased on purchase co mmercial profe ssional liability i nsurance for th eir estimates of th e ultimate cost of all lo sses and loss a djustment medical staff. Settled clai ms have not ex ceeded cov erage in expenses, incl uding lo sses and lo ss adjustment expenses any of the past three fiscal years. incurred but not y et reported, which are unpa id at the balance sheet dat e. The clai ms liab ilities of $45.215 million a nd Insurance coverage varies depending upon the amount of $48.292 million are the pre sent valu es of the aggregat e coverage and t he ty pe of policy . Ty pically the a mount o f actuarially determined claims liabilities of $ 44.181 million and primary cover age for medical liability is $1 million per $47.466 million, discounted at 2.5% at June 30, 2009 and 2.5% individual, cl aim, or i ncidence, and $3 million total or at June 30, 201 0. These esti mates are revie wed annually, and aggregate. Ma ny departments and institution s maintain excess as adj ustments beco me necessary, such adjustments are policies to provide additional coverage above that provided b y reflected in current operations. Cl aims against participants are the pri mary policy for medical liability . The policie s a re paid from the corpus of th e Trust Fun d. Ch anges in the Trust written on a claims made or occurrence basis, with the majority Fund's aggreg ate liabilitie s for clai ms for th e past t wo fisc al of the policies being claims made. The claims liabilities are not years are as follows (dollars in thousands): measurable.
b. Self-Insurance through the Liability Insurance Trust Current-Year Beginning of Claims and Balance Fund Fiscal Year Changes in Claim at Fiscal The Liability Insuranc e Trust Fund (Trust Fund) is a n Liability Estimates Payments Year-End unincorporated entity created by Chapter 116, Article 26, of the 2008-09$ 60,958 $ 3,868 $ (19,611) $ 45,215 2009-10 45,215 8,083 (5,006) 48,292 General Statutes and the University of North Carolina Board of Governors Resolution of June 9, 1978. The Trust Fund is a self-insurance program e stablished t o provi de profession al medical malpractice liability covering the U niversity of North Carolina Hospitals at Chapel Hill (the H ospitals) and t he University of North Carolina at Chapel Hil l Phy sicians and Associates (UNC P&A). The Trust Fund provides coverage for program participants and indi vidual he alth c are practitioner s working a s employees, ag ents, or office rs of progra m
B-120 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
3. Public Officers' and Employees' weekly salary . In certain in stances, death benefits may b e Liability Insurance extended beyond the 400 weeks. The respon sibility for claim ing co mpensation is on th e In accordance with Chapter 58, Article 32, Part 15, of the injured employee. If the injured employee or his representative General St atutes, public officers' and employees' liabili ty does not notify the e mployer within 30 day s from th e date of insurance is provided by priv ate insurers for all e mployees of injury, the employer can refuse compensation. A claim must be the State and participating component units except for d octors filed with the NCIC by either the e mployee or the employ er and dentists. The policy provides $10 million excess insurance within two years from the date of knowledge thereof; otherwise over the $1 million statut ory l imit p ayable for any one clai m the clai m i s barred by law and no further co mpensation is under the Stat e Tort Clai ms Act. The first $150,000 of an allowable. W hen an e mployee is inj ured, the e mployer's award agai nst a state agency is the re sponsibility of the state primary resp onsibility is t o arrange for and provid e t he agency’s Gener al Fund budget code or up to $1 million if a necessary treatment for any work-related injury. The employ er Non-General F und budg et co de. For Gene ral Fund budg et tries to provid e the best po ssible medical care for inj ured codes, any award greater than $150,000 but less than $1 million employees to h elp them reach maximum medical improvement is funded by proportionate sh ares of esti mated lapse salaries and return to work as soon as possible. from all agenc ies’ General F und budget co des. Since sta te agencies and component units are re sponsible for funding any The State and its co mponent units are self-insured for tort claims of $ 1 million or less fro m their budget and/or lap se workers' co mpensation. A third-party adm inistrator handl es salaries, total cl aims liabilities are not measurable. E mployers workers’ co mpensation clai ms except for th e Depart ment of are charged a premium for t he exce ss in surance based on a Transportation. State agenci es and particip ating co mponent composite rate. The e mployers pay the premiu ms directly to units contribut e to a fund adm inistered by the Office of the the private insurer. Settled cl aims have not exceeded coverage State Controlle r to cover their workers’ co mpensation clai ms. in any of the past three fiscal years. The third party administrator receives a per case administration fee and draws down state funds to make medical and indemnity 4. Employee Dishonesty and Computer Fraud payments on b ehalf of the State in accordan ce with the Nort h Carolina Workers' Compensation Act. Blanket public employee dish onesty and co mputer fraud Each st ate a gency and partic ipating co mponent unit is insurance is provided for agencies of t he State and its billed for claims and an ad ministrative fee which is paid by the component units with a li mit of $5 m illion per occurrence, fund to the third party administrator. This fund is reported as an subject to a 1 0% participatio n in each loss and a $ 75,000 internal servi ce fund in this report. Bud gets for worke rs' deductible. Th is covera ge is placed wit h a private insura nce compensation for most st ate agencie s a nd participatin g company and is handled by the North Caroli na Department of component units are ba sed on the prior y ear's loss e xperience. Insurance. Agencies of the S tate and it s co mponent unit s are Since the relat ed liability is not measurable, clai m co sts are charged premiums by the priv ate insurance company. A sma ll recognized when paid. The Department of Transportation is the number of stat e agenci es and co mponent u nits of the Sta te only state agency that sets up a reserve for claims. For the year require faithful perfor mance coverage in addition to e mployee ended Jun e 3 0, 2010, wor kers' co mpensation co sts were dishonesty coverage. In these instance s, separate policies ha ve recognized as follows (dollars in thousands): been purchased. The a mounts of covera ge and the d eductibles vary a mong th ese separate po licies. Settled clai ms ha ve n ot exceeded coverage in any of the past three fiscal years.
5. Statewide Workers' Compensation Program Primary government ...... $ 93,290 University of North Carolina System ...... 8,368 The Workers' Compensation Program (the P rogram) was All other component units ...... 33 created by Cha pter 97, Article 1, of the Ge neral Statutes t o provide benefits to work ers injured on the j ob. All e mployees Total ...... $ 101,691 of the Stat e a nd its co mponent unit s are included in th e Program. An injury is covered under workers' compensation if it is caused by an accident that arose out of and in the course of employment. Also, c ertain o ccupational di seases specifically designated in t he North Carolina W orkers' Co mpensation A ct are co mpensable. Losses p ayable by the Program incl ude
medical clai ms, loss of w ages, disability , and death ben efits. Payments of all medical benefits are subj ect to approval ba sed on a fee sched ule establi shed by the North Carolina Industri al Commission (NCIC). Loss of wages and disability benefits are payable based on 66 2/3% of an e mployee's average weekly salary subj ect t o a st atutory co mpensation ra te minimum and maximum est ablished ann ually b y the NCIC. Death benefits are payable for 400 weeks at 66 2/3% of an e mployee's average
B-121 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
6. Workers’ Compensation Fund The following schedule shows the changes in the reported liability for the past two fiscal years (dollars in thousands): The Workers’ Co mpensation Fund (the Fund) is an insurance enterprise reported within the ente rprise funds. The Current-Year Fund is creat ed in the D epartment of Insurance (t he Beginning of Claims and Balance Fiscal Year Changes in Claim at Fiscal Department) and is ad ministered by the State Fire and Resc ue Liability Estimates Payments Year-End Commission (the Co mmission) through a ser vice contract with 2008-09$ 15,043 $ 6,104 $ (5,901) $ 15,246 a third-party ad ministrator. In accorda nce with Ch apter 5 8, 2009-10 15,246 6,198 (5,801) 15,643 Article 87, of the General Statutes, the purpose of the Statewide Workers’ Co mpensation Progra m (the Progra m) is to provi de workers’ compensation benefits to members of “eligible units,” 7. Health Insurance Program for Children which c onsist of volunte er fire depart ments or volunt eer rescue/EMS units that are not part of a unit of local government The Health Insurance Program for Children (the Program) and are exe mpt fro m stat e in come ta x un der General Statu te is an insurance enterprise rep orted within th e Gen eral Fun d. 105-130.11. These eligi ble u nits are not part of the reporti ng The Program was created by Chapter 108A, Article 2, Part 8, of entity. Benefits are payable for compensable injuries or deaths the General Statutes to provide comprehensive health insurance which occurred on or after July 1, 1996. The Fund is financ ed coverage to uninsured low-income children who are residents of by appropriations made to th e Department for this purpose a nd this State, incl uding cov erage for dental, he aring, and visi on by per capita fixed dollar a mounts for ea ch member of a services and supplies. participating eligible unit’s roster. The per capita fixed d ollar amount is set a nnually by the Commission an d is paid by the Coverage is pr ovided fro m fe deral funds rec eived, stat e eligible u nits t o the Co mmission on or befor e July 1 of e ach funds a ppropriated, and othe r nonappropria ted fund s made year for credit to the Fund. If pay ment is not received by July available for t his purpo se. All appropriati ons, alloc ations, 1, the eligible unit shall not receive worke rs’ co mpensation premium receipts, or any other receipts, including earnings on coverage for th at fiscal y ear. The appropriati on for the fisc al investments, o ccurring or ari sing in conn ection with acu te year ended June 30, 201 0 w as $1.9 million. A s of June 3 0, medical care benefits provided under the Program are deposited 2010, the Fu nd consi sted of 1 ,225 eligible units repre senting into the Child Health Insuranc e Fun d (the Fund ). approximately 45,422 members. Disbursements fro m the Fun d include any and all a mounts required to pa y the benefits and ad ministrative co sts of th e The liability for unpaid clai ms is based on an actu arial Program. For the fiscal y ear ended Jun e 30, 2010, $77.05 determination and repre sents a rea sonable esti mate of t he million w as ap propriated fro m the General F und to the Nor th ultimate cost of open claims and claim settlement expenses that Carolina Department of Health and Human Services (DHHS) to are unpaid as o f the fiscal year end, includin g incurred but n ot be used for the Program. reported losse s. The liability for unpaid clai ms is continually reviewed, and as adj ustments beco me necessary suc h The Program is administered by DHHS. Eligible children adjustments are included in current operations. Claim liabilities may be enrolled by the Division of Social Services based on the do not include nonincre mental clai ms adj ustment exp enses. availability of funds. The Nort h Carolina State Health Plan for The Progra m consider s an ticipated inve stment inco me in Teachers and S tate E mployees (The Plan) w as responsible f or determining if a pre mium deficiency exists. The Program the administration and processing of clai ms f or benefits und er recognizes sub rogation fro m third parties a s a reductio n to the Program, as provided under Chapter 135, Article 3A, Part 5 claim and claim settlement expenses incurred. As of June 30, of the General Statutes, until June 30, 2010. The Plan shall not 2010, there was no reduction for subrogation. incur any financial obligations for the Progra m in excess of the amount of funds that the Pl an receives f or the program . Acquisition co sts consist of co mmission payments t o Effective July 1, 2010, the ad ministration a nd processing of independent in surance agent s for marketing, pro motional a nd claims for benefits under the Program was transferred to DHHS administrative assistance with policy m aintenance to eligib le as outlined in HB 2436 SL 2008-107 Sec 10.13(b) General units. As cove rage is renewe d annually , acquisition co sts a re Statute 135-47. not amortized.
The Progra m maintains bot h spe cific e xcess of lo ss a nd aggregate reinsurance c overage. The specifi c exc ess of lo ss coverage provi des for statutory lim its above the Progra m’s retention of $500,000 per occurrence and a $1.5 million lim it for em ployer’s liability abov e the Program ’s retention of $500,000 per occurrence. Incurred losse s are reduced by estimated a mounts recovera ble under the Progra m’s exce ss of loss and aggregate reinsurance policies. As of June 30, 2010, there are claims recoverable from reinsurers in the amount of $3 thousand.
B-122 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Annual e nrollment fee s, co -payments, or other cost- Claim li abilities are based o n esti mates of t he ulti mate sharing c harges are deter mined by fa mily inco me. Howe ver, cost of clai ms that have be en incurred (b oth reported a nd there are no enrollment fees, deductibles, co-payments, or other unreported). Claim li abilities do not inclu de noni ncremental cost-sharing charges for fa milies covered un der the Progra m claims adjustment expenses. The following schedule shows the whose family income is at or below 150% of the federal poverty changes in the claims liability for the Program’s past tw o years level. A fa mily’s total annu al aggregat e co st-sharing c harges of operation (dollars in thousands): shall not e xceed 5% of the fa mily’s inco me for the y ear involved. The Progra m had an enrollment of 144,723 children as of Ju ne 30, 2010, and an average enroll ment of 140,3 89 Current-Year children insured during the year. Beginning of Claims and Balance Fiscal Year Changes in Claim at Fiscal Liability Estimates Payments Year-End 2008-09$ 26,602 $ 224,071 $ (226,175) $ 24,498 2009-10 24,498 240,730 (246,728) 18,500
B-123 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 16: INDIVIDUAL PLAN FINANCIAL STATEMENTS – PENSION AND OTHER EMPLOYEE BENEFIT TRUST FUNDS
Financial statements for Pen sion and Other Employee Ben efit Trust Funds as of and for the fiscal y ear ended Ju ne 3 0, 2010 are presented below.
COMBINING STATEMENT OF PLAN NET ASSETS June 30, 2010 (Dollars in Thousands) Firemen's and North Teachers' Rescue Carolina Local and State Consolidated Squad National Governmental Employees' Judicial Legislative Workers' Guard Employees' Retirement Retirement Retirement P ension P ension Retirement System System System Fund Fund System Assets Cash and cash equivalents...... $ 56,696 $ 574 $ 21 $ 294 $ 1,375 $ 29,553 Investments: U.S government and agency securities.... — — — — — — Mortgage pass throughs...... — — — — — — Collateralized mortgage obligations...... — — — — — — Government bonds...... — — — — — — Asset-backed securities...... — — — — — — Repurchase agreements...... — — — — — — Corporate bonds...... — — — — — — Certificates of deposit...... — — — — — — Mutual funds...... — — — — — — State Treasurer investment pool...... 48,725,147 386,382 25,965 283,486 71,553 15,760,910 Non-State Treasurer pooled investments.. — — — — — — Securities lending collateral...... 3,073,700 24,292 1,631 17,807 4,742 992,457 Receivables: Accounts receivable...... 2,917 31 — 28 9 3,202 Interest receivable...... 339 2 1 2 2 78 Contributions receivable...... 45,463 — — — — 32,537 Due from other funds...... 28,839 1,204 21 — — — Due from component units...... 5,758 — — — — — Notes receivable...... — — — — — — Total Assets...... 51,938,859 412,485 27,639 301,617 77,681 16,818,737
Liabilities Accounts payable and accrued liabilities: Accounts payable...... — — — — — — Benefits payable...... 1,193 — — 3 12 734 Obligations under securities lending...... 3,163,830 25,008 1,677 18,327 4,889 1,022,618 Total Liabilities...... 3,165,023 25,008 1,677 18,330 4,901 1,023,352
Net Assets Held in trust for: Employees' pension and other benefits...... 48,773,836 387,477 25,962 283,287 72,780 15,795,385 Total Net Assets...... $ 48,773,836 $ 387,477 $ 25,962 $ 283,287 $ 72,780 $ 15,795,385
B-124 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Register of 401(k) Death Retiree Disability Deeds' Supplemental Deferred Benefit Health Income Sheriffs' Supplemental Retirement Compensation Plan Benefit Plan Pension Pension Income Plan Plan of N.C. Fund of N.C. Fund Fund Totals
$ 12,419 $ 45 $ 2,535 $ 565,536 $ 12,584 $ 1,791 $ 28 $ 683,451
607,742 94,512 — — — — — 702,254 199,708 4,627 — — — — — 204,335 49,768 17,607 — — — — — 67,375 29,966 3,867 — — — — — 33,833 9,322 11,217 — — — — — 20,539 — 2,300 — — — — — 2,300 330,715 35,767 — — — — — 366,482 4,409 852 — — — — — 5,261 95,722 31,607 — — — — — 127,329 — — 342,618 — 345,615 — 40,380 65,982,056 3,098,767 501,882 — — — — — 3,600,649 274,587 — 56,603 111,351 59,133 354 6,626 4,623,283
5,234 65 — — 8,404 — — 19,890 9,044 976 3 669 17 2 — 11,135 7,623 92 1,008 25,239 2,911 — 67 114,940 — — 482 14,295 1,621 — — 46,462 — — 96 3,976 459 — — 10,289 198,948 8,756 — — — — — 207,704 4,933,974 714,172 403,345 721,066 430,744 2,147 47,101 76,829,567
52,166 2,252 128 — — — — 54,546 — — 3,439 — 84 — — 5,465 274,587 — 58,657 115,030 61,211 364 6,858 4,753,056 326,753 2,252 62,224 115,030 61,295 364 6,858 4,813,067
4,607,221 711,920 341,121 606,036 369,449 1,783 40,243 72,016,500 $ 4,607,221 $ 711,920 $ 341,121 $ 606,036 $ 369,449 $ 1,783 $ 40,243 $ 72,016,500
B-125 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
COMBINING STATEMENT OF CHANGES IN PLAN NET ASSETS
For the Fiscal Year Ended June 30, 2010 (Dollars in Thousands) Firemen's and North Teachers' Rescue Carolina Local and State Consolidated Squad National Governmental Employees' Judicial Legislative Workers' Guard Employees' Retirement Retirement Retirement P ension P ension Retirement System System System Fund Fund System Additions: Contributions: Employer...... $ 492,779 $ 10,740 $ — $ — $ — $ 273,337 Members...... 835,807 4,633 256 2,619 — 329,328 Other contributions...... — — — 10,080 7,008 — Total contributions...... 1,328,586 15,373 256 12,699 7,008 602,665 Investment Income: Investment earnings (loss)...... 5,865,085 46,372 3,194 33,949 8,322 1,856,620 Less investment expenses...... (232,666) (1,842) (125) (1,351) (336) (74,568) Net investment income (loss)...... 5,632,419 44,530 3,069 32,598 7,986 1,782,052 Other additions: Fees, licenses and fines...... — — — — — 4,343 Miscellaneous...... 3,256 — — 6 — 25 Total other additions...... 3,256 — — 6 — 4,368 Total additions...... 6,964,261 59,903 3,325 45,303 14,994 2,389,085
De ductions : Claims and benefits...... 3,201,608 29,629 1,968 22,665 6,477 805,726 Medical insurance premiums ...... — — — — — — Refund of contributions...... 75,927 23 35 432 — 40,271 Administrative expenses...... 10,962 29 11 894 63 4,547 Other deductions...... 1 — — — — 1 Total deductions...... 3,288,498 29,681 2,014 23,991 6,540 850,545 Change in net assets...... 3,675,763 30,222 1,311 21,312 8,454 1,538,540 Net assets — July 1 as restated...... 45,098,073 357,255 24,651 261,975 64,326 14,256,845 Net assets — June 30...... $ 48,773,836 $ 387,477 $ 25,962 $ 283,287 $ 72,780 $ 15,795,385
B-126 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
401(k) Registers of Supplemental Death Retiree Disability Deeds' Retirement Deferred Benefit Health Income Sheriffs' Supplemental Income Compensation Plan Benefit Plan Pension Pension P lan P lan of N.C. Fund of N.C. Fund Fund Totals
$ 167,468 $ — $ 26,432 $ 678,769 $ 77,791 $ 1,207 $ 736 $ 1,729,259 264,816 46,889 — — — — — 1,484,348 — — 19,224 — — — — 36,312 432,284 46,889 45,656 678,769 77,791 1,207 736 3,249,919
671,144 91,835 43,876 15,461 45,878 67 5,266 8,687,069 (3,953) (826) (224) (355) (234) (1) (26) (316,507) 667,191 91,009 43,652 15,106 45,644 66 5,240 8,370,562
— — — — — — — 4,343 — — — — — — — 3,287 — — — — — — — 7,630 1,099,475 137,898 89,308 693,875 123,435 1,273 5,976 11,628,111
183,533 31,379 42,040 — 88,007 1,283 1,490 4,415,805 — — 235 577,412 — — — 577,647 — — — — — — — 116,688 2,466 466 605 329 747 134 15 21,268 — — — — 1 — — 3 185,999 31,845 42,880 577,741 88,755 1,417 1,505 5,131,411 913,476 106,053 46,428 116,134 34,680 (144) 4,471 6,496,700 3,693,745 605,867 294,693 489,902 334,769 1,927 35,772 65,519,800 $ 4,607,221 $ 711,920 $ 341,121 $ 606,036 $ 369,449 $ 1,783 $ 40,243 $ 72,016,500
B-127 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 17: SEGMENT INFORMATION
Component Unit. T he N orth C arolina Housing Finance A gency’s Hom e Ow nership B ond Programs and R ental B ond Programs are initially funde d with re venue bond proceeds. These proceeds are used to purchase mortgage loans which provide the income along with investment earnings to repay the debt.
Condensed financial statements for the two seg ments of the North Carolina Housing Finance Agency as of and for the fiscal year ended June 30, 2010 are presented below (dollars in thousands).
N.C. Housing Finance Agency Home Ownership Rental Condensed Statement of Net Assets Assets: Current assets...... $ 436,656 $ 22,109 Noncurrent assets...... 1,293,777 16,823 Total assets...... 1,730,433 38,932 Liabilities: Current liabilities...... 213,704 809 Noncurrent liabilities...... 1,279,709 11,170 Total liabilities...... 1,493,413 11,979 Net assets: Restricted...... 237,020 26,953 Total net assets...... $ 237,020 $ 26,953
Condensed Statement of Revenues, Expenses, and Changes in Net Assets Operating revenues (pledged against bonds)...... $ 87,800 $ 3,583 Operating expenses...... (76,854) (2,749) Operating income...... 10,946 834 Transfers in...... 18,193 — Transfers out...... — (25,154) Change in net assets...... 29,139 (24,320) Net assets — July 1...... 207,881 51,273 Net assets — June 30...... $ 237,020 $ 26,953
Condensed Statement of Cash Flows Net cash provided (used) by: Operating activities...... $ 163,813 $ 4,575 Noncapital financing activities...... (102,672) (28,049) Investing activities...... (111,885) 13,006 Net increase (decrease)...... (50,744) (10,468) Cash and cash equivalents at July 1...... 195,755 31,026 Cash and cash equivalents at June 30...... $ 145,011 $ 20,558
B-128 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 18: PLEDGED REVENUES
Primary Government Proceeds fro m the bonds will be used to pay the costs of Governmental Activities land ac quisition, design, c onstruction, and equipping of t he Triangle Expressway System, a 19-mile toll r oad facility to be Grant Anticipation Revenue Vehicle Bonds built in Durha m an d W ake c ounties. The to tal principal an d interest re maining to be paid on the b onds i s $1.485 billio n, The State has pledged future federal transportation revenues payable throug h 2039 (final maturity date). For the curre nt to repay $434 .825 million o f Grant Anti cipation Revenue fiscal y ear, interest p aid, ava ilable revenues (federal interes t Vehicle (G ARVEE) bonds p ayable at Ju ne 30, 2010. These subsidy and i nvestment rev enues), an d state appropriatio ns bonds w ere issued in Octob er 2007 and A ugust 2009. Su ch (transfers in) were $15.052 million, $11.419 m illion, and $2 5 federal transportation revenues consist of amounts derived from million, respectively . The first principal p ayment is d ue in the National Highway Sy stem an d other federal surface 2017. transportation programs pur suant to Title 23 of the Uni ted States Code. Annual principal and interest requirements on th e Employer Unemployment Tax Contributions GARVEE bonds are exp ected to require less than 9% of suc h federal transpo rtation revenue s. The North Carolina G eneral The State h as pled ged future une mployment tax Statute 13 6-18 li mits t he a mount that ca n be i ssued by contributions fro m e mployers to repay $2.15 billion in providing that the maximum debt servi ce on all GA RVEE repayable advances from the Federal Unemployment Account. bonds may not exceed 15% of the expe cted annual fe deral The debt is currently interest free through December 31, 2010. revenue and th at the outstand ing principal am ount m ay not Proceeds fro m the advan ces w ere used t o pa y une mployment exceed th e to tal a mount of federal transportation fund s benefits be cause of an op erating deficit in the State’s authorized to the State in the prior federal fiscal year. Unemployment Compensation Fund.
Proceeds fro m the bond s wi ll be used to accelerate th e The repay able advance s are pay able sole ly fro m the funding of various tran sportation proj ects identified in th e unemployment tax contributions and these contributions will be current State T ransportation Improv ement Pl an. As require d used specifically fo r pay ing d own the debt until it is settle d. by State law, the proj ects have be en sel ected on fa ctors Meanwhile, the unemployment benefits will continue to be paid including a br oad geographi cal distribution across the Stat e. from the repayable advances. The total principal and interest rem aining to be paid on the bonds i s $549 .331 million, payable throug h 2021. For the Total revenu e collected fro m une mployment t ax current fiscal year, principal a nd interest paid and tot al federal contributions for the y ear was $976.839 million. Employer tax transportation revenues were $67.167 million and $823.45 contributions were use d to pay down the principal on th e million, respectively. repayable advances in the amount of $873.545 million.
Business-type Activities
Triangle Expressway System Revenue Bonds
The State has pledged, as security for revenue bond s issued by the North Carolina Tur npike Aut hority (NCTA), net revenues fro m the operation of the Triangle Expresswa y System. On July 29, 2009, NCTA issued Tria ngle Expressway
System State Annual Appropriation Revenue Bonds ($352.675 million) and Triangle Expressway System Senior Lien Revenue Bonds ($270.083 million).
