Legislators (Finally) Approve State Budget for FY2023-25

After months of negotiations, legislative leaders agreed this week on the final details of the state budget for FY2023-25 (H.B. 259). Both the NC House of Representatives and NC Senate approved the budget yesterday and today, so it now goes to Governor Roy Cooper for his consideration. Shortly after the Senate passed the budget, Governor Cooper announced that he will allow it to become law without his signature. This means that it will be enacted into law 10 days after he receives it (which could be later today or early next week).

The final budget – which is a total of 1,411 pages – includes many provisions that could affect some or all charitable nonprofits in North Carolina, including:

• Steep reductions to the individual income tax rate. In 2024, the rate would drop from 4.6% to 4.5%, in 2025 the rate would drop to 4.25%, and in 2026, it would drop to 3.99%. If the state meets revenue targets, the rates could decrease to 2.49% sometime between 2029 and 2034. Overall, these tax cuts are projected to reduce state revenue by nearly $800 million over the next two years and could reduce state revenue by up to $7 billion per year once the rate drops to 2.49%. This revenue loss could mean significant cuts to state funding for nonprofits in the future. It could also force state legislators to look to new taxes or fees on nonprofits to offset the loss of income tax revenue.
• Major policy changes that could give legislative leaders broad authority to investigate the finances and operations of nonprofits that receive state funding (see the second item in today’s update for details).
• Medicaid expansion will begin in North Carolina later this year or early next year (see the third item in today’s update for details). 
• Increase in the annual fee for lobbyist principals (including many nonprofits that lobby) and lobbyists (including many nonprofit staff and contractors) from $250 per year to $500 per year. This fee increase could create financial challenges for small nonprofits that advocate with the state legislature or state agencies and could discourage some nonprofits from lobbying or registering their staff as lobbyists. The Center opposed this provision and is working with other advocates to explore the possibility of legislators reversing the change in future legislation.
• Creation of legislative “fast passes” for lobbyists, which would cost up to $2,000 for lobbyists, including those who work for nonprofits. Over the past few years, the NC General Assembly has added security checks, including metal detectors, for all members of the public who enter the Legislative Building and Legislative Office Building. Legislators and legislative staff receive passes that enable them to use separate entrances and bypass security checkpoints. On busy days, it can be difficult for lobbyists and other nonprofit advocates to get between the two buildings. The steep price of the “fast passes” could be prohibitive for many nonprofits, putting their organizations at a competitive disadvantage with for-profit lobbyists in legislative advocacy. 
• A provision increasing the cap on the amount of state funds a nonprofit can use to pay any individual employee’s salary from $120,000 to $140,000. The Center asked for this change to help nonprofits by adjusting the state funding salary cap for inflation. The current $120,000 cap has been in place since 2015. 
• Directed grants for a wide variety of specific nonprofits across the state. The Center estimates that the budget includes about $1.478 billion in new funding (most of it one-time funding) for nearly 600 nonprofit organizations. This includes $500 million in funding for NCInnovation, a relatively new nonprofit organization, which would be the largest-ever state investment into a single nonprofit entity.
• Elimination of the NC Department of Health and Human Services (DHHS) competitive grant program for nonprofits. Many of the nonprofits that typically receive funding through the DHHS competitive grant program received direct appropriations.
• Some investment in child care and early education programs, but much smaller increases in early childhood funding than many nonprofit advocates feel are adequate to meet child care and early education needs across the state.
• Significant increases in funding and eligibility for the Opportunity Scholarship program, which provides financial assistance to families with students in private (mostly nonprofit) K-12 schools. 
• Increased limit on administrative costs for Smart Starts to 10% of total funding. The current limit is 9%, and the limit had been 8% until last year. 
• $2.5 million per year in increased funding for grassroots arts grants in 95 counties (every county except Buncombe, Durham, Mecklenburg, Union, and Wake).
• Creating a sales tax exemption for many sales by nonprofit continuing care retirement communities.
• A provision making attorneys working for Legal Aid of North Carolina ineligible for the NC Legal Education Assistance Fund (NC LEAP), which provides student loan forgiveness for lawyers.
• A provision that would prohibit local governments from adopting or imposing labor laws differing from statewide laws, which would mean that counties, cities, and towns could not raise the minimum wage or require employers to provide paid time off for workers.
• A provision allowing state legislators to choose for their records and correspondence not to be subject to the public records law. This change will significantly reduce transparency about legislative operations and about businesses and nonprofits that influence legislative action.

The Center has prepared a comprehensive analysis of the nonprofit appropriations and provisions in the final version of the budget and how they compare to the versions passed by the House and Senate this spring. We hope this summary will provide an overview of the main provisions in the budget affecting nonprofits and help your organization identify whether you are one of the nearly 500 nonprofits receiving direct appropriations in the budget (it’s probably worth doing a word search in the document for your organization’s name). Let us know if you see items that are missing from – or incorrect in – the Center’s summary; we will continue to update this document in the coming weeks.

