NCInnovation (NCI), the private nonprofit aiming to help further public university research toward commercialization via the select issuance of grants, was appropriated a total of $500 million in taxpayer funds in the 2023-2024 biennial state budget.

The House Oversight and Reform Committee heard testimony Tuesday from Bennet Waters, chief executive officer of NCInnovation, as lawmakers attempt to wrap their heads around the details of a project for which they already appropriated taxpayer money.

“Our goal today is to understand whether NCI has complied with state law to receive state funds and how NCInnovation has used and plans to use those funds,” said Rep. Harry Warren, R-Rowan, co-chair of the House Oversight and Reform Committee, in opening the hearings. Warren noted in his opening remarks that he, other members, and their constituents could quickly come up with a “list of critical needs the state could meet” with $500 million in tax revenues, a contributing factor to the high level of scrutiny NCI would face from the committee.

In introducing the mission of NCI, Waters described the goal as filling a gap in the relay race of research to development.

NCInnovation CEO Bennet Waters testifies in front of the NC House Oversight Committee on July, 9, 2024

“I often describe this as a relay race,” Waters said. “Why do you want to be the first or the second runner, if there’s no third, or fourth runner in a relay race? Doesn’t matter how fast you run, doesn’t matter how much of a lead you get by the time you get to the finish line; if there’s nobody to hand the baton to, you’re done.”

Waters said other states are investing directly in commercializing research, even using taxpayer funds, and that North Carolina was thus losing out on opportunities for in-state development. He contrasted similar models in other states, which have drawn criticism as well-intended boondoggles, with that of NCI, asserting they have more accountability practices and protections in place to avoid similar pitfalls.

Committee co-chair Rep. Jake Johnson, R-Polk, welcomed Waters to the hearing after emphasizing the relative lack of information members had about one of the budget’s biggest line items.

“I think one of the biggest concerns — somebody looking at this from the outside, even members — this was an expedited process when it came through,” lamented Johnson. “So even members may be a little confused.”

Committee members questioned the executive on compliance issues, board relations, and why they think filling this gap is the responsibility of North Carolina taxpayers.


“We did everything I just mentioned without spending a single state dollar,” boasted Waters after reviewing a list of compliance items NCI has completed. “Let me repeat that; we have fulfilled all of our statutory responsibilities, identified, evaluated, validated, and awarded the first set of pilot grants, without spending a single state dollar.”

NCI was required by law to raise $25 million in private funds (within five years) to pay for all overhead and administrative expenses, such as lobbying and executive pay. Controversy regarding NCI’s accounting treatment of said pledged donations earlier this year led to one board member officially requesting an audit of NCI’s books by the Office of State Auditor.

Waters told committee members that, although the statute allows for some significant spending of the corpus (the original investment principal), NCI is committing to avoiding any drawdowns at all. Instead, only net investment returns on the endowment will be utilized to fund the grants.

“Having received $250 million in state funds in January, we immediately invested those dollars with an independent third party to generate high interest income,” reported Waters. “With the receipt of the second tranche, funding the NCInnovation corpus will stand at just over 506 million dollars.”

That doesn’t mean the taxpayer funds are safe, necessarily. Being that the funds will be invested in various capital markets — NCI is undergoing a search for an investment manager now — the corpus of taxpayers’ funds will be subject to market volatility much like other investments. Water described the potential for variability in total grant awards.

“If the stock market went crazy and interest rates were nuts and we had $100 million dollars of income; we could potentially fund up to 100 million dollars in grants,” teased Waters. “If the stock market collapsed, and we had $5 million in interest income; we would have five million dollars in grants.”

Typically, stock market collapses aren’t associated with investment gains of any kind. No committee members asked Waters what would happen if the investment corpus of taxpayer funds experienced negative returns.

