NCInnovation provided its 2024 audit to General Assembly on November 21. You can find the audit here and an Excel spreadsheet of the financials here. Of note in the cover letter from independent auditor BDO is the acknowledgement that NCInnovation did not have an independent audit before receiving its first $250 million in state funds:

The 2023 financial statements of the Organization were reviewed by other auditors, whose report dated January 10, 2024[,] stated that they were not aware of any material modifications that should be made to those statements for them to be in accordance with accounting principles generally accepted in the United States of America. A review is substantially less in scope than an audit and does not provide a basis for the expression of an opinion on the financial statements as a whole. [emphasis added]

NC Gen. Stat. 143-728(d)(9) requires NCI to “maintain separate accounting records for and separate accounts [for State and private funds] and shall not commingle [the two],” but the audited financial statements do not make clear the separation of public and private funds. Despite this, it appears that grants are the only thing currently being paid from state funds. This is the largest expense for NCI as projects in the pilot round of grants qualify for their second tranche of funding and as NCI completes its first statewide round of grantmaking in early 2025. The Request for Proposals page states, “The deadline for the fall 2024 pre-application is Friday, December 13, 2024. Applicants can anticipate hearing a response from NCI within one to two months from the application deadline.”

The second largest expense for NCI is salaries and benefits, totaling $2.6 million for the fiscal year. Because the regional hub personnel did not start until November, the annualized expense is more than $3.0 million.

NCInnovation FY2024 Audited Financial Statements and Report [PDF]

Annotated NCInnovation FY2024 Audited Financial Statements [Excel]

The House Oversight and Reform Select Committee has called NCInnovation (NCI) CEO Bennet Waters to testify before the committee Tuesday, July 9, at 9 a.m. in the Legislative Building’s Blue Ridge Auditorium.

NCI is a public-private partnership intended to speed commercialization of university research. After proposals to fund NCI from the earnings of a $1.425 billion endowment, the final 2023 budget bill (HB 259, SL 2023-134) included two appropriations to the endowment of $250 million each.

“The General Assembly made a big bet on NCInnovation. If it succeeds in bringing university research to market, the state will reap significant returns,” said co-chair Rep. Harry Warren (R-Rowan). “NCI leadership has not publicly addressed its funding assumptions or its operations. This hearing can be a step to increase our comfort with putting so much faith in one organization’s ability to pick winning technologies.”

Committee members have questions on NCI’s legislative reporting, receipt and use of state funds, its operations and grantmaking, its funding assumptions, and its long-term plans.

Co-chair Rep. Jake Johnson (R-Polk) noted, “NCInnovation intentionally chose two projects from each region, which does raise concerns of how much it is making decisions on merit and how much on political considerations.”

A hearing that began with conflicting stories between the Department of Motor Vehicles and a vendor ended with questions of DMV’s compliance with state law. Along the way, members had many questions for DMV Commissioner Wayne Goodwin and Idemia North America Vice President for Global Corporate Relations Lisa Shoemaker during the Thursday, June 6 House Oversight and Reform hearing.

From 6:45 on February 15 to 5:45 on February 20, DMV software improperly allowed 2,136 customers to renew their licenses. By the time DMV recognized the problem, its vendor Idemia had already printed many of the requested licenses. Idemia and DMV blamed each other for the eventual decision to find and retrieve the problem cards from among 33,000 printed at the same time. Idemia halted production to conduct the search and did not resume until March 4. Over the next few weeks, the backlog from missed production days and high demand for IDs grew to more than 350,000. Some people were waiting two months to receive their credentials.

Although DMV and Idemia disputed each other’s interpretations of events, both agreed that Idemia will be back on track by June 30. In addition to the 10,000 daily units Idemia produces in Sacramento, California, the company expanded production to its Springfield, Illinois, plant on May 13.

Committee members targeted their questions on the legality of this decision. Chair Harry Warren (R-Rowan) cited Commissioner Goodwin’s May 6 letter to all members of the General Assembly. “As you know,” Goodwin wrote, “the Division of Motor Vehicles (“DMV”) is required to have all credentials produced and issued from a central location. N.C. GEN. STAT. § 20-1(c1)(5) [N.C. GEN. STAT.§207-(f)(5)].”

