Posted on 08/19/2002 1:18:26 PM PDT by jern
Opinion NEW YORK, Aug 19, 2002 -- Moody's has downgraded the state of North Carolina's General Obligation rating to Aa1, from Aaa, affecting $3.5 billion of long-term debt. The rating change reflects the state's continued budget pressure, its reliance on non-recurring revenues, and its weakened balance sheet. The task of restoring structural budget balance and rebuilding reserves faces political and economic obstacles. The state is considering actions which over time could help to restore fiscal stability and rebuild reserves. Future rating considerations will take into account the state's economic and fiscal progress and the impact on future financial results.
The state's underlying economy and finances remain sound and a return of economic growth with adoption of key budget actions should enable the state to reestablish its historic level of credit quality. The outlook for the state is stable.
North Carolina has suffered a series of adverse economic and fiscal events in the form of costly legal judgements related to tax policy, costs for the emergency response and rebuilding in the wake of hurricanes and floods, and revenue loss resulting from the national economic recession and the bursting of the stock market bubble. In addition, the state experienced revenue erosion from sizable multi-year tax reductions, while spending pressures were rising.
The state has taken prompt and aggressive actions to address its budget shortfalls, using its strong executive branch powers to control spending. It also raised new revenue by raising taxes. However, it has also continued to rely heavily on non-recurring budget actions to fund rising costs, and has drawn down its formal rainy day reserves.
Despite strong efforts to meet these financial challenges, audited financial results show that the state has been running operating deficits for the last two years and are expected to be negative for fiscal 2002, and once positive accumulated GAAP fund balances have turned negative. This negative general fund condition is likely to persist in the current year and, depending on the outcome of pending debate, next year as well. The state is currently still in budget deliberations, and Moody's expects it will take the necessary actions to address its significant current revenue shortfall and meet its constitutional balanced budget requirement for this fiscal year. At this time, however, some measures currently under consideration to reestablish structural balance in the long term remain politically sensitive and uncertain. These include a sales tax increase and a state lottery.
At Aa1, the state's credit position is still strong. Flexible cash reserves outside the general fund are ample, and North Carolina does not need external cash flow borrowing to meet seasonal liquidity needs. A transition of the North Carolina economy from a low wage manufacturing economy to a knowledge-based economy has been underway for many years and is expected to continue to raise income levels and fiscal capacity once the national economy recovers. Debt levels are low and pension funding is exceptionally strong.
ECONOMIC SLOWDOWN CONTINUES
Throughout the 1990s, the state's economy diversified from one dependent on textile and apparel manufacturing to one more reliant on services, finances, and trade, and easily outpaced the nation in terms of employment and personal income growth. Such diversification served the state well over the last five years, enabling North Carolina to realize positive employment growth despite losing more than 100,000 traditional manufacturing jobs during this period.
More recently, however, North Carolina, like many states in the country, suffered an economic slowdown as a result of the national recession. State employment growth slowed significantly to 2% in 2000, dropping below the national rate for the first time since the 1991 recession. North Carolina suffered employment losses from the manufacturing sector as well as the high technology and telecommunications sector. These two had helped to propel the state's strong job growth in recent years. Employment growth continued to drop in 2001, at 0.8%, reflecting additional losses in manufacturing, high technology and telecommunications, which was down by an additional 22,000 jobs. The unemployment rate also increased from 3.6% in 2000 to 5.5% in 2001, exceeding the national average of 4.8%. The unemployment rate has continued to rise in 2002, reaching 6.8% in June. Overall, weakness in the manufacturing sector is likely to persist in the near future, contributing further to the continuing slowdown of North Carolina's economy.
BUDGETARY SHORTFALLS PERSIST IN CURRENT FISCAL YEAR
North Carolina has needed to tap into its available balances over the last several years to address major one-time expenditures and replace lost revenue. The Rainy Day Fund was drawn down from $522 million in 1999 to $125 million at the end of fiscal 2002. Audited unreserved general fund balances have also been decreasing steadily over the last few years, from positive $445 million in 1998, reaching negative balances in 2000 and 2001 and expected for 2002.
State tax collections came in approximately $141 million below budget estimate in fiscal year 2000, a shortfall that was addressed through expenditure reductions including the temporary delay in the payment of certain tax refunds. These payments were processed shortly after the start of the fiscal year 2001, in turn contributing to the deficit in fiscal 2001. The state experienced a revenue shortfall of $589.5 million in fiscal 2001, also resulting from a continued slowdown of the state's economy and tax cuts over the last several years. In response, the Governor declared a state of emergency and instituted a number of actions to assure that the state met its constitutional requirement to balance the budget. Constitutionally, the governor can tap resources from other funds, through an Executive Order, to balance the budget should the state face revenue shortfalls. North Carolina maintains a healthy $1.2 billion in cash balances through various non-general funds available for this purpose.