The State h as el ected t o treat the State Ann ual Appropriation Revenue Bon ds as “ Build A merica Bond s” fo r purposes of the A merican Re covery and Reinvest ment Act o f 2009 and to r eceive a cash sub sidy fro m the United Stat es Treasury equal to 35% of the i nterest payable on these bond s.
For the State Annual Ap propriation Rev enue Bond s, spe cific revenues pledged consist of state annual appropriations, federal interest su bsidy pa yments, and invest ment inco me. For the
Senior Lien Re venue Bonds, specific revenue s pledged co nsist of toll revenues and all other income derived from the operation of the Triangle Expressway System.
B-129 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Component Units
University of North Carolina System
The University of North Carolina System has pledged future revenues, net of specific operating expenses, t o repay revenue bonds, certific ates of partic ipation, and n otes pay able as shown in the table below (dollars in thousands): Future Revenues Pledged Current Year % of Total Pledged Principal Final Revenue Revenues, Net and Interest Maturity Bonds Payable as Purpose Revenue Source Amount Source of Expenses Payments Date of 6/30/2010 Revenue Bonds (1) Housing and Dining Housing/Dining Revenues$ 81,043 1.78% - 74.00%$ 57,034 $ 7,660 2034 $ 59,837 Utilities Utilities Revenues 86,518 11.00% - 19.00% 43,888 4,270 2024 61,988 Health Care Facilities Patient Service Revenues 148,934 20.00% - 100.00% 39,651 12,412 2033 103,965 Other Various 23,266 5.00% - 86.00% 12,190 4,986 2033 18,228 Total $ 339,761 $ 152,763 $ 29,328 $ 244,018
Certificates of Participation Student Housing System Housing Revenues $ 37,642 79.00% - 87.00%$ 1,756 $ 1,491 2036 $ 22,050 Banner System Tuition/Administative Fees 3,168 62.00% 1,287 793 2014 2,870 Total $ 40,810 $ 3,043 $ 2,284 $ 24,920
Note Payable Student Housing System Housing Revenues/ $ 32,462 40.83% $ 22 $ 64 2014 $ 31,000 Federal interest subsidy Total $ 32,462 $ 22 $ 64 $ 31,000
(1) The Future Revenues Pledged Amount is equivalent to the total principal and interest remaining to be paid on the associated bonds.
North Carolina Housing Finance Agency
The North Carolina Housing Finance Agency (Agency) has 2001 to 2005, 2007 and 2008. Proceeds from the bonds issued collateralized $1.35 billion in mortgage loans recei vable, were utilized t o finance student loans. The b onds are payable $142.62 million in reserves, and $1.85 million in program funds through 2037 and are paid down fro m cash colle ctions on to repay $1.47 billion singl e family and multiple family bonds student lo ans receivable, i nterest e arnings on loan s a nd payable at June 30, 2010. Proceeds from the bonds issued were investments, and unex pended bond proceeds. In additi on to utilized to fin ance housing opportunities t hroughout North cash coll ections on stud ent lo ans receiv able, all net availab le Carolina. The bonds are pay able through 20 39 and are pai d revenues are expected to be pledged to meet annual principal down fro m ca sh coll ections on mortgage l oans re ceivable, and interest payments on the bonds. For the current fiscal year, interest re ceivable on mortgage lo ans, u nexpended bo nd principal and i nterest paid a nd total net available reve nues proceeds, and sale of inve stments. The Agen cy expects 100 % were $536.735 million and $373.981 million respectively. The of the mortgage loans, both p rincipal and int erest to pay the total principal and interest remaining to be paid on the bo nds, principal a nd i nterest debt service on the b onds. The tota l notes payable and short term debt is $5.309 billion. principal and i nterest remaining to be paid o n bonds i s $2.472 billion. For the current fi scal year, principal and interest pai d and net availa ble revenue on mortgage loan s receivabl e we re $112.774 million and $83.967 million respectively.
State Education Assistance Authority
The State Education Assistance Authority has collateralized $4.44 billion in student loan s receivable and $ 65.88 million in reserves to re pay $4.498 billi on of bond s, n otes payable a nd short ter m de bt at Ju ne 30, 2010. These tax exe mpt, tax guaranteed student loan rev enue bonds, ta xable guaranteed student loan revenue private place ment b onds, tax exe mpt guaranteed student loan revenu e and refunding bonds, Cond uit Funding Not es and Plan Pa rticipation Fin ancing with t he Department of Education we re issu ed bet ween fisc al y ears
B-130 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 19: COMPONENT UNITS — FINANCIAL INFORMATION
The financial statements for the University of North Carolina System and Community Colleges include their nongovernmental component uni t foundations and similarly affiliated organizations. Financial statements for com ponent units as of and for the fiscal year ended June 30, 2010 are presented below (dollars in thousands).
Statement of Net Assets University N.C. State of North Housing Education State Other The Golden Carolina Community Finance Assistance Health Component LEAF, Inc. System Colleges Agency Authority Plan Units Total
Assets Cash and cash equivalents...... $ 1,161 $ 1,733,171 $ 198,155 $ 8,214 $ 47,631 $ 121,484 $ 177,686 $ 2,287,502 Inves tm ents ...... 638,322 876,128 54,666 — — — 136,786 1,705,902 Receivables , net...... 2 817,131 74,581 24,064 93,433 65,560 12,725 1,087,496 Due from component units...... — 5,922 3,895 — 1,740 — 1,185 12,742 Due from prim ary governm ent...... — 1,978 — 53,040 26,900 — — 81,918 Inventories ...... — 76,999 17,584 — — — 745 95,328 Prepaid item s ...... 80 40,294 2,476 — 8 — 1,781 44,639 Notes receivable, net...... — 231,790 680 1,441,958 4,510,282 — 12,096 6,196,806 Inves tm ent in joint venture...... — 9,692 — — — — — 9,692 Deferred charges ...... — 18,627 — 15,020 18,099 — 912 52,658 Restricted/designated cash — and cash equiv...... — 1,352,349 84,931 281,133 313,056 — 56,690 2,088,159 Res tricted inves tm ents ...... — 3,208,304 123,283 222,770 669,359 — 1,777 4,225,493 Restricted due from primary — governm ent...... — 11,882 42,292 — — — — 54,174 Restricted due from component units... — 359 2,335 — — — — 2,694 Deferred outflow of res ources ...... — 50,801 — 6,698 — — 293 57,792 Capital assets-nondepreciable...... 928 1,458,575 268,590 754 — — 284,354 2,013,201 Capital as s ets -depreciable, net...... 3,095 8,253,333 1,903,433 2,220 6,417 81 376,526 10,545,105 Total As s ets ...... 643,588 18,147,335 2,776,901 2,055,871 5,686,925 187,125 1,063,556 30,561,301
Liabilities Accounts payable and accrued liabilities...... 67,866 620,658 56,115 2,376 18,017 25,214 26,369 816,615 Medical claim s payable...... — — — — — 253,329 — 253,329 Interes t payable...... — 22,500 23 42,217 5,956 — 775 71,471 Short-term debt...... — 59,784 — — 823,685 — — 883,469 Due to component units...... 15,436 — — — — — — 15,436 Due to prim ary governm ent...... 1,228 2,548 38 — — 4 17,865 21,683 Unearned revenue...... — 157,061 20,634 9,133 — 9,276 1,886 197,990 Advance from prim ary governm ent...... — — — — — — 21,742 21,742 Depos its payable...... — 9,065 — 3,465 — — 25 12,555 Funds held for others ...... — 781,538 9,237 — 580,211 — 90 1,371,076 Hedging derivatives liability...... — 50,801 — 6,698 — — 293 57,792 Long-term liabilities: — Due within one year...... 18 242,037 10,059 172,436 758,366 2,637 2,449 1,188,002 Due in more than one year...... — 3,894,079 97,864 1,299,835 2,916,851 4,326 109,187 8,322,142 Total Liabilities...... 84,548 5,840,071 193,970 1,536,160 5,103,086 294,786 180,681 13,233,302
Net Assets Inves ted in capital as s ets , net of related debt...... 4,023 6,263,083 2,131,155 2,974 6,417 81 529,081 8,936,814 Restricted for: Nonexpendable: Higher education...... — 1,584,347 136,199 — — — — 1,720,546 Expendable: Higher education...... — 1,867,303 175,927 — 501,635 — — 2,544,865 Health and hum an s ervices ...... — — — — — — 1,782 1,782 Economic development...... — — — 507,456 — — 271,049 778,505 Unres tricted...... 555,017 2,592,531 139,650 9,281 75,787 (107,742) 80,963 3,345,487 Total Net As s ets ...... $ 559,040 $ 12,307,264 $ 2,582,931 $ 519,711 $ 583,839 $ (107,661) $ 882,875 $ 17,327,999
B-131 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Statement of Activities University N.C. State of North Housing Education State Other The Golden Carolina Community Finance Assistance Health Component LEAF, Inc. System Colleges Agency Authority Plan Units Total Total expenses...... $ 67,795 $ 8,538,407 $ 2,023,795 $ 358,692 $ 412,604 $ 2,546,554 $ 288,777 $ 14,236,624 Program revenues: Charges for s ervices ...... 5 5,124,400 316,177 328,211 114,460 2,470,377 66,653 8,420,283 Operating grants and contributions: State aid - program ...... — 137,816 — 36,025 209,247 — 149,051 532,139 Other operating grants and contributions ...... 66,763 1,037,925 803,447 — 72,913 62,303 14,629 2,057,980 Capital grants and contributions: State capital aid...... — 284,294 65,518 — — — 19,645 369,457 Other capital grants and contributions ...... — 71,778 119,813 — — — 63,553 255,144 Net program (expense) revenue...... (1,027) (1,882,194) (718,840) 5,544 (15,984) (13,874) 24,754 (2,601,621) Non-tax general revenues: State aid - general...... 73,179 2,600,397 844,404 11,028 — 5,000 33,714 3,567,722 Mis cellaneous ...... — 404 103 — — — 1,645 2,152 Total non-tax general revenues...... 73,179 2,600,801 844,507 11,028 — 5,000 35,359 3,569,874 Contributions to endowments...... — 60,943 7,337 — — — — 68,280 Change in net assets...... 72,152 779,550 133,004 16,572 (15,984) (8,874) 60,113 1,036,533 Net as s ets — July 1, as res tated ...... 486,888 11,527,714 2,449,927 503,139 599,823 (98,787) 822,762 16,291,466 Net assets — June 30...... $ 559,040 $ 12,307,264 $ 2,582,931 $ 519,711 $ 583,839 $ (107,661) $ 882,875 $ 17,327,999
Significant Balances and Transactions Between Component Units University N.C. State of North Housing Education State Other The Golden Carolina Community Finance Assistance Health Component LEAF, Inc. System Colleges Agency Authority Plan Units Total The Golden LEAF, Inc.: Due from (due to) component units...$ (15,436) $ 6,281 $ 6,230 $ — 1,740$ $ — $ 1,185 $ — Grant revenue (expense)...... (9,323) 1,805 5,528 — 1,740 — 250 — UNC System-grant revenue (expense). — (55,016) — — 55,016 — — —
Intra-Entity Balances — Between Primary Government and Component Units
Due From/Restricted Due From Component Units Due From/Restricted Due From Primary Government University NC State Other of North Housing Education Governmental Other Carolina Community Finance Assistance General Fund Funds Funds Total System Colleges Agency Authority Total Due To Component Units: General Fund...... $ — $ — $ — $ — $ 1,978 $ — $ 53,040 $ — $ 55,018 Other Governm ental Funds ...... — — — — 11,882 42,292 — 26,900 81,074 Due To Primary Government: The Golden LEAF, Inc...... 143 1,085 — 1,228 — — — — — University of North Carolina System... — 1,724 824 2,548 — — — — — Com m unity Colleges ...... — 1 37 38 — — — — — State Health Plan ...... — — 4 4 — — — — — Other Com ponent Units ...... 1,215 16,620 30 17,865 — — — — — Total...... $ 1,358 $ 19,430 $ 895 $ 21,683 $ 13,860 $ 42,292 $ 53,040 $ 26,900 $ 136,092
B-132 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 20: RELATED ORGANIZATIONS
MCNC MCNC (for merly the Microel ectronics Cente r of North North Carolina Capital Facilities Finance Agency Carolina) is a legally separat e private non- profit corporation The North Car olina Ca pital Facilities Fi nance Age ncy fostering the advanc ement of education, innovation a nd provides the b enefits of tax- exempt fin ancing to n on-profit economic development throughout North Carolina by providing institutions pro viding ele mentary and se condary education , high quality network infrastructure and network-based services. private institut ions of higher education, an d various oth er It is managed by a Board of Directors rangi ng fro m 13 to 20 entities for spe cial purpose proj ects serving a public intere st members. Six of the members are appointed by the Governor. (see Not e 22). The agency is governed by a sev en member Another si x members serve ex officio as f ollows: four a re board co mprised of two members app ointed by the Gener al chancellors of universities in the University of North Carolin a Assembly, three members appointed by the Governor, and the System, a component unit of the State; o ne is the pre sident of State Treasurer and th e Stat e Auditor, both o f whom serve ex MCNC; and one is designated by the Board of Trustees of Duke officio. University. The re maining up to eight members are ele cted by the majority v ote of persons then constitut ing the MCN C Board. Any appointed director may be removed from office by the Governor for cause. Any elected director may be re moved by the Board of Directors at will.
Centennial Authority The Centennial Authority (Authority) is a legally separate organization cr eated by the 1 995 Ge neral Assembly to st udy, design, pl an, c onstruct, own, promote, finan ce, and op erate a regional facilit y on land o wned by the St ate. Prior to t his legislation, the General Assembly authoriz ed the con struction by North Carolina State Univ ersity (NCSU) of a facility known as the Entertai nment and Spo rts Arena (ESA). In fiscal year 2003, a na ming rights agree ment wa s exe cuted to cha nge the name of the ESA to t he RBC Center. A s a re sult of th is agreement, N CSU will receiv e $13.18 million over a 10-y ear period beginni ng in fiscal y ear 2003. The RBC Center hou ses entertainment shows and is h ome to t wo sports te ams, th e National Hock ey League’s Carolina Hurricane s and NCSU men’s ba sketball. The Authority is governed by a 21 member board co mprised of 10 members app ointed by the Gener al Assembly, four members appointed by the Wake County Board of Commissioners, four members appointed by the Raleigh City Council, two members appointed j ointly b y the mayors of all the cities in Wake County, and the Chancellor of NCSU (or th e Chancellor’s d esignee). A m ember may be re moved by the appointing authority for cause.
The Authority entered into a ground lease w ith the State of North Carolina to lease land for the RBC Center for a period of 99 y ears at an annual rent of $1. NCSU entered into a use agreement with the Auth ority. Both p arties agreed that NCSU shall be the pri mary and preferred user of all areas of the RBC Center. NCSU is required to pay the great er of 10% of gro ss ticket reve nues or $47 t housand for ea ch men's a nd $2 1 thousand for each wo men's basketball game to co mpensate the Authority for facility rental an d operating expenses. Rent an d expense p ayments for miscellaneous events will be negotiated on an event by event basis based on the availability of the RBC Center and th e anticipated attendance. In fisc al year 2008, t he University entered a capital improv ement plan agreement with the Aut hority to pay $6 million in quarterly install ments o ver the next 15 years.
B-133 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 21: RELATED PARTY TRANSACTIONS
Primary Government environment. These affiliated organizations are not included a s component units since the economic resources received or held Supplemental Retirement Income Plan of North Carolina by an individual organization a re not significa nt to the pri mary and North Carolina Public Employee Deferred government. Therefore, the financial statements of the U NC Compensation Plan System and co mmunity colleges do not include the asset s, General Statut e 135-96 esta blished the S upplemental liabilities, net assets, or o perational tran sactions of th ese Retirement Bo ard of Trustee s (Board) to administer b oth t he foundations, e xcept for su pport fro m e ach organizatio n to Supplemental Retire ment Inc ome Plan of N orth Carolina a nd constituent inst itutions or coll eges. For the fiscal y ear end ed the North Caro lina Public E mployee Deferred Co mpensation June 30, 2010, this support approximated $43.51 million for the Plan. The Plan docu ment for each Pla n d esignates t hat t he UNC System and $843 thousand for community colleges. general ad ministration and re sponsibility for carry ing out t he provisions of the Plan, as direct ed by the Board, shall be place d University of North Carolina System with the Retire ment Sy stems Division of the Depart ment of North Carolin a Agricult ural and Te chnical Stat e State Treasurer as Primary Administrator. University (NCA&T) and the University of North Carolina at Greensboro (UNCG) hav e formed a j ointly governed nonpro fit The Board an d Pri mary Ad ministrator have entered into organization, Gateway University Rese arch Park, an agreem ent with Prudential Retirem ent Services to perform Inc.(Research Park). The pur pose of this o rganization i s t o recordkeeping, ad ministration and inve stment management provide a col laborative rese arch environ ment that foste rs services for bo th Plans. Prud ential Retire ment Services i s a academic enric hment, researc h growth, technology transfer, subsidiary of The Prudenti al I nsurance Company of A merica commercialization and di scovery while encouraging a nd (Prudential). Each Plan al so has an inv estment management promoting regional economic development. agreement wit h Prudential, Great-W est Life & Annuity Insurance Company (Great-W est), and Pay den & Ry gel. For the fiscal year ended Ju ne 30, 2010, NCA&T made Prudential Reti rement Insuran ce and A nnuity Co mpany is the payments and incurred addi tional liabilitie s totaling $1 0.18 owner of the Pooled Separate Account SA-NC. Sy nthetic GIC million to th e Research Park for the constr uction of a new (Guaranteed In vestment Cont ract) contracts are held with research and c lassroom facili ty on the sout h ca mpus to be Prudential and Great-West. Prudential al so provides the N orth known a s t he Joint S chool of Na noscience a nd Carolina Stabl e Value Fund as an inve stment option for Nanoengineering. In additi on, NCA&T h as e stablished a participants in each Plan. commitment to Gateway University Research Park, Inc. in the amount of $47.28 million for the payment of future construction The Supple mental Retire ment Inco me Plan of North costs incurred by the Research Park for the building of the Joint Carolina (401( k) Plan) recognized approxi mately $6.4 m illion School of Nanoscience and Nanoengineering. in exp enses to related parties. The expen ses rel ate t o lo an initiation fees and investment management fees. Certain other For the fiscal y ear ended Jun e 30, 2010, UNCG made administrative expenses of the 401(k) Pl an are paid b y payments totali ng $760 tho usand to the Research Park f or Prudential Retirement Services. In addition, the 401(k) Plan has operation and maintenance of UNCG faciliti es at th e Research a securities len ding contract wi th State Street Bank and Trust Park, operating funding for th e Research Park, rental ex pense, Company (State Street), a custodian of the 401(k) Plan asse ts, renovations, and facility use fees. and receives securities lending in come related to this arrangement. The pooled fund held a s collat eral u nder securities lending transactions is a State Street fund.
Component Units
University of North Carolina System and Community College Foundations
The University of North Car olina (UN C) Sy stem and
community colleges have separately incorporated not-for-profit
foundations tha t are asso ciated with constitu ent institution s of
the UN C Sy stem or individu al college s. Th ese organizations
serve as a fundraising arm of the respective institutions through
which in dividuals, corporati ons, and oth er organizati ons
support instit ution progra ms by providing scholar ships,
fellowships, faculty salary supplements, and unrestricted fun ds
to specific d epartments an d the institution’ s overall acade mic
B-134 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 22: COMMITMENTS AND CONTINGENCIES
A. No Commitment Debt equal educational opportunities, by denying due process of law, and by violati ng variou s statutes rel ating to p ublic ed ucation. The State, by a ction of the Ge neral A ssembly, created th e Five other school board s a nd stud ents t herein interven ed, North Carolina Medical Care Commission which is author ized alleging claims for relief on th e basis of th e high proportion of to issue tax-exempt bonds and notes to finance construction and at-risk and high-cost students in their counties' systems. equipment projects for non profit and public hospitals, nursi ng homes, co ntinuing care facilit ies for the eld erly and related The suit is si milar to a number of suits in other states, so me facilities. Th e bonds are n ot an indebtedness of the Stat e and, of which re sulted in holdi ngs that the re spective sy stems of accordingly, are not reflected in the acco mpanying financia l public educ ation funding w ere uncon stitutional under t he statements. Each issue is pay able solely from the reve nues of applicable state law. The State filed a motion to dismiss, which the facility financed by that i ssue and any other credit support was de nied. O n appeal, the North Carolina Supre me Cou rt provided. The refore, each i ssue is separatel y secured and is upheld the present fundin g sy stem a gainst the clai m th at it separate and in dependent from all other issue s as to source of unlawfully discri minated a gainst low wealth countie s, b ut payment and security . The indebtedn ess o f each entity i s remanded the case for trial on the claim for relief based on the serviced and administered by a trustee independent of the State. Court's conclusion that the Co nstitution guarantees every child Maturing serially to calenda r y ear 2042, the outsta nding the opportunity to obtain a sound basic education. Trial on the principal of su ch bonds a nd notes a s of Ju ne 30, 2010, was claim of one pl aintiff-county was held in the fall of 1999. On $6.99 billion with interest rates varying from 0.2% to 8%. October 26, 20 00 the trial c ourt, in Section T wo of a proj ected three-part ruling, conclude d that at-risk c hildren in Nort h The North Carolina Capit al Facilities Fi nance Ag ency Carolina are constitution ally entitled to su ch pre-kindergar ten (Agency) is au thorized by the State to issue t ax-exempt bonds educational programs as may be nece ssary to prepare the m for and note s to finance indu strial and manufacturing facilitie s, higher levels o f education an d the “ sound basic ed ucation” pollution co ntrol facilities for industry (in connecti on w ith mandated by the Supre me Court. On March 26, 2001, t he manufacturing) where th ere is a favor able i mpact on Court issued Section Three of the three-part ruling, in which the employment or pollution control co mmensurate with the size judge ordered all parties to investigate certain school systems to and cost of the facilities and to finance faciliti es and structures determine why they are succee ding without ad ditional funding. at private nonp rofit colleges a nd universitie s, and institution s The State filed a Notice of Appeal to the Court of Appeal s, providing kind ergarten, ele mentary and sec ondary educatio n, which resulted in the Court’s decision to re-open the trial an d and various other nonprofit entities. The Agency’s authority to call additional witnesses. That proceeding took place in the fall issue bond s an d notes also i ncludes financi ng private sect or of 2001. On April 4, 2002, th e Court entered Section F our of capital i mprovements for act ivities that co nstitute a publ ic the ruling, ord ering the State to take such actions a s may be purpose, and beginning in 20 09, authority to issue Recove ry necessary to r emedy the constitutional def iciency for th ose Zone Facility Bond s (as auth orized by the federal A merican children who a re not being p rovided with access to a so und Recovery and Reinvestment Act of 2009 and by amended NC basic educ ation and to report to the Court at 90-day interva ls bond statutes) for proj ects that promote economic development remedial action s being i mplemented. On July 30, 2004, t he and increa sed employment. T he bond s issue d by the Agen cy North Carolina Supreme Court affirmed the majority of the trial are not an in debtedness of the State and, a ccordingly, are not court’s orders, thereby directing the executi ve and legi slative reflected in the accompanying financial statements. Each issu e branches to take corrective action necessary to ensure that every is payable solely from the rev enues of the fa cility financed by child ha s th e o pportunity to o btain a sound, basic educ ation. that issue and any other credi t supp ort provi ded. Therefor e, The Supreme Court did agree with the St ate that the trial court each issue is separately secured and is separate and independent exceeded it s a uthority in ordering pre-kinde rgarten progra ms from all other issue s as to source of pay ment and securit y. for at-risk child ren. The State is now undertaking measures to Maturing serially to calenda r y ear 2045, the outsta nding respond to the trial court’s directive s. The m agnitude of stat e principal of such bonds and notes as of June 30, 2010, was $2.9 resources whi ch may ulti mately be requ ired cannot b e billion with fixed interest rates vary ing from 2.5% to 7.1% an d determined at t his ti me; ho wever, the total cost could exceed variable interest rates which can be reset weekly. $100 million.
B. Litigation N.C. School Boards Association, et al. v. Richard H. Moore, State Treasurer, et al. — Use of Administration Payments. On December 14, 1998, plaintiffs, including county Hoke County, et al. v. State of North Carolina and State school board s of W ake, Durham, Jo hnston, Bu ncombe, Board of Education — Right to a Sound Basic Education Edgecombe an d Lenoir Counties, filed suit i n Superior Court (formerly Leandro). In 1994, students and board s of requesting a declaration th at certain pa yments to state education in fi ve countie s in the State filed suit in Supe rior administrative agencie s must be distribute d to the public Court requesting a declaration that the public education system schools on th e theory that such a mounts a re civil penalti es of North Carolina, including its sy stem of fun ding, violates t he which u nder th e North Carolina Constituti on must be paid to state Constitution by failing to provide adequate or substantially the schools.
