Agency Downgrades State Bond Rating by 1 Level

Moody's Investors Service, one of three main credit rating agencies, announced Monday that it had dropped North Carolina's bond rating from AAA to Aa1.

"It's just one step down," said Katherine Kirkman, director of public affairs for the state treasurer. "Aa1 is still a strong rating."

A press release from the N.C. Department of the State Treasurer said Moody's cited the state's "continued budget pressure, its reliance on nonrecurring revenues, and its weakened balanced sheets" as reasons for the downgrade.

But legislators are confident that continued efforts to fine-tune the state's 2002-03 budget will reverse the downgrade.

"If we can get our house in order in certain areas, we can get our rating back up," said Sen. Howard Lee, D-Orange.

Moody's announcement came as UNC-system officials were trying to capitalize on a favorable bond market. Bonds that already have been issued will not be affected by the downgrade.

Officials say the UNC system is currently spending 14 percent less than was allocated for projects -- a result of low interest rates and a competitive bidding market.

Kevin MacNaughton, UNC-system finance and university property officer, said the state's tax revenue, generated in part by equipment purchases, salary taxes and other bond-related expenditures, exceeds the amount to be repaid on the bonds -- at least for now.

"The debt service is actually less than the tax flow," MacNaughton said.

Additionally, he said, the construction-related bond "is essentially keeping the construction industry afloat in North Carolina." MacNaughton said any surplus will be stored away to account for inflation or in case there is a construction deficit in the future.

The bonds, approved by a referendum vote in November 2000, allocate $3.1 billion to higher education specifically for construction. Of that, $2.5 billion will go to the UNC system. The remaining $600 million will go to state community colleges.

According to the University of North Carolina Bond Project Status Overview, as of July the system had allocated a total of $591.2 million dollars to design, construction and land acquisition for UNC-system schools.

Higher education bonds have been issued twice since receiving approval -- once in March and once in April.

In April, the state secured a 1.8 percent interest rate on the bonds, a relatively low rate made possible by the state's AAA credit rating.

The Raleigh-based Pope Center for Higher Education Policy , a conservative think-tank, advised lawmakers and system administrators last week to hold onto bond money until the state's budget crisis decreased in severity.

John Sanders, vice president of the foundation, said, "(The good economic market) doesn't take away from the fact that the state is in a tight fiscal situation and that every little bit counts."

But MacNaughton said the system will capitalize on the favorable price situation while it can -- an option that might fade away as a result of the recent bond rating downgrade.

The State & National Editor can be reached at stntdesk@unc.edu.