Legislators Unlikely to Pass State Budget Before Start of New Fiscal Year

The state will begin its new fiscal year tomorrow without a state budget in place. Legislative leaders had hoped to have the budget for FY2023-25 (H.B. 259) in place by now, but they are still negotiating details of individual income tax rate cuts and how to spend billions of dollars in savings reserve funds. With legislators taking a break next week, it is unlikely that a final budget will be in place until mid-July or later.

Unlike with the federal government, the failure to pass a state budget on time doesn’t cause parts of state government to shut down. Under state law, spending levels will continue in place at current levels until a new state budget becomes law. Even without the threat of a government shutdown, legislators and Governor Roy Cooper have two reasons to try to come to agreement on a new state budget soon:

1. Medicaid expansion in North Carolina cannot begin until a new state budget is in place; and
2. Without a new state budget, legislators cannot make adjustments to existing spending levels to account for inflation and new or changing needs in communities, and legislators cannot make changes to state tax laws.

To help your nonprofit better understand the differences between the two competing versions of the state budget, the Center has prepared an analysis of the nonprofit provisions and appropriations in the House and Senate budgets and a tutorial video on the state budget.

NC House Approves Bill to Modernize Nonprofit Laws

On Wednesday, the NC House of Representatives approved a bill (H.B. 741) that would make important changes to two state laws affecting nonprofits. Specifically, the bill would reform the state charitable solicitation licensing statute and would make a variety of changes to modernize the NC Nonprofit Corporation Act to bring it into closer alignment with best practices for nonprofits and with nonprofit corporation laws in other states. The Center has recommended this legislation based on input from nonprofits and from attorneys and accountants who represent nonprofit organizations. 

The House passed the bill by a 112-1 margin, and it now goes to the Senate for consideration. The Center is advocating for the Senate to pass it next month, but it is unclear whether the Senate will take up much legislation other than the state budget for the remainder of the year.

Legislators Approve Changes to DHHS-Nonprofit Contracting Reform Law

This week, both the NC Senate and NC House of Representatives passed a bill (H.B. 190) that would make several changes to the nonprofit contracting reform law (H.B. 791) 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, 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.

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 continue to work with legislators, DHHS, and other state officials to ensure that any changes don’t weaken the existing law.

Last Thursday and this Monday, the Senate amended the bill to include several changes to the state’s new abortion laws. The final version passed both chambers with strong bipartisan support, and Governor Cooper signed it into law yesterday.

NC Senate Approves Regulatory Reform Bill That Would Improve Nonprofit Raffle Laws

On Wednesday, the NC Senate approved regulatory reform legislation (H.B. 600) that includes provisions intended to cut red tape by reducing a variety of state and local government regulations, including many environmental rules.

The Senate regulatory reform bill includes a provision that would make 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 passed a different version of the regulatory reform bill last month (without the raffle law changes) and will likely take a vote on the Senate version of the bill the week of July 10. If the House doesn’t concur with the Senate version of the bill, a House-Senate conference committee will work out the details of a final version of the regulatory reform bill.

Center Accepting Applicants for President & CEO Role

With Jeanne Tedrow’s recent retirement announcement, the Center is accepting applications for the position of President & CEO through July 14. Take a minute to read the position profile and share with colleagues who may be interested – or apply for the position yourself.

New Law Will Limit Nonprofits’ Ability to Provide Some Types of Training to Government Agencies

On Tuesday, the NC House of Representatives voted to override Governor Cooper’s veto of a bill (S.364) that will prohibit state agencies from offering workplace trainings covering 13 specific topics related to race and gender equity (see page 2 of the bill text for a listing of the 13 topics). This would mean that nonprofits that offer trainings to state employees would no longer be able to include content on topics related to equity, diversity, and inclusion in these trainings. The bill would allow contractors (including nonprofits) providing trainings for state agencies to answer questions about these topics as long as they are clear that the state agency does not endorse these concepts.

In his veto message, Governor Cooper explained: “In North Carolina, the diversity of our people is a strength. This legislation attempts to eliminate training that can help us understand the unconscious bias we all bring to our work and our communities... Instead of pretending that bias and racism don’t exist, the legislature should instead encourage training that can help eliminate discrimination so we can work toward common goals.”