B-135 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
On December 14, 2001, the Superior Court of Wake County before the Cou rt. Plaintiffs have agreed to dismiss the ca se granted su mmary judgment in favor of the plaintiffs on al l with prejudice. issues, co ncluding that the fu nds in di spute are civil fine s or penalties required by Article IX, Section 7 of the Constitution to State Employees Association of North Carolina (SEANC) be re mitted to the public sc hools in the c ounty where the v. State; Stone v. State – Diversion of Employer’s Retirement violation oc curred. The court further deter mined a thre e-year System Contribution. On May 22, 2001, SEANC filed an statute of li mitations to be applicable, m aking the order action in Wake County Superior Court demanding repayment of retroactive to Dece mber 199 5. This case was argue d in the approximately $129 million in e mployer retirem ent Court of Appeals in February, 2003. The North Carolina Co urt contributions to the Retire ment Sy stems. The Govern or of Appeals rendered a decision in September 2003 substantially withheld, and subseq uently used, the withhel d funds under his favorable to th e State. On July 1, 2005, the Supre me Court constitutional a uthority to balance the state b udget. The trial reversed th e Court of App eals in part, concludin g tha t a court dism issed the action on May 23, 20 01, and the North majority of the funds in dispute are civil penalties required to be Carolina Court of Appeals affirmed this dismissal on December paid into the Civil Penalty and Forfeiture Fund for the benefit of 3, 2002. The Supreme Court, on June 13, 2 003, reverse d t he public schools. The ca se was remanded to Superior Court and Court of Appeals on issue s related to class standin g and on August 8, 2008 the Superi or Court entere d judgment in t he remanded with instructions to consider procedural issues raised amount of $7 49.886 million. Of the $ 749.886 million, but not addressed by the Co urt of Appeals. The Court of $731.703 million is included in the long-term liabilities footnote Appeals re manded the c ase t o the Superior Court of W ake (Note 8). The Court acknowledged, however, that the j udicial County without opinion and without considering any remaining branch did not have the pow er to force the State to sati sfy the issues. judgment and t hat any decisio n to do so would have to co me from the legislature. In June 200 2, the Stone c ase was filed in Wake County Superior Court on be half of individual state e mployees an d Southeast Compact Commission — Disposal of Low- retirees seeking repay ment of the wit hheld e mployer level Radioactive Waste. North Carolin a and seven ot her contribution and a prohibition against future diversions. A class southeastern st ates cre ated th e Southea st Interstate Low-lev el comprised of all members of the Retire ment System ha s bee n Radioactive W aste Management Co mpact ( Compact) to pl an certified and the case is cur rently proceeding through cla ss and dev elop a site for the d isposal of low -level radioacti ve notification and toward trial. On September 6, 2006, the tri al waste g enerated in the member state s. North Carolina wa s court issued an interlocutory order in response to cross-motions assigned respo nsibility for de velopment of the first disposal for summary judgment. The c ourt’s order fo und the di version site, with c osts to be di stributed equitably among the Compact of funds to be in violation of the Constitution, but did not direct members. In 1997, the Co mpact Co mmission discontinued any repay ment of funds, reserving the quest ion of repay ment funding of the development of the North Carolina site, alleging for consideration, if necessary after appeal of the constitutional that the State was n ot activ ely pursuing the per mitting a nd issues. On A ugust 5, 2008, t he Court of Ap peals affirmed the development of the propo sed site. North Carolina withdre w Superior Court order. Both sides gave noti ce of appeal a nd from the Compact in 1999. T he Compact subsequently asked filed petitions for discretionary review with the North Carolin a the United States Supreme Court to accept its Complaint against Supreme Co urt. On June 17, 2009, the Supre me Co urt North Carolina demanding the repay ment, with interest, of $ 80 dismissed the appeals and denied the petitions for discretionary million of Compact payments expended on the permitting of the review. site, plus $10 million of future lost income, interest and attorney fees. The Supr eme Court denied this motion in August 2001. The cas e now returns to the Superior Court for On Augu st 5, 2002 the Compact, with the addition of fou r consideration of damages. Because the General Assembly has member st ates as plai ntiffs, filed a ne w motion reque sting t he repaid the principal am ount withheld fro m t he Retirement United State s Supreme Court to accept th e clai m under i ts System, consideration will focus on lost interest and earnings, if original j urisdiction. On Jun e 16, 2003, the Court acce pted any. A new judge will need to be appointed to hear the case, as jurisdiction of the case and the State filed an answer and motion the judge previously assigned to the ca se is now employed by to dism iss on August 2 1, 200 3. On Nove mber 17, 2003, the the North Carolina Department of Transportation. U.S. Supreme Court appointed a Special Ma ster with author ity to receive evid ence and make reco mmended rulings on the Goldston v. State of North Carolina – Highway Trust issues pre sented by the case. On April 2, 2009, the Speci al Fund Transfers. On November 14, 2002, a l awsuit was filed Master filed his “Preliminary Report” and his “Second Report” in W ake Coun ty Superior Co urt de manding that $ 80 million recommending that th e Court dismi ss th e clai ms seeking transferred by t he Go vernor fr om the High way Trust Fund to enforcement of the monetary sanctio n i mposed again st N orth the General Fund for purpose s of balancin g the state budget be Carolina by the Co mpact Commission as well as the entry of returned to the Highway Trust Fund. The suit further alle ges partial su mmary judgment finding that North Carolina did n ot that actions of the General A ssembly regarding the transfer of breach the Compact when it withdrew. Briefing by the part ies funds fro m th e Highway Trust Fund to t he General Fu nd on Exceptions t o the Reports o f the Special Ma ster conclud ed constitute a borrowing by the State of Highway Trust Fund cash on September 9, 2009. The United State s Supreme Court heard surplus a nd are unlawful and unconstituti onal. The lawsu it oral arguments on January 11, 2010, and issued an o pinion on requests a dec laration that taxes c ollected for purposes of June 1, 2010, finding it in favor of North Caro lina on all issue s Highway Trust Fund expenditures c annot b e used for ot her
B-136 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
purposes. Summary Judgment was granted in favor of the State amount at issue is not readily calculable, but it is likely to be in on all issues and Plaintiff has filed a notic e of appeal. O n excess of $20 million. September 2 0, 2005, the N orth Carolina Court of Appea ls upheld th e trial court’s order. The plaintiff filed a p etition fo r Other Litigation. The State is involv ed in numerous other discretionary review with the North Carolin a Supre me Court, claims a nd leg al proceeding s, many of whic h are nor mal for and the Court a greed on Marc h 2, 2006 to re view a portion of governmental operations. A review of the status of outstanding the Court of Appeals’ deci sion and oral argument was heard on lawsuits involv ing the State b y the North Carolina Attorne y October 16, 20 06. In an opini on filed De cember 15, 2006, t he General did not disclose other proceedings that are expected t o Supreme Court reversed the Court of App eals, concluding that have a material adverse effect on the financial position of t he plaintiffs have standing to p ursue t heir clai ms. On remand to State. Wake County Superior Court, Judge John ruled in favor of the State on both the standing argument and the merits of the case. Plaintiff’s appeal was argued in the Court of Appeals on C. Federal Grants January 28, 2009. In an opinion filed Septe mber 15, 2009 the Court of Appea ls held that alth ough the Gen eral Assembly had The State receives significant financial assist ance from the the authority to transfer $125 m illion from the Highway Trust Federal Gover nment in the for m of grants and entitle ments, Fund to the General Fund, the Governo r exceeded hi s which are generally conditioned upon compliance wit h ter ms constitutional a uthority in transferring $80 million fro m t he and condition s of the grant agree ments a nd a pplicable feder al Highway Trust Fund to the General Fund. On October 8, 2010, regulations, including the ex penditure of the resource s for the Court anno unced that the members w ere equally divided . eligible purposes. Under the terms of the grants, periodic audits As a matter of law the decision of th e Court of Appe als i s are required an d certain co sts may be que stioned as n ot bein g affirmed but has no precedential value. appropriate ex penditures. Any disallowanc e as a result of questioned costs could beco me a liability of t he State. As of State of North Carolina v. Philip Morris, Inc., et al., 98 June 3 0, 2010, the State i s u nable to e stimate what liabiliti es CVS 14377 — Master Settlement Agreement (MSA) may result from such audits. Payments. On April 20, 2006, the State of North Carolina filed a Motion for D eclaratory Order in the North Carolina Business D. Highway Construction Court ag ainst defendants Phil ip Morris, Inc. , R. J. Rey nolds Tobacco Co mpany, and Lorillard Tobacco Co mpany. The Motion is seeking a declaration that (1) in 2003, North Carolina The State may be liable for approximately $138.5 million to continuously h ad a Qualify ing Statute in ful l force a nd eff ect contractors for highway constr uction clai ms t hat the State has and “diligently enforced” its pr ovisions throughout that y ear in contested. The State may also be liable for an additional $58.17 accordance with the MSA; (2) North Carolina is not subject to a million in co ntested rights-of-way acquisition costs to proper ty Non-Participating Manufacturers’ Adjustment for 2003; and (3) owners in co ndemnation pro ceedings. The se c osts ha ve not defendants are obligated not t o withhold or pa y into a dispute d been includ ed in proj ect-to-date cost s. Also, the Stat e is payments account any payments due, or seek any offset of any contingently li able for out standing co ntractors’ clai ms in the payments made, on the basis that North Carolina is subj ect to a amount of $54.79 million. Non-Participating Manufacturers’ Adjustment for 2003. If th e State is unable to ultimately prevail in the dili gent enforcement E. USDA-Donated Commodities litigation, the S tate may be un able to rec over a portion of th is year’s MSA pa yment. On D ecember 4, 2006 , Judge Tennill e The State has custodial respo nsibility for $3 .8 million of allowed the def endant’s motion to co mpel ar bitration of these U.S. Department of Agric ulture donated food commodities for issues. The Court of Appeals upheld the Ord er and on Marc h which the State is liable in the event of loss. 19, 2009, the State’s P etition to the North Carolina Supreme Court was denied. The State i s therefore now participating in a national arbitration process wit h the tobacco c ompanies and a ll F. Construction and Other Commitments other MSA states. At Jun e 30, 2 010, the State had co mmitments of $ 2.04 Pendergraph v. North Carolina Department of Revenue billion for construction of hi ghway infrastructure. Of this – Refund of Income Taxes. Taxpayers filed a class actio n amount, $1.46 billion relat es to the High way Fund, $416.56 complaint and petition for judicial review with the Nor th million relat es to the NC Turnpike Author ity, and $171.61 Carolina Busin ess Court for a refund of income taxe s on million relat es to the Highway Trust Fund. The other September 2 4, 2009. Taxpay ers are pur suing a con stitutional commitments for constructio n and i mprovements of st ate challenge to North Carolin a General St atute 128-31, Nor th government f acilities t otaled $660.73 million (includi ng Carolina G eneral Statute 135- 9 and North Carolina G eneral $459.25 million for the Department of Environment and Natural Statute 105-134.6, which repea led the tax e xemptions for st ate Resources an d $76.15 million for the Depart ment of and local retireme nt ben efits a nd subj ected all state, loc al an d Correction). federal benefit s abov e $4,00 0 to tax. These a mendments became effective for taxable years beginning on or after January At June 30, 2010, the U niversity of North Ca rolina System 1, 1989. The Department of Rev enue has filed a motion to (component unit) had outstanding construction commitments of dismiss, w hich is currently pending b efore the Court. The $632.63 million (including $ 149.1 million for University of
B-137 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
North Carolina at Chapel Hill, $113.77 million for University of G. Tobacco Settlement North Carolina at Charlotte , $68.43 million for North Carolina State University, $55.72 million for North Carolina Agricultural In 1998, North Carolina, along with 45 other states, signed and Technical State University, $47.77 million for UNC Health the Master Set tlement Agreement (MSA) with the natio n’s Care System, and $44.23 million for East Carolina University). largest tobacco companies to settle existing and potential claims of the states for damages arising from the use of the companies’ At June 30, 20 10, co mmunity colleges (co mponent units) tobacco products. Under the MSA, the toba cco companies are had outst anding constructi on commitments o f $76.84 million required to a dhere to a vari ety of marketing, advertisin g, (including $17. 29 million for Guilford Techn ical Co mmunity lobbying, and y outh access restriction s, support smoking College, $14.2 8 million for Sandhills Community Colle ge, cessation and prevention programs, and provide payments to the $13.54 million for Wake Technical Co mmunity College, $5.59 states in perpe tuity. The am ount that No rth Carolina w ill million for Central Pied mont Co mmunity College, $3. 95 actually receiv e fro m thi s settlement re mains unc ertain, b ut million for Joh nston Community College and $3.93 million for projections are that the State will receive ap proximately $4.6 Mitchell Community College). billion through the y ear 2025 . In the e arly y ears of MSA, participating states received initial pay ments that were distin ct The State Treasurer has e ntered into contracts with external from annual payments. The initial payments were made for five fund managers of the Real Estate Invest ment, Alternati ve years: 1998 and 2000 through 2003. The annual pay ments Investment, Credit Invest ment, and Inflation Protecti on began in 2000 and will contin ue indefinitely. However, these portfolios, where the State Treasurer agrees to commit capital to payments are subj ect to a nu mber of adj ustments including an these inv estments. The portfolios are pa rt of the State inflation adj ustment and a volu me adj ustment. So me Treasurer’s Investment Pool as described in section A of No te adjustments (e. g., inflation) should result i n an increase in th e 3. As of June 30, 2010, the State Treasurer has $1.8 billio n payments whil e others (e.g., do mestic cigar ette sal es vol ume) committed for Real Estat e Investment portfolio which includ es may de crease t he pay ments. Also, future p ayments may b e 83.2 million euro and 23.3 million pounds sterling converted to impacted by continuing and potential litig ation ag ainst t he U.S. dollars e quivalent. Th ere were co mmitments of $ 2.8 tobacco indu stry and changes in the financial condition of the billion for Alternative Invest ment portfolio w hich inclu de 23 3 tobacco co mpanies. At y ear-end, the State recognize s a million euro co nverted to U.S. dollars equivalent. There wer e receivable and revenue for the tobacco settlement based on the also commitments in the Inflation Protection and Credit underlying dom estic shipment of cigarettes. This accrual Investment por tfolios in the amount of $24 9.6 million and estimate is b ased on the projected pay ment sche dule in t he $228.9 million, respectively. MSA adjusted for historical payment trends.
The UNC Inv estment F und, LLC (Sy stem Fund) at the In 1999, the State approve d legislatio n to i mplement th e University of North Carolina at Chapel Hill has entered in to terms of the MSA in North Carolina. Th e State cre ated a agreements with lim ited partners hips to in vest capital. These nonprofit corpo ration, The Gol den Leaf, Inc. (Foundation), to agreements rep resent the fund ing of capital over a desig nated distribute 50% of the settle ment funds receiv ed by the State of period of ti me and are subject to adj ustments. As of June 30, North Carolina . The legislati on directed tha t these fund s be 2010, the Sy stem Fund had approxi mately $509.9 million used for the pu rposes of providing econo mic impact assistance unfunded committed capital. to economically affected or tobacco-dependent regions of North Carolina. How ever, the Foun dation’s share of the pay ments At June 30, 2010, The Golden LEAF (Long-term Economic may be diverted by the North Carolina G eneral Assembly prior Advancement Foundatio n), Inc. (co mponent unit) had to the funds being received by the North Carolina State Specific outstanding commitments of $49.13 million to invest in se veral Account. Th e Foundation is r eported as a discretely presented private equity and other limited partnerships. component unit.
In 2000, the S tate enacted le gislation that e stablished th e Health and W ellness Trust Fu nd and the Tob acco Tru st Fu nd and cre ated commissions ch arged with managing the se fun ds. Each fund will receive 25% of the tobacco settlement payments. The purpose o f the Health a nd W ellness Trust Fund is t o finance progra ms and initi atives to i mprove the health and wellness of th e people of N orth Carolina. An 18 member Health and W ellness Trust Fu nd Co mmission ad ministers t he Fund. The pri mary purpo se of the Tobac co Trust Fund is to compensate the tobacco-relat ed seg ment of North Carolin a’s economy for the economic hardship it is expected to experience as a re sult of the MSA. An 18 member To bacco Trust Fu nd Commission ad ministers the F und. The He alth and W ellness Trust Fund a nd Tobacco Trust Fund are re ported a s sp ecial revenue fu nds. In fisc al y ear 2008-2009, Se ssion La w 20 08- 107, Section 2. 2.(e) and Section 2.2.(f) direc ted the Tobacco
B-138 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Trust Fund and the Healt h and Wellness Trust Fund to tran sfer $5 million ea ch to the General Fund in order to support appropriations.
H. Other Contingencies
As of June 30, 2010, the North Carolina Global TransPark Authority (Authority), a component unit of the State, had a loan outstanding including accrued interest payable totaling $38.361 million to the Escheat Fund (special revenue fund). The loan is due on Octo ber 1, 2011. As of Octo ber 15, 2010, t he investment bal ance a nd the c urrent a mount of operating c ash held by the Authority are not sufficient to pay the balance du e to the Escheat Fund and as such, sub stantial doubt ab out t he Authority’s abi lity to continue as a going c oncern exi sts. I n addition, if the Authority declares bankruptcy, funding received to date from the Federal Aviation Administration (FAA) may be required to be paid back. A s of June 30, 20 10, the Authori ty has an a mortized co mmitment of approxi mately $17.4 million from the FAA.
B-139 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 23: CHANGES IN FINANCIAL ACCOUNTING AND REPORTING
CHANGES RESULTING FROM ADOPTION OF NEW ACCOUNTING PRINCIPLES
For the fiscal y ear ended June 30, 201 0, the State implemented t he following pronouncements i ssued by t he Governmental Accounting Standards Board (GASB):
- GASB State ment No. 5 1, Accounting and Financial Reporting for Intangible Assets. - GASB Stat ement No. 53, Accounting and Financial Reporting for Derivative Instruments.
GASB State ment No. 51 provides nee ded guid ance regarding how to identify, account for, and report intangible assets. This St atement requir es that all intangible asset s n ot specifically exc luded by its scope provi sions be classified as capital assets. Accordingly , existing authoritative guidance related to the accountin g and financial reporting for capit al assets should be applied to these intangible assets, as applicable. This pronoun cement provides additional guidanc e t hat specifically addresses the uni que nature of intangible assets, including 1) e stablishing a specified co nditions ap proach to recognizing int angible assets that are int ernally generated, 2) providing gui dance on re cognizing int ernally generated computer software, and 3) establishing specific guidance for the amortization o f intangible assets. Int angible assets wi th indefinite useful lives sh ould not be a mortized. Consequ ently, the beginning accu mulated a mortization b alance relate d to permanent ea sements of the N.C. Highway S ystem w as removed (see Note 24).
GASB State ment No. 53 addresses the recognition , measurement, and discl osure of inform ation regard ing derivative i nstruments enter ed into by state and loc al governments. This prono uncement sp ecifically requires governments t o measure most deriv ative i nstruments at fair value in their financial stat ements that are prepared using th e economic resources measurement focus and the accrual basis of accounting. Sp ecific criteria are provided for deter mining whether a derivative instru ment results in an effective hedge. The changes in fair value of derivative instruments that are used for invest ment purpose s or t hat are reporte d as in vestment derivative i nstruments be cause of in effectiveness are report ed within the investment revenue classification. Alternatively, the changes in fa ir value of derivative instr uments th at are classified as hedging derivative instruments are reported in the statement of n et assets as deferrals. Beginning fund equity was restated for der ivatives that were us ed for inves tment purposes and for derivatives that were ineffective as hedges at the end of the current and previous repor ting periods ( see Note 2 4). For hedging deriv ative instru ments, this pro nouncement h as essentially incorporated th e disclo sure require ments of Technical Bull etin No. 2003-1, Disclosure Requirements for Derivatives Not Reported at Fair Value on the Statement of Net Assets. The disclosure s for invest ment deriv ative instru ments are similar to the disclosures of other investments.
B-140 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 24: FUND EQUITY RECLASSIFICATIONS AND RESTATEMENTS
The following t able reconciles the beginning fund equity as previously reported to th e beginning fund equity as rest ated (dollars in thousands). The adj ustments in the “ GASB 51 and 53 Im plementation” colu mn are d ue to the State’s adoption o f new GAS B pronouncements as discussed in Note 23. The adj ustments in the “Securities Lending Losses” column are due to unrealized losses on the investment of c ash collateral received for se curities lent t hat were previously not reported by the Invest ment Pool (see Note 3A). The adjustments in the “ Fund Recl assifications” column result pr imarily from reclassifications of the followin g: 1) an other govern mental fund to the General Fund due to a statutory change, 2) the N.C. Turnpike Authority from a component unit to an enterprise fund due to a statutory chang e, and 3) the State Health Pl an fro m an othe r e mployee ben efit trust fund to a co mponent unit due to a m anagement reevaluation of fund type. The amounts in the “Other Adjustments” column include correction of errors related to prior periods.
July 1, 2009 Fund Equity Securities July 1, 2009 as Previously GASB 51 and 53 Lending Fund Other Fund Equity Reported Implementation Losses Reclassifications Adjustments as Restated Primary Government M ajor Governmental Funds: General F und ...... $ (775,864) $ — $ (66,014) $ 64,415 $ (110) $ (777,573) H ighway F und ...... 1,021,232 — (19,974) — 23,383 1,024,641 H ighway T rust F und ...... (169,629) — (993) — (23,383) (194,005) Other Governmental Funds: — Spec ial R evenue F unds ...... 2,451,310 — (27,981) (65,679) (1,238) 2,356,412 C apital P ro jec ts F unds ...... 282,774 — — — (1,532) 281,242 P erm anent F unds ...... 79,417 — (1,518) — — 77,899 T o tal Go v ernm ental F unds ...... 2,889,240 — (116,480) (1,264) (2,880) 2,768,616
Internal Serv ic e F unds ...... 256,627 — (1,060) — 17,221 272,788
Government-wide adjustments: C apital ass ets ...... 34,173,884 2,000,720 — (20) (265,831) 35,908,753 Unav ailable deferred rev enues ...... 249,189 — — — (23,991) 225,198 Lo ng-term liabilities ...... (8,685,353) — — — 15,433 (8,669,920) A c crued interest payable ...... (81,113) — — — (508) (81,621) Inv es tm ent deriv ativ es ...... — (39,875) — — — (39,875) P ens io n as s ets ...... 3,418 — — — — 3,418 T o tal Go v ernm ent-wide adjustm ents ...... 25,660,025 1,960,845 — (20) (274,897) 27,345,953
T o tal Go v ernm ental A c tivities ...... 28,805,892 1,960,845 (117,540) (1,284) (260,556) 30,387,357
Business-type Activities - Enterprise Funds: Unem plo ym ent C o m pens atio n F und ...... (298,761) — (520) — — (299,281) EP A R ev o lv ing Lo an F und ...... 1,001,286 — (6,258) — — 995,028 N .C . State Lo ttery F und ...... — — (1,238) — 1,238 — N .C . T urnpik e A utho rity ...... — — — 50,751 (1) 50,750 Other enterpris e funds ...... 129,080 — (1,888) 1,284 974 129,450 T o tal B us ines s -type A c tivities - Enterprise F unds ...... 831,605 — (9,904) 52,035 2,211 875,947
Fiduciary Funds Pension and Other Employee Benefit Trust Funds .... 65,900,220 — (455,426) 98,787 (23,781) 65,519,800 Inv es tm ent T rus t F und ...... 593,149 — (10,393) — — 582,756 P rivate P urpo se T rus t F unds ...... 1,042,311 — (13) — — 1,042,298 T o tal F iduc iary F unds ...... 67,535,680 — (465,832) 98,787 (23,781) 67,144,854
T o tal P rim ary Go vernm ent ...... $ 97,173,177 $ 1,960,845 $ (593,276) $ 149,538 $ (282,126) $ 98,408,158
Component Units T he Go lden LEA F , Inc...... $ 486,888 $ — $ — $ — $ — $ 486,888 Univ ersity o f N o rth C aro lina Sys tem ...... 11,531,575 — — — (3,861) 11,527,714 C o m m unity C o lleges ...... 2,449,079 — — — 848 2,449,927 N C H o us ing F inanc e A gency ...... 503,139 — — — — 503,139 State Educatio n A s s istanc e A utho rity ...... 599,823 — — — — 599,823 State H ealth P lan ...... — — — (98,787) — (98,787) Other co m po nent units ...... 846,852 — — (50,751) 26,661 822,762 T o tal C o m po nent Units ...... $ 16,417,356 $ — $ — $ (149,538) $ 23,648 $ 16,291,466
B-141 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 25: SUBSEQUENT EVENTS
Primary Government North Carolina Turnpike Authority (NCTA)
General Obligation Refunding Bonds On October 26, 2010 the NCTA issued $233.92 million in t axable St ate App ropriation R evenue B onds, Se ries On August 31, 2010, the State issu ed $472.6 million in 2010A. Th ese b onds ar e dated O ctober 26, 20 10, an d will General Obligation Refunding Bonds, Series 2010B with an bear interest from that date. average coupon interest rate of 5% and a true interest cost of 1.72%. T he b onds ar e dat ed A ugust 3 1, 20 10, an d b ear The Authority has elected to treat the Series 2010A interest from that date. Interest on the bonds will be payable bonds as “B uild Am erica Bo nds” for pu rposes o f t he semiannually on each J une 1 and December 1 commencing American R ecovery an d R einvestment Act of 2009 a nd to December 1, 2010. The bonds will m ature annually from receive a cash subsidy from the United States Treasury equal June 1 , 2011 to 2 019 in clusive an d ar e n ot subj ect to to 35% of the interest payable on the Series 2010A bonds for redemption prio r to m aturity. Th e p roceeds of th e Series an effectiv e yield o f 3.45%. In terest on t he b onds will b e 2010B Bond s w ere used to refu nd $499.87 m illion of payable sem iannually on each Ja nuary 1 and July 1, General Obligation Refunding Bonds Series 2002B through commencing J anuary 1, 2011. T he b onds were i ssued to 2002F, to provide for termination payments on t wo interest provide funds for the Monroe Connector System. Included in rate swaps and three sta ndby bond pu rchase agr eements this sal e were seri al and t erm bonds with t he f ollowing associated with the Series 2002B through 2002F bonds and terms: to p ay certain costs in curred i n co nnection with the • Serial bo nds of $35 m illion, with in terest rates execution a nd delivery of t he b onds. T he ref unding was ranging from 4.25% to 4.75 %, maturing January 1, undertaken t o red uce t otal d ebt servi ce payments by $9. 19 2022 to January 1, 2025; million ove r t he ne xt 9 y ears and res ulted i n an econ omic • Term bonds of $61.92 million, at an interest rate of gain of $6.2 million. 5.32%, due January 1, 2031; • Term bonds of $137 million, at an i nterest rate of On October 12, 2010, the State issued $302.15 million in 5.42%, due January 1, 2041. General Obligation Refunding Bonds, Series 2010C with an average coupon interest rate of 5% and with a tru e interest cost of 2.37%. The bonds are d ated October 12, 2010, and bear i nterest fro m th at d ate. In terest on the b onds will be payable sem iannually on ea ch M ay 1 an d N ovember 1 commencing on May 1 , 2011. Th e bonds will mature from May 1 , 2 018 to 2 022 in clusive an d ar e n ot subj ect to redemption prio r to m aturity. Th e p roceeds of th e Series 2010C Bonds were used to refund $30.4 million of Gen eral Obligation Hi ghway Bon ds, Series 2 003 with an av erage coupon i nterest rat e of 4.25%, $40 m illion of General Obligation Hi ghway Bon ds, Series 2 004 with an av erage coupon interest rate of 4.25% and $248.65 million of Public Improvement General Obligation Bonds, Series 2005A with an average coupon interest rate of 5%. The net proceeds of the refunding bonds were used to purchase U.S. government securities. These securities were deposited in an irrevocable trust to p rovide fo r all fu ture d ebt serv ice o n th e refun ded bonds. As a result, the refunded bonds are considered to be defeased and th e liab ility h as been rem oved fro m th e statement o f net assets. Th e refu nding was u ndertaken to reduce total debt service payments by $21.1 million over the next 12 y ears and resulted in an ec onomic gai n of $15.8 million.