State Budget Provision Would Allow for Burdensome Legislative Investigations into Nonprofits

A provision in the state budget gives the Joint Legislative Oversight Committee on Governmental Operations (GovOps) broad authority to investigate any nonprofit with a state grant, contract, or appropriation. GovOps is run by legislative leaders and hires partisan legislative staff to conduct its operations and investigations. This provision was not in either the House or Senate versions of the budget and was first made public late Wednesday afternoon when the conference report on the budget was posted to the General Assembly’s website.

Among other things, the budget provision gives GovOps broad authority to:

1. “Study the efficiency, economy, and effectiveness of any...non-State entity receiving state funds”; and
2. “Investigate possible instances of misfeasance, malfeasance, nonfeasance, mismanagement, waste, abuse, or illegal conduct by...officers and employees of a non-State entity receiving, directly or indirectly, public funds as it relates to the officer’s or employee’s responsibilities regarding the receipt of public funds.”

The provision expressly allows GovOps to require nonprofits with state funds – and many of their employees and board members – to provide legislators with virtually any record or document that they may request and to allow GovOps staff to access the facilities of any nonprofit with state funds. Nonprofits and their staff or board members who do not comply with requests for information or access to their facilities could be subject to criminal penalties.

Practically, this gives GovOps the authority to impose extremely burdensome information requests on nonprofits for almost any reason. The Center is deeply concerned that this provision could lead to costly and unwarranted legislative investigations into some nonprofits’ finances and operations that could be harmful to nonprofit organizations and to the people and communities they serve. The Center is continuing to research the practical implications of this new legislative investigative authority for nonprofits with state grants, contracts, and appropriations.

Medicaid Expansion Likely to Begin in North Carolina in December or Early 2024

With the passage of the state budget, the NC Department of Health and Human Services (DHHS) can now finalize its plans for the implementation of Medicaid expansion in North Carolina. Last weekend, legislators proposed including language in the state budget that would require the General Assembly to approve casino gambling legislation for Medicaid expansion to take effect. By Monday, legislators had agreed to remove that provision from the budget, so Medicaid expansion can now move forward once the budget becomes law.

This summer, DHHS had worked out a plan with the federal government to begin Medicaid expansion on October 1, as long as it had authority to do so by the end of August. While DHHS has not announced a new starting date for Medicaid expansion, it appears likely to begin either on December 1 or sometime in early 2024. 

Medicaid expansion will provide health coverage for about 600,000 North Carolinians in the health coverage gap who have incomes too high to qualify for Medicaid but too low to receive health care subsidies under the Affordable Care Act marketplace. It has been a major policy priority for the Center and hundreds of other nonprofits for more than a decade. As we explained in a Care4Carolina blog post last summer, the Center strongly supports Medicaid expansion because it would support the work of charitable nonprofits by:

1. Complementing the work of many nonprofits that provide services to North Carolinians who don’t currently have adequate health coverage;
2. Providing health coverage for some employees of nonprofits that don’t offer group health plans and whose salaries leave them in the health care coverage gap; and 
3. Providing payment for some types of Medicaid-eligible services that nonprofits currently provide to clients for free.

Legislators Approve Regulatory Reform Bill That Improves NC Raffle Laws

This morning, the NC Senate gave final approval to regulatory reform legislation (H.B. 600). The bill includes a variety of provisions intended to cut red tape by reducing a variety of state and local government regulations, including many environmental rules. 

The regulatory reform bill also makes two improvements to the state law on nonprofit raffles:

1. It would allow nonprofits to hold up to five raffles per year. Under current law, nonprofits can hold up to four raffles per year.
2. It would increase the maximum value of real estate that nonprofits can raffle each year from $500,000 to $2.25 million. Nonprofits occasionally receive houses or other real estate as bequests or donations. For some nonprofits, the best way to make use of this donated property is to raffle it as a high-value fundraiser to support the organization’s programs and services. With increased property values in recent years, the current $500,000 threshold may be well below the value of property that nonprofits receive and may want to raffle. The bill requires that any real estate raffled by a nonprofit is free of liens or encumbrances – essentially ensuring that a nonprofit isn’t raffling property that will come with significant and unexpected costs for supporters of the organization. 

While the Center hasn’t taken a position on the entirety of the regulatory reform bill, we support the changes to raffle laws in the Senate version of the bill since they would create new (or at least improved) fundraising opportunities for some nonprofits. 

The House approved the regulatory reform bill last night, so it now goes to Governor Cooper for his consideration. Even if Governor Cooper vetoes the bill, it is likely to become law since enough legislators voted for the bill to override a veto.