The new law takes effect on December 1, 2023. The law does not prohibit nonprofits – including those with state grants and contracts – from offering workplace training for their own staff on topics of race or gender equity. The Center is seeking guidance from state officials on how the new law will affect training that nonprofits offer if state employees are participants. We will share additional guidance once it becomes available.

U.S. Supreme Court Rules Against NC Legislators in Election Law Decision

On Tuesday, the U.S. Supreme Court issued its opinion in the Moore v. Harper case in which North Carolina legislative leaders challenged the authority of the North Carolina Supreme Court to override legislatively-drawn congressional maps for the 2022 election. In a 6-3 decision, the Court rejected the argument from leaders in the NC General Assembly that state legislature should have the sole authority in determining how congressional elections are administered and results are determined.

The Court’s decision likely means greater consistency in the rules governing future elections in our state. If the Court had ruled in favor of legislative leaders, state legislators in North Carolina and elsewhere in the country would have had broad authority – without the potential for judicial review in state courts – to set different rules for federal elections than for other elections. For example, state legislators could have created separate Early Voting periods and separate voter identification requirements for congressional elections than for other things on the ballot, effectively forcing North Carolinians to vote twice – with different sets of rules – in even-numbered years. This would have created confusion for voters and added much more work for nonprofits that provide nonpartisan information about elections to the people they serve.

Despite the Court’s ruling, state legislators will still redraw North Carolina’s congressional and state legislative districts this fall. Earlier this year, the NC Supreme Court ruled that partisan gerrymandering is permissible under the state constitution, reversing its decision from last December, when the partisan makeup of the court was different. With the new state court ruling, legislator leaders plan to redraw the maps to maximize their partisan political advantage.

New Report Shows Steep Drop in Charitable Giving in 2022

The annual Giving USA report, which was released last week, found that charitable giving from individuals, businesses, and foundations dropped by 10.4% relative to inflation last year, and that individual giving declined by 13.4%. The National Council of Nonprofits has posted an analysis of the report, noting that the decline in giving is just one of several challenges currently facing the nonprofit sector. From a public policy perspective, the report highlights the critical importance of Congress passing the Charitable Act (S. 566/H.R. 3435), which would create a universal charitable deduction that would help offset the reductions in individual philanthropy by encouraging people to give more generously to nonprofits. Specifically, the Charitable Act would create an above-the-line tax deduction for non-itemizers who make charitable contributions. The deduction would be capped at one-third of the standard deduction (about $4,600 for individuals and $9,200 for couples).

Second Quarter Lobbying Reports Due by July 24

Nonprofits that are registered as lobbyist principals (and their staff or contractors who were registered as lobbyists) must file their second quarterly reports of 2023 with the Secretary of State Lobbying Compliance Division by July 24. All reports must be filed electronically. To help you understand the basics of state lobbying laws affecting nonprofits, check out the Center's summary of NC lobbying laws for nonprofits.

IRS Guidance Provides Clarification on Energy Tax Credits Available to Nonprofits

The Internal Revenue Service recently released temporary regulations regarding direct payment of energy credits enacted in the Inflation Reduction Act of 2022 and will soon provide guidance on transferable energy credits available to nonprofit building owners. The Inflation Reduction Act permits tax-exempt entities and others to claim new energy-efficiency tax credits via “elective pay,” informally known as “direct pay.” The newly-released FAQ explains that "elective pay" allows “entities that would otherwise be unable to claim these credits because they do not owe federal income tax, to benefit from some clean energy tax credits by treating the amount of the credit as a payment of tax and refunding any resulting overpayment.” Nonprofits can claim elective/direct pay for the Credit for Alternative Fuel Vehicle Refueling/Recharging Property, the Commercial Clean Vehicle Credit, and Energy Credit, among others. The IRS is continuing to work on regulations implementing the changes made to Code Section 179D which will now permit building owners, including tax-exempt organizations who construct or increase energy efficiency of existing buildings by at least 25 percent, to claim or transfer a tax deduction.

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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.