Legislative Commission Empowered to Examine, Evaluate, and Investigate Local Governments, Public Authorities, and Their Private Contracting Parties

Published for Coates' Canons on October 16, 2023.

North Carolina local governments and public authorities (collectively “local units”) are subject to oversight by the State in various ways. The Local Government Commission monitors the fiscal health of all local units, sets rules for financial management and audit compliance, and has the authority to impose additional interventions under certain circumstances. Other state agencies set rules and provide compliance and performance oversight of particular local units, often related to State grants or other funding. The State Bureau of Investigation probes potential criminal wrongdoing of local government officials and staff. The State Auditor investigates reports of certain financial malfeasance. With the adoption of this year’s State Budget, specifically Section 27.10(b) of S.L. 2023-134, local units, and many of the private entities that they contract with, are now also subject to potential examination, evaluation, and investigation by a revamped legislative commission—the Joint Legislative Commission on Governmental Operations.

Newly Revamped Joint Legislative Commission on Governmental Operations

First established in 1975, the Joint Legislative Commission on Governmental Operations has provided legislative review of State government implementation of public policies and the expenditure of State funds. The Commission’s charge has been primarily to “conduct evaluative studies of the programs, policies, practices and procedures of the various departments, agencies, and institutions of State government.” G.S. 120-73. A new provision in the 2023 State Budget, Section 27.10(b) of S.L. 2023-134, appreciably expands the scope of the Commission’s investigative powers. And, significantly for local units, it also expands the reach of the Commission’s investigative authority to include local governments, public authorities, and many private entities that contract with these local units and receive public funds. As stated in new G.S. 120-71(b), the purpose of the Joint Legislative Commission on Governmental Operations is now to “undertake the ongoing examination, evaluation, and investigation of State agencies, public authorities, units of local government, and non-State entities receiving public funds, and of their actual effectiveness in implementing public policy or providing public services….” As discussed below, this is a very broad charge.

Commission Membership

The new law does not change the composition of the Commission. As provided in G.S. 120-74, the Commission is comprised of 42 members, with 21 appointees from the Speaker of the House and 21 appointees from the President pro tempore of the Senate. At least 5 of each chambers’ appointees must be members of the minority party. The Speaker of the House and President pro tempore of the Senate serve as cochairs of the Commission. The Commission’s cochairs may jointly establish subcommittees to carry out the various aspects of the Commission’s work. The Subcommittees have the same powers and authorities as the full Commission. The Commission also may utilize Commission staff, who are legislative employees whose primary responsibilities are to provide professional or administrative services to the Commission. G.S. 120-75.

Entities Subject to Commission’s Examination, Evaluation, and Investigation Authority 

The Joint Legislative Commission on Governmental Operations’ examination, evaluation, and investigation authority now extends to the following four categories of entities:

State agencies. A state agency is “a unit of the executive, legislative, or judicial branch of State government, such as a department, institution, division, commission, board, council, community college, or The University of North Carolina.” G.S. 120-72(11).

Units of local government. A unit of local government is defined in G.S. 120-72(13), by reference to G.S. 143C-1-1(d)(29), and includes the following:

    • counties (G.S. Chapter 153A);
    • municipalities (cities, towns, villages) (G.S. Chapter 160A);
    • consolidated municipal-county governments (G.S. Chapter 160B);
    • sanitary districts (G.S. Chapter 130A, Article 2, Part 2);
    • county water and sewer districts (G.S. Chapter 162A, Article 6);
    • metropolitan sewerage districts (G.S. Chapter 162A, Article 5);
    • metropolitan water districts (G.S. Chapter 162A, Article 4);
    • mosquito control districts (G.S. Chapter 130A, Article 12, Part 2);
    • special airport districts (G.S. Chapter 63, Article 8); and
    • regional public transportation authorities (G.S. Chapter 160A, Article 26);
    • hospital districts (G.S. Chapter 131E, Art. 2, Part 3);

Public authorities. A public authority is defined in G.S. 120-72(9), by reference to G.S. 143C-1-1(d)(22), and includes the following:

