North Carolina’s latest statewide financial audit shows the state ended the 2025 fiscal year in strong financial shape—yet auditors also uncovered nearly $1.14 billion in reporting errors, major spikes in spending, and several long-term risks buried inside the state’s 400-page Annual Comprehensive Financial Report (ACFR).
The new 2025 Annual Comprehensive Financial Report, released by the North Carolina Office of the State Auditor and reviewed by Charlotte Stories, confirms the state’s financial statements are materially accurate after corrections—but the scale of the adjustments raises questions about internal oversight and financial controls at several agencies.
Major Finding: Over $1 Billion in Accounting Misstatements
Auditors identified six material adjustments, including massive overstatements and understatements within the Department of Commerce, which alone reported:
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$872.8 million in overstated amounts
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$262.5 million in understated amounts
These discrepancies were significant enough that Commerce will receive a formal financial reporting finding in the state’s upcoming Single Audit Report. (The finding is referenced in the auditor’s opinion section as a material adjustment requiring correction.)
Such a high volume of corrections—over $1.1 billion in errors—suggests meaningful internal-control weaknesses.
Statewide Financial Overview: Surpluses Up, Spending Up Even More
Despite the accounting problems, North Carolina’s financial position strengthened again in 2025.
Key Statewide Financial Results
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Net position increased by $6 billion (up 6.51%).
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Governmental net position: $88.67 billion
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Business-type net position: $9.48 billion
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AAA credit rating affirmed by all three major agencies—making North Carolina one of only 14 states with the top rating.
However, several major cost centers surged at historically high rates:
Spending Increases
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Health & Human Services: up $5.67 billion (16.37%)
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Higher Education: up $884.48 million (13.51%)
These jumps far outpace both inflation and population growth, suggesting structural pressures that could challenge future budgets.
Hurricane Helene: A Massive Financial Liability
One of the largest financial risks detailed in the ACFR involves Hurricane Helene, which caused:
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$59.6 billion in total estimated damage
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103 deaths
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25 disaster-declared counties
As of June 30, 2025:
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Only $7.6 billion in recovery funds have been distributed (state and federal combined).
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$3.1 billion more in federal aid is approved but not yet released.
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North Carolina has already transferred $1.1 billion out of the Savings Reserve to fund storm recovery.
This drawdown cut the once-record reserve from $4.75 billion to $3.62 billion by year-end.
Major Concern: Reserve Funds Are Being Depleted Quickly
The Savings Reserve—the state’s main emergency buffer—fell by more than $1.1 billion due to disaster recovery appropriations. While still above the recommended target (12.16% vs. 11.9%), the decline is significant given rising statewide costs and more frequent severe weather events.
Another major reserve—the Unfunded Liability Solvency Reserve—ended the year with $0 after all funds were transferred out, signaling limited progress on long-term pension and retiree health liabilities.
Capital Projects Surge as State Invests Billions
The report shows the state invested heavily in infrastructure in 2025:
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$76.57 billion in capital assets (up 4.85%)
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Major construction projects include:
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$3.14 billion in highway projects
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$820.85 million for a statewide social services benefits system
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$246.99 million for the new DHHS campus relocation
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$107.41 million for a new statewide education campus
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These expansion costs represent long-term commitments that could pressure future budgets.
Debt Remains Stable — But Pressures Are Emerging
North Carolina’s long-term debt increased slightly to $7.2 billion, but the state remains well below its debt-capacity ceiling. The Debt Affordability Advisory Committee reported the state can safely issue $1.76 billion in new debt annually over the next decade.
However, the report also shows:
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Debt service is projected to peak at 1.4% of revenues, still below the 4% target
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Over 55% of current debt must be retired within 10 years to remain within guidelines
These conditions are stable for now, but cost pressures and storm recovery spending could complicate future borrowing.
Potential Holes and Financial Risks Identified in the Review
A deeper review of the ACFR reveals several structural vulnerabilities:
1. Large Accounting Errors Signal Internal Control Weaknesses
If Commerce could misstate nearly $1.14 billion, similar risks may exist elsewhere. The auditor’s report does not identify all causes, but the size of the adjustments is unusual for a AAA-rated state.
2. Rapid Spending Growth May Not Be Sustainable
Health & Human Services and Higher Education grew at double-digit rates, outpacing revenue growth and economic output.
3. Disaster Recovery Funding Could Outrun Reserves
Hurricane Helene consumed over $1.1 billion in state reserves in a single year—and total damages exceed $59 billion.
4. Retirement System Pressures Loom Despite Reforms
The TSERS employer contribution rate continues climbing under the stabilization policy, and the Retiree Health Benefit Trust is closed to new members—reducing solvency risks, but not eliminating unfunded liabilities.
5. Federal Policy Shifts Could Impact Future Revenue
Tariffs, changing interest rates, and Medicaid expansion cost savings create volatility in tax collections and budget planning.
What It Means for Charlotte and the Growing Carolinas Region
Charlotte plays an outsized role in North Carolina’s revenue generation, especially in personal income taxes and retail sales. As the state confronts rising costs, stronger reporting oversight, and long-term rebuilding after Helene, the financial health of the Charlotte metro will directly influence future budget cycles.
A slowdown in Mecklenburg, Union, or surrounding counties could dramatically impact the state’s revenue base—even as the region continues to experience rapid population and infrastructure growth.
