North Carolina’s Northeast Partnership was formally separated from the state-created Northeastern North Carolina Economic Development Commission in 2003 in order to evade state Public Records Act requirements, according to documents obtained by Carolina Journal and confirmed by a Commission director.

In July 2003, shortly after CJ made a series of public records requests to both the Partnership and Commission, the directors board of both organizations — identical in makeup — moved to create a clear distinction between the two. The former legal counsel for both organizations, Ernie Pearson of the Raleigh-based Sanford Holshouser Law Firm; their former president, Rick Watson; and some directors had maintained prior to the 2003 changes that the nonprofit Partnership was private and not subject to public disclosure requirements. But they were hampered by a 1999 attorney general’s opinion that insisted the Partnership was public, based in part on: its shared board with the Commission; the two groups’ common mission; and the fact that the Commission was unauthorized to declare itself independent from the state Department of Commerce, which board members did in a special meeting in July 1994.

John Schrote, a Commission board member who also served similarly for the Partnership until the realignment in 2003, acknowledged the two groups were separate entities beforehand but acted in unison. He said the Partnership was created separately so that their industrial recruiters could entertain prospects — say, with alcoholic beverages — by using some funds that didn’t originate with taxpayers. But the boards would conduct business for both in meetings held at the same time, and annually the Commission would vote to convey its state appropriation to the Partnership, almost as a formality, Schrote said.

“At the time we didn’t have our authority diluted,” he recalled, “so we just did it. I didn’t feel uncomfortable with that at all.”

CJ Document Requests

But CJ in 2003 began asking for records from the Commission/Partnership. In a series of requests between February and June that year, publication staff asked for documents pertaining to the recruitment of an ethanol plant for both Martin and Beaufort counties; documented salary, bonus and other information that supported figures on the Partnership’s IRS tax returns; and records of all accounting documentation of financial disbursements since 2000. In a written response to CJ’s requests at the time, Pearson — maintaining his posture that the Partnership was private — nevertheless claimed that gathering the information requires “a great deal of staff time,” because employees would “have to go to multiple sources on their records and files.” Pearson requested that CJ deposit $1,000 into a Partnership “trust account” before undertaking the work, an amount he estimated would be the labor cost for fulfilling the request.

Meanwhile board members moved to excise the Partnership from the Commission, so that no doubt would remain about its independence, in hopes of getting a new attorney general — Roy Cooper — on their side in the dispute.

Pearson’s advice

Pearson’s counsel to his clients, Partnership president Watson and then-chairman Bob Spivey, belied his public stance that their organization was exempt from the public records law. A June 18, 2003 advisory letter to the pair from Pearson set goals for the separation of the Partnership.

“Our recommendations herein are designed to maximize the chances that the Region’s nonprofit entities will not be found to be public entities,” should a lawsuit be brought against the Partnership, Pearson wrote to Watson and Spivey.

Pearson then explained where he believed the Partnership was vulnerable to a court challenge, beginning with its identical board of directors with the Commission.

“This unity of control would be a strong part of any challenge which contends that the Partnership is a public agency,” Pearson wrote.

He also suggested the co-use of public funds was problematic.

“Currently, all of the funding for the Partnership consists of the public funds which come to the Commission,” Pearson wrote. “This makes the Partnership more susceptible to a claim that it is a public agency.”

Pearson recommended that the Partnership draw monies from two other Commission-associated nonprofits to alter its appearance.

“This would bolster our position that the Partnership is a private entity,” Pearson wrote.

He also noted that the board conducted minimal business for the Commission, meeting only a few minutes, adjourning, then taking up matters under the Partnership banner, “during which virtually all of the business of the Region is conducted.” Pearson recommended that this practice change.

“I suggest that all publicly accessible information be discussed in the Commission meeting,” Pearson advised, “and that information which is sensitive or private be discussed in the Partnership board meeting.” He added that expenses incurred that were “not publicly sensitive” be paid by the Commission, while the Partnership would pay “sensitive” expenses, including contract employee and senior executive compensation.