B-142 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
Component Units
State Education Assistance Authority - Federal Loan Participation Purchase Program
During fiscal year 2010, loans were financed through the Federal Loan Participation Purchase Program (Federal LPP) of t he U .S. D epartment of Education c reating a s hort-term liability fo r the State Ed ucation Assistan ce Au thority (the Authority). Und er the terms o f the Fed eral LPP au thorized by the “Ensuring Continued Access to Student Loans Act of 2008”, Pub. Law 110-227, as amended by Pub. Law 110-315 and Pub. Law 110 -350 ( ECASLA), all 2 009-2010 participations were to be terminated by September 30, 2010. As of Ju ne 30, 201 0, the Authority’s short-term o bligation under th e Federal LPP was $823 million (see No te 6). To effect a term ination of its p articipation in the Federal LPP, the Authority sold the participated student loans to the U.S. Department of Education, as permitted under ECASLA, on September 13, 2010.
The Authority is cu rrently in the process of co nsidering all fi nancing and refinancing o ptions ava ilable and ha s authorized th e issu ance of ap proximately $915 mill ion in Student Loan B acked Not es for th e purposes o f r efunding and defeasing cert ain pri or obl igations. The A uthority expects to close one or more transactions to accom plish this purpose during the coming year.
Univeristy of North Carolina Health Care System Rex Healthcare – Revenue Bonds
On October 2 6, 2 010, Rex H ealthcare issued $1 23 million in tax-exempt Revenue Bonds, Series 2010A. These bonds are dated Oct ober 26, 20 10, and will b ear in terest from that d ate. In terest on th e bo nds will b e p ayable semiannually on each Ja nuary 1 and J uly 1, com mencing January 1, 2011. The bonds will mature annually from July 1, 201 1 t o Ju ly 1 , 20 30 and w ere issu ed at co upon r ates ranging from 2% to 5%. T he bonds were issued to provide funds for refunding certain bonds previously issued for the benefit of Rex Ho spital, to pay and reimburse Rex Ho spital for pay ing t he cost s of c onstructing a new cent ral e nergy plant o n t he m ain cam pus of R ex H ospital and r outine capital expenditures for Rex Hospital, which is referred to as the Project, to fund a portion of the i nterest accruing on the 2010A Bonds during the acquisition and construction of the Project an d to p ay cer tain ex penses of issu ing th e 2010A Bonds.
B-143 B-144 B-145 State of North Carolina REQUIRED SUPPLEMENTARY INFORMATION SCHEDULES OF FUNDING PROGRESS ALL DEFINED BENEFIT PENSION TRUST FUNDS June 30, 2010 (Expressed in Thousands)
Unfunded UAAL as a Actuarial Actuarial AAL Funded Annual Percentage of Valuation Value of Accrued (UAAL) Ratio Covered Covered Payroll Retirement System Date Assets Liability (AAL) (b) - (a) (a) / (b) Payroll ((b-a)/c) (a) (b) NOTE 1 (c) Teachers' and 12-31-09$ 55,818,099 $ 58,178,272 $ 2,360,173 95.9%$ 13,253,030 17.8% State Employees' 12-31-08 55,127,658 55,518,745 391,087 99.3% 13,267,554 3.0% 12-31-07 55,283,120 52,815,089 (2,468,031) 104.7% 12,701,017 (19.4)% 12-31-06 52,420,808 49,391,907 (3,028,901) 106.1% 11,711,386 (25.9)% 12-31-05 49,670,182 46,624,668 (3,045,514) 106.5% 10,990,239 (27.7)% 12-31-04 47,383,509 43,827,854 (3,555,655) 108.1% 10,366,137 (34.3)%
Consolidated 12-31-09 $ 439,987 $ 474,949 $ 34,962 92.6% $ 66,171 52.8% Judicial 12-31-08 433,553 441,933 8,380 98.1% 65,083 12.9% 12-31-07 430,356 418,137 (12,219) 102.9% 61,338 (19.9)% 12-31-06 406,015 378,490 (27,525) 107.3% 53,348 (51.6)% 12-31-05 382,501 355,498 (27,003) 107.6% 51,018 (52.9)% 12-31-04 363,110 334,272 (28,838) 108.6% 49,368 (58.4)% Legislative 12-31-09 $ 29,792 $ 23,511 $ (6,281) 126.7% $ 3,622 (173.4)% 12-31-08 30,097 23,092 (7,005) 130.3% 3,670 (190.9)% 12-31-07 30,698 22,883 (7,815) 134.2% 3,680 (212.4)% 12-31-06 29,589 21,742 (7,847) 136.1% 3,695 (212.4)% 12-31-05 28,381 21,524 (6,857) 131.9% 3,681 (186.3)% 12-31-04 27,478 20,696 (6,782) 132.8% 3,658 (185.4)% Firemen's and Rescue 6-30-09 $ 315,697 $ 351,324 $ 35,627 89.9% N/A N/A Squad Workers' 6-30-08 316,973 339,022 22,049 93.5% N/A N/A 6-30-07 305,869 322,453 16,584 94.9% N/A N/A 6-30-06 287,933 304,339 16,406 94.6% N/A N/A 6-30-05 274,265 285,356 11,091 96.1% N/A N/A 6-30-04 261,148 273,826 12,678 95.4% N/A N/A North Carolina 12-31-09 $ 81,371 $ 121,855 $ 40,484 66.8% N/A N/A National Guard 12-31-08 78,067 112,747 34,680 69.2% N/A N/A 12-31-07 74,794 109,431 34,637 68.3% N/A N/A 12-31-06 66,898 105,017 38,119 63.7% N/A N/A 12-31-05 59,204 81,803 22,599 72.4% N/A N/A 12-31-04 54,069 93,388 39,319 57.9% N/A N/A Registers of Deeds' 12-31-09 38,913 21,840 (17,073) 178.2% 6,092 (280.3)% 12-31-08 37,212 18,365 (18,847) 202.6% 6,024 (312.9)% 12-31-07 35,453 17,830 (17,623) 198.8% 5,869 (300.3)% 12-31-06 32,371 17,375 (14,996) 186.3% 5,558 (269.8)% 12-31-05 28,242 11,788 (16,454) 239.6% 5,367 (306.6)% 12-31-04 24,262 12,240 (12,022) 198.2% 5,549 (216.6)%
Local Governmental 12-31-09$ 17,723,253 $ 17,804,791 $ 81,538 99.5% $ 5,184,128 1.6% Employees' 12-31-08 17,100,739 17,173,975 73,236 99.6% 4,974,742 1.5% 12-31-07 16,791,984 16,868,147 76,163 99.5% 4,750,682 1.6% 12-31-06 15,564,789 15,643,377 78,588 99.5% 4,468,394 1.8% 12-31-05 14,395,849 14,480,208 84,359 99.4% 4,241,334 2.0% 12-31-04 13,377,297 13,466,189 88,892 99.3% 4,088,170 2.2%
NOTE 1- A negative UAAL denotes excess actuarial assets
N/A - Not applicable
The information presented in these required supplementary schedules was determined as part of the actuarial valuations at the dates indicated. Additional information for the latest actuarial valuations is presented on page 140.
B-146 State of North Carolina REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF CONTRIBUTIONS FROM THE EMPLOYERS AND OTHER CONTRIBUTING ENTITIES ALL DEFINED BENEFIT PENSION TRUST FUNDS For the Six-Year Period 2005 to 2010 (July 1 to June 30) (Expressed in Thousands) State Annual Fiscal Required Percentage Retirement System Year Contribution Contributed
Teachers' and 2010$ 483,205 100% State Employees' 2009 472,374 100% 2008 406,576 99% Note 1 2007 332,149 100% Note 2 2006 269,587 100% 2005 237,170 100%
Consolidated 2010 $ 10,248 100% Judicial 2009 8,373 106% 2008 8,158 104% Note 1 2007 6,520 100% Note 2 2006 6,448 100% Note 2 2005 6,513 100%
Legislative 2010 $ — NR 2009 — NR 2008 — NR Note 1 2007 — NR 2006 — NR 2005 — NR
Firemen's and Rescue 2010 $ 10,074 100% Squad Workers' 2009 9,757 100% 2008 8,734 100% 2007 8,440 100% 2006 7,926 100% 2005 7,521 100%
North Carolina 2010 $ 5,682 123% National Guard 2009 6,248 94% 2008 6,232 ## 112% 2007 7,327 96% 2006 5,944 102% 2005 1,412 111%
Registers of Deeds' 2010 $ — NR Note 3 2009 — NR 2008 — NR 2007 — NR 2006 — NR 2005 29 10,458%
Local Governmental 2010 $ 262,591 100% Employees' 2009 265,690 ## 100% 2008 246,004 ## 100% 2007 233,003 100% 2006 226,665 100% 2005 216,097 100%
NR- No contribution was required or made. Note 1- The State made additional contributions not related to the ARC of $42.4 million for Teachers', $2.3 million for Judicial and $209 thousand for Legislative. Note 2- The State made minor additional contributions not related to the ARC disclosed in that year's CAFR. Note 3 For Registers, significant fees and collections are contributed. They are not directly related to the ARC. The information presented in these required supplementary schedules was determined as part of the actuarial valuatio at the dates indicated. Additional information for the latest actuarial valuations is presented on page 140. B-147 State of North Carolina REQUIRED SUPPLEMENTARY INFORMATION SCHEDULES OF FUNDING PROGRESS OTHER POSTEMPLOYMENT BENEFITS June 30, 2010 (Expressed in Thousands)
Actuarial Actuarial Unfunded UAAL as a Value of Accrued AAL Funded Covered Percentage of Valuation Assets Liability (AAL) (UAAL) Ratio Payroll Covered Payroll Date (a) (b) (b) - (a) (a) / (b) (c) ((b-a)/c) (1) (2) Retiree Health Benefit 12-31-09$ 556,303 $ 33,321,784 $ 32,765,481 1.7% $ 15,131,146 216.5% 12-31-08 434,769 28,288,439 27,853,670 1.5% 15,295,560 182.1% 12-31-07 296,500 28,890,120 28,593,620 1.0% 14,810,279 193.1%
Disability Income 12-31-09$ 352,628 $ 492,731 $ 140,103 71.6% $ 14,534,661 1.0% 12-31-08 350,145 477,574 127,429 73.3% 14,493,066 0.9% 12-31-07 326,674 474,614 147,940 68.8% 13,849,158 1.1%
(1) The Retiree Health Benefit AAL has been prepared using the projected unit credit cost metho The Disability Income AAL has been prepared using the entry age actuarial cost method. The information presented is intended to approximate the funding progress of the plan as required by GASB Statements 43 and 45.
(2) Buck Consulting reported the unadjusted covered payroll for the DIPNC long-term disability benef Aon Consulting reported the adjusted, annualized payroll for postemployment health benefits.
B-148 State of North Carolina REQUIRED SUPPLEMENTARY INFORMATION SCHEDULES OF EMPLOYER CONTRIBUTIONS OTHER POSTEMPLOYMENT BENEFITS For the Fiscal Years Ended June 30, 2008-2010 (Expressed in Thousands) State Annual Fiscal Required Percentage Year Contribution Contributed
Retiree Health Benefit (1) 2010 $ 3,018,969 27% 2009 2,674,416 31% 2008 2,714,184 22%
Disability Income 2010 $ 72,428 107% 2009 78,314 102% 2008 73,470 102%
(1) Beginning in the fiscal year ending June 30, 2009, total contributions as defined by the actuary are the total net retiree benefits paid by the State Health Plan plus employer contributions deposited to the Retiree Health Benefit Fund less payments from the Fund to the State Health Plan during the fiscal year. For prior fiscal years, total contributions were only the employer contributions depositto the Retiree Health Benefit Fund.
B-149 State of North Carolina REQUIRED SUPPLEMENTARY INFORMATION SCHEDULE OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE BUDGET AND ACTUAL (BUDGETARY BASIS — NON-GAAP) GENERAL FUND For the Fiscal Year Ended June 30, 2010 (Dollars in Thousands)
Budgeted Amounts Variance with Original Final Actual Final Budget Revenues: Taxes: Individual income...... $ 9,514,249 $ 9,514,249 $ 9,047,606 $ (466,643) Corporate income...... 1,051,100 1,051,100 1,197,866 146,766 Sales and use...... 5,628,611 5,628,611 5,565,043 (63,568) Franchise...... 622,000 622,000 724,451 102,451 Insurance...... 487,300 487,300 486,849 (451) Beverage...... 287,900 287,900 282,317 (5,583) Inheritance...... 113,100 113,100 71,906 (41,194) Tobacco products...... 247,434 247,434 251,731 4,297 Other...... 103,500 103,500 117,270 13,770 Non-Tax: Fees, licenses and fines...... 247,831 247,831 217,012 (30,819) Investment income...... 67,200 67,200 40,784 (26,416) Disproportionate share receipts...... 125,000 125,000 124,995 (5) Other...... 322,942 322,942 402,951 80,009 Transfers in...... 108,500 108,500 126,119 17,619 Tobacco settlement...... — 73,179 73,179 — Departmental: Federal funds...... 12,147,609 12,202,961 10,765,522 (1,437,439) Local funds...... 700,659 720,427 691,014 (29,413) Inter-agency grants and allocations...... 34,224 28,289 17,346 (10,943) Intra-governmental transactions...... 2,857,997 4,309,775 4,272,152 (37,623) Sales and services...... 107,661 106,870 94,297 (12,573) Rental and lease of property...... 8,999 10,200 10,580 380 Fees, licenses and fines...... 418,014 482,146 484,067 1,921 Contributions, gifts and grants...... 484,035 1,466,520 1,449,042 (17,478) Federal recovery funds...... 93,384 2,380,385 1,921,372 (459,013) Miscellaneous...... 676,198 813,762 582,421 (231,341) Total Revenues...... 36,455,447 41,521,181 39,017,892 (2,503,289) Expenditures: Current: General government...... 922,827 905,681 749,597 156,084 Primary and secondary education...... 10,425,269 11,658,836 10,223,435 1,435,401 Higher education...... 4,048,436 4,152,510 3,935,547 216,963 Health and human services...... 16,723,327 19,672,917 18,988,173 684,744 Environment and natural resources...... 402,899 403,338 345,094 58,244 Economic development...... 180,417 377,338 243,353 133,985 Public safety, corrections, and regulation...... 2,444,085 2,660,413 2,352,871 307,542 Agriculture...... 90,425 136,462 126,627 9,835 Capital outlay...... 4,875 4,875 4,875 — Debt service...... 1,404,462 1,911,889 1,859,116 52,773 Total Expenditures...... 36,647,022 41,884,259 38,828,688 3,055,571 Excess revenues over (under) expenditures...... (191,575) (363,078) 189,204 552,282 Total fund balance at July 1, 2009, as restated...... 630,285 630,285 630,285 — Total fund balance at June 30, 2010...... $ 438,710 $ 267,207 $ 819,489 $ 552,282
Fund balance reserved: Statutory...... $ 194,428 Non-reverting purposes...... 388,159 Fund balance unreserved...... 236,902 Total fund balance at June 30, 2010...... $ 819,489
B-150 State of North Carolina NOTES TO REQUIRED SUPPLEMENTARY INFORMATION
BUDGETARY REPORTING
A. General Fund Budgetary Process This is accomplished by the department writing a check to itself and recording a budgetary expenditure. The check is deposited The State of North Carolina operates on a biennial budget in the next fiscal year as a budgetary receipt. cycle with se parate annu al depart mental certified bud gets adopted by the Gen eral A ssembly on th e ca sh b asis of A detail ed li sting of a ppropriation and d epartmental accounting for the General Fund. budget infor mation is availabl e for public i nspection in the separately published "Budgetary Compliance Report" prepared The acc ompanying budgetary co mparison schedule di s- by the Office of the State Controller, 3512 Bush Street, Raleigh, closes the an nual original b udget and fina l budget for the NC 2 7609-7509 and throu gh the Office of State Bu dget a nd General Fund. Actual amounts in the schedule are presented on Management, 116 West Jones Street, Raleigh, NC 27603-8005. the budgetary basi s. Since the budgetary basis differs fro m generally acc epted a ccounting principle s (GA AP), a B. Special Fund Budgetary Process reconciliation between the budgetary basis and the GAAP basis is presented in section C below. The major special revenue funds, which are t he Highway Fund and Highway Trust Fund, do not have annual appropriated On July 20, 20 06, the G eneral Asse mbly pa ssed House budgets. Bill 914, the State Budget A ct, to replace the Executive Bu dget Act. This legi slation was eff ective July 1, 2007 an d affec ted C. Reconciliation of Budget/GAAP budget de velopment an d management by si mplifying, reorganizing, updating the current budget stat utes, and making Reporting Differences changes to co nform the st atutes to the st ate constit utional The Schedule of Revenues, Expenditures and Changes in provisions governing appropri ations. The legislation provided Fund Balance – Budget and Actual (Budgetary Basis – Non- that agency budgets b e classified in ac cordance with g enerally GAAP) – General Fund, presents co mparisons of the leg ally accepted ac counting principl es a s interpret ed by the Sta te adopted bud get (which is more fully described in sectio n A, Controller. above) with a ctual d ata on a budg etary basis. A ccounting
principles appli ed to develop data on a budgetary basis differ The legal level of budgetary c ontrol is essent ially at the significantly fro m tho se prin ciples used to prese nt finan cial object level. H owever, departments and in stitutions may make statements in c onformity with generally accepted acc ounting changes at th eir discretio n wit hin the budg et of each purpo se principles (G AAP). The following describe s the major between and among objects for supplies and materials, current differences between b udgetary financial data and GAAP obligations and services, fixed charges and other expenses, and financial data. capital o utlay. Also, Chapter 116, Article 1 , Part 2A of t he
General St atutes a uthorized the 16 u niversities within t he Entity differences. Certain funds not in cluded in the University of North Carolina Sy stem and t he North Carolina annual budgetary statements but which hav e the characteri stics School of Sci ence and Mathematics to a pply for special of govern mental fund s are pr esented in the General Fund f or responsibility status, w hich sets the leg al le vel of b udgetary GAAP purposes. control at the institution’s budget code level. A budget code is a conv ention use d in t he State’s acc ounting system to Basis differences. Budgetary funds are ac counted for o n distinguish the type of fund and the respon sible department or the ca sh ba sis of accounting, while under G AAP the gov ern- institution. Bu dget codes are al so used to segregat e certain mental funds use the modified accrual basis. Accrued revenues purposes withi n depart ments or institution s. Institution s wi th and expe nditures are recog nized in the GAAP finan cial special respon sibility status must still hav e certain budg et statements. revisions, prim arily those associat ed with unanti cipated revenues, approved by the Office of State Budg et a nd Timing differences. A significant variance b etween budg- Management (OSBM). A dditionally, universities m ust etary practices and GA AP is the authorize d carry forward of maintain progr ams and services in acc ordance with t he appropriated funds, which is described in section A. guidelines est ablished by the Board of Governors of the consolidated U niversity of N orth Carolin a System. All 16 The following table presents a reconciliati on of resulting universities an d the North Carolina School of Science and entity, basis and ti ming diff erences in th e fund bala nces Mathematics have applie d for and received special (budgetary basi s) at Jun e 30, 2010 to the fu nd balanc es o n a responsibility status. modified accru al basi s (GAA P). Am ounts are expressed i n
thousands. Generally, unexpended ap propriations at the end of the fiscal year lapse and are rea ppropriated in the next fisc al year. However, in c ertain circu mstances the OS BM will allow a department t o carry forward appropriation s for specific ally identified expenditures that will be p aid in the next fiscal year.
B-151 State of North Carolina NOTES TO REQUIRED SUPPLEMENTARY INFORMATION
General D. Budgetary Reserves Fund Fund balance The North Ca rolina General Asse mbly ha s e stablished (budgetary basis), several accounts in the G eneral Fund as re served fund balances June 30, 2010...... $ 819,489 for budgetary purposes. Funds that are transferred to the se accounts fro m the unreserve d credit balanc e of the General Reconciling Adjustments: Entity Difference: Fund ca n be u sed only for their intended pu rposes and on a Primary government: budgetary basis are not available for appropriation. Other...... 903 Savings Reserve Account (General Statute 143C-4-2). The Basis Differences: State Controlle r shall reserve to the Savings Reserve Acco unt Accrued revenues: one-fourth of a ny unreserved f und balance, as determined on a Taxes receivable...... 1,369,427 cash ba sis, re maining in the General Fund at the end of each Accounts receivable...... 265,779 fiscal y ear. The Saving s Rese rve Accou nt is a co mponent of Federal funds , net...... 1,029,259 the unappropriated General Fund balance. Funds reserved to the Other receivables ...... 177,500 Savings Reserve Acco unt sh all be availa ble for expendit ure Less: only upon an act of appropriation by the General Asse mbly. Tax refunds payable...... (1,402,587) The General Assembly recog nizes t he ne ed to esta blish and Deferred revenue...... (607,424) maintain sufficient reserves to address unanticipated events and Total accrued revenues...... 831,954 circumstances such a s natur al disast ers, econ omic downtur ns, threats to pu blic safety , health, and welfare, and other Accrued expenditures: emergencies. It is a goal of the General Assembly and the Stat e Medical claim s payable...... (971,053) to accu mulate and maintain a balance in the Savings Re serve Accounts payable and accrued liabilities ...... (828,762) Other payables ...... (190,746) Account equal to or greater than eight percent (8%) of the p rior Total accrued expenditures...... (1,990,561) year's General Fund operating budget.
Other Adjustments: At the beginni ng of fiscal y ear 2009-10 th e balance of t he Notes receivable...... 21,830 Savings Reserve Account w as $150 million. The General Inventories ...... 65,391 Assembly did not authorize any transfer of unreserve d fun d Inves tm ent Market Value ...... (17,950) balance fro m fiscal y ear 20 09-10 to the Savings Reser ve Account under Session Law 2 010-31. Therefore, at the end of Timing Differences: the fiscal y ear 2009-10, the balance of this reserve re mained at Authorized carryforward for $150 million. s pecific encum brances ...... 154,776 Fund balance (GAAP basis) Repairs and Renovations Reserve Account (General June 30, 2010...... $ (114,168) Statute 143C-4-3). The Re pairs and Renovations Re serve Account i s esta blished a s a reserve in the G eneral Fund. The State Co ntroller shall reserve to the Re pairs and Re novations Reserve Account one-fourth of any unreserved fund balance, as determined on a ca sh ba sis, re maining in t he General Fu nd a t the end of each fiscal y ear. The funds in the Repairs a nd Renovations Reserve Account shall be u sed only for the repair and renovation of State facilities and rel ated infrastructure that are supported fro m the General Fund. Fund s re served to t he Repairs and Renovations Reserve Account shall be available for
expenditure onl y upon an act of appropriation by the General Assembly. The General A ssembly did n ot authorize any transfer of unreserved fund balance from fiscal year 2009-10 to the Repairs and Renovations Reserve under Session Law 2010- 31. Therefore, at the end of the fiscal year 2009-10, the balance of this reserve was $0.
