NCInnovation’s public funding is a mistake

The North Carolina Senate has proposed a perfect recipe for corruption: Start with $1.425 billion of taxpayer money, stir in concentrated political power, and add a lack of public oversight and accountability. All of these elements can be found in the state budget’s provision for a nonprofit organization called NCInnovation (NCI).

Established by business leaders in 2018, NCI is designed to commercialize innovations resulting from university research and to act as a bridge connecting innovators’ work to the market. In addition to encouraging innovators to stay in North Carolina, the Senate believes that NCI’s work will lead to job growth and economic development, especially in the rural parts of the state. Currently, the state ranks a humble 20th in innovation, according to a report commissioned by NCI. “NCInnovation intends to fix that,” its website states.

The nonprofit has raised over $20 million, but it says it needs a lot more if North Carolina is to be a leader in innovation.

According to the News & Observer, the Senate plan “would create an endowment, managed by a third-party investment firm, with the goal of making NCInnovation self-sustaining.” A big part of the plan is to direct funding to rural, currently underfunded parts of the state.

NCI’s mission and goals may sound attractive, but, as the Martin Center and others have pointed out, there are several red flags in the proposed public-private partnership. In the proposal, for example, the legislature would appoint eight of the 13 members on NCI’s board. None would be appointed by the executive branch. “I am no apologist for the Cooper Administration, but I am skeptical of amassments of political power,” writes John Locke Foundation CEO Donald Bryson.

One of the most glaring concerns is that NCI is not subject to open-meeting and public-records laws—despite the fact that 98.2 percent of its funding would come from taxpayer dollars. Bryson and his colleague Brian Balfour argue that NCI should be subject to the same transparency laws as another government-funded nonprofit, the Golden LEAF Foundation. North Carolina general statute Chapter 143 Article 74A says that Golden LEAF—which is also a 501(c)(3) organization—is subject to open-meeting and public-record laws and must publish a publicly accessible annual report detailing “every expenditure or distribution in furtherance of the public charitable purposes of the Golden LEAF Foundation.”

As an entity that “performs its duties for the benefit of the State,” with operations almost completely covered by the state, why isn’t NCI subject to the same level of transparency as Golden LEAF? A possible explanation boils down to a technicality.

According to the North Carolina Nonprofit Corporation Act, corporations that fall under either of the two descriptions that follow are subject to public-records and open-meeting laws:

(1) A corporation organized under the terms of any consent decree and final judgment in any civil action calling on a state officer to create the corporation, for the purposes of receipt and distribution of funds allocated to the State of North Carolina to provide economic impact assistance on account of one industry.

(2) A corporation organized upon the request of the State for the sole purpose of financing projects for public use.

In short, it seems that Golden LEAF is subject to open-meeting and public-records laws because it was instituted by the state to benefit the public. NCI was not created by the state but instead by “some of the state’s top business minds to enable a public-private partnership.” Given the amount of money the state is pouring into NCI, however, this technical distinction is a very weak justification for keeping taxpayers in the dark about how their hard-earned money is being spent.

With over $1.4 billion on the table, however, the legislature does require NCI to report annually to the Joint Legislative Commission on Governmental Operations and the Fiscal Research Division. Either of those entities may request more frequent reporting. The annual report must include the following information (this is an abbreviated list):

1. Every investment, equity stake acquired, or other funding award of any kind.

2. Outcome data collected by NCInnovation, including the number of jobs created.

3. Cumulative investment, equity stake information, and other funding award data by program and by county.

4. An unaudited report, itemized by category, of its overhead and administrative costs for the previous fiscal year.

5. Current fiscal year budget, planned activities, and goals for the current fiscal year.

6. Developed performance metrics of entities in which NCInnovation has taken an equity stake or to which NCInnovation has made a funding award or other investment, including any returns on investment.

7. A detailed explanation of how annual salaries are determined, including base pay schedules and any additional salary amounts or bonuses.

NCI must also provide a copy of its annual audited financial statement, as well as a copy of its annual federal income tax return. It is also subject to audits from the state auditor. Furthermore, NCI may not spend state funds without the approval of the general assembly.

Reporting on “outcome data,” “performance metrics,” and every “equity stake acquired” are all necessary steps in maintaining accountability. But will the legislature be willing to take action if NCI’s efforts are ineffectual? As Brian Balfour noted in Carolina Journal, government-supported projects are rarely dismantled for ineffectiveness. Governments pouring money into failing projects is an all-too-familiar story. Although the proposal includes a clause that allows the General Assembly to dissolve NCI, it doesn’t articulate metrics for how the organization’s success or failure will be assessed. The dissolution clause, which is similar to the one for Golden LEAF, states merely that “NCInnovation may be dissolved pursuant to Chapter 55A of the General Statutes or by the General Assembly.”

