Memorandum of Law


Jul 25th, 2013
by Jeanette Doran

MEMORANDUM OF LAW

The Governor Acted within his Clear Statutory Authority in

Suspending Funding to the Rural Center

The North Carolina Institute for Constitutional Law[1]

ncicl.org

July 25, 2013

On July 18, the Office of State Budget and Management (OSBM) informed the North Carolina Rural Economic Development Center, Inc., (known as the “Rural Center”) that OSBM was suspending scheduled disbursements from the State to the Rural Center.[2] OSBM cited a critical state audit of the Rural Center as the reason for that suspension. OSBM also explained it was considering pursuing the return of state funds previously given to the Rural Center. As explained in this memorandum, OSBM’s actions were legally authorized and factually supported by both the state audit cited by OSBM in its letter to the Rural Center and by a federal Environmental Protection Agency audit not referenced by OSBM.

A.    The Governor has oversight of non-State entities receiving state funds.

Article III, Section 3 of the North Carolina Constitution gives the Governor the duty to administer the state budget. In light of this constitutional duty, G.S. § 143C-2-1 denominates the Governor the “Director of the State Budget” and vests him with the duty to ensure that state funds are spent properly. This statute also authorizes the Governor to delegate some of his oversight duties to OSBM or other officials. Id.  Regarding the use of state funds by non-State entities, G.S. § 143C-6-22(b) provides: 

If the Director of the Budget finds that a non-State entity has spent or encumbered State funds for an unauthorized purpose, or fails to submit or falsifies the information required by G.S. 143C-6-23 or any other provision of law, the Director shall take appropriate administrative action to ensure that no further irregularities or violations of law occur . . . Appropriate administrative action may include suspending or withholding the disbursement of State funds and recovering State funds previously disbursed.

 

In short, the Governor may “take administrative action” when a non-State entity: (1) spends funds for an unauthorized purpose, (2) fails to submit information required by law, or (3) falsifies legally required information. When any one of these instances occurs, the Governor “shall take administrative action,” which may include “suspending or withholding the disbursement of State funds and recovering State funds previously disbursed.  Id. Prior to suspending disbursements or seeking recovery of previously disbursed funds, the Governor or OSBM must consult with the State agency administering the funds to the non-State entity which is the subject of the action. G.S. § 143C-6-23.

B.    Suspension of funding to the Rural Center followed statutory guidelines.

OSBM’s decision to suspend funding to the Rural Center followed statutory guidelines, which permit OSBM to suspend disbursements upon finding violations of state law and consulting with the Rural Center’s grantor agency. OSBM’s letter informing the Rural Center of the suspension of scheduled disbursements cites multiple violations of state law, including failure to utilize state funds for proper purposes and failure to monitor funds given to sub-grantees. These findings were made after the State Auditor issued a financial audit finding severe problems in Rural Center oversight and financial management.[3] The audit found that the Rural Center improperly spent thousands of dollars of state funds on entertainment costs, failed to abide by state grant reporting requirements, and gave false information in its response to the audit. These failures violated the state grant reporting and monitoring requirements contained in North Carolina Administrative Code at 09 NCAC 03M. T he audit also raised concerns about investment income the Rural Center earned from State funds and lavish compensation packages for some employees.

Before taking any action, OSBM consulted with the Rural Center’s grantor agency, the State Department of Commerce, as required by G.S. § 143C-6-23(f). The actions OSBM took in response to these violations, namely suspension of disbursements and consideration of action to recover past funding, are specifically authorized by G.S. § 143C-6-23(f). Thus, the actions taken by the Governor were in compliance with the mechanisms set out by state law: OSBM found violations at the Rural Center, consulted with the Rural Center’s grantor agency, and then issued an order that was within its statutory powers.

C.    Potential Implications of Federal Audit of the Rural Center.

Although not mentioned in OSBM’s letter to the Rural Center or the State Auditor’s report, the federal Environmental Protection Agency (EPA) conducted an audit of an almost $1.2 million federal grant to the Rural Center.[4] This audit found that the Rural Center failed to properly allocate funding between federal and state sources, among other violations.  In response, the EPA has designated the Rural Center a “high risk” grantee, meaning the Rural Center will have to abide by additional conditions before receiving future federal funds. The audit initially recommended that the EPA recover the $1.2 million from the Rural Center, and the EPA’s Inspector General is still not satisfied with the Rural Center’s response to the EPA audit.[5] The EPA audit is significant for two reasons. First, it shows the Rural Center’s failure to abide by federal grant conditions, which violates a state rule mandating that non-State entities abide by federal rules when receiving both state and federal funds.  09 NCAC 03M .0201. Second, the State Auditor’s report did not mention the EPA report so it is unclear whether the Rural Center informed the State Auditor of the EPA audit.  If the Rural Center failed to inform the State Auditor about the EPA report, this failure may constitute a violation of G.S. § 143C-6-23(g), which requires non-State entities to give information about ongoing outside audits to the State Auditor.

Conclusion

The executive branch acted within its clear statutory authority by suspending disbursements to the Rural Center. This action was authorized by law and supported by both a critical state audit and a critical EPA audit. Both audits signal the need for further investigation of the Rural Center’s activities and serious consideration of action to recover taxpayer money that has previously been given to the Rural Center.



[1] For more information please contact Jeanette Doran at 919-838-5313 or doran@ncicl.org. This paper was prepared with substantial assistance by Neal Inman, law student intern.

[2] Letter from Art Pope, Assistant State Budget Director, Office of State Budget and Management, to Elaine Matthews, Senior Vice President, North Carolina Rural Economic Development Center, Inc. (July 18, 2013) (available at http://www.wral.com/asset

/news/state/nccapitol/2013/07/18/12679102/Art_Pope_letter_to_Rural_Center.pdf).

[3] North Carolina Rural Economic Development Center, Inc., Financial Related Audit, State Grant Management and Sub-Recipient Monitoring, July 2013 (available at http://media2.

newsobserver.com/smedia/2013/07/17/10/29/KQdaq.So.156.pdf#storylink=relast).

[4] Environmental Protection Agency Office of the Inspector General Report No. 12-4-0499, “Costs Claimed by the Rural Economic Center, Inc., Under EPA Grant No. X96418405, May 23, 2012 (available at http://www.epa.gov/oig/reports/2012/20120523-12-4-0499.pdf).

[5] See Id.; Memorandum from Arthur A. Elkins, Jr., Environmental Protection Agency Office of the Inspector General, to Gwendolyn Keyes Fleming, Region Administrator, Region 4, Environmental Protection Agency, (Oct. 3, 2012) (available at http://www.epa.gov/oig/reports/2012/12-4-0499_IG_Comment_on_Response.pdf).