Disproportionate Share Reserve Account (Session Law 2009-451, Senate Bill 202, Section 10.64(a)). Disproportionate share payments are Medicaid payments made to ho spitals w hich serve a disproportionate share of indig ent patients. This account wa s established to reserve for future appropriation a ny excess coll ection of di sproportionate share revenues above those budgeted as non-tax revenues. At the end of the fiscal year 2009-10, the remaining balance of this reserve was $0.
B-152 State of North Carolina NOTES TO REQUIRED SUPPLEMENTARY INFORMATION
Assembly to annually appropriate funds to this reserve i n Disaster Relief Reserve (Session Law 2005-1, Senate Bill amounts sufficient to m eet an ticipated ca sh require ments for 7). During fiscal y ear 2004-2005 $248.17 million w as each fi scal y ear of the JDIG Program e stablished pursu ant to transferred to the Disaster Relief Reserve. This $248.17 million General Statute 143B-437.52. Funds in the a mount of $4.5 was fund ed fro m req uired age ncy, university , and co mmunity million w ere appropriated for fiscal y ear 20 04-05, $9 million college transfe rs, a Sa vings Reserve Account transfer, a nd for fiscal y ear 2005-06, $12.4 million for fi scal y ear 200 6-07 transfers of fun ds from the unreserved credit balance. During and $12.4 million for fiscal y ear 2007-08. While $27.4 million fiscal y ear 2009-10, $2.7 m illion was di sbursed fro m t his was appropriated for JDIG fo r fiscal y ear 20 08-09, this enti re reserve for disaster related expenditures resulting in a remaining amount wa s dir ected by the G overnor to reve rt at y ear end to balance of $41.3 million. help ensure that the State not incur a deficit. The JDIG Reserve was appropriat ed $19 million for fiscal y ear 2009-10 and $21 Job Development Investment Grant (JDIG) Program million was disbursed fro m thi s reserv e. At the end of fiscal Reserve (General Statute 143-15.3E). In accordan ce wit h year 2009-10, the balance of this reserve was $3.1 million. Session Law 2004-124, Hou se Bill 141 4, Section 6.12.(a), Article 1 of Chapter 143 of th e General Statu tes was amended by adding a ne w section requiring the establi shment of a JDIG Reserve in th e General Fu nd. It is the intent of the Gen eral
B-153
Comparative Financial Statements of Selected Funds
The following comparative financial statements of selected funds have been compiled by the staff of the Office of State Controller from audited Comprehensive Annual Financial Reports of the State of North Carolina for the fiscal years ended June 30, 2010, 2009, 2008, 2007 & 2006.
B-154 State of North Carolina GENERAL FUND COMPARATIVE BALANCE SHEETS
As of June 30, 2006 through June 30, 2010 (Expressed in Thousands) 2010 2009 2008 2007 2006
ASSETS Cash and cash equivalents...... $ 1,138,523 $ 1,208,187 $ 2,401,698 $ 2,928,971 $ 2,421,376 Investments...... 2,602 2,325 2,233 2,121 2,014 Securities lending collateral...... 595,092 1,063,722 3,147,335 4,407,723 3,763,630 Receivables: Taxes receivable...... 1,369,427 1,046,243 1,735,612 1,932,799 1,790,815 Accounts receivable...... 265,779 313,395 257,113 233,729 258,855 Intergovernmental receivables...... 939,383 852,682 744,395 859,671 1,061,100 Interest receivable...... 487 4,415 14,324 19,950 13,835 Due from other funds...... 1,330 67 2,599 164 5,690 Due from component units...... 1,358 — 1,478 1,866 2,438 Inventories...... 65,391 69,596 55,705 86,016 73,343 Notes receivable...... 21,830 24,201 25,427 14,319 6,578 Securities held in trust...... 424 424 423 425 565 Restricted/designated cash and cash equivalents...... 11,131 360 69,839 145,000 —
Total Assets...... $ 4,412,757 $ 4,585,617 $ 8,458,181 $ 10,632,754 $ 9,400,239
LIABILITIES AND FUND BALANCE Liabilities: Accounts payable and accrued liabilities...... $ 781,957 $ 1,063,092 $ 712,819 $ 703,314 $ 688,067 Medical claims payable...... 971,053 972,070 871,345 958,985 983,145 Tax refunds payable...... 1,402,587 1,426,309 1,276,922 1,183,264 1,183,801 Obligations under securities lending...... 613,042 1,129,736 3,147,335 4,407,723 3,763,630 Interest payable...... — — — — 655 Due to fiduciary funds...... 64,235 62,323 103,901 46,057 42,541 Due to other funds...... 25,069 34,447 18,617 16,330 14,180 Due to component units...... 55,018 55,986 50,439 43,179 48,446 Deferred revenue...... 567,116 566,870 562,357 696,191 749,622 Deposits payable...... — — — 51 51 Funds held for others...... 46,848 52,357 35,368 749 903 Total Liabilities...... 4,526,925 5,363,190 6,779,103 8,055,843 7,475,041
Fund Balance: Reserved...... 224,358 189,288 173,850 178,427 155,418 Unreserved...... (338,526) (966,861) 1,505,228 2,398,484 1,769,780 Total Fund Balance...... (114,168) (777,573) 1,679,078 2,576,911 1,925,198
Total Liabilities and Fund Balance...... $ 4,412,757 $ 4,585,617 $ 8,458,181 $ 10,632,754 $ 9,400,239
The accompanying Notes to the Financial Statements are an integral part of this statement.
Compiled by the North Carolina Office of the State Controller.
B-155 State of North Carolina GENERAL FUND COMPARATIVE STATEMENTS OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCE
For the Fiscal Years Ended June 30, 2006 through June 30, 2010 (Expressed in Thousands) 2010 2009 2008 2007 2006 REVENUES: [1] Tax Revenues: Individual income tax...... $ 9,343,303 $ 8,658,635 $ 10,672,362 $ 10,737,494 $ 9,493,714 Corporate income tax...... 1,245,515 941,509 1,265,654 1,357,454 1,208,356 Sales and use tax...... 5,871,166 4,872,318 5,125,674 5,078,997 5,007,567 Franchise tax...... 904,959 797,079 739,947 669,235 628,665 Beverage tax...... 295,349 263,553 257,393 245,430 232,987 Insurance tax...... 495,059 483,756 492,699 475,546 431,729 Piped natural gas tax...... 59,693 59,490 58,413 61,345 58,397 Inheritance tax...... 71,901 104,266 158,789 161,604 133,248 Tobacco products tax...... 278,296 242,071 249,664 241,687 187,566 License tax...... 41,338 37,716 55,293 48,137 46,035 Gift tax...... 12,036 12,294 17,361 15,669 16,251 Manufacturing tax...... 32,125 32,044 37,661 39,132 11,992 Other taxes...... 23,943 21,625 16,623 16,640 15,579 Total tax revenues...... 18,674,683 16,526,356 19,147,533 19,148,370 17,472,086 Non-Tax Revenues: Departmental revenues: Federal funds...... 12,825,403 11,970,322 10,843,765 10,312,318 9,905,879 Sales and services...... 97,323 104,925 102,307 94,664 94,994 Local funds...... 153,234 304,270 486,536 665,532 574,300 Fees, licenses and fines...... 212,260 184,952 164,813 160,006 210,687 Investment earnings...... 3,264 4,788 7,829 8,059 7,357 Interest earnings on loans...... 202 261 113 399 — Contributions, gifts and grants...... 20,391 16,179 16,054 17,207 17,632 Rental and lease of property...... 8,810 8,773 7,908 8,392 7,885 Miscellaneous...... 117,511 119,107 106,517 56,733 113,171 Total departmental revenues...... 13,438,398 12,713,577 11,735,842 11,323,310 10,931,905 Income from General Fund investments...... 36,877 103,703 234,478 208,955 122,405 Judicial department...... 216,772 190,995 198,520 159,583 158,646 Federal recovery funds...... 1,961,425 1,155,174 — — — Tobacco settlement...... 146,358 175,187 159,954 142,825 136,453 Other non-tax revenues...... [2] 318,646 239,342 417,270 444,869 283,741 Total non-tax revenues...... 16,118,476 14,577,978 12,746,064 12,279,542 11,633,150 Total revenues...... 34,793,159 31,104,334 31,893,597 31,427,912 29,105,236 EXPENDITURES: Current: General government...... 909,279 1,232,720 1,083,760 1,011,709 869,092 Primary and secondary education...... 9,547,910 9,678,610 9,463,994 8,723,640 7,954,919 Higher education...... 3,728,849 3,570,067 3,880,171 3,613,384 3,060,173 Health and human services...... 16,712,294 16,118,943 14,822,331 14,117,990 13,230,073 Economic development...... 284,908 351,221 400,812 258,793 242,953 Environment and natural resources...... 262,015 290,614 284,244 261,803 249,692 Public safety, corrections, and regulations...... 2,221,098 2,191,913 2,167,484 2,010,415 1,894,345 Agriculture...... 85,579 87,570 93,181 84,436 102,256 Debt service: Principal retirement...... 391,926 372,702 368,736 332,923 312,524 Interest and fees...... 276,753 280,253 287,047 263,421 248,168 Debt issuance costs...... 623 6 3 527 508 Total expenditures...... 34,421,234 34,174,619 32,851,763 30,679,041 28,164,703 Excess revenues over (under) expenditures...... 371,925 (3,070,285) (958,166) 748,871 940,533 OTHER FINANCING SOURCES (USES): Transfers in...... 713,024 1,073,819 789,758 575,989 625,532 Transfers out...... (433,923) (532,030) (745,653) (732,938) (620,313) Refunding bonds issued...... 371,920 — — 84,385 — Premium on debt issued...... 64,301 — — 1,305 — Other debt issued...... 9,098 463 4,590 2,747 3,857 Capital leases...... — — — 799 — Sale of capital assets...... 2,450 1,401 11,592 1,848 8,313 Insurance recoveries...... 480 454 540 350 411 Payment to refunded debt escrow agent...... (435,870) — — (85,519) — Total other financing sources (uses)...... 291,480 544,107 60,827 (151,034) 17,800 Excess revenues and other sources over (under) expenditures and other uses...... 663,405 (2,526,178) (897,339) 597,837 958,333 Fund balance - July 1 as restated (Note 1) ...... (777,573) 1,748,605 2,606,718 1,966,400 953,509 Increase (decrease) in reserve for related assets...... — — (30,301) 12,674 13,356 Fund balance - June 30...... $ (114,168) $ (777,573) $ 1,679,078 $ 2,576,911 $ 1,925,198
[1] For fiscal year ended June 30, 2009, the State changed its method of accounting for inventories of governmental funds from the purchases method to the consumption method. [2] For fiscal year ended June 30, 2009, with the investment markets downturn, situations occurred related to securities lending activity that resulted in the State experiencing unrealized losses on the investment of cash collateral received for securities lent. The State had unrecorded unrealized losses and undistributed income that resulted in a restatement.
The accompanying Notes to the Financial Statements are an integral part of this statement. Compiled by the North Carolina Office of the State Controller. B-156 State of North Carolina STATE HIGHWAY FUND COMPARATIVE BALANCE SHEETS
As of June 30, 2006 through June 30, 2010 (Expressed in Thousands)
2010 2009 2008 2007 2006
ASSETS Cash and cash equivalents...... $ 887,433 $ 921,814 $ 864,744 $ 642,700 $ 589,757 Securities lending collateral...... 154,982 334,388 548,297 526,227 532,421 Receivables: Taxes receivable...... 108,545 107,115 103,214 105,911 107,306 Accounts receivable...... 8,006 7,404 10,076 13,271 10,588 Intergovernmental receivables...... 22,313 38,121 35,850 55,295 56,789 Interest receivable...... 1,161 1,511 3,349 2,717 391 Other receivables...... 3,265 3,093 3,170 3,532 2,102 Due from other funds...... 13,653 152,107 17,398 41,255 75,495 Inventories...... 84,963 81,631 87,604 79,879 74,991 Notes receivable...... 1,035 1,030 1,025 1,022 1,102 Securities held in trust...... 2,645 9,155 17,933 2,824 4,546 Restricted investments...... 167,026 51,988 187,793 — —
Total Assets...... $ 1,455,027 $ 1,709,357 $ 1,880,453 $ 1,474,633 $ 1,455,488
LIABILITIES AND FUND BALANCE Liabilities: Accounts payable and accrued liabilities...... $ 404,588 $ 299,864 $ 378,418 $ 295,510 $ 305,952 Tax refunds payable...... 5,516 6,564 6,833 7,212 — Obligations under securities lending...... 159,687 334,388 548,297 526,227 532,421 Due to fiduciary funds...... — — — 7,891 — Due to other funds...... 6,365 7,401 7,982 7,301 8,544 Deferred revenue...... 13,621 16,976 15,201 21,269 25,014 Funds held for others...... 16,651 22,932 31,975 15,254 14,772 Total Liabilities...... 606,428 688,125 988,706 880,664 886,703
Fund Balance: Reserved...... 283,707 179,516 233,579 62,068 53,999 Unreserved...... 564,892 841,716 658,168 531,901 514,786
Total Fund Balance...... 848,599 1,021,232 891,747 593,969 568,785
Total Liabilities and Fund Balance...... $ 1,455,027 $ 1,709,357 $ 1,880,453 $ 1,474,633 $ 1,455,488
The accompanying Notes to the Financial Statements are an integral part of this statement.
Compiled by the North Carolina Office of the State Controller.
B-157 State of North Carolina STATE HIGHWAY FUND COMPARATIVE STATEMENTS OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES For the Fiscal Years Ended June 30, 2006 through June 30, 2010 (Expressed in Thousands)
2010 2009 2008 2007 2006 [1] REVENUES: Gasoline tax ...... $ 1,146,104 $ 1,117,187 $ 1,163,527 $ 1,179,097 $ 1,114,743 Federal funds...... 530,106 1,113,003 904,400 793,637 993,867 Motor vehicle revenues: Motor vehicle registration...... 348,715 355,406 367,922 368,916 344,526 Driver license fees...... 126,531 129,738 133,330 125,923 110,493 International registration plan fees...... 59,757 62,993 66,138 69,146 67,285 Penalties...... 34,541 40,850 48,034 44,831 40,720 Safety equipment inspection fees...... 1,399 1,422 1,848 1,978 2,023 Other motor vehicle revenues...... 34,910 43,395 32,676 32,431 32,279 Investment earnings...... 31,595 30,586 67,905 49,039 38,343 Interest on loans...... — 6 12 — 7 Sales and services...... 1,116 1,058 863 797 813 Rental and lease of property...... 6,620 9,878 13,700 14,892 13,399 Local funds...... 30,043 28,968 20,989 30,786 14,778 Contributions, gifts and grants...... 7,489 8,192 13,329 11,618 1,946 Federal recovery funds...... 293,344 6,256 — — — Miscellaneous...... 6,903 7,621 24,387 18,619 13,288 Total revenues...... 2,659,173 2,956,559 2,859,060 2,741,710 2,788,510 EXPENDITURES: Current: Transportation...... 2,766,591 2,626,486 2,709,713 2,510,000 2,448,816 Debt service Principal retirement...... 49,515 45,895 3,100 18,354 — Interest and fees...... 21,352 13,701 6,607 2,412 — Debt issuance costs...... 421 51 667 — — Total expenditures...... 2,837,879 2,686,133 2,720,087 2,530,766 2,448,816 Excess of revenues over (under) expenditures...... (178,706) 270,426 138,973 210,944 339,694 OTHER FINANCING SOURCES (USES): Transfers in...... 39,741 50,330 53,458 77,377 85,906 Transfers out...... (309,511) (290,054) (300,257) (277,277) (255,040) GARVEE bonds issued...... 242,520 — 287,565 — — Other debt issued...... — — — 150 3,000 Premium on debt issued...... 20,616 — 12,231 — — Sale of capital assets...... 2,849 7,192 11,549 9,191 5,773 Insurance recoveries...... 6,449 7,453 6,525 5,124 5,203 Total other financing sources (uses)...... 2,664 (225,079) 71,071 (185,435) (155,158) Excess of revenues and other sources over (under) expenditures and other uses...... (176,042) 45,347 210,044 25,509 184,536
Fund balance - July 1 as restated (Note 1)...... 1,024,641 975,885 678,902 568,785 383,302 Increase (decrease) in reserve for related assets...... — — 2,801 (325) 947 Fund balance - June 30...... $ 848,599 $ 1,021,232 $ 891,747 $ 593,969 $ 568,785
[1] For fiscal year ended June 30, 2009, the State changed its method of accounting for inventories of governmental funds from the purchases method to the consumption method.
The accompanying Notes to the Financial Statements are an integral part of this statement. Compiled by the North Carolina Office of the State Controller.
B-158 State of North Carolina HIGHWAY TRUST FUND COMPARATIVE BALANCE SHEETS
As of June 30, 2006 through June 30, 2010 (Expressed in Thousands)
2010 2009 2008 2007 2006
ASSETS Cash and cash equivalents...... $ — $ 126 $ 6,811 $ 151,239 $ 21,766 Securities lending collateral...... 30,223 16,384 24,258 163,077 23,001 Receivables: Taxes receivable...... 36,946 37,443 36,770 37,767 37,855 Accounts receivable...... 83 109 107 35 392 Intergovernmental receivables...... 2,814 2,726 3,999 3,191 2,529 Interest receivable...... 144 33 108 619 518 Due from other funds...... — — 47 — 105 Advance to other funds...... 18,279 ———— Advance to component units...... — 14,974 11,180 7,556 3,622 Notes receivable...... 81 88 96 100 107
Total Assets...... $ 88,570 $ 71,883 $ 83,376 $ 363,584 $ 89,895
LIABILITIES AND FUND BALANCE Liabilities: Accounts payable and accrued liabilities...... $ 61,692 $ 70,739 $ 113,775 $ 138,032 $ 125,347 Tax refunds payable...... 1,839 2,188 2,278 2,404 - Obligations under securities lending...... 31,425 16,384 24,258 163,077 23,001 Due to other funds...... 13,653 152,107 17,398 41,255 75,495 Deferred revenue...... 98 94 282 1,695 1,050 Total Liabilities...... 108,707 241,512 157,991 346,463 224,893
Fund Balance: Reserved...... 18,360 15,062 11,276 7,656 3,729 Unreserved...... (38,497) (184,691) (85,891) 9,465 (138,727)
Total Fund Balance...... (20,137) (169,629) (74,615) 17,121 (134,998)
Total Liabilities and Fund Balance...... $ 88,570 $ 71,883 $ 83,376 $ 363,584 $ 89,895
The accompanying Notes to the Financial Statements are an integral part of this statement.
Compiled by the North Carolina Office of the State Controller.
B-159 State of North Carolina HIGHWAY TRUST FUND COMPARATIVE STATEMENTS OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES For the Fiscal Years Ended June 30, 2006 through June 30, 2010 (Expressed in Thousands)
2010 2009 2008 2007 2006
REVENUES: Gasoline tax ...... $ 382,740 $ 378,898 $ 387,776 $ 393,673 $ 372,072 Highway use tax ...... 439,506 440,749 566,132 607,511 577,237 Motor vehicle revenues: Title fees...... 72,589 72,138 87,020 92,087 90,287 Other motor vehicle revenues...... 13,382 14,066 16,864 17,287 16,061 Investment earnings...... 862 1,101 2,592 6,475 3,018 Rental and lease of property...... 2,166 2,285 1,999 1,636 1,434 Local funds...... 3,038 327 5,452 5,339 1,976 Contributions, gifts and grants...... — 314 1,199 — 868 Miscellaneous...... 599 2,120 1,367 5,924 2,053 Total revenues...... 914,882 911,998 1,070,401 1,129,932 1,065,006 EXPENDITURES: Transportation...... 486,667 640,008 764,005 786,301 770,733 Debt service: Principal retirement...... 55,634 54,090 54,055 54,675 54,675 Interest and fees...... 22,499 31,527 34,788 36,623 38,883 Debt issuance costs...... 133 6 78 — — Total expenditures...... 564,933 725,631 852,926 877,599 864,291 Excess of revenues over (under) expenditures...... 349,949 186,367 217,475 252,333 200,715 OTHER FINANCING SOURCES (USES): Transfers in...... — — — 5,700 1,321 Transfers out...... (177,678) (197,495) (225,351) (106,733) (322,243) Sale of capital assets...... 1,597 252 1,073 819 571 Total other financing sources (uses)...... (176,081) (197,243) (224,278) (100,214) (320,351) Excess of revenues and other sources over (under) expenditures and other uses...... 173,868 (10,876) (6,803) 152,119 (119,636) Fund balance - July 1 as restated (Note 1)...... (194,005) (158,753) (67,812) (134,998) (15,362)
Fund balance - June 30...... $ (20,137) $ (169,629) $ (74,615) $ 17,121 $ (134,998)
The accompanying Notes to the Financial Statements are an integral part of this statement.
Compiled by the North Carolina Office of the State Controller.
B-160 State of North Carolina NOTES TO THE FINANCIAL STATEMENTS
NOTE 1: FUND BALANCE RESTATEMENT AND RECLASSIFICATION
In the fiscal year ended June 30, 2006, the State restated beginning fund balance for the General Fund as a result of the change in methodology for applying GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions.
All othe r re statements are re lated to c orrection of e rrors due to c hanges m ade to confor m to gene ral accepted ac couting principles. Such changes resulted from correcting errors in recognizing accruals of revenues and expenditures for the fiscal years ended Jun e 30, 200 5, 2006 , 2007, 2008, an d 200 9. Th e af fected balance sh eet accou nts were properly r estated; ho wever, th e corresponding r evenue and expenditure acco unts were no t ad justed. Altern atively, a restate ment figure is in cluded on th e Comparative Statements of Revenues, Expenditures and Changes in Fund Balance, which adjusted beginning fund balances as of July 1, 2005, 2006, 2007, 2008 and 2009.
B-161 (THIS PAGE INTENTIONALLY LEFT BLANK)
APPENDIX C
SUMMARY OF PRINCIPAL LEGAL DOCUMENTS
C-1
SUMMARY OF PRINCIPAL LEGAL DOCUMENTS
Brief descriptions of the Trust Indenture and the Third Supplemental Trust Indenture are included in this Appendix C. Such descriptions do not purport to be comprehensive or definitive; all references herein to the Trust Indenture and the Third Supplemental Trust Indenture are qualified in their entirety by reference to each such document, copies of which are available for review at the offices of the Trustee.
Definitions
The following is a summary of certain definitions set forth in the Trust Indenture, the Third Supplemental Trust Indenture and used in this Official Statement:
“Act” means The State Capital Facilities Finance Act, the same being Article 9 of Chapter 142, as amended, of the General Statutes of North Carolina.
“Authorized Officer” means the State Treasurer or other person designated from time to time to perform the duties imposed on an Authorized Officer by the Trust Indenture whose name is filed pursuant to an Officer’s Certificate with the Trustee for such purpose.
“Bond” or “Bonds” means the Series 2011A Bonds and any other notes or bonds issued under the provisions of the Trust Indenture and secured on a parity with each other by the Trust Indenture.
“Bond Fund” means the fund created and designated the State of North Carolina Capital Improvement Limited Obligation Bond Fund by the Trust Indenture.
“Bond Insurance Policy” means a municipal bond insurance policy or similar arrangement permitted by the Act and obtained or established in connection with the incurrence of any Bonds.
“Bond Insurer” means the Person providing a Bond Insurance Policy, as designated in the Supplemental Indenture providing for the issuance of Bonds.
“Bond Registrar” means, with respect to any Series of Bonds, the Bond Registrar at the time serving as such under the Supplemental Indenture relating to such Series, whether the original or a successor Bond Registrar.
“Bond Year” means the period commencing on the date of issuance of Bonds and ending on the succeeding April 30 and thereafter the period commencing on May 1 of any year and ending on April 30 of the following year.
“Business Day” means a day on which the Trustee, the applicable Bond Registrar and the New York Stock Exchange are open for the purpose of conducting business.
“Construction Fund” means each of the funds created and designated the “State of North Carolina Capital Improvement Limited Obligation Bond 2011A Construction Fund” by the Trust Indenture.
“Cost,” as applied to the Projects, means all costs as are eligible under the provisions of the Act.
“Credit Facility” means a line of credit, letter of credit, standby bond purchase agreement or similar liquidity or credit facility permitted by the Act (but excluding a Bond Insurance Policy) and established or obtained in connection with the incurrence of any Bonds.
“Credit Provider” means the Person providing a Credit Facility, as designated in the Supplemental Indenture providing for the issuance of the Bonds.
C-2
“Defeasance Obligations” means noncallable Government Obligations.
“Event of Default” means each of those events of default set forth in the Trust Indenture.
“Fiscal Year” means the period commencing on the first day of July of any year and ending on the last day of June of the following year.
“Fitch” means Fitch Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, and if such corporation will be dissolved or liquidated or will no longer perform the functions of a securities rating agency, “Fitch” will be deemed to refer to any other nationally recognized securities rating agency designated by the State by notice to the Trustee.
“Government Obligations” means direct obligations of, or obligations the principal of and the interest on which are fully and unconditionally guaranteed by, the United States of America in either certificated or book-entry form, including (a) to the extent permitted by law, evidences of ownership of, or fractional undivided interests in, future interest and principal payments on such obligations and (b) to the extent permitted by law, obligations issued pursuant to Section 21B(d)(3) of the Federal Home Loan Bank Act, as amended by Section 511(a) of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, and commonly known as “interest strips” of the Resolution Funding Corporation.
“Interest Account” means the account in the Bond Fund created and so designated by the Trust Indenture.