    • certain housing authorities (G.S. Chapter 157, Article 1);
    • certain redevelopment commissions (G.S. Chapter 160A, Article 22);
    • water and sewer authorities (G.S. Chapter 162A, Article 1);
    • certain soil and water conservation districts (G.S. Chapter 139, Article 1);
    • parking authorities (G.S. Chapter 160A, Article 24);
    • public transportation authorities (G.S. Chapter 160A, Article 25);
    • tourism development authorities (authorized by local acts);
    • regional transportation authorities (G.S. Chapter 160A, Article 27);
    • regional natural gas districts (G.S. Chapter 160A, Article 28);
    • single- and multi-county public health authorities (G.S. Chapter 130A, Article 2, Part 1B)
    • councils of government (G.S. Chapter 160A, Article 20, Part 2);
    • regional planning commissions (G.S. Chapter 153A, Article 19);
    • regional economic-development commissions (G.S. Chapter 158, Article 2);
    • regional planning and economic-development commissions (G.S. Chapter 153A, Article 19);
    • multi-county area mental health, developmental disabilities, and substance abuse authorities (G.S. Chapter 122C, Article 4, Part 2);
    • district health boards (G.S. Chapter 130A, Article 2, Part 1);
    • joint municipal power agencies (G.S. Chapter 159B);
    • regional libraries (G.S. Chapter 153A, Article 14);
    • joint agencies created by interlocal government agreement (G.S. Chapter 160A, Article 20); and
    • metropolitan water and sewerage districts (G.S. Chapter 162A, Art. 5A).

Local school administrative units (G.S. Chapter 115C) and ABC boards (G.S. Chapter 18B) likely also constitute public authorities for purposes of this definition, even though they are not public authorities for purposes of the Local Government Budget and Fiscal Control Act. There may be other entities created by local act of the General Assembly that are public authorities for purposes of this new law.

Non-State entities. The term non-State entity is defined in relevant part as “an individual, firm, partnership, association, or corporation, or any other private organization or group acting as a unit” that receives public funds “to (i) conduct a program or (ii) provide a service to a State agency, a unit of local government, or a public authority.” G.S. 120-72(7) & (10). Public funds are state and/or local funds. Local funds include monies generated by a local unit or received as grants, appropriations, donations, or other means from the state government, federal government, and private individuals and entities. In other words, local funds are any funds that must be budgeted according to S. 159-8. Local funds do not include monies held by a local unit in a trust capacity.

Local units contract with and disburse local funds to a variety of private entities—ranging from paying money to the local hardware store for supplies, to engaging an architecture firm for design work, to hiring a contractor to construct a new building, to procuring an auditor to conduct the annual audit, to paying a private provider to administer mental health services, to hiring a landscaping company to maintain the public parks, to contracting with a nonprofit to carry out a community support project, and much more. Which of these example activities constitutes a program or service to the local unit as contemplated by the statute? The answer is most of them.

The term program is defined as “a specific activity or set of activities established or described by law, administrative rule, executive order, policy, or local ordinance.” G.S. 120-72(8). Thus, the definition of non-State entity likely comprises any private entity or individual that carries out a legally authorized activity on behalf of the local unit in exchange for public funds. That includes a private party to which a local government has outsourced its administrative functions, as well as a private party that receives public funds to undertake a community program or activity that the local unit has statutory authority to engage in. (Recall that a local unit does not have authority to grant or donate funds to a private entity without receiving some public benefit in return. See N.C. Const. Art. I, Sect. 32.)

The definition of non-State entity also applies to a private individual or entity that provides a service to a local unit. Many other private parties that contract with a local unit and receive public funds can be characterized as providing a service to the local unit. But let’s look at some possible exceptions.

One set of private individuals and entities is explicitly exempted from the definition of non-State entity—those that receive public funds as beneficiaries, without carrying out a program or providing a service in return. See G.S. 120-72(10). For example, if a local government establishes a rental assistance program for low-income citizens, a citizen receiving public funds as a beneficiary of the program is NOT non-State entity for purposes of this law. But if the local government contracted with and paid a nonprofit to administer the assistance program, the nonprofit would be a non-State entity.

The new law does not otherwise define service, though, which creates some interpretative grey area. Black’s Law Dictionary defines service, in relevant part, as “[t]he being employed to serve another; duty or labor to be rendered by one person to another.” Based on this definition, private individuals and entities that supply goods to local units (without also providing services) are likely exempt. Goods, themselves, are neither programs nor services. Similarly, when a local unit purchases equipment or real property, the private party to the transaction may be receiving public funds but likely is not conducting a program for or providing a service to the local unit. What about an economic development incentive agreement? We do not typically think of the consideration promised by a private party in exchange for cash incentives as a service to a local unit. But it’s possible that such a promise, which often involves a commitment to generate additional tax base and/or jobs, would be considered a service for purposes of this definition. Construction contractors present another interpretative challenge. Construction contracts are not considered service contracts for competitive procurement purposes, but, based on the Black’s Law definition, construction contractors may be providing a service to the local unit for purposes of this statute, and thereby included in the definition of non-State entity. And even if certain construction contractors are excluded from the definition of non-State entiy, those who engage in design-build contracts, providing a mix of construction and architectural and engineering services work, clearly fit within the definition.

There are likely other types of contracting parties that fall within a grey area. Ultimately it will be up to the Commission to determine its reach. Local units should prepare all their private vendors, contractors, and service providers for the potential of a Commission investigation.