The Board’s role

Members did have plenty of interest in how NCI executives viewed the role of their board of directors. Rep. George Cleveland, R-Onslow, asked Waters about his perspective on this question in reference to a schism between directors selected internally and those appointed by the legislature.

As a condition of receiving taxpayer funds, NCI is required to accept eight directors appointed by the legislature, joining five legacy board members from the project’s genesis, forming a 13-member board. Apparently, conflicts have emerged between the approach of legacy members and NCI executives and that of directors appointed by the legislature to look out for taxpayers.

Meeting minutes and email exchanges obtained by Carolina Journal confirm that executives bristled at certain member requests for documents and financial statements.

“The board’s role, to your question, should be to provide strategic input, advice, and oversight to ensure that we are complying with what is in the legislation,” answered Waters. “It’s my belief that the board is doing that. [It’s] not the board’s role to be our lawyer; it’s not the board’s role to be our accountant; it’s not the board’s role to review all of our grants; and, it’s not the board’s role to review the grants that didn’t get funded. Boards of banks don’t make lending decisions, boards of healthcare organizations don’t make patient care decisions.”

Traditional separation between governing boards and operational decisions in the business world notwithstanding, the examples Waters lists are presumably accountable to shareholders. NCI is distinct from these in its reliance on state taxpayers to fund the entire investment corpus, making them the largest stakeholder in the project.

Particularly, members asked Waters about why a board member felt the need to request an audit of NCI from the Office of State Auditor.

“Why did he do that?” asked Rep. Carla Cunningham, D-Mecklenburg, of Waters.

“Ma’am, I think the best person to answer that question is the board member that you’re speaking of,” Waters responded. “What I would say, as background information, is that this is also an individual that lobbied the General Assembly in opposition to NCInnovation through the summer of ’23. And I believe, to the gentleman’s question, has been a frequent, uh, requester of information, uh, that if not provided within four to 24 hours, results in a memo claiming that it wasn’t provided. I can’t speak to, why? And I think that’s a question better posed to that director.”

The director in question, Art Pope, CEO and Chairman of Variety Wholesalers and co-founder of the John Locke Foundation, was appointed by the General Assembly late last year as one of then-seven directors appointed by the legislature. Their role, ostensibly, is that of a watchdog for North Carolina taxpayers.

Waters’ testimony suggests NCI executives are averse to board members “micromanaging” decisions on behalf of taxpayers.

Role of Government?

Another question focused on whether the government should be using taxpayer funds at all for such a projects, versus the private market investors deploying their own capital.

“So I mean, if someone, if an industry doesn’t see the viability in the investment and doesn’t see the return on the investment, why would we [taxpayers] want to jump in there and make that?’ Co-chair Warren asked Waters. “Do they have access to information we don’t have? Like, what other research is going on within the industry, or within the United States or within the world, that would foreshadow that and make that a bad investment?

“Why?” he added. “I guess that’s the main question: What makes that a viable project, if people in the industry aren’t interested in it?”

In response to Warren, Waters spoke about the competitive environment in advanced technology fields, the breakneck pace of change, and the potential for missed opportunities going to other states.

In closing remarks, Warren further expressed his reticence to support government expansion in this area.

“Some of these scholar entrepreneurs may need support for their research to get to market, but I believe a privately-funded effort to promote that support would be a better solution,” admitted Warren. “I have doubts about NCI’s ability to get the projected investment returns, but mostly I have doubts about whether or not this is really the best use of taxpayer dollars in light of state priorities that we have in areas like transportation, mental health, education, and many other issues that are before the legislature.”

Warren further noted his and other members’ displeasure with the rushed process to appropriate such a large sum of money without going through the standard committee vetting process, a sentiment echoed by member Rep. Amos Quick, D-Guilford.

“One of the reasons, back when this appropriation showed up in the budget, that I did not vote for the budget was because we didn’t have this vetting process that we’re having right now…,” said Quick.

Committee chairs announced they may find cause to asked Waters back for further questioning as more questions arise.