“Interest Payment Date” means, with respect to any Series of Bonds, each of the interest payment dates provided for in the Supplemental Indenture relating to such Series. “Interest Payment Date” means, with respect to the Series 2011A Bonds, May 1 or November 1, as the case maybe, beginning November 1, 2011.
“Investment Obligations” means, any investment from time to time permitted for investment of funds by the State by Section 147-69.1 of the General Statutes of North Carolina, as amended, or any successor or other statute.
“Moody’s” means Moody’s Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, and if such corporation will be dissolved or liquidated or will no longer perform the functions of a securities rating agency, “Moody’s” will be deemed to refer to any other nationally recognized securities rating agency designated by the State by notice to the Trustee.
“Officer’s Certificate” means a certificate signed by an Authorized Officer.
“Outstanding” when used with reference to Bonds means, as of a particular date, all Bonds theretofore authenticated and delivered under the Trust Indenture, except:
(a) Bonds theretofore canceled by the Bond Registrar or delivered to the Bond Registrar for cancellation;
(b) Bonds deemed to be no longer Outstanding pursuant to the Trust Indenture;
(c) Bonds in exchange for or in lieu of which other Bonds have been authenticated and delivered under the Trust Indenture;
(d) Bonds deemed to have been paid in accordance with the defeasance provisions of the Trust Indenture; and
C-3 (e) Bonds constituting Put Bonds deemed to have been purchased in accordance with the provisions of the applicable Supplemental Indenture in lieu of which other Bonds have been delivered under such Supplemental Indenture.
“Owner” means a Person in whose name a Bond is registered in the registration books provided for in the Trust Indenture.
“Person” includes corporations, firms, associations, partnerships, joint ventures, joint stock companies, trusts, unincorporated organizations, and public bodies, as well as natural persons.
“Principal Account” means the account in the Bond Fund created and so designated by the Trust Indenture.
“Prior Bonds” of any particular Bond means every previous Bond evidencing all or a portion of the same debt as that evidenced by such particular Bond; and, for purposes of this definition, any Bond authenticated and delivered under the Trust Indenture in lieu of a lost, destroyed or stolen Bond will be deemed to evidence the same debt as the lost, destroyed or stolen Bond.
“Projects” means collectively “capital facilities,” as defined by and duly authorized pursuant to the Act.
“Put Bonds” means fixed or variable rate Bonds, 25% or more of the principal of which may, at the option of the Owner thereof, be tendered to the State, the Trustee or a paying agent or other fiduciary, or an agent of any of the foregoing, for payment or purchase at one time.
“Redemption Account” means the account in the Bond Fund created and so designated by the Trust Indenture.
“Redemption Price” means, with respect to Bonds, the principal amount of such Bonds called for redemption plus the applicable premium, if any, payable upon redemption thereof.
“Regular Record Date” means, with respect to any Series of Bonds, the regular record date, if any, provided for in the Supplemental Indenture relating to such Series. “Regular Record Date” means, with respect to the Series 2011A Bonds, the 15th day of the month preceding any Interest Payment Date, whether or not a Business Day.
“S&P” means Standard & Poor’s Ratings Services, a Division of The McGraw-Hill Companies, Inc., and its successors and assigns, and if such entity will be dissolved or liquidated or will no longer performs the functions of a securities rating agency, “S&P” will be deemed to refer to any other nationally recognized securities rating agency designated by the State by notice to the Trustee.
“Third Supplemental Trust Indenture” means the Third Supplemental Trust Indenture, dated as of February 1, 2011, between the State and U. S. Bank National Association, as Trustee authorizing the issuance of the Series 2011A Bonds.
“Serial Bonds” means the Bonds of any Series that are stated to mature in consecutive annual installments.
“Series” means all of the Bonds designated as being of the same series.
“Series 2011A Bonds” means the State’s Capital Improvement Limited Obligation Bonds, Series 2011A, dated as of the date of their delivery.
“Series 2011A Subaccount of the Interest Account” means the subaccount created and so designated by the Third Supplemental Trust Indenture.
C-4 “Series 2011A Subaccount of the Principal Account” means the subaccount created and so designated by the Third Supplemental Trust Indenture.
“Series 2011A Subaccount of the Redemption Account” means the subaccount created and so designated by the Third Supplemental Trust Indenture.
“Series 2011A Subaccount of the Sinking Fund Account” means the subaccount created and so designated by the Third Supplemental Trust Indenture.
“Sinking Fund Account” means the account in the Bond Fund created and so designated by the provisions of the Trust Indenture.
“Sinking Fund Requirement” means, with respect to any Series of Bonds, the Sinking Fund Requirement provided in the Supplemental Indenture relating to such Series.
“Special Record Date” means a date fixed by the Trustee for determining the Owner of Bonds for the payment of Defaulted Interest pursuant to the Trust Indenture.
“State” means the State of North Carolina.
“Supplemental Indenture” means a supplemental trust indenture executed and delivered by the State authorizing the issuance of any particular Series of Bonds that is required to be executed and delivered by the Trust Indenture prior to the issuance of any such Series.
“Term Bonds” means the Bonds of any Series, other than Serial Bonds, that are designated as such in the Supplemental Indenture for such Series.
“Trust Indenture” means the Trust Indenture and any supplement and amendment thereto permitted thereby.
“Trustee” means the Trustee serving as such under the Trust Indenture, whether original or successor.
SUMMARY OF THE TRUST INDENTURE
Details of Bonds
Each Bond will bear interest from the Interest Payment Date next preceding the date on which it is authenticated unless it is (a) authenticated upon an Interest Payment Date, in which event it will bear interest from such Interest Payment Date, or (b) authenticated prior to the first Interest Payment Date, in which event it will bear interest from its date or such later date as is specified in the Supplemental Indenture providing for its issuance; provided, however, that if at the time of authentication of any Bond interest is in default, such Bond will bear interest from the date to which interest has been paid.
Unless provided to the contrary in a Supplemental Indenture, and as permitted by law, the principal of and the interest and premium, if any, on the Bonds will be payable in any coin or currency of the United States of America that is legal tender for the payment of public and private debts on the respective dates of payment thereof. The payment of interest on each Bond will be made (a) by the Bond Registrar on each Interest Payment Date to the person appearing on the registration books of the Bond Registrar as the registered owner thereof as of the Regular Record Date by check mailed to the registered owner at his address as it appears on such registration books, or (b) by such additional or alternative means as is provided in any Supplemental Indenture providing for the issuance of such Bond. Unless otherwise provided in a Supplement Agreement, payment of the principal of all Bonds will be made upon the presentation and surrender of such Bonds at the
C-5 principal corporate trust office of the Bond Registrar as the same become due and payable (whether at maturity or by redemption, acceleration or otherwise).
Any interest on any Bond of any Series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called “Defaulted Interest”) will forthwith cease to be payable to the Owner on the relevant Regular Record Date solely by virtue of such Owner having been such Owner; and such Defaulted Interest may be paid by the State, at its election in each case, as described in paragraphs (a) or (b) below:
(a) The State may elect to make payment of any Defaulted Interest on the Bonds of any Series to the persons in whose names such Bonds (or their respective Prior Bonds) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which will be fixed in the following manner. The State will notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Bond and the date of the proposed payment (which date will be such as will enable the Trustee to comply with the next sentence hereof), and at the same time, the State will deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or will make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as provided in the Trust Indenture. Thereupon, the Trustee will fix a Special Record Date for the payment of such Defaulted Interest which will be not more than fifteen (15) nor less than ten (10 days prior to the date of the proposed payment and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment. The Trustee will promptly notify the State of such Special Record Date and, in the name and at the expense of the State, will cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Owner at his address as it appears in the registration books maintained under the Trust Indenture not less than ten (10) days prior to such Special Record Date. The Trustee may, in its discretion, in the name and at the expense of the State, cause a similar notice to be published at least once in (i) a financial journal distributed in the Borough of Manhattan, City and State of New York, and (ii) a newspaper of general circulation in the County of Wake, North Carolina, but such publication will not be a condition precedent to the establishment of such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest will be paid to the persons in whose names the Bonds (or their respective Prior Bonds) are registered on such Special Record Date and will no longer be payable pursuant to the Trust Indenture as described in paragraph (b) below.
(b) The State may make payment of any Defaulted Interest on the Bonds of any Series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Bonds may be listed and upon such notice as may be required by such exchange, if, after notice given by the State to the Trustee of the proposed payment pursuant to the Trust Indenture, such payment will be deemed practicable by the Trustee.
Subject to the foregoing described provisions, each Bond delivered under the Trust Indenture upon transfer of or in exchange for or in lieu of any other Bond will carry all the rights to interest accrued and unpaid, and to accrue, which were carried by such other Bond and each such Bond will bear interest from such date, that neither gain nor loss in interest will result from such transfer, exchange or substitution.
Exchange of Bonds
Bonds, upon surrender thereof at the designated corporate trust office of the Bond Registrar, together with an assignment duly executed by the Owner or his attorney or legal representative, or legal representative of his estate if the Owner is deceased, in such form as will be satisfactory to the Bond Registrar, may, at the option of the Owner thereof, be exchanged for an equal aggregate principal amount of Bonds of the same Series and maturity, of any denomination or denominations
C-6 authorized by the Supplemental Indenture pursuant to which such Bonds were issued, bearing interest at the same rate and in the same form as the Bonds surrendered for exchange.
The State will make provision for the exchange of Bonds at the designated corporate trust office of the Bond Registrar.
Transfer and Registration of Transfer of Bonds
Unless provided to the contrary in a Supplemental Indenture, and as permitted by law, the Bond Registrar will keep books for the registration and the registration of transfer of the Series of Bonds as to which it is Bond Registrar as provided in the Trust Indenture. The registration books will be available at all reasonable times for inspection by the State and any Owner of such Bonds and may be copied by either of the foregoing and their agents or representatives.
The Bond Registrar will evidence acceptance of the duties, responsibilities and obligations of the Bond Registrar under the Trust Indenture and the applicable Supplemental Indenture by the execution of the certificate of authentication on the related Series of Bonds.
The transfer of any Bond may be registered only upon the books kept for the registration and registration of transfer of Bonds upon presentation thereof to the Bond Registrar together with an assignment duly executed by the Owner or his attorney or legal representative, or legal representative of his estate if the Owner is deceased, in such form as will be satisfactory to the Bond Registrar. No transfer of any Bond will alter the ownership of such Bond for purposes of the Trust Indenture unless such transfer is registered with the Bond Registrar. Upon any such registration of transfer, the State will, if necessary, execute and the Bond Registrar will authenticate and deliver in exchange for such Bond a new Bond or Bonds, registered in the name of the transferee, of any denomination or denominations authorized by the Supplemental Indenture pursuant to which such Bond was issued, in the aggregate principal amount equal to the principal amount of such Bond surrendered or exchanged, of the same maturity and bearing interest at the same rate.
In all cases in which Bonds will be exchanged or the transfer of Bonds will be registered under the Trust Indenture, the State will, if necessary, execute and the Bond Registrar will authenticate and deliver at the earliest practicable time Bonds in accordance with the provisions of the Trust Indenture. All Bonds surrendered in any such exchange or registration of transfer will forthwith be canceled by the Bond Registrar. No service charge will be made for any registration, transfer or exchange of Bonds, but the State and the Bond Registrar may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Bonds. Unless otherwise required by the applicable Supplemental Indenture, neither the State nor the Bond Registrar will be required (a) to issue, transfer or exchange Bonds during a period beginning at the opening of business fifteen (15) days before the day of the mailing of a notice of redemption of Bonds and ending at the close of business on the day of such mailing or (b) to transfer or exchange any Bond so selected for redemption in whole or in part.
Effect of Calling for Redemption
On or before the date upon which Bonds are to be redeemed, the State will deposit with the Trustee or Bond Registrar money or Defeasance Obligations, or a combination of both, that will be sufficient to pay on the redemption date the Redemption Price of and interest accruing on the Bonds to be redeemed on such redemption date.
On the date fixed for redemption, notice having been given in the manner and under the conditions provided in the Trust Indenture, the Bonds or portions thereof called for redemption will be due and payable at the Redemption Price provided therefor, plus accrued interest to such date, and if moneys sufficient to pay the Redemption Price of the Bonds or portions thereof to be redeemed plus accrued interest thereon to the date of redemption are held by the Trustee or Bond Registrar in trust for the Owners of Bonds to be redeemed, interest on the Bonds or portions thereof called for
C-7 redemption will cease to accrue; such Bonds or portions thereof will cease to be entitled to any benefits or security under the Trust Indenture or to be deemed Outstanding; and the Owners of such Bonds or portions thereof will have no rights in respect thereof except to receive payment of the Redemption Price thereof, plus accrued interest to the date of redemption.
Bonds and portions of Bonds for which irrevocable instructions to pay on one or more specified dates or to call for redemption on any one or more dates as determined by the State have been given to the Trustee or Bond Registrar in form satisfactory to it will not thereafter be deemed to be Outstanding under the Trust Indenture and will cease to be entitled to the security of or any rights under the Trust Indenture, and the Owners will have no rights in respect of the same other than to receive payment of the principal or Redemption Price thereof and accrued interest thereon, to be given notice of redemption in the manner provided in the Trust Indenture, and to the extent hereinafter provided, to receive Bonds for any unredeemed portions of Bonds if money or Defeasance Obligations (that have maturity dates or redemption dates which, at the option of the holder of such Defeasance Obligations, will not be later than the date or dates on which moneys will be required to effect such payment or redemption), or a combination of both, sufficient to pay the principal or Redemption Price of such Bonds or portions thereof, together with accrued interest thereon to the date upon which such Bonds are to be paid or redeemed, are held in separate accounts by the Trustee or Bond Registrar in trust for the Owners of such Bonds.
Any Supplemental Indenture may provide that any notice of redemption, except a notice of redemption in respect of a Sinking Fund Requirement, may state that the redemption to be effected is conditioned upon the receipt by the Trustee or Bond Registrar on or prior to the redemption date of moneys sufficient to pay the principal of and premium, if any, and interest on the Bonds to be redeemed, and that if such moneys are not so received, such notice will be of no force or effect and such Bond will not be required to be redeemed. In the event that such notice contains such a condition and moneys or Defeasance Obligations sufficient to pay the Redemption Price and interest on such Bonds are not received by the Trustee or Bond Registrar on or prior to the redemption date, the redemption will not be made and the Trustee or Bond Registrar will within a reasonable time thereafter give notice, in the manner in which the notice of redemption was given, that such moneys were not so received. The Supplemental Indenture may also provide for the giving of notice of insufficient money prior to the redemption date and such other provisions as the State may determine.
If less than all of an Outstanding Bond is selected for redemption, the Owner thereof or his attorney or legal representative, or legal representative of his estate if the Owner is deceased, will present and surrender such Bond to the Bond Registrar for payment of the principal amount thereof so called for redemption, and the redemption premium, if any, on such principal amount, and the State will, if necessary, execute and the Bond Registrar will authenticate and deliver to or upon the order of such Owner or his attorney or legal representative, without charge, for the unredeemed portion of the principal amount of the Bond so surrendered, a new Bond of the same Series and maturity, bearing interest at the same rate and of any denomination or denominations authorized by Supplemental Indenture for such Bond.
Construction Funds
Each Supplemental Indenture may create a special fund with the Trustee and designate the fund the “State of North Carolina Capital Improvement Limited Obligation Bond 20___ Construction Fund.”
Payment of the Cost of the Projects will be made from the applicable Construction Fund. All payments from the Construction Funds will be subject to the provisions and restrictions set forth in the Trust Indenture and the State will not cause or agree to permit to be paid from the Construction Funds any sums except in accordance with such provisions and restrictions.
C-8 The State has granted to the Trustee for the benefit of the Owners of respective Series of Bonds a lien on and a security interest in all monies and securities in the Construction Fund relating to that Series of Bonds. The money in each Construction Fund will be held by the Trustee in trust and, pending application to the payment of the Cost of the Projects will, to the extent permitted by law, be subject to a lien and charge in favor of the Owners of the respective Series of Bonds issued and Outstanding under the Trust Indenture and will be held for the security of such Owners, except as otherwise provided in the Trust Indenture or in any Supplemental Indenture.
Establishment of Funds
In addition to the Construction Funds, there is established the State of North Carolina Capital Improvement Limited Obligation Bond Fund, in which there are established the Interest Account, the Principal Account, the Sinking Fund Account and the Redemption Account. The Bond Fund and the accounts and subaccounts therein will be established with and held by the Trustee.
The State has granted to the Trustee for the benefit of the Owners of Bonds a lien on and security interest in all monies and securities in the Bond Fund. The money in the Bond Fund and its accounts and subaccounts will be held in trust and applied as provided in the Trust Indenture and, pending such application, will be subject to a pledge, charge and lien in favor of the Owners of the respective Series of Bonds issued and Outstanding under the Trust Indenture and for the security of such Owners, except as otherwise provided in the Trust Indenture or in any Supplemental Indenture.
Each Supplemental Indenture will provide, to the extent applicable, for the creation of a separate subaccount within the Interest Account, the Principal Account, the Sinking Fund Account and the Redemption Account with respect to each Series of Bonds, which subaccounts will bear the designation of such Series of Bonds.
A Supplemental Indenture may provide for the creation of such other funds and accounts as the State may determine for the Series of Bonds authorized by such Supplemental Indenture.
Payment of Debt Service
Subject to the limitations described in the Trust Indenture, the State will make the following payments to the Trustee in the following manner and order:
(a) At such time or times as provided in the Supplemental Indentures, the State will deliver to the Trustee the amounts required by the Supplemental Indentures for deposit in the appropriate subaccounts of the Interest Account, provided that if there will not be sufficient money to satisfy all such deposits, such deposits will be made to each such subaccount of the Interest Account ratably according to the amount so required to be deposited or paid.
(b) At such time or times as provided in the Supplemental Indentures, the State will deliver to the Trustee the amounts required by the Supplemental Indentures for deposit in the appropriate subaccounts of the Principal Account and Sinking Fund Account, provided that if there will not be sufficient money to satisfy all such deposits, such deposits will be made to each such subaccount of the Principal Account and the Sinking Fund Account ratably according to the amount so required to be deposited or paid.
On or before the 45th day next preceding any date on which Serial Bonds are to mature or Term Bonds are to be redeemed pursuant to Sinking Fund Requirements therefor or are to mature, the State may satisfy all or a portion of its obligation to make the payments required above paragraphs (a) and (b) by delivering to the Trustee Serial Bonds maturing or Term Bonds maturing or required to be redeemed on such date. The price paid to purchase any such Bond, including accrued interest to the date of purchase, will not exceed the principal or Redemption Price plus accrued interest to the date of purchase. Upon such delivery, the State will receive a credit against amounts required to be
C-9 deposited into the Interest Account and the Principal Account or Sinking Fund Account, as the case may be, on account of such Bonds with respect to all interest payments for the remainder of the Fiscal Year and in the amount of 100% of the principal amount of any such Serial Bonds or Term Bonds so delivered.
Application of Money in Interest Account
Not later than 10:00 A.M. on each Interest Payment Date, the date for the payment of Defaulted Interest or date upon which Bonds are to be redeemed, or on such other date as may be specified in the applicable Supplemental Indenture, the Trustee will withdraw from the applicable subaccount in the Interest Account and wire transfer to the Bond Registrar, in Federal Reserve or other immediately available funds, the amounts required for paying interest on the respective Bonds on such Interest Payment Date. The Bond Registrar will remit or otherwise set aside the amount due and payable to the Owners as provided in the Supplemental Indentures.
Unless otherwise provided by a Supplemental Indenture, on the date of issuance of any Series of Bonds, an Authorized Officer will deliver to the Trustee a schedule of payments to be made on Interest Payment Date from the applicable subaccount of the Interest Account to the Bond Registrar for the payment of financed interest.
Unless otherwise provided by a Supplemental Indenture, if the State fails to deposit with the Trustee the amounts required to be deposited in the Interest Account as provided in the Trust Indenture, or if the balance in the Interest Account on the Business Day next preceding an Interest Payment Date is insufficient to pay interest becoming due on the Bonds on such Interest Payment Date, the Trustee will notify the State of the amount of the deficiency and request the State to immediately cure such deficiency.
Application of Money in Principal Account
Not later than 10:00 A.M. on each principal payment date, the Trustee will withdraw from the applicable subaccount in the Principal Account and wire transfer to the Bond Registrar, in Federal Reserve or other immediately available funds, the amount necessary to pay the principal of such Bonds at their respective maturities. The Bond Registrar will remit or otherwise set aside the amount due and payable to the Owners as provided in the Supplemental Indentures.
If on any date there is money in the Principal Account and no Serial Bonds are then Outstanding or if on any principal payment date money remains therein after the payment of the principal of Serial Bonds then due, the Trustee will withdraw such money therefrom and will apply the same in the following order: (a) deposit into the Sinking Fund Account the amount then required to be paid thereto by the State pursuant to the Trust Indenture and (b) deliver all remaining amounts to the State.
Unless otherwise provided in a Supplemental Indenture, if the State fails to deposit with the Trustee the amounts required to be deposited in the Principal Account as provided in the Trust Indenture, or if the balance in the Principal Account on the Business Day next preceding a principal payment date is insufficient to pay principal coming due on the Serial Bonds on such principal payment date, the Trustee will notify the State of the amount of the deficiency and request the State to immediately cure such deficiency.
Application of Money in the Sinking Fund Account
Money held for the credit of the subaccounts in the Sinking Fund Account will be applied to the retirement, purchase, redemption or payment of Term Bonds in the manner provided in the applicable Supplemental Indenture. Unless otherwise provided in a Supplemental Indenture, if the State fails to deposit with the Trustee the amount required to be deposited in the Sinking Fund Account as provided in the Trust Indenture, or if the balance in the Sinking Fund Account on the
C-10 Business Day next preceding a sinking fund payment date is insufficient to retire Term Bonds on such date as required by a Supplemental Indenture, the Trustee will notify the State of the amount of the deficiency and request the State to immediately cure such deficiency.
Application of Money in the Redemption Account
The Trustee will apply money in the Redemption Account to the purchase or redemption of Bonds as follows:
(a) Subject to the provisions of paragraph (c) below, and if instructed to do so by an Authorized Officer, the Trustee will endeavor to purchase and cancel Bonds or portions thereof, whether or not such Bonds or portions thereof are then subject to redemption, at the direction of an Authorized Officer, provided that the purchase price of each Bond, plus accrued interest to the date of purchase, will not exceed the Redemption Price that would be payable on the next redemption date to the Owners of such Bonds under the provisions of the applicable Supplemental Indenture plus accrued interest to the redemption date if such Bond or such portion thereof were called for redemption on such redemption date from the money in the applicable subaccount of the Redemption Account. The Trustee will pay the interest accrued on such Bonds or portions thereof to the date of settlement from the applicable subaccount of the Interest Account and the purchase price from the applicable subaccount of the Redemption Account, but no such purchase will be made by the Trustee from money in the applicable subaccount of the Redemption Account within the period of 45 days immediately preceding any date on which such Bonds or portions thereof are to be redeemed except from moneys other than the moneys set aside in the applicable subaccount of the Redemption Account for the redemption of Bonds.
(b) Subject to the provisions of paragraph (c) below, the Trustee will call for redemption on a date permitted by the applicable Supplemental Indenture such amount of Bonds or portions thereof as, with the redemption premium, if any, will exhaust the moneys then held in the applicable subaccount of the Redemption Account as nearly as may be; provided, however, that not less than $50,000 principal amount of Bonds will be called for redemption at any one time unless the Trustee is so instructed by the State. The Trustee will pay the accrued interest on the Bonds or portions thereof to be redeemed to the date of redemption from the applicable subaccount of the Interest Account and the Redemption Price of such Bonds or portions thereof from the applicable subaccount of the Redemption Account. On or before the redemption date, the Trustee will withdraw from the applicable subaccount of the Redemption Account and the applicable subaccount of the Interest Account and transfer to the Bond Registrar the respective amounts required to pay the Redemption Price and accrued interest to the redemption date of the Bonds or portions thereof so called for redemption.
(c) Money in the Redemption Account may be applied by the Trustee in each Fiscal Year to the purchase or the redemption of Bonds of any one or more Series then Outstanding in accordance with the latest Officer’s Certificate filed with the Trustee (i) designating one or more Series of Bonds to be purchased or redeemed, (ii) if more than one Series of Bonds is so designated, setting forth the aggregate principal amount of Bonds of each Series to be purchased or redeemed, and (iii) unless the Supplemental Indenture relating to the Bonds to be redeemed specifies the order of redemption, designating the Bonds to be redeemed within each Series, and if such Bonds are Term Bonds, the years in which future Sinking Fund Requirements are to be reduced as a result of such redemption and the amount of such reduction in each such year. In the event no such certificate is filed and unless the Supplemental Indenture relating to the Bonds to be redeemed specifies otherwise, (A) the Trustee will apply such money to the purchase of one or more Series of Bonds as it will determine or to the redemption of Bonds bearing the highest rate of interest, (B) if Bonds of more than one maturity bear the same interest rate, the Trustee will redeem such Bonds in the inverse order of maturities, and (C) if the Bonds bearing the highest rate of interest are Term Bonds, the Trustee will reduce Sinking Fund Requirements for such Term Bonds in inverse order of the scheduled redemption of such Term Bonds. All Bonds will be redeemed as provided in the applicable Supplemental Indenture.