Commission members (except for Schrote) accepted the advice of Pearson and Watson and voted to remove several members from the Partnership board. For the most part Commission board members appointed by the governor, the Speaker of the House, and the President of the Senate were removed from the Partnership. Left for the Partnership was a much smaller board — 11 members — with only three that also served on the Commission.

Schrote said he was the only Commission director who opposed the division. He said Pearson and the “executive committee” of the board — consisting of chairman Jack Runion and a few other officers — recommended the split to the full board to “get around” the state’s Public Records Act.

“The argument was that there were certain things in business and industry which are proprietary, and therefore they didn’t want to be in the position of giving that out,” Schrote said. “I think it’s apparent today the real reason for it.”

But the state records law allows for those exceptions, in which economic development agencies do not have to divulge information about prospects until they finalize a decision about relocation or expansion. And public agencies involved in economic development already are protected under state law from disclosing a business’s trade secrets.

What resulted in 2003 was a continuation of the Commission directors, in an annual exercise, transferring their state appropriation to the control of the Partnership. But now, even though carried out in practice before, the control of the Partnership’s “executive committee” over major decisions and financial issues was codified, in amended bylaws. The changes meant the board would “delegate the authority and responsibilities of the day-to-day management of the [Partnership] to an executive committee consisting of the chairman [Runion], treasurer [O.S. “Buck” Suiter], and the president [Watson].” The new bylaws stated that the executive committee would also have the authority to hire, fire, set the salaries and other compensation for the Partnership’s “senior officers,” including Watson.

This concentration of power with a few board members led to a highly critical report on the actions of the Partnership and Commission, which was released last week by State Auditor Les Merritt.

Memorandum of Understanding

A “memorandum of understanding” between the Partnership and Commission, dated June 18, 2003 and to be renewed annually by the boards of both organizations, outlined details of the relationship between the two entities. For the fiscal year 2003-04, the Commission turned over $950,000 to the Partnership. For each year, the Partnership would be required to provide a “contribution request” to the Commission, which would include details of what the funds would be used for, and also the total budget for the Partnership showing its funding from all sources. The memorandum also called for the Partnership to provide an annual report to the Commission — “written or oral” — summarizing the use of Commission funds from the previous year. The Partnership also asserted its rights under the state Public Records Act, stating that information discussed regarding industrial prospects would be conducted in a closed meeting.

The memorandum also clearly outlines the separation of the Partnership from the Commission, stating it is “not an agency, agent, or legal representative.”

“The [Partnership] has no authority whatsoever to bind the Commission to any commitment or to expose the Commission to any liability,” the memorandum says, among other distinguishing language.

Plea for a revised opinion

Armed with revised bylaws and the new memorandum agreement, Pearson sent a letter in October 2003 seeking a new opinion from the attorney general’s office about the Partnership’s legal status under the state’s Public Records law. In his seven-page dispatch, Pearson explained that:

• “The Partnership and the Commission work cooperatively, but are governed independently.”

• The Partnership is funded “jointly” from the Commission and from other related nonprofits that raise private funds (Government funding accounted for 95 percent of the Partnership’s revenue during the last three years).

• The Commission’s members on the board of the Partnership “are a distinct minority.”

• The Partnership and the Commission “deal with each other on an arms-length basis.”

• “The Partnership has independent control of the exact expenditures” of the funds it receives.

• The Partnership removed the Department of Commerce as the recipient of all the Partnership’s assets should it be dissolved, leaving the decision with the board of directors.

“The Partnership is clearly a private non-profit entity and not an agency of the State within the meaning of the [Public Records Act],” Pearson wrote in conclusion.

A year later Chief Deputy Attorney General Grayson Kelly responded to Pearson’s request saying based on the information provided, “a court would likely conclude that the Partnership is not an agency of the State….” He added that his opinion could change, “should new evidence be presented.”

Now that the audit has been released, Schrote is one of several Commission board members who are dissatisfied with the current structure of the Northeast economic development agencies.

“We delegated away the authority, basically, and we have to get it back,” he said.

Pearson, Watson, and Runion did not return phone messages seeking comment for this article.

Paul Chesser ([email protected]) is associate editor of Carolina Journal.