After audit, pressure mounts for changes at Rural Center

acurliss@newsobserver.comJuly 18, 2013 

  • Keeping its investment gains

    The Rural Center has been getting money from lawmakers before it was needed for projects on the ground, allowing the agency to earn and keep $20 million in investment income in five years, a state audit says.

    Taxpayer money has been given to the Rural Center “long before those funds were needed to fund Rural Center grants,” the audit says. “These early disbursements allowed the Rural Center to accumulate significant interest income while waiting for projects to be completed.”

    One example is a Clean Water Partners program run by the Rural Center that received $145.5 million in state funds in fiscal years 2008 and 2009. By June 2012, the audit says, approximately $55.9 million still had not been spent.

    The center received $145.3 million in infrastructure grant funds from 2005 through mid-2012 but had distributed only $86.9 million of it, the audit says.

    The audit says state law does not require that the Rural Center share the investment earnings with the state, but said the state should consider a different approach and the General Assembly should clarify its intentions.

    -- J. Andrew Curliss

Pressure was mounting late Wednesday for changes at the taxpayer-funded N.C. Rural Economic Development Center, criticized in a new state audit for failing to provide proper oversight of millions in state money and paying its longtime president an “unreasonable” salary of $221,000.

The office of State Auditor Beth Wood released the report Wednesday morning. By evening, Gov. Pat McCrory called for the replacement of longtime president Billy Ray Hall and the board’s chairwoman, Valeria Lee. Senate leader Phil Berger said no more taxpayer money should go to the center, which is a nonprofit funded almost entirely by the state.

House Speaker Thom Tillis said he was “deeply troubled” and that “time for change” had come, but offered no specifics.

Officials at the Rural Center said they would not respond immediately. In a statement, Hall said the center was working to improve and was committed to “being a good steward of state funds.”

The audit looked at grants awarded in 2011 and 2012, a relatively small slice of the center’s work, but documented multiple concerns about oversight and procedures. It also found that the center has placed nearly a quarter million dollars into a special account to pay Hall, 65, a severance when he leaves the agency, which was created in 1987 to help poor and struggling pockets of the state.

The severance account for Hall was started in 2003 and has grown by $10,000 to $40,000 a year since, according to the audit. The severance account held $241,856 on June 30, 2012.

That money for Hall is separate from regular retirement account contributions that he also has received, according to the audit. The auditors did not comment on the severance account, but mentioned it in a footnote. Rural Center officials did not respond to requests for more information about the arrangement.

Wood, a Democrat, said her office released the audit to ensure lawmakers had important information about the center as they are debating how much taxpayer money to send it for the next two fiscal years. She said her office had found “serious” concerns that policymakers needed to know.

“We did want to get this out before the budget was decided on,” she said. “Based on our audit and the evidence that we were able to pull together, the Rural Center is not overseeing our tax dollars as well as it should be.”

McCrory, a Republican in his first term, issued a statement that said “it is time for new leadership at the Rural Center in the roles of president and chairman of the board.” At least nine members of the 50-member Rural Center board are political appointees, including three by the governor.

A budget battle

A two-part series in The News & Observer last month had raised a range of questions, finding that the center claimed it created jobs in places where none exist; takes credit for creating mostly minimum-wage jobs at dozens of retail, restaurant and big-box stores; makes exceptions to its own rules to aid some projects; and that politicians have influenced grant decisions.

After The N&O series, Rural Center officials announced an “aggressive” review of how the agency awards, monitors and reports on its grants. That was to be completed by the end of July, but it has been delayed while the state budget is still up in the air, according to Carolyn Justice, the former state lawmaker who was tapped to lead that review.

Lawmakers in the state House have wanted to send the center $36 million through June 2015. The Senate would divert all money from the center to form rural programs overseen by state agencies. The governor had proposed providing about $7 million a year to the center over the next two years. Legislators are sprinting to settle the budget soon.

Berger said the audit only reinforced his chamber’s position.

“Funding the Rural Center would send the wrong message to voters who elected Republicans to provide accountability in state government,” he said in a statement.

Wood’s office started its work after completing a Department of Commerce audit last year that showed the department was not adequately monitoring money it sent to various nonprofits.

Among concerns auditors found at the Rural Center:

• Inadequate monitoring of grant recipients and “deficiencies” in internal control.

• A lack of action against grantees when they fail to comply with grant terms.

• Unallowable expenses charged to the state, including money for salaries and a $7,025 catered anniversary luncheon.

“The Rural Center’s failure to adequately apply monitoring procedures resulted in an inability to hold its ... grantees accountable for how taxpayer dollars were spent,” the audit says. “There is an increased risk that more than $58.8 million in grant funds spent in fiscal year 2012 were not used for their intended purpose.”

The audit also says that lawmakers have been sending money to the center long before it was needed, allowing the center to earn $20 million in investment income over a five-year period that was not available to the state.

Hall promises improvement

Hall wrote in response to the audit that the Rural Center will work to improve, and offered some explanations. Auditors took the unusual step of responding to that, saying the Rural Center had not provided correct information.

In a statement released to the N&O, Hall said auditors had “identified opportunities for us to strengthen the way we monitor the performance of those who receive grants and we are currently making improvements to address those issues.”

Hall, who has led the agency since 1987, could not be reached. Lee, the board chairwoman since 2009, said late Wednesday she could not comment at this time other than to say the center has always strived to do a good job. She said she was unaware that the governor had asked for her to step aside and could not respond to that. The Rural Center has received about $25 million a year over the past four years from the state budget. Based in Wake County, it makes grants to provide aid – mostly with water and sewer projects, but also through a range of other efforts – in 85 of North Carolina’s 100 counties.

Hall told lawmakers in a committee meeting early this year that the Rural Center stays on top of its grantees and gets back the taxpayer money if a project isn’t working out.

The N&O’s series and the state auditor both show that isn’t what happens.

The audit says that of 48 files it reviewed, a total of 28 grantees had not provided timely progress or final reports to the center about how they had or were using the money. None were required to refund money and none were given a written notice, the audit says.

For 30 of the grants, there was no documented “risk assessment” to gauge whether a grantee could meet grant goals. Auditors also looked at a subset of 38 of those grants and found that in five cases the Rural Center had not verified performance results.

The Rural Center said it did not have money to hire sufficient personnel to monitor all grants and that it tries to “work with grantees instead of enforcing grant conditions and terms,” according to the audit.

Auditors said Hall’s salary was 77 percent higher than the pay for the secretary of the state Department of Commerce. They said it was “not reasonable” and “may have resulted from a flawed analysis” by the Rural Center board that looked at executives of all nonprofits in the country regardless or funding sources.

The center’s most recent tax forms show that Hall’s total annual compensation was about $283,000.

Auditors said Hall’s salary is from $49,000 to about $73,000 too much when compared with other similar organizations.

And several vice presidents at the center, who are also paid more than $100,000 annually, are overpaid by about 20 percent, according to the audit.

Curliss: 919-829-4840

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