C-11 Investment of Money
Money held for the credit of all funds, accounts and subaccounts will be continuously invested and reinvested by the Trustee in Investment Obligations or held as cash to the extent investment or reinvestment in Investment Obligations is not practicable. Except as provided in the Trust Indenture with respect to the disposition of investment income, the particular investments to be made and other related matters in respect of investments may, as to each Series of Bonds, be provided in the applicable Supplemental Indenture. Investment Obligations will mature or be redeemable at the option of the holder thereof not later than the respective dates when the money held for the credit of such funds, accounts and subaccounts will be required for the purposes intended.
Notwithstanding the foregoing, no Investment Obligations pertaining to any Series in any fund, account or subaccount will mature on a date beyond the latest maturity date of the respective Series of Bonds Outstanding at the time such Investment Obligations are deposited. For purposes of this paragraph, the maturity date of any repurchase agreement will be deemed to be the stated maturity date of such agreement and not the maturity dates of the underlying obligations.
Investment Obligations acquired with money in or credited to any fund, account or subaccount established under the Trust Indenture will be deemed at all times to be part of such fund, account or subaccount. Any loss realized upon the disposition or maturity of such Investment Obligations will be charged against such funds, accounts or subaccounts. The interest accruing on any such Investment Obligations and any profit realized upon the disposition or maturity of such Investment Obligations will be credited to such funds, accounts or subaccounts.
Any such interest accruing and any such profit realized will be transferred upon the receipt thereof by the Trustee pursuant to the provisions of the Trust Indenture.
Whenever a transfer of money between two or more of the funds, accounts or subaccounts established under the Trust Indenture is permitted or required, such transfer may be made as a whole or in part by transfer of one or more Investment Obligations at a value determined at the time of such transfer in accordance with the Trust Indenture, provided that the Investment Obligations transferred are those in which money of the receiving fund, account or subaccount could be invested at the date of such transfer.
For purposes of making any investment under the Trust Indenture, the Trustee may consolidate money held by it in any fund, account or subaccount with money in any other fund, account or subaccount. Transfers from any fund, account or subaccount to the credit of any other fund, account or subaccount provided for in the Trust Indenture may be effectuated on the books and records of the Trustee, the State without any actual transfer of funds or liquidation of investments. Investment Obligations purchased with consolidated funds will be allocated to each fund, account or subaccount on a pro rata basis in accordance with the initial amount so invested from each such fund, account or subaccount.
Unless otherwise directed by the State, Investment Obligations may be purchased by the Trustee through its own investment division or other bank facilities established for such purpose.
The Trustee will sell or reduce to cash a sufficient amount of such Investment Obligations whenever it is necessary to do so to provide money to make any payment from any such fund, account or subaccount. The Trustee will not be liable or responsible for any loss resulting from any such action.
C-12 Security for Deposits
Any and all money deposited with the Trustee will be trust funds under the terms of the Trust Indenture, and, with the exception of the Construction Funds and the Bond Fund, will not be subject to any lien or attachment by any creditor of the State.
All money deposited with the Trustee will be credited to the particular fund, account or subaccount to which such money belongs.
Valuation
For the purpose of determining the amount on deposit in any fund, account or subaccount, Investment Obligations in which money in such fund, account or subaccount is invested will be valued by the Trustee (a) at face value if such Investment Obligations mature within twelve (12) months from the date of valuation thereof and (b) if such Investment Obligations mature more than twelve (12) months after the date of valuation thereof, at the price at which such Investment Obligations are redeemable by the holder at its option, if so redeemable, or, if not so redeemable, at the lesser of (i) the cost of such Investment Obligations minus the amortization of any premium or plus the amortization of any discount thereon and (ii) the market value of such Investment Obligations.
All Investment Obligations in all of the funds, accounts and subaccounts created under the Trust Indenture will be valued as of the last day of each Fiscal Year. When a valuation is made by the Trustee, the Trustee will report the result of such valuation to the State within 30 days after such valuation. In addition, Investment Obligations will be valued at any time requested by the State on reasonable notice to the Trustee (which period of notice may be waived or reduced by the Trustee); provided, however, that the Trustee will not be required to value Investment Obligations more than once in any calendar month.
Payment of Bonds; Limited Obligation; Budgeting
The State will cause to be paid, when due, the principal of (whether at maturity, by acceleration, by call for redemption or otherwise) and the premium, if any, and interest on the Bonds at the places, on the dates and in the manner provided in the Trust Indenture and in the Bonds and the documentation securing such Bonds, according to the true intent and meaning thereof. The Bonds are limited obligations of the State payable during any Fiscal Year solely from funds appropriated for that purpose by the General Assembly of the State in its discretion, and money and Investment Obligations held in the applicable funds, accounts and subaccounts created under the Trust Indenture for each Series of Bonds and the income from Investment Obligations in such funds, accounts and subaccounts.
The Governor of the State (or any other officer at any time charged with the responsibility of formulating budget proposals) will (1) include the principal and interest on the Bonds coming due in each Fiscal Year in the corresponding annual budget request to the General Assembly of the State and (2) if the General Assembly does not include such amounts in the State’s budget, the State will deliver notice to the Trustee, S&P, Moody’s and Fitch within five days after the adoption by the General Assembly of the State’s budget. Nothing contained in the Trust Indenture obligates the State to appropriate moneys contained in the proposed budget for the payment of principal and interest on the Bonds.
Events of Default
Each of the following events is an Event of Default under the Trust Indenture:
(a) payment of the principal of and the redemption premium, if any, on any of the Bonds is not made when the same are due and payable, either at maturity or by redemption or otherwise;
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(b) payment of the interest on any of the Bonds is not made when the same is due and payable;
(c) the State fails to budget and appropriate moneys sufficient to pay all the principal and interest on the Bonds coming due in any Fiscal Year.
Acceleration
Upon the happening and continuance of any Event of Default, then and in every case the Trustee may, and upon the written request of the Owners of not less than 25% in aggregate principal amount of the Bonds then Outstanding will, by a notice in writing to the State, declare the principal of all the Bonds then Outstanding (if not then due and payable) to be due and payable immediately, and upon such declaration the same will become and be immediately due and payable, anything contained in the Bonds or the Trust Indenture to the contrary notwithstanding; provided, however, that if at any time after the principal of the Bonds will have been so declared to be due and payable, and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, or before the completion of the enforcement of any other remedy under the Trust Indenture, moneys will have accumulated in the Bond Fund sufficient to pay the principal of all matured Bonds and all arrears of interest, if any, upon all the Bonds then Outstanding (except the principal of any Bonds not then due and payable by their terms and the interest accrued on such Bonds since the last interest payment date and sufficient to satisfy the sinking fund requirement, if any, for any Term Bonds then Outstanding, for the then current Fiscal Year, and the charges, compensation, expenses disbursements, advances and liabilities of the Trustee and all other amounts then payable by the State will have been paid or a sum sufficient to pay the same will have been deposited with the Trustee or the appropriate Bond Registrar, and every other default known to the Trustee in the observance or performance of any covenant, condition, agreement or provision contained in the Bonds or the Trust Indenture (other than a default in the payment of the principal of such Bonds then due and payable only because of a declaration of acceleration) will have been remedied to the satisfaction of the Trustee, then and in every such case the Trustee may, and upon the written request of the Owners of not less than 25% in aggregate principal amount of the Bonds not then due and payable by their terms and then Outstanding will, by written notice to the State, rescind and annul such declaration and its consequences, but no such rescission or annulment will extend to or affect any subsequent Event of Default or impair any right consequent thereon.
Notwithstanding the provisions of the foregoing paragraph, if a Bond Insurer providing a Bond Insurance Policy or a Credit Provider providing a Credit Facility for an entire Series of Bonds has not failed to comply with its respective payment obligations under such Bond Insurance Policy or Credit Facility, any acceleration of such Series of Bonds, or any annulment of such acceleration, will be subject to the prior written consent of such Bond Insurer or such Credit Provider, but only if the relevant Supplemental Indenture confers such right of prior written consent; provided, however, that failure of such Bond Insurer or Credit Provider to give such consent will not affect the acceleration, or annulment of acceleration, of any other Series of Bonds in the manner provided above.
Additional Remedies on Default
Upon the happening and continuance of any Event of Default then and in every such case the Trustee may, and upon the written request of the Owners of not less than 25% in aggregate principal amount of the Bonds then Outstanding will proceed (subject to the requirements of prior indemnification) to protect and enforce its rights and the rights of the Owners of the Bonds under applicable laws and under the Trust Indenture by such suits, actions or special proceedings in equity or at law, or by proceedings in the office of any board or officer having jurisdiction, either for the specific performance of any covenant or agreement or in aid or execution of any power granted or for the enforcement of any proper legal or equitable remedy, as the Trustee, being advised by counsel, chosen by the Trustee, will deem most effectual to protect and enforce such rights.
C-14 Pro Rata Application of Funds
Anything in the Trust Indenture to the contrary notwithstanding, if at any time the money in the Interest Account, the Principal Account and the Sinking Fund Account is not sufficient to pay the interest on or the principal of the Bonds as the same become due and payable (either by their terms or by acceleration), such money, together with any money then available or thereafter becoming available for such purposes (except for such money that has already been deposited in subaccounts of the Interest Account, Principal Account or Sinking Fund Account for a particular Series of Bonds pursuant to the Trust Indenture), whether through the exercise of the remedies provided for in the Trust Indenture or otherwise, will be applied, after payment of the reasonable fees and expenses of the Trustee in exercising its rights and remedies under the Trust Indenture, as follows:
(a) if the principal of all Series of Bonds will not have become or will not have been declared due and payable, all such money will be applied as follows:
first: to the payment to the persons entitled thereto of all installments of interest on Bonds then due and payable in the order in which such installments became due and payable and, if the amount available will not be sufficient to pay in full any particular installment, then to the payment, ratably according to the amounts due on such installments, to the persons entitled thereto, without any discrimination or preference except as to any difference in the respective rates of interest specified in such Bonds;
second: to the payment to the persons entitled thereto of the unpaid principal of any Bonds that will have become due and payable (other than Bonds deemed to have been paid pursuant to the provisions of the Trust Indenture), in the order of their due dates, with interest on the overdue principal at a rate equal to the rate on such Bonds, and, if the amount available will not be sufficient to pay in full all of the amounts due on the Bonds on any date, together with such interest, then to the payment ratably according to the amount of such principal due on such date, to the persons entitled thereto, without any discrimination or preference; and
third: to the payment of the interest on and the principal of Bonds, to the purchase and retirement of Bonds, and to the redemption of Bonds, all in accordance with the provisions of the Trust Indenture.
(b) If the principal of all of the Series of Bonds will have become or will have been declared due and payable, all such money will be applied to the payment of principal and interest then due upon such Bonds, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto without any discrimination or privilege.
(c) If the principal of all of the Series of Bonds will have been declared due and payable and if such declaration will thereafter have been rescinded and annulled, then, subject to the provisions of paragraph (b) above in the event that the principal of all of the Series of Bonds will later become due and payable or be declared due and payable, the money then remaining in and thereafter accruing to the Bond Fund will be applied in accordance with the provisions of paragraph (a) above.
Control of Proceeding; Restrictions Upon Action; Notice of Default
Anything in the Trust Indenture to the contrary notwithstanding, the Owners of a majority in aggregate principal amount of Bonds at any time Outstanding will have the right, subject to the prior indemnification of the Trustee, by an instrument or concurrent instruments in writing executed and delivered to the Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Trustee under the Trust Indenture, provided that such direction will be in accordance with law and the provisions of the Trust Indenture.
C-15 Except as provided in the Trust Indenture, no Owner of Bonds will have any right to institute any suit, action or proceeding in equity or at law on any Bonds or for the execution of any trust under the Trust Indenture or for any other remedy under the Trust Indenture unless such Owner of Bonds previously (a) has given to the Trustee written notice of the Event of Default on account of which suit, action or proceeding is to be instituted, (b) has requested the Trustee to take action after the right to exercise such powers or right of action, as the case may be, will have accrued, (c) has afforded the Trustee a reasonable opportunity either to proceed to exercise the powers granted by the Trust Indenture or to institute such action, suit or proceedings in its or their name, and (d) has offered to the Trustee reasonable security and satisfactory indemnity against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee has refused or neglected to comply with such request within a reasonable time. Notwithstanding the foregoing and without complying therewith, the Owners of not less than 25% in aggregate principal amount of Bonds then Outstanding may institute any such suit, action or proceeding in their own names for the benefit of all Owners of Bonds. No one or more Owners of Bonds will have any right in any manner whatsoever by his or their action to affect, disturb or prejudice rights under the Trust Indenture or to enforce any right thereunder except in the manner provided by the Trust Indenture, that all proceedings at law or in equity will be instituted, had and maintained in the manner provided in the Trust Indenture and for the benefit of all Owners of Bonds and that any individual rights of action or other right given to one or more of such Owners by law are restricted by the Trust Indenture to the rights and remedies provided therein.
The Trustee will mail all Owners at their addresses as they appear on the registration books written notice of the occurrence of any Event of Default within 30 days after the Trustee has knowledge or notice that any such Event of Default has occurred. The Trustee will not be subject to any liability to any Owner by reason of its failure to mail any such notice.
Concerning the Trustee
Prior to the occurrence of any Event of Default and after the curing of all such Events of Default that may have occurred, the Trustee will perform such duties and only such duties of the Trustee as are specifically set forth in the Trust Indenture. Upon the occurrence and during the continuation of any Event of Default, the Trustee will use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.
No provision of the Trust Indenture will be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that:
(a) prior to any such Event of Default, and after the curing of any Event of Default that may have occurred:
(i) the duties and obligations of the Trustee will be determined solely by the express provisions of the Trust Indenture, and the Trustee will not be liable except for the performance of such duties and obligations of the Trustee as are specifically set forth in the Trust Indenture, and no implied covenants or obligations will be read into the Trust Indenture against the Trustee and no permissive right of the Trustee under the Trust Indenture will impose any duty on the Trustee to take such action, and
(ii) in the absence of willful misconduct on its part, the Trustee may conclusively rely, as to the accuracy of the statements and the correctness of the opinions expressed therein, upon any certificate or opinion furnished to it conforming to the requirements of the Trust Indenture, but in the case of any such certificate or opinion which by any provision of the Trust Indenture is specifically required to be furnished to the Trustee, the Trustee will be under a duty to examine the same to determine whether or not on its face it conforms to the requirements of the Trust Indenture; and
C-16 (b) at all times, regardless of whether or not any such Event of Default will exist:
(i) the Trustee will not be liable for any error of judgment made in good faith by a responsible officer or officers of the Trustee unless it will be proved that the Trustee was negligent in ascertaining the pertinent facts, and
(ii) the Trustee will not be liable with respect to any action taken or omitted to be taken by it in accordance with the direction of the Owners of not less than 25% or a majority, as the Trust Indenture will require, in aggregate principal amount of the Bonds then Outstanding relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any power conferred upon the Trustee under the Trust Indenture.
None of the provisions contained in the Trust Indenture will require the Trustee to expend or risk its own funds or otherwise incur individual financial liability in the performance of any of its duties or in the exercise of any of its rights or powers.
The Trustee will be under no obligation to institute any suit or to take any remedial proceeding (including, but not limited to, the appointment of a receiver or the acceleration of the maturity date of any or all Bonds under the Trust Indenture) or to enter any appearance or in any way defend in any suit in which it may be made defendant, or to take any steps in the execution of any of the trusts created or in the enforcement of any rights and powers, until it will be indemnified to its satisfaction against any and all costs and expenses, outlays and counsel fees and other reasonable disbursements, and against all liability. The Trustee nevertheless may begin suit, or appear in and defend suit, or do anything else in its judgment proper to be done by it as such Trustee, without indemnity, and in such case the State, at the request of the Trustee, will reimburse the trustee for all costs, expenses, outlays and counsel fees and other reasonable disbursements properly incurred in connection therewith. If the State fails to make such reimbursement, the Trustee may reimburse itself from any money in its possession under the provisions of the Trust Indenture and will be entitled to a preference therefor over any Bonds Outstanding.
The Trustee will be under no obligation to effect or maintain insurance or to renew any policies of insurance or to inquire as to the sufficiency of any policies of insurance carried by the State, or to report, or make or file claims or proof of loss for, any loss or damage insured against or that may occur, or to keep itself informed or advised as to the payment of any taxes or assessments, or to require any such payment to be made. Except as to the acceptance of the trusts under the Trust Indenture the Trustee will have no responsibility in respect of the validity or sufficiency of the Trust Indenture, or in respect of the validity of Bonds or the due execution or issuance thereof. The Trustee will be under no obligation to see that any duties therewith imposed upon the State, any Bond Registrar or any party other than itself, or any covenants contained in the Trust Indenture on the part of any party other than itself to be performed, will be done or performed, and the Trustee will be under no obligation for failure to see that any such duties or covenants are so done or performed.
The Trustee will not be liable or responsible because of the failure of the State or of any of its employees or agents to make any collections or deposits or to perform any act required of the State. The Trustee will not be responsible for the application of any of the proceeds of Bonds or any other money deposited with it and invested, paid out, withdrawn or transferred under the Trust Indenture if such application, investment, payment, withdrawal or transfer will be made in accordance with the provisions of the Trust Indenture.
Subject to the acceptance of appointment by a successor Trustee, the Trustee may resign and thereby become discharged from the trusts created by the Trust Indenture, by notice in writing given to the State, and mailed, postage prepaid, at the Trustee’s expense, to each Owner of Bonds, not less than 60 days before such resignation is to take effect, but such resignation will take effect immediately upon the appointment of a new Trustee if such new Trustee will be appointed before the time limited by such notice and will then accept the trusts under the Trust Indenture. The
C-17 immunities and exemptions from liability of the Trustee extend to its directors, officer, employees and agents.
Supplemental Trust Indentures
The State and the Trustee may, from time to time and at any time, execute and deliver supplemental trust indentures (which supplemental trust indentures will thereafter form a part of the Trust Indenture) as will be substantially consistent with the terms and provisions of the Trust Indenture and, in the opinion of the Trustee, who may rely upon a written opinion of legal counsel, will not materially and adversely affect the interest of the Owners:
(a) to cure any ambiguity or formal defect or omission, to correct or supplement any provision in the Trust Indenture that may be inconsistent with any other provision, to make any other provisions with respect to matters or questions arising under the Trust Indenture, or to modify, alter, amend, add to or rescind, in any particular, any of the terms or provisions contained in the Trust Indenture, or
(b) to grant or to confer upon the Trustee, for the benefit of the Owners, any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Owners or the Trustee, or
(c) to add to the provisions of the Trust Indenture other conditions, limitations and restrictions thereafter to be observed, or
(d) to add to the covenants and agreements of the State in the Trust Indenture other covenants and agreements thereafter to be observed by the State or to surrender any right or power therein reserved to or conferred upon the State, or
(e) to permit the qualification of the Trust Indenture under any federal statute now or hereafter in effect or under any state Blue Sky law, and, in connection therewith, if the State so determines, to add to the Trust Indenture or any supplemental trust indenture such other terms, conditions and provisions as may be permitted or required by such federal statute or Blue Sky law, or
(f) to provide for the issuance of Bonds in bearer form.
At least 30 days prior to the execution and delivery of any supplemental trust indenture for any of the purposes set forth above, the Trustee will cause a notice of the proposed execution and delivery of such supplemental trust indenture to be mailed, postage prepaid to all Owners of Bonds. Such notice will briefly set forth the nature of the proposed supplemental trust indenture and will state that copies thereof are on file at the designated corporate trust office of the Trustee for inspection by all Owners of Bonds. A failure on the part of the Trustee to mail such notice will not affect the validity of such supplemental trust indenture.
The Owners of not less than a majority in aggregate principal amount of the Bonds then Outstanding that will be affected by a proposed supplemental trust indenture will have the right, from time to time, anything contained in the Trust Indenture to the contrary notwithstanding, to consent to and approve the execution and delivery of such supplemental trust indentures as are deemed necessary or desirable by the State for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Trust Indenture or in any supplemental trust indenture; provided, however, that nothing contained in the Trust Indenture will permit, or be construed as permitting (a) an extension of the maturity of the principal of or the interest on any Bonds without the consent of the Owner of such Bond, (b) a reduction in the principal amount of any Bonds or the redemption premium or the rate of interest on any Bonds without the consent of the Owner of such Bond, (c) a preference or priority of any Bonds over any other Bonds without the consent of the Owners of all Bonds then Outstanding or (d) a reduction in
C-18 the aggregate principal amount of the Bonds required for consent to such supplemental trust indenture without the consent of the Owners of all Bonds then Outstanding.
If at any time the State and the Trustee determine that it is necessary or desirable to execute and deliver any supplemental trust indenture for any of the purposes of the preceding paragraph, the Trustee will cause notice of the proposed supplemental trust indenture to be mailed, postage prepaid, to all Owners at their addresses as they appear on the registration books and to all Owners in accordance with the related Supplemental Indenture as of the date of mailing such notice. Such notice will briefly set forth the nature of the proposed supplemental trust indenture and will state that copies thereof are on file at the principal corporate trust office of the Trustee for inspection by all Owners of Bonds. The Trustee will not, however, be subject to any liability to any Owner of Bonds by reason of its failure to cause the notice required by this paragraph to be mailed, and any such failure to cause the notice required by this paragraph to be mailed will not affect the validity of such supplemental trust indenture when consented to and approved as provided in the preceding paragraph.
Whenever, at any time within three (3) years after the date of the mailing of such notice, the State delivers to the Trustee an instrument or instruments in writing purporting to be executed by the Owners of not less than a majority in aggregate principal amount of Bonds then Outstanding that are affected by a proposed supplemental trust indenture, which instrument or instruments will refer to the proposed supplemental trust indenture described in such notice and will specifically consent to and approve the execution and delivery thereof in substantially the form of the copy thereof referred to in such notice, thereupon, but not otherwise, the State and the Trustee may execute and deliver such supplemental trust indenture in substantially such form, without liability or responsibility to any Owner of Bonds whether or not such Owner will have consented thereto.
Defeasance
When:
(a) the Bonds issued under the Trust Indenture will have become due and payable in accordance with their terms or otherwise as provided in the Trust Indenture, and the whole amount of the principal and the interest and premium, if any, so due and payable upon all Bonds will be paid, and
(b) if the Bonds will not have become due and payable in accordance with their terms, the Trustee or the Bond Registrar will hold, sufficient (i) money or (ii) Defeasance Obligations or a combination of (i) and (ii), the principal of and the interest on which, when due and payable, will provide sufficient money to pay the principal of, and the interest and redemption premium, if any, on all Bonds then Outstanding to the maturity date or dates of such Bonds or to the date or dates specified for the redemption thereof, as verified by a verification agent or independent certified public accountant, and there will have been delivered to the Trustee an opinion of nationally recognized bond counsel that such deposit of money or Defeasance Obligations will not adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds, and
(c) if Bonds are to be called for redemption, irrevocable instructions to call the Bonds for redemption will have been given by the State to the Trustee, and
(d) sufficient funds will also have been provided or provision made for paying all other obligations payable under the Trust Indenture by the State; then and in that case the right, title and interest of the Trustee in the funds, accounts and subaccounts under the Trust Indenture will thereupon cease, determine and become void and, upon being furnished with an opinion, in form and substance satisfactory to the Trustee, of counsel approved by the Trustee, to the effect that all conditions precedent to the release of the Trust Indenture have been satisfied, the Trustee will release the Trust Indenture and will execute such
C-19 documents to evidence such release as may be required by such counsel, and the Trustee will turn over to the State any surplus in, and all balances remaining in, all funds, accounts and subaccounts other than money held for the redemption or payment of Bonds. Otherwise, the Trust Indenture will be, continue and remain in full force and effect; provided, however, that in the event Defeasance Obligations will be deposited with and held by the Trustee or the Bond Registrar, (i) in addition to the requirements set forth in the Trust Indenture regarding the redemption of Bonds, the Trustee, within 30 days after such Defeasance Obligations will have been deposited with it, will cause a notice signed by the Trustee to be mailed, postage prepaid, to all Owners of Bonds, setting forth (a) the date or dates, if any, designated for the redemption of the Bonds, (b) a description of the Defeasance Obligations so held by it, and (c) that the Trust Indenture has been released in accordance with this paragraph, and (ii) (a) the Trustee will nevertheless retain such rights, powers and privileges under the Trust Indenture as may be necessary and convenient in respect of the Bonds for the payment of the principal, interest and any premium for which such Defeasance Obligations have been deposited and (b) each Bond Registrar will retain such rights, powers and privileges under the Trust Indenture as may be necessary and convenient for the registration, transfer and exchange of Bonds; provided, however, that failure to mail such notice to any Owner or to the Owners, or any defect in such notice so mailed, will not affect the validity of the release of the Trust Indenture.
All money and Defeasance Obligations held by the Trustee or any Bond Registrar for this purpose will be held in trust and applied to the payment, when due, of the obligations payable therewith.
SUMMARY OF THE THIRD SUPPLEMENTAL TRUST INDENTURE
Establishment of Construction Fund and Bond Fund Subaccounts
The Third Supplemental Trust Indenture establishes the State of North Carolina Capital Improvement Limited Obligation Bond 2011A Construction Fund (the “2011A Construction Fund”) and within it the Series 2011A Premium and Earnings Account. The original principal amount of the Series 2011A Bonds will be deposited into the 2011A Construction Fund, and any net original issue premium on the Series 2011A Bonds, and all earnings on amounts in the 2011A Construction Fund will be deposited to the Series 2011A Premium and Earnings Account. All amounts in the 2011A Construction Fund and that Account will be invested and disbursed as provided in the Trust Indenture.
