The Golden LEAF Foundation failed to effectively oversee hundreds of millions of dollars in economic development grants and violated open meetings laws, according to the State Auditor's Office.
The report issued Monday by State Auditor Beth Wood also recommends that state lawmakers consider legislation that would make Golden LEAF more like other agencies. Currently, the foundation is exempt from ethics rules by its status as a nonprofit corporation.
"There is a risk that potential conflicts of interest or political influence play a role in Golden LEAF investment decisions," the report says.
The audit also complains that Golden Leaf was "less than cooperative" during the audit and even prevented a staff auditor from inspecting files at one point. The foundation says that incident was a misunderstanding.
The mission of Golden LEAF, which is funded out of the state's share of a national legal settlement with cigarette manufacturers, is to promote economic development in tobacco-dependent and economically distressed regions of the state. Founded in 1999, the foundation has made $326.2 million in grants to date.
But critics have long called for reform at the foundation, which oversees more than $700 million, and have worried that too little oversight could hurt its mission.
"In the larger sense, I think the General Assembly should rethink whether an organization like Golden LEAF, populated by political appointees, is the best vehicle we have to make decisions about the spending of these funds," Sen. Phil Berger, the Republican leader, said Monday.
Schorr Johnson, a spokesman for Senate leader Marc Basnight, a Manteo Democrat, said the senator hasn't yet reviewed the audit but hopes the foundation will take steps "to approve accountability."
The audit also found that although Golden LEAF does monitor its grant recipients, the nonprofit foundation doesn't do enough to verify the data it receives from them or to review their financial condition. The upshot is that "state funds could be wasted on grantees that are not achieving desired results or lack the capacity to sustain operations," the audit says.
Dan Gerlach, who joined Golden LEAF as its president in October 2008, disputes the criticism of the foundation's grant-monitoring efforts.
"I think we have strong grant oversight," said Gerlach, who was previously budget adviser to Gov. Mike Easley. "I think our grantees are amazed at how much oversight there is."
In its official response to the audit, the foundation notes that its staff of 14 people made more than 169 visits to monitor grantees in the past year.
Gerlach did concede that the foundation could, and will, do a better job of standardizing the information it requires from grant recipients. Currently the foundation imposes different reporting requirements on a grant-by-grant basis.
"We don't make grants to companies. We make grants to nonprofits and government agencies," Gerlach said. "So when I make a grant to N.C. State University, I don't evaluate the university's financial condition because it's been there for a century and a half."
The audit report cited several examples that it found demonstrate the need for Golden LEAF to be bound by state ethics laws, and Gerlach provided additional details. They included a $30 million investment in Hatteras Venture Partners, a Triangle venture capital firm whose partners include John Crumpler, a Raleigh businessman long active in Democratic politics; and a $6 million investment in Carousel Capital, a Charlotte private equity firm co-founded by Erskine Bowles, the president of the University of North Carolina System.
Gerlach said those investments have performed well and were made after proper "due diligence," or investigation into the firms' track record, management and other pertinent details.
"We made the decisions based on our investment policy and to maximize return," he said.
Problems are 'fixable'
A spokesman for the State Auditor's Office, Dennis Patterson, said that the monitoring issues at Golden LEAF are typical of state agencies.
He added that those and other issues raised by the audit are fixable. "And in fact, Golden LEAF is trying to fix it even as we speak," Patterson said.
The report found that Golden LEAF violated the state open meetings law by approving a $15 million grant aimed at luring a beverage maker to the state during a closed session in 2005.
The foundation is also deficient in maintaining minutes of its open and closed board sessions, according to the audit. The foundation initially provided the auditor with 400 sets of minutes from meetings held from 1999 through 2009, omitting 29 meetings.
Gerlach said that approving a grant in a closed session was "a mistake" adding, "We won't do it again."
He also said that the audit's concerns about the foundation's minutes are legitimate, although he said that all the missing sets of minutes but one go back more than six years.
"We are going to fix that -- and we have fixed it," he said.
The audit also takes the unusual step of qualifying its findings because Golden LEAF's management, both before and after Gerlach took the helm, was "less than cooperative."
Several instances of non-cooperation "delayed the completion of our work and created an environment where auditors identified risks regarding the integrity of information obtained from the foundation," the audit states.
The most serious instance, according to the audit, occurred on Oct. 8, 2008, when a senior vice president "confronted a staff auditor and removed him from the [investment file] room."
Gerlach said the Oct. 8 incident, which took place about a week after he joined the foundation at a time when the financial markets were in serious turmoil, was a misunderstanding. In no way, he said, was Golden LEAF trying to hide something.
"I had just gotten there," Gerlach said. "I wouldn't have known if there was anything to hide. I wouldn't have known where to find it to hide it."