Scope of the Commission’s Examination, Evaluation, and Investigation Authority of Local Units and Non-State Entities

The scope of the Commission’s examination, evaluation, and investigation powers is expansive. The Commission, or a subcommittee of the Commission, may “study the efficiency, economy, and effectiveness” of any local unit and “evaluate the implementation of public policies” of the same. G.S. 120-75.1. It also may investigate “possible instances of misfeasance, malfeasance, nonfeasance, mismanagement, waste, abuse, or illegal conduct” by officers or employees of a local unit in the exercise of their public duties. It is hard to think of an action or function of a local government or public authority that the Commission could not examine, evaluate, or investigate—including general government and public enterprise functions; regulatory actions and the provision of services; state-mandated and discretionary undertakings; official actions of the governing board and actions of individual officials and employees; internal administrative actions and external contracts; policy-setting and ministerial functions. And the law leaves it up to the Commission to develop its evaluative criterion and define such concepts as efficiency, effectiveness, mismanagement, and waste.

The Commission has a similarly broad scope in its examination, evaluation, and investigation of non-State entities (the private entities that conduct programs or provide services to a local unit in exchange for public funds). Employing the means identified below, the Commission may review any aspect of the agreement between the local unit and private party and the execution of the program or service by the private party. It also may investigate any of the private party’s officers and employees for “possible instances of misfeasance, malfeasance, nonfeasance, mismanagement, waste, abuse, or illegal conduct” in relation to the “officer’s or employee’s responsibilities regarding the receipt of public funds.” G.S. 120-75.1(3)(b).

The Commission may carry out its work by any of the following means. (Be sure to also read the section on the confidentiality of Commission inquires below.)

  1. Testimony. The Commission may require any official or staff member of a local unit to appear before it and testify about any issue within the scope of the Commission’s authority. G.S. 120-779(a)(2). The Commission also may compel testimony of any officer or employee of a non-State entity who is responsible for implementing a program or providing a service paid for with public funds. Id. Hearings must be conducted in accordance with G.S. 120-19.1 through 19.4. G.S. 120-77(h). During a hearing, a witness may be examined under oath and may be accompanied by his/her attorney.
  2. Access to Buildings and Facilities. Unless prohibited by federal law, a local unit must give the Commission and/or Commission staff access to any building or facility owned or leased by it. G.S. 120-77(b)(2). As a practical matter, Commission staff is likely to coordinate a visit with the local government or public authority staff, but advance notice is not mandated by statute. Requests for access are subject to the confidentiality provisions discussed below. Likewise, unless prohibited by federal law, a non-State entity that receives public funds to conduct a program or provide a service to a local unit also must grant Commission staff access to any building or facility used to implement the program or service, if “the access is reasonably related to the receipt, purpose, or implementation” of the program or service. G.S. 120-77(b)(3).
  3. Access to Documents. The Commission may compel access to any document or system of record (data management or storage system) held by a local unit. G.S. 120-77(a)(1). Such a request is subject to the confidentiality provisions discussed below. The Commission also may require the same of any document or system of record held by a non-State entity that receives public funds director or indirectly, to the extent the document or system of record relates to the receipt, purpose, or implementation of a program or service paid for with public funds.

Most documents that a local unit has are already subject to public access under state public records laws. But there are some records and information that are shielded from public access. May the Commission compel access to documents with protected records or information? Unfortunately, the answer to this question is unclear and may depend on the nature of the document and the extent to which it is shielded. North Carolina’s public records laws are complex. Although the default is that all records made or received in the transaction of public business are subject to public access, G.S. 132-1, the legislature has carved out exceptions. And the exceptions take many forms. Further, records and information held by a local unit and non-State entity may also be protected under federal law.

State Law Protection of Records and Information

The protections for records and information under state law fall on a continuum. At one end are records and information that are not automatically subject to public access; rather the law leaves it to the discretion of the local unit. A common example is public enterprise billing information. G.S. 132-1.1(c). It seems likely that the Commission may compel access to documents and information that are within the discretion of a local unit to disclose.

Moving along the continuum are records or information that must be kept confidential by the local unit, but for which disclosure is allowed if required by law. See, e.g. G.S. 105-259; G.S. 153A-148.1; G.S. 160A-208.1 (certain taxpayer income and receipts information). Disclosure of these documents to the Commission is required by law, pursuant to G.S. 120-77(a)(1). The new law protects this information in the hands of the Commission, providing that “any confidential information obtained by the Commission shall remain confidential and is not a public record as defined in G.S. 132-1.” G.S. 120-77(d).

Next are records or information that must be kept confidential and for which there is no general exception for disclosures required by law. Whether the Commission can compel access to these documents (and with or without redactions of confidential information) is much less clear. The new law does not explicitly grant the Commission access to confidential records or information. The Commission may take the position, though, that the new law allows it to compel disclosure of all documents held by a local unit, regardless of their confidential status. It may cite to the provision quoted above that requires the Commission to keep confidential information confidential as sufficient protection to comply with the underlying confidentiality requirements. Or the Commission may determine that it does not have authority to compel access to these documents. As advised below, a local unit should be prepared for either scenario.