The Third Supplemental Trust Indenture establishes the following subaccounts in the Bond Fund:
Series 2011A Subaccount of the Interest Account;
Series 2011A Subaccount of the Principal Account; and
Series 2011A Subaccount of the Redemption Account.
The fund, account and subaccounts mentioned above will be established with and held by the Trustee pursuant to the Trust Indenture and the Third Supplemental Trust Indenture.
Payments by the State
The State will, subject to the limitations of the Trust Indenture, deposit or cause to be deposited with the Trustee the following amounts, and the Trustee will apply such amounts to the various subaccounts specified herein in the following order:
(a) into the Series 2011A Subaccount of the Interest Account, on or before each Interest Payment Date, the interest payable on the Series 2011A Bonds on such Interest Payment Date; and
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(b) into the Series 2011A Subaccount of the Principal Account, on or before each May 1, the principal of all Series 2011A Bonds coming due on such May 1.
In addition, the Trustee will deposit to the Series 2011A Subaccount of the Redemption Account all amounts delivered to the Trustee by the State from time to time with instructions that such amounts be so deposited.
Application of Money in the Series 2011A Subaccount of the Redemption Account
The Trustee will apply money in the Series 2011A Subaccount of the Redemption Account to the purchase or redemption of Series 2011A Bonds as follows:
Subject to the provisions of the last paragraph of this section, the Trustee will endeavor to purchase and cancel Series 2011A Bonds or portions thereof, regardless of whether such Bonds or portions thereof are then subject to redemption, at the direction of an Authorized Officer, provided that the purchase price of each Series 2011A Bond will not exceed the Redemption Price that would be payable on the next redemption date to the Owner of such Series 2011A Bond under the provisions of the Third Supplemental Trust Indenture, plus accrued interest to that redemption date. The Trustee will pay the interest accrued on such Bonds or portions thereof to the date of settlement from the Series 2011A Subaccount of the Interest Account and the purchase price from the Series 2011A Subaccount of the Redemption Account, but no such purchase will be made by the Trustee from money in the Series 2011A Subaccount of the Redemption Account within the period of forty-five (45) days immediately preceding any date on which such Series 2011A Bonds or portions thereof are to be redeemed.
Subject to the provisions described in the following paragraph, the Trustee will call for redemption on a date permitted by the Third Supplemental Trust Indenture such amount of Series 2011A Bonds or portions thereof as, with the redemption premium, if any, will exhaust the money then held in the Series 2011A Subaccount of the Redemption Account as nearly as may be practicable; provided, however, that not less than Fifty Thousand Dollars ($50,000) in principal amount of the Series 2011A Bonds will be called for redemption at any one time unless the Trustee is so instructed by the State. The Trustee will pay the accrued interest on the Series 2011A Bonds or portions thereof to be redeemed to the date of redemption from the Series 2011A Subaccount of the Interest Account and the Redemption Price of such Bonds or portions thereof from the Series 2011A Subaccount of the Redemption Account. The Trustee will withdraw from the Series 2011A Subaccount of the Redemption Account and set aside the respective amounts required to pay the Redemption Price of the Series 2011A Bonds or portions thereof so called for redemption.
Money in the Series 2011A Subaccount of the Redemption Account will be applied by the Trustee in each Fiscal Year to the purchase or the redemption of Series 2011A Bonds then Outstanding in accordance with the latest Officer’s Certificate filed with the Trustee designating the Series 2011A Bonds to be redeemed. In the event no such certificate is filed (i) the Trustee will apply such money to the purchase of Series 2011A Bonds bearing the highest rate of interest, and (ii) if Series 2011A Bonds of more than one maturity bear the same interest rate, the Trustee will redeem such Series 2011A Bonds in the inverse order of maturities.
Supplemental Trust Indentures Without Consent of Owners
The State may, from time to time and at any time, execute and deliver such trust indentures supplemental to the Third Supplemental Trust Indenture (which supplemental trust indentures will thereafter form a part thereof) as will be substantially consistent with the terms and provisions of the Third Supplemental Trust Indenture and, in the opinion of the Trustee, who may rely upon a written opinion of legal counsel, will not materially and adversely affect the interest of the Owners:
C-21 (a) to cure any ambiguity or formal defect or omission, to correct or supplement any provision herein that may be inconsistent with any other provision herein, to make any other provisions with respect to matters or questions arising under the Third Supplemental Trust Indenture or to modify, alter, amend, add to or rescind, in any particular, any of the terms or provisions contained in the Third Supplemental Trust Indenture;
(b) to grant or to confer upon the Trustee for the benefit of the Owners any additional rights, remedies, powers, authority or security that may lawfully be granted to or conferred upon the Owners or the Trustee;
(c) to add to the covenants and agreements of the State in the Third Supplemental Trust Indenture other covenants and agreements thereafter to be observed by the State or to surrender any right or power therein reserved to or conferred upon the State;
(d) to permit the qualification of the Third Supplemental Trust Indenture under any federal statute now or hereafter in effect or under any state Blue Sky law, and, in connection therewith, if the State so determines, to add to the Third Supplemental Trust Indenture or any supplemental trust indenture such other terms, conditions and provisions as may be permitted or required by such federal statute or Blue Sky law; or
(e) to provide for the issuance of Series 2011A Bonds in bearer form.
At least thirty (30) days prior to the execution and delivery of any supplemental trust indenture for any of the purposes described above, the Trustee will cause at the State’s expense a notice of the proposed supplemental trust indenture to be mailed first-class, postage prepaid, to all Owners of the Series 2011A Bonds. Such notice will briefly set forth the nature of the proposed supplemental trust indenture and will state that copies thereof are on file at the designated corporate trust office of the Trustee for inspection by all Owners of the Series 2011A Bonds. A failure on the part of the Trustee to mail the notice described in this paragraph will not affect the validity of such supplemental trust indenture.
Modification of the Third Supplemental Trust Indenture With Consent of Owners
Subject to the terms and provisions contained in this section, and not otherwise, the Owners of not less than a majority in aggregate principal amount of the Series 2011A Bonds then Outstanding that will be affected, as defined in the Third Supplemental Trust Indenture, by a proposed supplemental trust indenture will have the right, from time to time, anything contained in the Third Supplemental Trust Indenture to the contrary notwithstanding, to consent to and approve the execution and delivery by the State and the Trustee of such supplemental trust indenture as will be deemed necessary or desirable by the State for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Third Supplemental Trust Indenture or in any supplemental trust indenture; provided, however, that nothing herein contained will permit, or be construed as permitting (a) an extension of the maturity of the principal of or the interest on any Series 2011A Bond without the consent of the Owner of such Series 2011A Bond, (b) a reduction in the principal amount of any Series 2011A Bond or the redemption premium or the rate of interest thereon without the consent of the Owner of such Series 2011A Bond, (c) a preference or priority of any Series 2011A Bond over any other Series 2011A Bond without the consent of all Owners of the Series 2011A Bonds then Outstanding, or (d) a reduction in the aggregate principal amount of Series 2011A Bonds required for consent to such supplemental trust indenture without the consent of all Owners of the Series 2011A Bonds then Outstanding. Nothing herein contained, however, will be construed as making necessary the approval by the Owners of the execution and delivery of any supplemental trust indenture as described above under the subheading “Supplemental Trust Indentures Without Consent of Owners.”
The Trustee will, at the expense of the State, such expense to be paid from any available moneys, cause notice of the proposed supplemental trust indenture to be mailed, postage prepaid, to
C-22 all Owners of the Series 2011A Bonds as of the date such notice is mailed. Such notice will briefly set forth the nature of the proposed supplemental trust indenture and will state that copies thereof are on file at the principal corporate trust office of the Trustee for inspection by all Owners. The Trustee will not, however, be subject to any liability to any Owner by reason of its failure to mail the notice described in this paragraph, and any such failure will not affect the validity of such supplemental trust indenture when approved and consented to as described in this paragraph.
Whenever, at any time within three (3) years after the date of the mailing of such notice, the State will deliver to the Trustee an instrument or instruments in writing purporting to be executed by the Owners of not less than a majority in aggregate principal amount of Series 2011A Bonds then Outstanding that are affected, as defined in the Third Supplemental Trust Indenture, by a proposed supplemental trust indenture, which instrument or instruments will refer to the proposed supplemental trust indenture described in such notice and will specifically consent to and approve the execution and delivery thereof in substantially the form of the copy thereof referred to in such notice, thereupon, but not otherwise, the State and the Trustee may execute and deliver such supplemental trust indenture in substantially such form, without liability or responsibility to any Owner, whether or not such Owner will have consented thereto.
If the Owners of not less than a majority in aggregate principal amount of the Series 2011A Bonds Outstanding at the time of the execution and delivery of such supplemental trust indenture and that are affected, as defined in the Third Supplemental Trust Indenture, by a proposed trust indenture have consented to and approved the execution and delivery thereof as provided in the Third Supplemental Trust Indenture, to the extent permitted by law, no Owner will have any right to object to the execution and delivery of such supplemental trust indenture, to object to any of the terms and provisions contained therein or the operation thereof, to question the propriety of the execution and delivery thereof, or enjoin or restrain the State or the Trustee from executing and delivering the same or from taking any action pursuant to the provisions thereof.
Upon the execution and delivery of any supplemental trust indenture pursuant to the provisions of described in the preceding four paragraphs, the Third Supplemental Trust Indenture will be and be deemed to be modified and amended in accordance therewith, and the respective rights, duties and obligations under the Third Supplemental Trust Indenture of the State, the Trustee and all Owners will thereafter be determined, exercised and enforced in all respects pursuant to the provisions of the Third Supplemental Trust Indenture, as so modified and amended.
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APPENDIX D
PROPOSED FORM OF OPINION OF BOND COUNSEL
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[Letterhead of Hunton & Williams LLP and The Charleston Group]
February 16, 2011
State of North Carolina c/o State Treasurer 325 North Salisbury Street Raleigh, North Carolina 27603-1385
$500,000,000 State of North Carolina Capital Improvement Limited Obligation Bonds, Series 2011A
Ladies and Gentlemen:
We have acted as co-bond counsel to the State of North Carolina (the “State”) in connection with the issuance by the State of its $500,000,000 Capital Improvement Limited Obligation Bonds, Series 2011A (the “Bonds”), in accordance with Article 9 of Chapter 142 of the General Statutes of North Carolina, as amended. The Bonds are issued pursuant to an Indenture of Trust dated as of August 1, 2008 (the “Original Indenture”), between the State and U.S. Bank National Association, as trustee (the “Trustee”), and a Third Supplemental Trust Indenture dated as of February 1, 2011, between the State and the Trustee (the “Third Supplemental Trust Indenture” and, with the Original Indenture as previously supplemented, the “Indenture”), and a resolution of the Council of State of the State adopted on December 7, 2010 (the “Resolution”), to (i) finance portions of various capital projects of the State and (2) pay certain costs incurred in connection with the execution and delivery of the Bonds. Reference is made to the Indenture and the form of the Bonds, including their payment and redemption provisions, their purpose and the proceedings pursuant to which they are issued. All terms not defined herein are as defined in the Indenture.
Without undertaking to verify the same by independent investigation, we have relied on certifications by representatives of the State as to certain facts relevant to both our opinion and requirements of the Internal Revenue Code of 1986, as amended (the “Code”). The State has covenanted to comply with the current provisions of the Code regarding, among other matters, the use, expenditure and investment of the proceeds of the Bonds and the timely payment to the United States of any arbitrage rebate amounts with respect to the Bonds,
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State of North Carolina February 16, 2011 Page 2
all as set forth in the Indenture, the Resolution and the proceedings and documents providing for the issuance of the Bonds (the “Covenants”).
Based on the foregoing and assuming the due authorization, execution and delivery of the documents by the parties thereto other than the State and subject to the limitations set forth below, we are of the opinion that:
(1) The Indenture has been duly authorized, executed and delivered by the State and constitutes a valid and binding agreement of the State enforceable against the State in accordance with its terms. The Bonds have been duly authorized, executed and delivered by the State and constitute valid and binding limited obligations of the State enforceable against the State in accordance with their terms.
(2) The enforceability of the obligations of the State with respect to the Bonds and the Indenture may be limited or otherwise affected by (a) bankruptcy, insolvency, reorganization, moratorium or other laws affecting the rights of creditors generally and (b) principles of equity, whether considered at law or in equity. In addition:
(i) the obligation of the State to make any payments on the Bonds is subject to appropriation of funds on an annual basis by the General Assembly of North Carolina; and
(ii) the taxing power of the State is not and may not be pledged directly or indirectly to secure any amounts due on the Bonds.
(3) Under existing law, interest on the Bonds, including accrued original issue discount (“OID”), (a) is not included in the gross income of the holders thereof for federal income tax purposes and (b) is not an item of tax preference for purposes of the federal alternative minimum income tax imposed on individuals and corporations; however, with respect to corporations (as defined for federal income tax purposes), such amounts are taken into account in determining adjusted current earnings for the purpose of computing the alternative minimum
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State of North Carolina February 16, 2011 Page 3
income tax. The opinion set forth in the preceding sentence is subject to the condition that there is compliance subsequent to the issuance of the Bonds with all requirements of the Code that must be satisfied in order that interest on the Bonds not be included in gross income for federal tax purposes. Failure of the State to comply with the Covenants, among other things, could cause interest on the Bonds to be included in the gross income of the holders thereof for federal income tax purposes retroactively to their date of issuance. In the case of the Bonds maturing in the years 2025, 2028 and 2030 (the “OID Bonds”), the difference between (i) the stated principal amount of each maturity of such Bonds and (ii) the initial offering price to the public (excluding bond houses and brokers) at which a substantial amount of such maturity is sold, will constitute OID; OID will be accrued for federal income tax purposes on a constant yield-to-maturity method; and a holder’s basis in such a Bond will be increased by the amount of OID treated for federal income tax purposes as having accrued on the Bond while the holder holds the Bond. No opinion is given as to the tax-exempt status of any amounts payable on the Bonds following non-appropriation by the State of amounts due under the Indenture. We express no other opinion regarding other federal tax consequences of the ownership of or receipt or accrual of interest or other payments on the Bonds.
(4) Under existing law, the Bonds are free from taxation by the State or any political subdivision or any of their agencies, excepting estate, inheritance, and gift taxes; income taxes on the gain from the transfer of the Bonds; and franchise taxes, and the interest on the Bonds, including accrued OID, is not subject to taxation as to income by the State.
Our services as co-bond counsel to the State have been limited to rendering the foregoing opinion based on our review of such proceedings and documents as we deem necessary to approve the validity of the Bonds and the tax-exempt status of interest thereon. We express no opinion herein as to the financial resources of the State, its ability to provide for the payments required on the Bonds or the accuracy or completeness of any information that may have been relied upon by anyone in making the decision to purchase Bonds, including the Preliminary
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State of North Carolina February 16, 2011 Page 4
Official Statement dated January 24, 2011, and the Final Official Statement dated February 2, 2011, relating to the offering of the Bonds.
Very truly yours,
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APPENDIX E
BOOK-ENTRY ONLY SYSTEM
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APPENDIX E
Book-Entry Only System
Beneficial ownership interests in the Bonds will be available only in a book-entry system. The actual purchasers of the Bonds (the “Beneficial Owners”) will not receive physical bonds representing their interests in the Bonds purchased. So long as The Depository Trust Company (“DTC”), New York, New York, or its nominee is the registered owner of the Series 2011A Bonds, references in this Official Statement to the Owners of the Series 2011A Bonds shall mean DTC or its nominee and shall not mean the Beneficial Owners.
THE FOLLOWING DESCRIPTION OF DTC, ITS PROCEDURES AND RECORD KEEPING WITH RESPECT TO BENEFICIAL OWNERSHIP INTERESTS IN THE BONDS, PAYMENT OF INTEREST AND OTHER PAYEMNTS WITH RESPECT TO THE BONDS TO DET PARTICIPANTS OR TO BENEFICIAL OWNERS, CONFIRMATION AND TRANSFER OF BENEFICIAL OWNERSHIP INTERESTS IN THE BONDS AND/OR OTHER TRANSACTIONS BY AND BETWEEN DTC, DTC PARTICIPANTS AND BENEFICIAL OWNERS IS BASED ON INFORMATION FURNISHED BY DTC.
DTC will act as securities depository for the Bonds. The Bonds will be registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond in the aggregate principal amount of each maturity of the Bonds will be issued and deposited with DTC. SO LONG AS CEDE & CO. IS THE REGISTERED OWNER OF THE BONDS, AS DTC’S PARTNERSHIP NOMINEE, REFERENCE HEREIN TO THE OWNERS OR REGISTERED OWNERS OF THE BONDS SHALL MEAN CEDE & CO. AND SHALL NOT MEAN THE BENEFICIAL OWNERS OF THE BONDS.
DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC holds and provides asset servicing for over 2.2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 100 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transaction in deposited securities through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities bonds. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Fixed Income Clearing Corporation and Emerging Markets Clearing Corporation as well as by the New York Stock Exchange, Inc., the American Stock Exchange, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (the “Indirect Participants” and collectively with the Direct Participants, the “Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC rules applicable to its Participants are on file with the Securities and Exchange Commission.
Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of the Bonds defined above is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation form DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing E-2 details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participants through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial owners will not receive physical Bonds representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.
To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the identities of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of the Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Bonds, such as Prepayments, defaults and proposed amendments to the security documents. For example, Beneficial Owners of the Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.
Prepayment notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount o the interest of each Direct Participant in the Bond to be prepaid.
Neither DTC nor Cede & Co. (nor such other DTC nominee) will consent or vote with respect to the Bonds unless authorized by a Direct Participant in accordance with DTC’s procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the State as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting and voting rights to those Direct Participants to whose accounts the Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).
BECAUSE DTC IS TREATED AS THE OWNER OF THE BONDS FOR SUBSTANTIALLY ALL PURPOSES UNDER THE INDENTURE, BENEFICIAL OWNERS MAY HAVE A RESTRICTED ABILITY TO INFLUENCE IN A TIMELY FASHION REMEDIAL ACTION OR THE GIVING OR WITHHOLDING OR REQUESTED CONSENTS OR OTHER DIRECTIONS. IN ADDITION, BECAUSE THE IDENTITY OF BENEFICIAL OWNERS IS UNKNOWN TO THE STATE OR TO DTC, IT MAY BE DIFFICULT TO TRANSMIT INFORMATION OF POTENTIAL INTEREST TO BENEFICIAL OWNERS IN AN EFFECTIVE AND TIMELY MANNER. BENEFICIAL OWNERS SHOULD MAKE APPROPRIATE ARRANGEMENTS WITH THEIR BROKER OR DEALER REGARDING DISTRIBUTION OF INFORMATION REGARDING THE BONDS THAT MAY BE TRANSMITTED BY OR THROUGH DTC.
Principal, and interest payments with respect to the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the State on each payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such E-3
Participants and not of DTC (nor its nominee) or the State, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the State’s responsibility, disbursement of such payments to Direct Participants is DTC’s responsibility, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants. THE STATE CANNOT AND DOES NOT GIVE ASSURANCE THAT DIRECT AND INDIRECT PARTICIPANTS WILL PROMPTLY TRANSFER PAYMENTS TO BENEFICIAL OWNERS.
DTC may discontinue providing its services as securities depository with respect to the Bonds at any time by giving reasonable notice to the State. Under such circumstances, in the event that a successor depository is not obtained, physical Bonds are required to be printed and delivered. The State may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, physical bonds will be printed and delivered to DTC.
THE STATE HAS NO RESPONSIBILITY OR OBLIGATION TO DTC, THE DIRECT PARTICIPANTS, THE INDIRECT PARTICIPANTS OR THE BENEFICIAL OWNERS WITH RESPECT TO (1) THE ACCURACY OF ANY RECORDS MAINTAINED BY DTC OR ANY PARTICIPANT, OR THE MAINTENANCE OF ANY RECORDS; (2) THE PAYMENT BY DTC OR ANY PARTICIPANT OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT OF THE BONDS, OR THE SENDING OF ANY AMOUNT DUE TO ANY BENEFICIAL OWNER IN RESPECT TO THE BONDS, OR THE SENDING OR ANY TRANSACTION STATEMENTS; (3) THE DELIVERY OR TIMELINESS OF DELIERY BY DTC OR ANY PARTICIPANT OF ANY NTOICE T ANY BENEFICIAL OWNER WHICH IS REQUIRED OR PERMITTED UNDER THE CERTIFICATE RESOLUTION TO BE GIVEN TO OWNERS; (4) THE SELECTION OF THE BENEFICIAL OWNERS TO RECEIVE PAYMENTS UPON ANY PARTIAL PREPAYMENT OF THE BONDS; OR (5) ANY CONSENT GIVEN OR OTHER ACTION TAKEN BY DTC OR ITS NOMINEE AS THE REGISTERED OWNER OF THE BONDS, INCLUDING ANY ACTION TAKEN PURSUANT TO AN OMNIBUS PROXY
The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources the State believes to be reliable, but the State takes no responsibility for accuracy thereof.
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APPENDIX F
LIST OF AUTHORIZED PROJECTS
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LIST OF AUTHORIZED PROJECTS
Amount Facility Authorized
Central Psychiatric Hospital (including supplemental authorization) $ 130,000,000 North Carolina Cardiovascular Diseases Institute (ECU) 60,000,000 Bioinformatics Center (UNCC) 35,000,000 Center for Health Promotion and Partnerships (UNCA) 35,000,000 Pharmacy School (ECSU) 28,000,000 Youth Development Centers (including supplemental authorization) 35,200,000 Land near Military Bases (Shaken Creek) 20,000,000 Nursing Education and Research Center (FSU) 10,000,000 Nursing and Allied Health Building (UNC Pembroke) 28,308,351 NC Center for Health and Aging (WCU) 9,279,037 Center for Design Innovation (WSSU/NCSA) 11,500,000 Classroom Building (UNCC) 45,827,400 DHHS Public Health laboratory/Medical Examiner Office 98,782,540 Eastern Regional Psychiatric Hospital 138,325,814 Regional Medical and Mental Health Center – DOC 132,200,000 Western Regional Psychiatric Hospital 154,772,801 Downtown Raleigh Parking Deck 20,000,000 College of Education Building (ASU) 34,000,000 Science and Technology Complex (FSU) 20,999,216 Library (NCSA) 23,043,890 Engineering Building III Addition (NCSU) 31,609,924 Rhoades Hall Renovation (UNCA) 8,449,786 Genomics Science Building (UNCCH) 111,200,204 Teaching Laboratory (UNCW) 32,899,699 Health and Gerontological Sciences Building (WCU) 37,687,800 Student Activities Center (WSSU) 27,039,160 Nanoscience Building (UNCG & NCA &T) 49,274,294 Coastal Studies Institute (UNC-BOG) 31,357,684 Scotland Medium Security Addition 15,066,500 Alexander Minimum Security Addition 9,291,300 Tryon Palace Education and Visitor Center 35,000,000 State Conservation Land Acquisition and Waterfront/Marine Access Project 120,000,000 School of Dentistry Building (ECU) 61,599,369 Family Medicine and Geriatric Center (ECU) 35,198,537 School of Education building (ECSU) 16,689,507 Horse Park Barns (NCA&T) 2,438,000 General Classroom Instructional Facility (NCA&T) 19,049,628 School of Nursing Building (NCCU) 22,536,039 Central Storage Facility (NCSA) 10,237,116 Film School Production Design Facility (NCSA) 11,543,828 Centennial Campus Library (NCSU) 98,341,186 4-H Campus Improvements (NCSU) 4,000,000 School of Dentistry Addition (UNCCH) 61,599,369 Energy Production Infrastructure Center (UNCC) 52,494,149 Academic Classroom and Office Building (UNCG) 42,670,000
F-2
Facility Authorized
Health Care and Mental Health Facility – NC Correctional Institute for Women 39,795,790 Minimum Security Addition – Scotland Correctional Institution 9,595,445 Medium Security Addition – Bertie Correctional Institution 17,617,884 Minimum Security Addition – Tabor Correctional Institution 12,095,445 Medium Security Addition – Lanesboro Correctional Institution 17,617,884 CSS Neuse State Historic Site Building – Phase I 2,925,000 Southeastern NC Agricultural Center Pavilion 3,700,000 Bathroom and Truckshed Expansion at Western NC Farmers’ Market 650,000 Davis Arena Renovation and Expansion – Western NC Agricultural Center 6,765,461 Research Oyster Hatchery 4,303,944 NC Zoo Polar Bear Exhibit Addition and Renovation 2,700,000 Land for Tomorrow Conservation Funds 10,000,000 Fire Sprinkler Systems for UNC System Residence Halls (UNCGA) 10,000,000 Maury Correctional Institution 16,000,000 Green Square Project (DENR) 99,054,584 Biomedical Research Imaging Center (UNCCH) 223,000,000 Repairs and Renovations Projects and Related Infrastructure 50,000,000
Total: $2,543,333,565
The list of projects set forth above may be amended and/or expanded by future legislation. Previous issues of special indebtedness and general obligation bonds have been issued for these and other projects and special indebtedness may be issued in the future for these or any additional authorized projects. A portion of the bonds issued hereby will be used for certain of the projects set forth above or any additional authorized projects.
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[Insert Large Colored State of North Carolina Seal]
Department of State Treasurer 325 North Salisbury Street Raleigh, North Carolina 27603-1385
As required for disclosure by G.S. 143-170.1, 54 copies of the public document were printed at a cost of $706.00, or $13.08 per copy.