General Fund tax revenue collections continued to be weaker than expected for 2002. Collections were 10.6% under budget, totaling $1.56 billion, and unreserved general fund balances remained negative. In anticipation of a significant budget shortfall for the year, the Governor issued a second Executive Order in February, identifying $1,320.8 million of available resources. These included a 7% reduction of Agency expenditures, the suspension of budgeted appropriations, the suspension of local revenue sharing and tapping the Rainy Day Fund. These resources, held in an escrow account, would be released for their original purpose should they not be needed to balance the budget. As of July 30, 2002, the Rainy Day Fund totaled $125 million.
Budget problems persist into fiscal 2003. Recognizing revenue weakness, the fiscal 2003 budget is built upon the very conservative revenue assumption of 0% (baseline) to 1.8% (including revenue enhancements) over fiscal 2002. Revenue enhancements, non-general fund transfers and spending cuts are all necessary to balance the fiscal 2003 budget.
While the budget has still not been passed, proposals under consideration include significant agency reductions as well as highway trust fund transfers, the use of tobacco settlement funds and the suspension of local government reimbursement. In addition, the Governor has also proposed introducing a lottery and maintaining the ½ cent sales tax, which was scheduled to transition to a local source in July 2003, at the state level. To compensate, another ½ cent sales tax increase, to be levied at the local level, has been proposed. While these two measures would help the state transition back into structural balance over the longer term, their political viability remains uncertain at this time.
CONSERVATIVE DEBT MANAGEMENT, BUT DEBT LEVELS RISING
North Carolina has conservatively managed its debt issuances, reflecting the State Constitutional provision that limits the General Assembly's ability to incur debt. The Constitution stipulates that the total amount of legislatively authorized borrowing in any biennium is limited to two-thirds of the amount of debt paid down in the preceding biennium. Voters must approve any bond authorization above the two-thirds limit. All state debt is general obligation, structured for a rapid rate of retirement.
While historically moderate, the state's net tax supported debt outstanding has increased significantly over the last three years. It rose from $1.6 billion in 1996 to $3 billion in 2002. Despite the sizeable increase in debt outstanding over the last several years, the state's debt burden ranks among the lowest in the nation. The state's $375 debt per capita and 1.4% debt as a percentage of personal income in 2002, are still well below the national medians of $573 and 2.3%, respectively.
Voters have authorized a $3.1 billion general obligation bond issuance to expand and modernize the physical plant of both the University of North Carolina system and the state's community colleges. The $3.1 billion bond authorization represents the largest debt authorization in the state's history, and depending on the pace of issuance, will push the state's debt burden closer to the national median as it is issued in the coming years.
Outlook The outlook for the State of North Carolina is stable. The state continues to face budgetary challenges due to ongoing weak tax revenue collections resulting from the under-performance of the state economy. Strong executive management and budget controls have enabled the state to avoid deep deficits, but negative general fund operations continue. Longer term fiscal planning shows the state restoring balanced operations, but such plans are dependent upon a return to moderate economic growth, adoption of a state lottery and adoption of additional tax increases. These outcomes are either politically sensitive or uncertain, leaving structural balance an achievable but still elusive goal. Debt levels for the state remain well below the national average but are expected to rise with the issuance of over $3.1 billion in authorized general bonds for higher education.
Analysts Caroline Cruise Analyst Public Finance Group Moody's Investors Service
Robert A. Kurtter Backup Analyst Public Finance Group Moody's Investors Service
Raymond Murphy Senior Credit Officer Public Finance Group Moody's Investors Service
Renee Boicourt Director Public Finance Group Moody's Investors Service
Contacts
Journalists: (212) 553-0376
MKM
As they have been for 140 years. And no, I'm not kidding.
There is more pork here than anyone can imagine...the good-old boy dems can no longer hide the defict in smoke and mirror-type ways.
Heck, the state isn't even letting the local governments have the revenue it is supposed to get from local sales taxes.
IT WILL GET A LOT WORSE HERE IN NC BEFORE IT GETS BETTER!
In this internet world why couldn't they have just posted this worthless wet-lipped speaches on a website?
WHO WANTS TO READ THAT CRAP ANYWAY?
speaches are bad enough in person, why would someone want to read them as well?
You know as well as I know that there is a large number of people, far more than people want to admit, who vote democrat because their grandmother voted democrat and if they ever voted for a republican their grandmother would roll over in her grave. And that is the ONLY reason they vote democrat, even if they agree with republicans 100% on everything the can not bring themselves to ever vote for a republican because it would dishonor their family and loved ones memories.
I know, it sounds insane, stupid, and totally a work of fiction. But it is 100% true and these people drive me crazy when I talk to them.
Molly Broad and company scoffed but...
This is the REAL outrage to me!
Why watch your budget when you can steal from others to make it better.
Problem is, all the "others" have been stolen from....
No more fruit on the money tree and all the buds have been picked as well....
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.