Policy Watch Investigates

New state economic development group outside of ethics laws

Lindenmuth

Richard Lindenmuth, interim CEO for N.C.’s Economic Development Partnership

The new public-private group that will run North Carolina’s business recruiting and economic development efforts won’t be subject to North Carolina’s ethics laws,  the set of rules requiring public servants, elected officials and state board members to disclose financial interests and avoid conflicts of interest.

The board members for the Economic Development Partnership of North Carolina and Richard Lindenmuth, a Raleigh-based business executive hired under a contract in January to serve as the partnership’s first interim leader, do not fall under the State Government Ethics Act, said Perry Newson, the director of the State Ethics Commission.

“Neither it nor he is covered,” Newson said.

The ethics laws were passed in the wake of last decade’s corruption and “pay to play” scandals that sent former Democratic N.C. House Speaker Jim Black to prison. The laws are the primary set of rules North Carolina has to combat inappropriate influences in state government business.

The newly-formed partnership is not covered by the state’s ethics rules because it is organized outside of state government, Newson said. Lindenmuth is also in his Commerce role as a contractor with the state agency and not considered a state employee under his $120,000 annual contract.

But even if he was a state employee, he may not fall under the ethics rules because of the narrow guidelines that determine which public servants are covered, generally exempt employees in positions close to agency secretaries.

The economic development group to be funded with state business recruitment dollars and private donations could come under state ethics rules if lawmakers require it, however. The N.C. General Assembly has yet to pass legislation authorizing the public-private setup and is expected to do that in this spring’s legislative session.

The pending legislation does require the partnership to adhere to public records and open meetings laws, and also sets strict rules preventing board members to weigh in on decisions where financial conflicts of interest exist. The non-profit incorporated those safeguards in by-laws passed in late February, according to Kim Genardo, a Commerce Department spokeswoman. (Click here to read those bylaws.)

Unlike the new public-private economic development group, hundreds of other boards that perform state business do fall under the ethics rules, from the University of North Carolina system’s Board of Governors to boards with less weighty duties like the Agricultural Hall of Fame and licensing boards for barbers, geologists and locksmiths. (Click here to see a full list of covered boards.)

That means members of boards and state commission groups ranging from the powerful state education board to the five-member N.C. Board of Electrolysis Examiners are required to file annual economic interest forms, which the public has access to, while the board members for the new non-profit board group with sway over millions of state business recruitment funds won’t.

Bob Phillips, the executive director of the government watchdog group Common Cause North Carolina, finds the omission of ethics requirements for the public-private partnership worrisome.

“It has such a significant role in this shift of how we do commerce and promote North Carolina,” Phillips said. “Why in the world wouldn’t we want them to abide by the same rules as folks who are serving on less significant boards and commission?,” he asked.

Private-public partnership still finding footing

The partnership, a major piece of Republican Gov. Pat McCrory’s economic agenda, is operating in a state of limbo after authorizing legislation (Senate Bill 127) for the quasi-public arrangement was stalled last year by language that would have lifted a ban on hydraulic fracking of natural gas.

The proposed legislation had included strong language that discourages financial conflicts of interest and requires compliance with state public record and open meetings law, but does not opt to make the partnership subject to North Carolina’s ethics laws.

After the bill was held up during last year’s fast-moving session, lawmakers gave the effort up to $1 million this year for Commerce Secretary Sharon Decker to “reorganize positions and related operational costs within the Department to establish a public-private partnership which includes cost containment measures.”

Although the public records and conflict of interest provisions weren’t included in the budget provision that passed, the partnership is operating under the public records and conflict of interest rules that lawmakers outlined, Genardo said.

Lawmakers are expected to take the bill backup this spring, when the legislative short session convenes in May.

Public-private partnerships similar to what North Carolina is setting up have come under scrutiny in the handful of other states that have taken the economic development work outside of state government.

A fiscal researcher told lawmakers in a February oversight committee that only 12 states have moved their economic development efforts to a quasi-public setup. Most states have kept the recruitment efforts in state government and no conclusive studies have come out that looked at the value of pushing the work to outside groups, according to slides from the presentation.

In October, a scathing report from a Washington-based think-tank critical of private partnerships found that the handful of states that have ventured into the untested waters have become “costly failures” that “created ‘pay to play’ appearances of insider dealing and conflict of interest.”

“We found that the entities can end up lacking both the taxpayer accountability that is necessary in public agencies and the adherence to strict financial controls that is supposed to characterize well-functioning private-sector enterprises, “ according to the report from Good Jobs First. “The fact that PPPs often intermingle public funds and private contributions makes the problem even more pronounced.”

John Lassiter, a Charlotte businessman and chair of the group, said on Wednesday that the economic development partnership will follow all the rules set before it.

“Our goal is to follow what the law requires us to do,” Lassiter said.

Lassiter was, until recently, the head of the board for Renew North Carolina, a non-profit group formed after McCrory’s 2012 election that has run television advertisements promoting McCrory’s agenda and gave high-dollar donors opportunity to hear from McCrory and his political allies at weekend retreats.

The economic development group, he said, has been concentrated on getting paperwork into the IRS for recognition as a non-profit entity. No money has been received yet from private donors, though discussions are beginning with some who have expressed interest , he said.

Lassiter emphasized that, even without oversight from the State Ethics Commission, the partnership with operate with the best of intentions.

“Clearly, we’re all business people and we know what conflict is about,” Lassiter said, adding that he routinely has to follow conflict of interest policies on other boards. “We’re not going to do anything that creates a problem for us professionally.”

Questions? Comments? Reporter Sarah Ovaska can be reached at (919) 861-1463 or sarah@ncpolicywatch.com.

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