With revenue shortfalls forcing lawmakers in Raleigh to make deep and painful cuts to the state budget, the last thing North Carolina needs is further legislation that would reduce the state's investment in essential services by another 2%. Unfortunately, the General Assembly is considering a bill that would divert a portion of state grants to nonprofits away from the services they provide. This could mean: 2% fewer meals served to those in need; 2% less help for women experiencing domestic abuse; a 2% reduction in services to protect children's safety; 2% fewer people served by free health clinics; 2% cuts in programs for seniors and people with developmental disabilities; and 2% fewer mentoring programs for students.

What's the reason for these hidden cuts to critical services? Legislation was introduced last month (S.B.1218 and H.B. 1852) that would require state agencies to establish quantifiable performance measures for grants to these nonprofit grantees. To cover the increased costs of this oversight, the bill would authorize agencies to withhold up to 2% of these grants. This proposal stems from a report by the General Assembly's Program Evaluation Division recommending ways to strengthen oversight of state grants to nonprofits.

The bill has a laudable and necessary intent – to establish a system to measure the value North Carolina gets from its investment in the services of nonprofits. It's in everyone's best interest for the state to make sure that its money is wisely spent – particularly at a time when public resources are so scarce. In fact, most nonprofits agree that it's important for state agencies to have clear expectations and concrete benchmarks when they partner with charitable organizations.  

However, by letting state agencies withhold from grants to nonprofits, this legislation would cut even further into services that have been greatly compromised by massive cuts in state and local funding. Most nonprofits already operate on extremely tight budgets, so decreases in state grants generally lead directly to reductions in the critical services they provide. And with individual, corporate, and private foundation donations plummeting during the recession, it's often not feasible for nonprofits to expect to cover shortfalls in government grants with private contributions.

To make matters worse, demand for nonprofits' services increased by 62% last year, according to a recent national study. An additional 2% cut in state funding will only widen the already growing gap between available resources and North Carolinians' need for healthy meals for low-income children and seniors, affordable housing, programs for at-risk youth, counseling for victims of domestic violence, and basic healthcare for the unemployed and uninsured.

Here are two steps the General Assembly can take to create strong and reasonable performance measures for nonprofits without cutting into essential services:

First, lawmakers should take a closer look at the systems for oversight that already exist. The Program Evaluation Division's report suggests that many state agencies already have strong performance measures in place, and legislative staff has indicated that only about one quarter of agencies that make grants to nonprofits need additional resources for oversight. A careful examination of agencies that don't currently measure the outcomes and outputs of the nonprofits they fund could provide greater insight into the resources that are actually needed to sufficiently ramp up these agencies' capacity for oversight.

Second, the General Assembly should look at broader approaches to maximizing available revenue – not just to enable state agencies to have adequate oversight of nonprofits, but more importantly to invest in the public institutions that will strengthen North Carolina's future. Because it's done outside the appropriations process, the proposed 2% withholding from state grants may seem like a politically easy revenue solution. But in reality, North Carolinians served by nonprofits – many of whom are of low or moderate income – would effectively bear the burden of this proposal, which would provide about $3 million in additional annual support for state agencies. This is small change compared to more meaningful revenue reform – such as closing corporate tax loopholes, expanding the sales tax base, and eliminating ineffective tax expenditures.

The General Assembly is right to look at strong and reasonable performance measures and oversight to ensure that North Carolina gets the maximum return from its investment in nonprofits. However, it's essential that lawmakers remember that even a small cut to a nonprofit's funding can have staggering consequences for the lives of people served by the organization. While effective oversight has a cost, it shouldn't be borne solely by nonprofits and the people they serve.

David Heinen is the Director of Public Policy and Advocacy for the N.C. Center for Nonprofits .