On Wednesday, Governor Roy Cooper released his proposal for the state budget for the next two fiscal years (FY2023-24 and FY 2024-25). Several of Governor Cooper’s budget recommendations would affect nonprofits, including:

• Governor Cooper proposes total spending of $32.9 billion for FY2023-24 and $34.2 billion for FY2024-25. The actual state budget developed by state legislators won’t spend this much. Legislative leaders announced last week that they had agreed to spend $29.7 billion in FY2023-24 and $30.8 billion in FY 2024-25. Practically, this means that many of the proposals for increased spending in the Governor’s budget cannot be fully funded – or funded at all – in the budget that the legislature will send to him later this year.
• The Governor’s budget invests about $1.5 billion in early education and child care programs. In a national survey on the nonprofit workforce shortage from late 2021, nonprofits identified lack of access to affordable, high-quality child care as the second biggest factor for nonprofits being unable to fully fill staff vacancies. Because child care is a sector wide issue, the Center has included investment in accessible and affordable child care as part of our 2023 legislative agenda. While there is bipartisan support for increased state investment in early education and child care programs, the legislative budget will likely have a smaller increase in spending for these programs than what Governor Cooper is proposing. 
• Governor Cooper recommends changes to forthcoming tax rate cuts to increase state revenue in the future. Under a 2021 law, the individual income tax rate is set to drop from a flat 4.99% rate to a flat 3.99% rate in the next four years and the corporate income tax is schedule to drop from 2.25% to 0% over the next five years. The reduction in individual income tax rates and the phase-out of the corporate income tax will likely reduce overall state revenue later in this decade and beyond. This could create more pressure on lawmakers to cut investment in state grants and contracts with nonprofits and to explore new taxes on nonprofits to make up for the foregone revenue from corporate income tax. The Governor’s budget proposes keeping the corporate income tax rate at 2.5% and adding a second tax bracket for individuals with incomes above $100,000 and couples with incomes above $200,000.
• Governor Cooper proposes significant increases to state employee compensation and benefits to help recruit and retain state workers. The 23% vacancy in the state workforce is a big reason why many nonprofits receive late contracts and late payments when they receive state funding through grants and contracts.
• The Governor’s budget maintains the provision in the past eight state budgets that prohibits nonprofits from using more than $120,000 in state funds to pay for any individual employee’s “annual salary.” Note that nothing in the budget or other state law prohibits nonprofits with state grants and contracts from paying any of their employees salaries of more than $120,000 per year, as long as any amount above $120,000 is funded by other revenue sources like individual donations, foundation grants, or fees for services. 
• Governor Cooper proposes increasing state unemployment benefits. This could provide additional financial resources for many clients of nonprofits, but it also could create additional costs for nonprofits that elect to reimburse the state for unemployment claims rather than pay state unemployment tax if they have to furlough or lay off employees.
• The Governor’s budget would allow nonprofits that receive direct appropriations in FY2021-23 to have until June 30, 2024 to spend these funds. Under current law, these nonprofits need to return any funds they haven’t spent by June 30, 2023.
• Governor Cooper would eliminate state laws that require “pen-and-ink” signatures, essentially allowing all government contracts and filings to use electronic signatures. The change could help cut red tape for many nonprofits and expedite some nonprofit contracts with the state.
• The Governor proposes $5 million in funding to strengthen the state’s ability to apply for federal grants. This could help ensure that the state maximizes available federal grant funding for nonprofit programs and services.
• Governor Cooper recommends a new $5 million competitive grant program for nonprofits working on food insecurity.

While the NC General Assembly is very unlikely to pass the Governor’s budget proposal – or even most parts of it – the details will shape the spending, tax, and other policy debates for the remainder of the year. State legislators have already begun working on the details of their version of the budget. The House is planning to vote on its version of the budget the first week of April, and the Senate will likely pass its version of the budget in May. Legislators hope to send a final version of the state budget to Governor Cooper in mid-June before the start of the new fiscal year on July 1, 2023.

Over the past two years, the state budget has included hundreds of millions of dollars of directed grants or earmarks to nonprofits (for more details, see the Center’s analysis of nonprofit funding in the FY2021-22 and FY2022-23 state budget) and hundreds of millions of additional earmarks for local government projects. Many nonprofits have asked the Center how they can apply for these appropriations, which are generally made as one-time, unrestricted grants. The answer: There is no formal process for requesting directed grants in the state budget, and there is no transparency about which legislators requested specific earmarks in the budget.

Typically, the NC House of Representatives and NC Senate each include some earmarks in their versions of the budget, but many earmarks only appear in the final version of the budget that is negotiated between the two chambers and sent to the Governor. Some nonprofits that have received directed grants in recent state budgets have told the Center that they had talked with state legislators from their areas about their programs or services – or given legislators a tour of their nonprofits. However, some nonprofits received earmarks without requesting them, and a few weren’t even aware that they had received them until they were contacted by the state or saw their appropriations in the listings the Center prepared (see links above).

