The Money Maze of State Grants
An analysis by the Civitas Institute of state government grant oversight shows a need for more transparency, easier access to public records and stricter state and federal laws.
State Grants are not loans but state and federal funds awarded to organizations and companies with no repayment required for performing services under a contract. State agencies decide which applicants are awarded grants but by state law the Office of State Budget and Management (OSBM) has oversight. That relationship, however, is a little fuzzy at times.
Funding for over 1,000 recipients of North Carolina state grants has been suspended, repeatedly in many cases, mainly for not filing required annual reports of how the money was spent, but many of them still received additional grants. By the time many of the grants were suspended, however, the funds had already been spent with no accounting for how the money was used.
Interestingly, two of the non-profits whose grants were suspended were found to owe delinquent taxes to the Internal Revenue Service (IRS). One was Quality of Life Association of Hertford County. The organization received $50,000 for a women’s health grant in 2007-2008. The other was UHURU Community Development Corporation in Northampton County which received $12,785 in 2007-2008, also for a women’s health grant. The two grants were awarded through the state Division of Mental Health. A spokesman at OSBM, Jonathan Womer said in an email response his office was investigating non-profits but wasn’t sure how much money would be recovered. In fact, we never received a response on just how much had been recovered from any of the suspended grantees.
By law it is the responsibility of OSBM under General Statutes 143C-6-22 and 143C-6-23 to track the funds recovered from suspended grant recipients. Womer said in most cases the office leaves it up to state agencies to take action because OSBM doesn’t track that information. Apparently there is no central database on how much has been recovered.
Moreover, State Agencies do not rely on the state Department of Revenue to actively screen applicants to find out if they owe state taxes. The grantees are required only to file a statement that they don’t owe taxes. Womer said OSBM has “started to investigate matching Department of Revenue data against our grantee information.” This means that organizations who are delinquent on paying their state taxes can often still receive taxpayer funds through state grants if they simply don’t admit they owe state taxes.
Fourteen of the grantees with suspended funding have also lost their tax exempt status with the IRS.
Another fourteen suspended grantees received money for dropout prevention grants.
Some companies and non-profits had funding suspended one year and would still be awarded a grant the following year. In some cases the funding continued for three or four years.
An example is Cognosci, Inc., a medical research company in Research Triangle Park. It received a $12,500 grant in 2006 through the state Commerce Department. The funding was suspended in 2007 for not reporting how the money was spent. But that same year Cognosci received another state grant for $75,000. The funding was again suspended in 2008, the same year Cognosci received two grants for $18,750 and $56,250. The funding was once again suspended in 2009, but in 2010 Cognosci was given $22,500. A spokesman for the Commerce Department said the agency is working with the company to resolve the matter but didn’t say if any of the money had been retrieved.
About half of the 1,000 suspended grants were for child and adult nutrition programs administered by the state Division of Public Health. Most of those grant recipients had funding suspended over the course of three to four grants in consecutive years, but they continued to receive the grant funds anyway. Those recipients knew they wouldn’t lose their money even if they didn’t comply with reporting rules. The state couldn’t actually withhold those funds because of federal law. Those food programs were paid for with federal tax dollars that the Division of Public Health simply administered. Under federal law even if a grantee receiving federal funds doesn’t comply with state reporting rules the state still has to continue the funding.
There is no hard or strict rule about how much a grant recipient should spend on administrative costs, such as wages. A benchmark used by a national charity watchdog is 60 percent of funds should go to program services, leaving 40 percent, at most, to administrative costs.
That benchmark was clearly not followed by some non-profits that received state grants. The organization Ray of Hope, Inc. based in Goldsboro received a dropout prevention grant of $150,000 in 2008. Federal tax forms showed the salaries and other employee benefits amounted to $101,314. Executive Director Olavee Williams is shown on the tax forms as receiving $30,000 but forms don’t indicate who was paid the balance of salaries and benefits. Ray of Hope was also one of the non-profits to lose its federal tax exempt status.
The Alliance for Children and Youth, Inc. in Gaston County received dropout prevention grants in 2007 totaling over $75,000. It had its funding suspended but not before receiving the money. Federal tax forms for the year 2009 show revenue of over $1 million for that year. Salaries and other employee benefits were reported at $497,013, nearly 50 percent.
During the recent session of the General Assembly Sen. Andrew Brock (R-Davie) introduced SB460 to limit administrative expenses of state grant recipients to 15 percent. It was referred to the Senate Appropriations Committee and disappeared.
The Office of State Budget and Management did create a web site called NCOpenbook where the public can research what organizations are receiving grants and the amounts. Despite the fact grant recipients are required to file reports electronically the public does not have access to that database. So to find out what the grantees are reporting a citizen would have to request those as public records under the state public records law chapter 132.
That’s the money maze the public is left to navigate.
While I believe that DHHS, DPH, and sister agencies have provided an avenue for fraudulent activities in management of state monies, I think that a 15% management expense cap may be too strict for small organizations.
This research has revealed a weakness in funding of worthy projects. Deal with the problem legally, not with legislation. Laws backfire eventually.
The weakness is pervasive in all levels of government. Privatization has only masked the mismanagement and displaced it one notch. Budget growth needs careful supervision for this and other reasons.
We may have to allow that favoritism and paybacks will always be a part of a government budget, distasteful as it may be. Uncovering these frauds always takes years after the fact. And the perps go on to create new ways to get money.