Golden LEAF's oversight criticized

The Golden LEAF Foundation has failed to effectively oversee the more than $300 million in economic development grants it has made since it was formed a decade ago, according to the state auditor's office.

Although Golden Leaf does monitor its grant recipients, the nonprofit foundation doesn't do enough to verify the data it receives from grantees or to review their financial condition, asserts the performance audit released today by the office of State Auditor Beth Wood.

"Consequently, state funds could be wasted on grantees that are not achieving desired results or lack the capacity to sustain operations," the audit concludes.

The audit, which also criticizes the foundation's compliance with the state's open meeting laws and questions its exemption from laws that apply to state funds, recommends that the nonprofit beef up its policies for monitoring and reporting its economic development activities.

Dan Gerlach, who joined Golden Leaf as its president in October 2008, disputes the criticism of the foundation's oversight of grant recipients.

"I think we have strong grant oversight," Gerlach said. "I think our grantees are amazed at how much oversight there is."

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.

Gerlach did concede that the foundation could do a better job of standardizing the information it requires from grant recipients. "We are going to take steps to improve," he said.

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," said Gerlach. "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."

Gerlach was former Gov. Mike Easley's budget adviser before joining Golden LEAF.

The auditor's report also criticizes Golden LEAF for failing to analyze whether its grants produce the desired results. "As a result, ineffective programs could continue to receive state funding," the report concludes.

"That is a tough hurdle," said Gerlach. "Would Spirit Aerosystems have located in the Global Transpark without that grant from us? No. But the other thing is, we have a very strong business climate in North Carolina. We have a very good community college system. Would they have come if we didn't have those things? ... There are a lot of things that go into it."

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 of last year when a senior vice president "confronted a staff auditor and removed him from the [investment file] room."

"The Senior VP's insistence that the auditor leave the room immediately, along with the confrontational manner, contributed to our judgment that information may have existed within the room that management was withholding from our review,"  the audit states.

Gerlach said the Oct. 8 incident, which took place about a week after he joined the foundation, was a misunderstanding and in no way 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."

Gerlach stressed that the staff auditor was asked to leave the file room because the auditor failed to obtain the permission to be there as outlined in an agreement between the foundation and the auditor's office.

The audit also mentions that agreement, but then adds: "Notwithsanding that the Senior VP was acting based on a perceived breach of the agreement, we are required to consider whether the actions of the Senior VP were motivated by an urgency to separate the auditor from the information in the room."

Other findings and recommendations in the audit:

-- Golden LEAF violated state open meetings law by approving a $15 million grant in a closed session in 2005.

-- Golden LEAF is deficient when it comes to maintaining minutes of its open and closed board sessions. The foundation initially provided the auditor with 400 sets of minutes from meeting held from 1999 through 2009, omitting 29 meetings.

-- The Governor and General Assembly should consider passing a law to limit the amount of investment risk that the foundation can take with its investments, and to make it subject to state rules and regulations that aim to safeguard state funds from potential conflicts of interest and political influence.

Currently, Golden LEAF's status as a nonprofit corporation exempts it from state rules and regulations that apply to other state funds. "There is a risk that potential conflicts of interest or political influence play a role in Golden LEAF investment decisions," the report states.

Gerlach said that approving a grant in a closed session was "a mistake. 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 minutes but one go back more than six years.

"We are going to fix that -- and we have fixed it," Gerlach said.