Legislators don’t always include many – or any earmarks – in the state budget, but they often include them when state revenues are strong. The state currently has a projected revenue surplus of about $3 billion dollars, so there is a good chance that they will have funding available to include earmarks in the state budget this year. As noted in the first item, the House is hoping to pass its version of the state budget next month, and the Senate will be working on its version soon thereafter. It’s likely that some, but not all, state legislators will have the opportunity to weigh in on earmarks for nonprofits or local governments in their district. If your nonprofit is interested in receiving an earmark – which, again, is typically a one-time, unrestricted grant – now is the time to find your state Senator and Representative and let them know more about your nonprofit’s programs and services.

On Wednesday, the NC Senate gave final support to Medicaid expansion legislation (H.B. 76), which would 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. The NC House of Representatives plans to vote on the Senate-approved version of the bill next week and then send the bill to Governor Cooper for his consideration. Medicaid expansion has been a major policy priority for the Center and hundreds of other nonprofits for more than a decade. 

The Medicaid expansion bill will enable North Carolina to participate in the Healthcare Access and Stabilization Program (HASP), a federal program that will help provide better financial stability for many nonprofit hospitals. The bill also will develop a program to improve access to workforce development services for North Carolinians enrolled in the state’s Medicaid programs. It also makes some changes to the state’s Certificate of Need (CON) laws that limit the ability of health care providers to offer a variety of health-related services. Hospitals and health systems – many of which are 501(c)(3) nonprofits – have been concerned that major changes to CON laws could significantly reduce their revenue, potentially causing some hospitals to close. The Senate version of the bill would not fully repeal CON laws, but would remove some psychiatric beds, chemical dependency treatment beds, and replacement equipment from CON review throughout the state and would eventually exempt ambulatory surgery centers and MRI machines from CON review in counties with populations of more than 125,000 people.

Governor Cooper is expected to sign the bill into law once it passes its final vote in the House next week. Once the bill is signed into law, Medicaid expansion would begin in North Carolina after the federal government approves North Carolina’s Medicaid expansion plan and a state budget for FY 2023-24 is in place.

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.

Thank you to the many nonprofit leaders who have advocated for Medicaid expansion over the years.

On Tuesday, the NC House Health Committee approved a bill (H.B. 190) that would make several changes to the nonprofit contracting reform law (H.B. 791) that the General Assembly passed last summer. The 2022 law made four reforms to NC Department of Health and Human Services (DHHS) grants and contracts with nonprofits:

1. It establishes a de minimis 10% indirect cost rate for nonprofit grants/contracts with DHHS, regardless of whether funding initiates from federal or state funds. Many nonprofits currently have contracts that provide for much lower indirect cost rates or that make no allowance for nonprofits’ indirect costs.
2. It requires DHHS to provide most nonprofits with multi-year contracts rather than one-year contracts that are renegotiated every year. This change should reduce much of the red tape and contracting delays that nonprofits experience during the contract renewal process.
3. It provides three-month contract extensions for most nonprofits to ensure continuity of services – and of payments to nonprofits – after the end of nonprofits’ multi-year contracts with DHHS. This change is intended to help prevent many of the payment delays that have resulted from understaffing at DHHS.
4. It requires legislative staff to provide nonprofit contact information for nonprofits receiving directed grants in the state budget to DHHS in a timely manner. DHHS has identified the lack of clear communication about nonprofit contact information as a cause of some of its contract and payment delays.

The bill approved by the committee this week, which was recommended by DHHS, makes several clarifying and technical changes to the new law. The three substantive changes in the bill are:

1. Making the de minimis 10% indirect cost rate optional rather than mandatory for DHHS (meaning that DHHS could, at least in theory, choose not to use the de minimis rate for some nonprofits);
2. Excluding nonprofits with administrative expense limitations in other federal or state laws or regulations from the de minimis 10% indirect cost rate provision (e.g., nonprofits that are required by state budget provisions to have overall administrative costs of 8% or 9% would not automatically get 10% indirect cost rates on their state grants); and
3. Providing that the terms of nonprofits’ expired contracts with DHHS remain in place during the three-month extension period.

Two more House committees would need to approve the bill before it goes to the full House for consideration. The Center has heard from several nonprofits and from DHHS that the Department has not yet implemented many of the changes in the law. The Center is supportive of clarifying changes that would help more nonprofits with DHHS grants and contracts to benefit from these contracting reforms. We’re continuing to work with legislators and DHHS to ensure that any changes don’t weaken the existing law.

On Wednesday, the NC House of Representatives unanimously approved a bill (S.174) that would enable nonprofits to offer up to six tax-exempt annual sales events per year. Under existing law, nonprofits are exempt from collecting and remitting sales tax on a fundraising sales event (e.g., Girl Scout cookie sales) that it held on an annual basis where all sales take place within a 60-day period. The new legislation, which is part of a larger bill making changes to various state tax laws, would permit nonprofits to offer up to six of these tax-exempt sales events per year as long as:

1. The events don’t overlap with one another;
2. The nonprofit sells different products during each sales event; and 
3. Each event funds a distinct project from the other annual sales periods occurring during the year. 

