ATLANTA — Moody’s Investors Service on Friday restored its Aaa rating for North Carolina, making the state triple-A once again by all three major bond rating agencies.
Moody’s downgraded the state to Aa1 in 2002 due to what analyst Emily Raimes said in a report released Friday was an “unusual confluence of financial challenges that resulted in major one-time expenditures and lost revenue.”
Fitch Ratings and Standard & Poor’s maintained their AAA ratings for the state.
“The early 2000s was a period of severe strain for the state as it suffered a series of adverse economic and fiscal events including costly legal judgments, hurricanes and floods, and revenue loss resulting from the national economic recession,” she said.
In addition, the state experienced revenue erosion from sizable multiyear tax reductions, while spending pressures were rising, she said.
Over the course of several years, the state nearly depleted its rainy-day fund and tapped its unreserved general fund balances to the point that they dropped to negative levels from 2000 through 2005.
Since then, the state has been able to replenish its reserves and has experienced economic gains that surpass national averages, and those were among the factors that led to Moody’s upgrade.
Of the upgrade, North Carolina Treasurer Richard Moore said the state’s sound financial management is one of its hallmarks.
“Above all, [Friday’s] news highlights the importance of continuing to watch our state’s bottom line and to replenish our savings,” Moore said.
Raimes also noted that the state implemented tight expenditure controls as part of its conservative budgeting, and that was also taken into account when analysts reviewed the state for an upgrade.
Specifically, Raimes found that tax revenues exceeded budget forecast by 6.5% in fiscal 2006, and were 13.2% over fiscal 2005 revenues, resulting in a $940 million revenue surplus.
Raimes said the state’s economy has strengthened, with service sector jobs offsetting the decline in manufacturing. There have also been steady gains in financial performance, including a strong turnaround in general fund balances.
While the state has made great strides in improving its finances, it still faces several challenges, including dealing with rapidly growing financing needs for K-12 education. The idea of floating a multibillion bond package similar to one the state did several years ago for higher education has been bandied about to deal with the situation. In fact, legislation on the matter was introduced last year, but it failed to pass. Observers say school funding is one of the state’s most pressing needs.
Also, Raimes said although the state’s reserve levels have increased, available balances remain below prior peaks. She said the state is also challenged by its rising debt burden.
Moody’s warned that another downgrade would be in store if there is a return of structural imbalance, if there is a significant decline in reserve levels, or if the economy slows to the point that there are weaker revenue performance and a depletion of reserves. North Carolina has $6.4 billion of outstanding debt.
