July 23, 2024

NC lawmakers question their $500 million investment in a private nonprofit • NC Newsline

Members of the House Select Committee on Oversight and Reform on Tuesday grilled the president and CEO of NCInnovation, a private nonprofit that was awarded $500 million in the 2023 biennial state budget despite a widespread lack of understanding among lawmakers as to how the money would be used or how the projects would be chosen.

“Members need to understand what NCI plans to do with its money, how it expects to defy market trends and earn 8% annual returns each year for the next 10 years, how it chooses projects to fund, what it does with the rest of its money, and why it needs $1.42 billion from the start to fund a project, a pilot round of eight projects,” said Rep. Harry Warren, committee co-chair.

Bennet Waters, NCInnovation’s CEO, said the organization’s overarching mission is to solve real-world problems by supporting university applied research to proof of concept, essentially moving an idea from academia to industry.

NC Innovation operates four regional innovation networks anchored by “hub” universities. (SOurce: NC Innovation)

“A quick walk around NC State’s Centennial Campus shows just how much of a powerhouse the university-to-industry pipeline can be when fully mature,” said Waters. “Our vision is to make North Carolina the ‘innovation state’ by developing regional innovation ecosystems and drive statewide economic development centered on our public university system.”

Waters said their intent was not to replicate the Research Triangle Park but to grow similar hubs using university research to generate economic growth in surrounding areas.

“We want university faculty to go build something amazing and enduring after they advance through the university research and development sequence,” said Waters.

NCInnovation Board member Art Pope
NCInnovation Board member Art Pope (Photo: ncinnovation.org)

The project fell into a white-hot spotlight in February of 2024 when one of its own board members, Art Pope, the conservative former state budget director, called on the state auditor’s office to formally conduct an audit of the organization’s financial practices.

“Respectfully, I do not believe that as of December 7, 2023 NCInnovation was maintaining its records, accounts and financial reporting in accordance with generally accepted accounting principles,” wrote Pope in his February 14th email to Auditor Jessica Holmes.

Pope also maintained that he was denied access to the records, accounts, and supporting documentation.

‘Unreasonable requests on unreasonable timelines’

Waters said the organization has fulfilled its statutory responsibilities, secured more than $25 million in commitments from the private sector, and done so without spending a single state dollar.

NCInnovation received its first allotment of $250 million in state funds in January and then invested the dollars with an independent third party to generate interest income, Waters said. With a second scheduled infusion of funding from the state, the nonprofit’s assets will stand at just over $506 million. On the money invested in a money market fund, the group has earned 5.25% interest, he said.

“In other words, the endowment is working exactly as we committed. NCI is using reserved dollars to create investment income, and we are funding our programs with the amounts of that investment income,” assured Waters.

Rep. Jeff McNeely
Rep. Jeff McNeely leads a round of questioning about the NCInnovation project. (Photo: NCGA video stream)

“Do y’all have a budget? Is it accessible to us or public and did the board approve this budget?” asked Rep. Jeff McNeely, R-Iredell.

Waters said there was no current budget because NCI was awaiting the second appropriation of $250 million from the state.

“That number is materially important because it will compound interest that ultimately dictates the income that we have to deploy into our programs, those regional innovation networks,” said Waters.

Rep. George Cleveland was not happy with that answer.

“You know you’re going to get another $250 million. It should be in the process right now of coming to you,” said Cleveland.

Waters said that would be speculation, and that the remaining $250 million in the budget required certification by the Department of Commerce and the Office of the State Controller before it actually was transferred to NC Innovation.

Others on the oversight committee questioned the make-up of the nonprofit’s board, the members’ expertise, how much power the group has over grants awarded, and why one of the group’s own members wanted the state auditor to investigate.

The board of directors is made up of seven General Assembly appointees and five private members.

“I think management also has a responsibility to balance the operating needs of the organization with what quickly become unreasonable requests on unreasonable timelines,” responded Waters, presumably in reference to Pope’s request for more financial details.

As for reviewing the individual grants, Waters said that the board was not qualified to do so.

a graph developed by NC Innovation
Without adequate funding, many applied research technologies can fall into what NCInnovation calls the “valley of death.” (Slide: NCInnovation)

“Bank boards don’t look at individual mortgage applications or credit card applications. Health care boards don’t look at individual doctor decisions. They rely on the expertise of management and on the outside advisors and we’re doing that,” he responded. “That’s an appropriate governance model.”

Among the initial projects to receive funding: lithium refining, power grid efficiency, and a first-of-its kind cancer immunotherapy for melanoma patients.

An arms race for talent

Rep. Cleveland asked why the group contracted with multiple lobbyists in the short legislative session.

“We had an overwhelming number of members to try to educate about a very complicated process, in essence trying to solve a problem that some people weren’t even aware was a challenge,” explained Waters. “Some people aren’t aware that there’s an innovation arms race going on,” said Waters, insisting the lobbying expenditures were less than what most of the major universities pay a single legislative affairs liaison.

Without adequate funding, promising inventions and discoveries fall into what Waters called the “valley of death” before reaching commercial success, or those university researchers take their bright ideas to other states.

NCInnovation has yet to issue any funding to the eight pilot projects it hopes will become success stories. The terms and conditions of those grants are still being hammered out.

Rep. Harry Warren
Rep. Harry Warren remains skeptical of the NCInnovation project. (Photo: NCGA video stream)

“We’ve got nothing to hide. We are here for the benefit of the regional residents of this state and the researchers that are counting on us to assist them in bringing their life’s work to fruition,” Waters said.

At the end of the three-hour hearing, co-chair Rep. Warren said he did not approve of the way in which a major financial commitment and investment in policy bypassed the vetting process through the legislative committees.

“Some of these scholar entrepreneurs may need support for their research to get to market, but I believe a privately funded effort to promote that would be a better solution. I have doubts about NCI’s ability to get the projected investment returns,” said Warren. “Mostly I have doubts about whether or not this is really the best use of taxpayer dollars in light of state priorities that we have in areas like transportation, mental health, education and myriad other issues that are before the legislature.”

The combined appropriation of $500 million appeared for the first time when a conference committee charged to work out differences between Senate and House versions of the state budget inserted it into a conference report in September of 2023. At the time, the move drew a public protest from Pope and other conservative business leaders.

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