Finally under state law, there are some records and information that may be released only upon a court order. See, e.g., G.S. 132-1.4A (bodycam footage). Other records or information may be released only to certain government entities or officials. It is harder to argue that the general provision in the new law related to the Commission keeping confidential information confidential is enough to override these specific statutory processes or limitations. They don’t just prohibit access by the public generally but also access by other government officials. The Commission likely would have to follow the statutory processes to obtain access to these documents or abide by the more specific statutory limitations to access. Again, though, the law is not entirely clear. The Commission may argue that it has access to all documents of a local unit.

Federal Law Protections of Records and Information

A local unit or non-State entity also may have a variety of documents that are confidential or include confidential information under federal law. As with state law, there is not a uniform approach to these protections. There are complex arrays of federal (and state) protections for social services, public health, public education, and elections records. Additionally, there are protections associated with certain other federal programs administered by local units and associated with certain federal grants. Some federal laws allow disclosure as required by law. Arguably, G.S. 120-77(a)(1) makes disclosure of this confidential information to the Commission required by state law. Other federal laws might shield information from public exposure but allow it to be shared with certain government officials. Still other federal laws might simply make the records or information confidential. A local unit and the Commission will have to closely review the applicable provisions to determine if disclosure to the Commission is allowed. State law cannot override federal restrictions.

Analyzing all the potential protected records and information is beyond the scope of this blog post. Under state law, provisions shielding records and information from public access are scattered throughout the statutes. And there are myriad federal provisions that apply based on the nature of the federal funding and/or program. As always, local officials and employees should develop a general understanding of the legal treatment of records and information they commonly make or receive in connection with their job duties. (David Lawrence’s book, Public Records Laws for North Carolina Local Governments (2d ed. 2010)is still a helpful guide, as supplemented by Coates’ Canons blog posts addressing updates in the law since its publication.) With this new law, though, and given the potential legal consequences of improperly disclosing confidential records or information, local employees and officials should work with their unit’s attorney in advance of any specific Commission request to determine how to respond to a request for confidential records and/or information.

Confidentiality of Commission Inquiries and Work Product

Most of the Commission’s work is protected as confidential. The law deems “any request made to an agency employee by Commission staff and any communication between Commission staff and an agency employee” to be confidential. G.S. 120-77(f). An agency employee, defined by reference to G.S. 120-131.1, “means an employee or officer of every agency of North Carolina government or its subdivisions, including every public office, public officer or official (State or local, elected or appointed), institution, board, commission, bureau, council, department, authority, or other unit of government of the State or of any county, unit, special district, or other political subdivision of government.” It includes all local government and public authority board members, other officers, and employees. The law further provides that an officer or employee of a local unit may not disclose to anyone else (including other officials or employees of the local unit) “[t]he nature or existence of the request and communications” unless, and only to the extent, “necessary to fulfill a request for document production or to gather more information as required by the member of Commission staff.” Id. If an officer or employee violates the confidentiality requirement it “shall be grounds for disciplinary action, including dismissal.” Id. It is not clear whether a local employee or official may consult the local unit’s attorney about a Commission request, but under certain circumstances it might be necessary to fulfill a request for document production if there are legal questions about whether confidential records and information can be disclosed to the Commission. An individual receiving a request for documents from the Commission should talk with Commission staff first about whether consulting with the unit’s attorney or others is permissible.

Note that this confidentiality requirement does not apply to employees and officials of non-State entities, only to those of state agencies and local units.

Penalty for Noncompliance

The new law makes it a Class 2 misdemeanor for a person to conceal, falsify, or refuse to provide the Commission any document, information, or access to any building or facility with the intent to mislead, impede, or interfere with the Commission’s work.

When May the Commission Begin Its New Examination, Evaluation, and Investigation Work?

The redefined scope and authority for the Joint Legislative Commission on Governmental Operations became effective with the adoption of the State Budget (October 3, 2023). That means that its work may begin at any time now.

Does the Commission’s new authority extend to non-State entities who entered into contracts with local units before this effective date? The law, itself, does not give the Commission retroactive authority, nor does it explicitly state that the Commission’s new authority applies to non-State entities with existing contractual relationships with local units as of its effective date. However, it seems reasonable to assume that the Commission’s new powers apply to any covered non-State entity who is still performing under an existing agreement with a local unit (executed before October 3, 2023), and any non-State entity who contracts with a local unit to conduct a program or provide a service in exchange for public funds after this date. Note, though, that although the Commission’s investigative powers are broad, it may not exercise its authority in a way that violates the constitutional rights of a non-State entity.

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Topics - Local and State Government