Federal Government Shutdown Looming Next Week

The new federal fiscal year begins on October 1. That means that over the next eight days, Congress needs to either:

1. Pass 12 appropriations bills to fund the federal government through September 30, 2024; or
2. Pass a stopgap spending bill known as a “continuing resolution” to provide temporary funding for the federal government and give the U.S. Senate, U.S. House of Representatives, and the White House more time to negotiate full details of an appropriation plan.

If Congress is unable to take either of these actions, large parts of the federal government will shut down beginning on October 1. Government shutdowns can harm nonprofits and the communities they serve by causing delays in nonprofits’ payments from federal agencies and creating disruption in the delivery of federal benefits.

Negotiations are more challenging than usual this year because a small group of House members are poised to block any spending plan or continuing resolution that does not include severe spending cuts and controversial policy provisions that are unlikely to meet the Senate’s approval. Many Senate Republicans are encouraging their House counterparts to seek a bipartisan solution to prevent a government shutdown, but it remains to be seen whether House leadership is willing to consider working across partisan lines to pass a budget or a continuing resolution.

NC Senate Approves Bill That Could Set Dangerous Precedent on State Investigations of Nonprofits

Yesterday, the NC Senate approved a bill (H.B. 361) that would require Disability Rights North Carolina, a 501(c)(3) that does not receive state appropriations, to provide the General Assembly with significant reports about its programs, activities, and advocacy work. The stated reasoning behind the mandate is that the activities of the nonprofit directly impact the state budget, presumably through its litigation against and settlements with various state agencies. Some nonprofits that provide services to people with disabilities support the bill as a way to make public more information about litigation related to their clients and services.

The original House version of the bill would require Disability Rights NC to provide the General Assembly with reports about its past 10 years of activities by December 1, 2023 and would then need to submit reports to the General Assembly twice every year. This unfunded mandate could create significant financial and personnel costs for the private nonprofit. The Senate removed some of the onerous reporting requirements from the bill and also made its enactment contingent on passage of another unrelated bill, which both chambers passed into law late last night and this morning. Last night, the House accepted the Senate’s changes to the bill, so it now goes to Governor Cooper for his consideration. Even if Governor Cooper vetoes the bill, legislators have enough votes to override his veto.

The Center recognizes that other nonprofits may have interest in obtaining the information that would be made public through the reports mandated by the bill. We are supportive of identifying other means of obtaining appropriate information without burdening a non-state entity. Yet we oppose requiring reporting by a non-state entity that does not receive state appropriations, and instead support identifying other means of obtaining appropriate information. When the bill was last in committee in June, the Center expressed its concern that the bill sets a precedent of allowing legislators to impose burdensome information requirements on any 501(c)(3) nonprofit, even organizations that receive no state funding. Several legislators have echoed the Center’s concerns about the precedent the bill could create for other nonprofits without state appropriations and noted this precedent could have a chilling effect on advocacy nonprofits.

Legislators Approve Bill to Limit Independence of High School Athletics Nonprofit

This morning, both the NC House of Representatives and NC Senate gave final approval to a bill (S.452) that would make changes to the governance and operations requirements on the NC High School Athletic Association, the 501(c)(3) nonprofit that administers interscholastic high school athletic activities in North Carolina. The bill would require the nonprofit to sign a memorandum of understanding with the state that would limit the organization’s contracting and fundraising ability and would make the organization subject to state open meeting laws and public records laws. The Center opposes government policies that limit nonprofits’ governance as independent, nongovernmental corporations with control over their own organizational policies and practices, and we expressed concerns that the bill would have created a precedent of the state limiting the ability of a nonprofit organization to operate as an independent organization.

The bill, which also includes a variety of insurance law changes, now goes to Governor Cooper for his consideration. Even if he vetoes the bill, legislators have enough votes to override his veto.

New Law Helps Nonprofits by Modernizing NC’s Charitable Solicitation Processes

Last week, Governor Roy Cooper signed into law a bill (S.429) that makes three important reforms to the state charitable solicitation licensing statute: 

• Make automatic extensions of charitable solicitation filings identical to those for IRS Form 990. The IRS currently allows nonprofits to receive an automatic six-month extension of their filing deadline for 990s. The North Carolina charitable solicitation statute only allows for a three-month automatic extension, and further extensions may be made at the discretion of the NC Secretary of State. Practically, this creates situations where some nonprofits are unable to file their charitable solicitation paperwork in a timely manner if their Forms 990 have not yet been completed. This change is effective immediately.
• Exempt more small nonprofits from needing charitable solicitation licenses. Currently, nonprofits are exempt from having charitable solicitation licenses if they receive less than $25,000 in contributions per year (which generally includes foundation grants but not government grants and contracts) and do not pay compensation to fundraisers. The $25,000 threshold was established when the Internal Revenue Service (IRS) had a threshold of $25,000 in annual expenses for filing Form 990 (the annual information return for tax-exempt entities). Because the IRS threshold is now $50,000 (and organizations below that threshold now need to file the simple, online Form 990-N), some small nonprofits need to have charitable solicitation licenses – and spend significant time completing paperwork and preparing financial statements – even though they are exempt from basic filing requirements from the IRS. This change will take effect on October 1, 2023.
• Count charitable solicitation forms as timely filed if they are postmarked by the filing deadline. This change could help prevent nonprofits from being identified as out of compliance if there are mail delays. This change will also take effect on October 1, 2023.

