RALEIGH — The North Carolina Rural Economic Development Center returned more than $100 million in state appropriated grant funds to the state as ordered, but it did not relinquish $22.3 million in federal pass-through funds that statutorily belong to the state, the State Auditor’s Office concluded.
The audit, released Monday, further determined that it was impossible to verify interest earnings on some funds because they were comingled in a revenue pool with money that did not bear interest, and records were not kept well enough to distinguish how much came from paid interest and how much was from other revenue sources.
This is the second audit in two years of the beleaguered Rural Center. It was spurred by the first audit, released in July 2013.
In the first audit, State Auditor Beth Wood told told the Joint Legislative Program Evaluation Oversight Committee that the Rural Center held interest funds that would be difficult for the state to recover because they were in a private bank. The agency failed to monitor grants to ensure they met obligations, had lax reporting standards, and provided excessive compensation to its president, Billy Ray Hall, according to that audit.
Hall resigned after that earlier audit was released, and the General Assembly eliminated the Rural Center from the 2013-14 budget. A division was created in the Department of Commerce to promote and oversee rural economic development, and in October 2013 the Rural Center and Commerce Department signed a contract outlining the return of money to the state.
The Program Evaluation Committee then asked the Auditor’s Office to determine, among other things, if any funds remained at the Rural Center, to verify the Rural Center’s contention it still maintained $11.6 million in interest earnings, and determine whether the Rural Center ever performed a full compliance audit of state grant funds.
“The Rural Center never had a compliance audit on state appropriated grant funds,” according to the audit released Monday.
While local governments are required by law to perform audits on state grant funds “to determine an organization’s compliance with specific state program and grant requirements [on a] program-by-program level,” no such requirement exists for nonprofit entities that receive state grants, the audit stated.
According to the audit, the U.S. Treasury Department allocated $46.6 million to the state Commerce Department as part of the Small Business Credit Initiative program created by the Small Business Jobs Act of 2010. The intent of the act was to provide “critical resources to help small businesses” create jobs and stimulate economic recovery.
The Commerce Department contracted with the Rural Center to administer three initiatives:
• Capital Access Program – $8,261,319
• Loan Participation Program – $27,800,000
• Funds for Funds Program – $10,000,000
The audit concluded that $22.3 million of that total remained in the possession of the Rural Center. That money and any interest earned on the funds must be used specifically for the state’s Small Business Credit Initiative programs.
If the Commerce Department cancels its contract with the Rural Center to administer those programs, the state has three options for handling the leftover money, according to the audit.
It could create and administer the SBCI programs in-house within a state agency, or contract with another entity to administer the SBCI program. Both of those options would require approval from the U.S. Treasury Department. As an alternative, the state could return any remaining funds still held by the Rural Center to the Treasury Department.
“We’re not sure how that will play out, obviously. The legislature asked us to go in and look at this. It is up to them now to decide what they would like to do with the information,” said Bill Holmes, a spokesman for Wood.
In another issue, “auditors were not able to verify that the Rural Center held approximately $11.6 million in interest earnings as of October 31, 2013, because the Rural Center comingled interest earnings with non-interest earnings such as administrative receipts and donations,” the audit stated.
State statutes outline guidelines that governments must follow on how interest earned on state appropriations should be treated, but such rules did not exist prior to July 1 this year for nonprofit entities receiving state appropriations.
The Rural Center kept detailed records on the Clean Waters Partners program to enable verification of $11.3 million in interest earned and $2.7 million of interest spent.
“But due to a lack of detailed accounting records for interest earned on non-CWP funds, auditors could not verify that the Rural Center spent $7 million or had a balance of $3 million remaining from interest earned on non-CWP funds as of October 31, 2013,” the audit stated.
Dan E. Way (@danway_carolina) is an associate editor of Carolina Journal.