The legislative proposal doesn’t articulate metrics for how NCInnovation’s success or failure will be assessed.Chapter 55A of the General Statutes—the North Carolina Nonprofit Corporation Act—outlines the grounds for the dissolution of a nonprofit corporation. Article 14 Part 2, “Administrative Dissolution,” says that the secretary of state may dissolve a corporation for offenses such as failing to pay a fee, lacking a registered agent, or refusing to “answer truthfully and fully within the time prescribed in this Chapter interrogatories propounded by the Secretary of State.”

In other words, it seems that as long as NCI crosses its “X’s,” dots its “I’s,” and responds to any possible “interrogatories” put to it by the secretary of state, it needn’t be fearful of running afoul of this law. The budget proposal also states that the “charter of NCInnovation may be repealed at any time by the General Assembly pursuant to Section 1 of Article VIII of the North Carolina Constitution.” But, again, it’s unclear whether the General Assembly would take any punitive action if NCI were to underperform in its mission.

Aside from concerns about accountability, another question looms in the air: Would this plan for NCI violate current North Carolina law? The Umstead Act prohibits state employees and entities from engaging in business practices that unfairly compete with the private sector. According to the act, it is unlawful for

any individual employee or employees of the unit, department or agency [of the state government] in his, or her, or their capacity as employee or employees thereof, to engage directly or indirectly in the sale of goods, wares or merchandise in competition with citizens of the State … or to maintain service establishments for the rendering of services to the public ordinarily and customarily rendered by private enterprises.

As the John Locke Foundation’s Jon Guze notes, NCI’s entire goal is to grow and fund new businesses—businesses that will be offering goods and services that are “ordinarily and customarily rendered by private enterprises.”

By giving certain businesses a competitive advantage in the market, NCI may well be veering into unlawful territory. Even though NCI is technically a “private” entity, its relationship with the state clearly sets it apart from other businesses that have to compete without the government’s help (and, in this case, significant help).

Though NCInnovation is technically a private entity, its relationship with the state sets it apart from other businesses. There is another sense in which NCI may be treading on questionable legal ground. Its work will demand a notable use of university resources. Four UNC-System schools have signed a memorandum of understanding with NCI: UNC Charlotte, Western Carolina University, North Carolina A&T, and East Carolina University. Three of the memoranda state that the universities “will provide executive sponsorship and identify a member of its Chancellor’s senior leadership team to work directly with the NCI Regional Hub Director on a day-to-day basis.” East Carolina’s memorandum is similarly worded, except it doesn’t state “on a day-to-day basis.” (It should be noted that ECU’s signed memorandum does state that “ECU will participate in NCI’s governance by having its Chancellor sit on NCI’s Board of Directors.” Given that the current budget proposal wouldn’t allow a chancellor on NCI’s board, this agreement would have to be modified.)

All of the universities further agree to provide a working location for the designated NCI regional hub director and to make in-kind contributions toward “providing spaces to host and build the network of collaborators.”

Such involvement may seem appropriate given that NCI’s mission is to commercialize university research. But the law explicitly prohibits state employees from engaging “directly or indirectly in the sale of goods, wares or merchandise in competition with citizens of the State.” The agreement for a member of a chancellor’s senior leadership team to “work directly” and daily with NCI—which, again, will compete with private enterprises—would require a state employee to engage “directly or indirectly” in unfair competition.

The universities’ close work with NCI, however, may technically be permissible because the Umstead Act includes various exemptions for the University of North Carolina. The law states that its provisions do not apply to the University of North Carolina with regard to

the sale of articles produced incident to the operation of instructional departments, articles incident to educational research, articles of merchandise incident to classroom work, meals, books, or to articles of merchandise when sold to members of the educational staff or staff auxiliary to education or to duly enrolled students or occasionally to immediate members of the families of members of the educational staff or of duly enrolled students.

It’s not clear whether the above exemption applies to all of NCI’s activities.

Regardless of whether NCI is technically within the bounds of the law, the fact is unchanged that such a “public-private” partnership will give some businesses an unfair competitive advantage and may open the door to cronyism. With inflation affecting the everyday lives of hardworking citizens, North Carolinians need to be assured that their political leaders are making prudent and upright decisions. Funneling over $1 billion of funds into a risky and largely unaccountable venture is unlikely to inspire that confidence.

Shannon Watkins is the research associate at the James G. Martin Center for Academic Renewal.