The Center has advocated for this bill to be filed based on input from many nonprofits and from attorneys and accountants who work with nonprofit organizations. The Center is appreciative of the many nonprofits, attorneys, and accountants who provided input on the substance of the bill over the past five years and of the bill’s legislative champions, especially Rep. Brandon Lofton (D-Mecklenburg), Senator Tim Moffitt (R-Henderson), Senator Mike Woodard (D-Durham), and Representative Harry Warren (R-Rowan). Their combined efforts will help make the charitable solicitation licensing process a smoother experience for North Carolina nonprofits.

Have Questions about Nonprofits and the 2023 Election? We Have Answers!

Have you been wondering what types of election-related activities your nonprofit can and cannot do between now and Election Day? Or perhaps you are wondering when Election Day is this year in your city or town (or if you even have an election this year). You are not alone. The Center has been fielding questions about what types of election-related activities are legal and advisable for charitable nonprofits, and we have posted answers to 31 of the most common questions we are hearing. We have included information on several new state election laws that could affect your nonprofit and the people you serve, including the new requirement to show a photo ID when voting. Let us know of other questions you have about your nonprofit’s engagement in the 2023 election.

Legislators Holding Public Meetings on Redistricting Next Week

Next month, legislators are planning to return to Raleigh for a special session on redistricting. During that session, legislators will draw the districts for North Carolina’s 14 congressional districts, 50 state Senate districts, and 120 state House districts to be used in the 2024, 2026, 2028, and 2030 elections. Next week, the House and Senate are holding three meetings to get public input on the redistricting process:

• September 25, 2023 at 4:00 PM at the College of the Albemarle, Elizabeth City Campus (speaker registration link);
• September 26, 2023 at 4:00 PM at Appalachian State University, Hickory Campus (speaker registration link); and 
• September 27, 2023 at 4:00 PM at the Legislative Office Building, Raleigh (speaker registration link). 

Nonprofit leaders can register to speak at any of the public meetings to provide nonpartisan insights on the redistricting process and the ways districts can be drawn to best represent their communities.

SBA Seeking Nonprofits Input on Proposed DOL Overtime Rule

Three weeks ago, the U.S. Department of Labor (DOL) released new proposed regulations on the salary threshold under the Fair Labor Standards Act (FLSA). The proposed regulations would increase the salary threshold for overtime pay by nearly 55% over the current level to $55,068 per year. The Center anticipates that this change would affect thousands of North Carolina nonprofits, and we have prepared an analysis of the proposed regulations and their potential impact on nonprofit organizations.

The U.S. Small Business Administration (SBA) announced last week that its Office of Advocacy is hosting virtual roundtables for small employers (including nonprofits) on September 26 and 27 (both are from 1-3 p.m.) to get input on the proposed DOL overtime rule. The Center plans to participate and share input on the potential impact of the overtime rule on North Carolina nonprofits. For more information, including details on how to RSVP for one of the roundtables, check out the SBA’s announcement.

Nonprofits and others have until November 7 to submit public comments on the proposed rule. After DOL receives and reviews these comments, it could make some changes to the proposed regulations before issuing final regulations. The salary threshold in the final regulations may be even higher than the level in the proposed regulations – possibly as high as $60,209 per year. The new salary threshold will likely take effect sometime in 2024.

IRS Halting Processing of New Employee Retention Tax Credit Applications

The Internal Revenue Service announced last week that it will not process new Employee Retention Tax Credit (ERTC) applications until at least 2024 because of the recent proliferation of ERTC scams. This means that nonprofits that were eligible for the ERTC for 2020 or 2021 and have not yet filed for the tax credit will need to wait until at least early 2024 for the IRS to process their applications. Nonprofits that have pending ERTC applications should expect delays during the moratorium period because the IRS is processing existing claims at a much slower pace than usual. The IRS also issued new questions and answers about ERTC eligibility yesterday to help nonprofits and businesses better assess whether they meet the qualifying standards for the ERTC, which can help them avoid scams.

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Nonprofit Policy Update is North Carolina Center for Nonprofits' weekly newsletter of state and federal policy issues that affect all 501(c)(3) nonprofits. Learn about the Center's public policy priorities and agenda, or contact David Heinen, Vice President for Public Policy and Advocacy, for more information.