The Center supports this change, which would expand tax-exempt fundraising opportunities for nonprofits. We are appreciative of Rep. John Bradford (R-Mecklenburg) who made a small wording change to the bill to make it more consistent with the way most nonprofits describe their programs.

Two other provisions in the tax legislation could affect some nonprofits:

1. One provision would enable any representative of a nonprofit to request a quarterly refund of motor fuel tax paid by the nonprofit. Under current law, only the nonprofit’s chief executive officer may make this request on behalf of the organization.
2. Another provision would clarify that marketplace facilitators like Amazon.com or eBay.com don’t need to remit sales tax to the state if sellers on their platforms have already remitted sales tax on the same transactions. This proposed change is a good reminder to nonprofits that sell products through third party websites that the marketplace facilitators, not the nonprofits themselves, are now responsible for collecting and remitting sales tax.

The House needs to vote on the bill one more time next week, and then it will go back to the Senate for one final vote.

A bill (H.B. 374) filed in the NC House of Representatives on Tuesday would increase the maximum value of real estate that nonprofits can raffle each year from $500,000 to $2 million. Nonprofits sometime receive houses or other real estate as bequests or donations, and they sometime recognize that the best way to make use of this property is to raffle it as a high-value fundraiser to support the organization’s programs and services. The Center supports the bill since it would create a new (or at least improved) fundraising opportunity for some nonprofits.

On Tuesday, the NC Senate approved a bill (S.58) that would create new criminal penalties for anyone who knowingly and willfully damages or destroys energy facilities and other utility infrastructure in the state. The legislation was filed in response to an incident two months ago that left most of Moore County without power for several days. That incident created hardships for nonprofits that had to provide increased services to the community while the organizations themselves were without power. The bill now goes to the House for consideration.

Bills in the House (H.B. 362) and Senate (S.306) would make a variety of changes to state election laws and state government transparency laws, including:

1. Creating an independent redistricting process for North Carolina’s congressional and state legislative districts;
2. Making state judicial elections nonpartisan;
3. Prohibiting legislators from lobbying for two years after they leave office (currently, they can’t lobby for six months after leaving office);
4. Allowing online voter registration and creating an automatic voter registration process when people get their driver’s licenses;
5. Requiring live streaming of most state agency and state legislative meetings so more members of the public – including nonprofit advocates – have access to them;
6. Increasing transparency of political campaign contributions, including contributions from large political action committees; and 
7. Re-establishing public funding of political campaigns in North Carolina.

Many of these provisions would increase the ability of charitable nonprofits to more effectively advocate for their missions by increasing their access to information and by diminishing the impact of political donors on public policy. Neither bill is likely to be considered this year since both bills have only Democratic sponsors.

A bill (H.B. 376) filed in the NC House of Representatives on Tuesday would place a constitutional amendment on the November 2024 ballot to change the way NC Senate districts are drawn. Currently, the 50 state Senate districts must have roughly equal population. Under the proposal, each district would consist of two contiguous counties.

This change would give rural counties significantly more influence in the NC Senate. For example, the two most populous counties in North Carolina (Mecklenburg and Wake) are each currently represented by six senators. Under this bill, Mecklenburg and Wake counties would each have, at most, one senator. On the other hand, four current Senate districts cover 37 counties in eastern and western North Carolina. Under this proposal, those counties would be represented by at least 18 senators.

This proposal could weaken the ability of most of the state’s nonprofits to advocate for public policy. Based on the Center’s analysis, the majority of nonprofits and nonprofit employees are based in the most populous counties, which stand to lose representation in the state Senate if this constitutional amendment were to pass. At the same time, it would likely give rural nonprofits greater access to their state senators and potentially increase these organizations’ ability to influence public policy.

To get on the ballot, this bill would need to pass with 60% supermajorities in both the House and Senate. To become a part of the constitution, a majority of voters in the 2024 election would need to vote “yes” on the amendment.

The Think Babies NC Alliance, which supports infants and toddlers, their families and caregivers, and the people and organizations that serve and support them, is working to build a community of emerging early childhood professionals of color to help shift the power in early childhood organizations, address systemic racism in the sector, and add diverse voices on early childhood issues. If you identify with this effort, the Alliance asks that you consider taking 5-10 minutes to complete the Leaders from Within – Needs Assessment on Building a Network of Emerging BIPOC Leaders.

On Tuesday, a bill (S.304) was filed in the NC Senate to create a new tax credit for volunteers for nonprofit volunteer fire departments and nonprofit volunteer rescue and emergency medical services squads. The tax credit would cover unreimbursed expenses of volunteers at these organizations. The tax credit would not apply to employees or volunteers at other nonprofits. An identical bill (H.B. 25) was filed in the NC House of Representatives in January.

On Wednesday, the NC Senate unanimously approved a bill (H.B. 2) that would make a variety of technical and clarifying changes to the state budget for FY2022-23. Several of the provisions in the bill would make technical changes to ensure that specific nonprofits that received directed appropriations in the budget are able to receive and spend these funds. The bill now goes to the House for consideration.