Risk Tolerance: NCInnovation weighs investment risks for taxpayer-funded endowment

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  • Legislation appropriating the tax funds to NCI stipulates that the principal can be drawn down by as much as $50 million in the first fiscal year, and $140 million in total (28%).

The NCInnovation board of directors met last week to discuss and vote on issues ranging from the selection of a tax and audit accounting firm, to whether or not lobbying expenditures were properly reported on tax forms. They also discussed the search for an investment manager who would oversee the nonprofit’s taxpayer-funded endowment and if conflicts of interest may exist in that search.

The board was pitched a handful of research projects as researchers compete for the opportunity to be among the very first pilot programs. In the end, the board approved $5 million in grants to support eight university research projects.

NCInnovation (NCI) is a nonprofit formed in 2018 by North Carolina business leaders with an aim to plug the gap in the public university research-to-development pipeline by providing grant funding to selected university researchers to aid in development and commercialization. The private entity was appropriated a total of $500 million taxpayer funds in the biennial state budget passed by lawmakers last fall. NCI received the first $250 million earlier this year and, under current law, is slated to receive the second $250 million tranche of taxpayer money this summer.

Beyond the pilot grants, which Carolina Journal will report on in a coming article, the latest NCI developments are significant in that directors will soon be weighing exactly what level of risk they are willing to tolerate with the huge sum of taxpayers’ money forming the endowment; deciding how to treat potential conflicts of interests among the aspiring fund mangers; and, considering whether NCI accounting and reporting struggles could spell trouble down the road in the event the IRS decides to audit the entity.

Tax & Audit

Ahead of the full board meeting, subcommittee members interviewed accounting firms that could be retained by NCI to handle the nonprofit’s complicated tax and audit work. 

Accounting consistency has been a sore point for the young public-private partnership. Earlier this year, board member Art Pope invited the Office of State Auditor to investigate NCI’s books on suspicion that executives were not properly complying with statutory requirements in the accounting treatment of private donor pledges. The legislation enabling NCI’s award of taxpayer money required the nonprofit to raise at least $25 million in private donations and to follow certain accepted accounting methods.

Accounting practices were once again a source of debate among directors in recent days; this time related to the categorization of lobbying and other fees. Where the line between lobbying and consulting is drawn, as far as the IRS is concerned was a topic of debate at the subcommittee and full board level.

There were differences of opinion between select board members and NCI executives regarding how fees previously paid to a now board member should be categorized on IRS forms. The payments in question, totaling $180,000, were directed to Kelly Fuller, who was later appointed to NCI’s Board of Directors.

Director Art Pope, a co-founder of the John William Pope Foundation and former board member for the John Locke Foundation, encouraged his fellow NCI directors to adopt a conservative approach to accounting for those payments, so as to ward off potential ire from the IRS.

NCI’s Chief Financial Officer, Linda Hall, spoke to the concerns raised by Pope multiple times over recent committee and board meetings, suggesting the that a retrospective filing to dissect such fees is likely more tedious than valuable, as she believes the accounting on those questions to be valid and free of audit risk.

Ultimately the full Board voted to approve the filings regarding the tax forms.

The Board also supported the subcommittee’s recommendation for retaining the tax and audit services of accounting and advisory firm BDO. In interviewing the competing firms, directors placed a premium on a firm’s experience with IRS audits and employment of former IRS officers.

Investment risk

Another heavy consideration being weighed by NCI directors is who will manage the anticipated $500 million taxpayer-funded endowment and how much risk should those taxpayer funds be exposed to, and whether there was potential for conflicts of interest among investment managers submitting bids to run the endowment and earn fees.

NCI has reported private donation pledges in excess of the statutorily required $25 million private capital — the current balances for private funds designated for overhead expenses and operations stand only at $3.4 million — and some of those donation pledges came from the same financial institutions now competing to win the management contract on the NCI endowment.

Directors questioned whether selection of the investment manager search should be a blind process in order to avoid potential conflicts of interest in their selection.

“We want to make sure we recommend you the absolute most qualified manager to manage these funds,” said NCI director and chair of the investment subcommittee, Stanhope Kelly, to the board last week. “So what’s paramount is we’re mindful that we have pledges that are unconditioned from a number of providers who have submitted [bids]. So we know we’re holding that in mind.”

So far, NCI has received 17 proposals for endowment management services. Currently, the $250 million in taxpayer funds NCI received earlier this year sits in money market accounts earning an average interest return around 5.25%. That represents a relatively safe and healthy return within a high interest rate financial environment, but investment managers will not be limited to such conservative investment vehicles going forward.

Investment options are necessarily limited by the relatively low maximum fee limits placed in statute, meaning high investment fee investment vehicles like hedge funds or private equity are out. A managed portfolio of equities, bonds, and other derivative financial assets will presumably be part of the endowment mix, however — and all of them come with a risk to principal.

How much risk is too much for the taxpayer’s paying for the NCI endowment? According to statute, they can take quite the bath when it comes to draw downs of the corpus, or principal, of endowment funds. Legislation appropriating the tax funds to NCI stipulates that the principal can be drawn down by as much as $50 million in the first fiscal year, and $140 million in total (28%).


In a hopeful sign for taxpayers, directors appear committed, at least informally, to avoiding any drawdown of the corpus for financing grants.

“So although we were granted the opportunity to use up to 50 million dollars in this fiscal year, we will not use a single dollar out of the corpus, the grants will be funded entirely out of the investment income,” reported Kelly to the full NCI board of directors last week.

It’s within the endowment’s principal investments, however, where taxpayers face the most risk at the mercy of the market. In the event of market swoons like 2008 or 2020, the taxpayers funding NCI could take it on the chin.

The NCI Board could adopt more formal policy resolutions limiting endowment investment vehicles to those that best protect the corpus principal; trading the risky race for high returns for a relatively mundane portfolio that offers more safety for taxpayers instead.

Beyond the board’s non-binding commitments to protect the corpus, some publicly appointed directors have told Carolina Journal they’d support further statutory restrictions to better protect taxpayers from excessive investment risks or losses. Such considerations were never openly debated by the General Assembly because the half a billion taxpayer dollars for NCI was put in the state budget.

NCI directors plan to review investment management bids, and make a selection, within the next 90 days. Meanwhile, state lawmakers are engaged in budget modifications, balancing revenue surpluses against needs for education funding, tax rebates, and debt service.

Unless subject to budget adjustments, another $250 million of taxpayer funds are slated for NCI this summer, well before the efficacy of last week’s initial pilot grants will be established.

The meeting of the NCI Board of Directors is scheduled for Aug. 14.

Correction: A previous version of this article named Kelly Fuller, an NCInnovation Board Member, as having served as a lobbyist for NCI before transitioning to a strategic advisory role, all prior to her appointment to the Board. Though the accounting treatment of payments made to Fuller were a topic of debate in recent weeks, CJ has learned Fuller is not a registered lobbyist and was never retained as such by NCI.