At the hearing, DMV debated the meaning of “central location” while also acknowledging that the law should be changed to accommodate the transition between two vendors. Chairman Warren asked Commissioner Goodwin whether he had asked for a change in the law, recognizing the challenges it presents. Rep. George Cleveland (R-Onslow) also raised concerns about DMV’s willingness to solve one problem by selectively interpreting the law. Goodwin argued that central location could mean “one company.” Cleveland responded, “When Idemia opened another facility, they broke our state law, and you, I understand, did nothing about this.”

Rep. Allen Chesser (R-Nash) joined Cleveland and Warren in questioning DMV’s interpretation of state law. Chesser asked about DMV’s contracting exemption under HB650 (SL 2021-134) and its willingness to sign a contract for driver’s license production that conflicted with General Statute §20-7(n)(4) which specifies a physical license must include a color photo. Counsel Drew Marsh wrote in his April 12 response to chairs of the Joint Legislative Transportation Oversight Committee, “…DMV had a good faith belief at the time prior to and shortly after entering the contract that the State might be amenable to amending that statute, if in fact it was necessary.”

Chesser held up a poster showing what the updated driver’s license will look like. The license includes a small color photo on the back that required purchase of $3 million in additional equipment and led to a 13% increase in price per card to $2.91 from the originally contracted price of $2.55 per card.

Although DMV’s contract with Idemia and its predecessors dated back to 1996, Goodwin said, “It was our understanding that the legislature had changed the law previously whenever there was a change with contractors.”

“Changing the law at a previous date doesn’t mean you were in compliance with the current law,” Chesser responded.

With the disputes over the meaning of “central location,” the need for a color photograph on driver’s licenses, and DMV’s exemption from Department of Information Technology contracting procedures and oversight, Chairman Warren summed up his frustration: “The department sems to have a pattern of interpreting statute as it best fits your need.”

Idemia has sued DMV over its contract award to Canadian Bank Note Secure Technology, Inc. (CBN-STI). Any judgment in the lawsuit could affect DMV’s ability to use the exemption. The transition to CBN should be complete by July 1, and with the backlog resolved, will settle for now the color photo requirement and the definition of “central location.” DMV has added another series of projects to replace its core systems for driver’s licenses and vehicle titles under the HB650 exemption, so that controversy will continue as will the possible need to amend state law.

While DMV was the focus of the hearing, members complained that other agencies have taken similar liberties with the law. “If you want to circumvent the law, counsel is a good way to go.… I see that being done. Not only in your organization, I see it in other agencies that I have the pleasure of overseeing, and it’s something that really needs to stop,” Cleveland said.

Raleigh, NC – The House Oversight and Reform Committee has requested Department of Motor Vehicles Commissioner Wayne Goodwin to appear before the committee Thursday, June 6, at 9 a.m. in the Legislative Building Auditorium.

Members of the committee will be seeking answers on problems old and new. Goodwin is expected to address the backlog of delivery of driver’s licenses and state IDs and report on the implementation of kiosks. Members will also question the commissioner on the transition to a new vendor for credentials, expectations for the summer DMV office rush, and the status of license plate agencies.

“Drivers have enough frustrations dealing with the DMV without additional delays in getting their licenses. I expect Commissioner Goodwin will be able to explain the reason for the delay and what measures the DMV is taking to fix this latest problem quickly,” co-chair Harry Warren (R-Rowan) said.

Members will also be following up on questions from last year’s House Oversight hearing and a February meeting of the Joint Legislative Transportation Oversight Committee.

“DMV deserves scrutiny,” said co-chair Jake Johnson(R-Polk). “It is one of the most conspicuous services of state government, so it should set the bar for customer service. We know its problems and I hope Commissioner Goodwin will be able to tell us about its progress.”

Members of the House Oversight and Reform Committee gained a clearer understanding of the North Carolina Reinsurance Facility Tuesday, January 30.

Executive Director Joanna Biliouris explained that the Facility exists because drivers are required to purchase liability insurance, insurers cannot set rates entirely based on the risk of a specific policy, and the rates that are allowed are too low for companies to provide that insurance to everyone. In short, the Facility does what it was created by statute to do. but that the Facility can’t quantify its own value. Legislators also learned that the Facility operates as it does due to how the insurance commissioner sets auto liability rates.

The cost of the Facility in the year ending June 30,2023, was $360 million in surcharges on every auto liability policy written in North Carolina, but the value is harder to quantify. Biliouris said, “The Facility cannot be credited with North Carolina having such low liability rates, but North Carolina’s low liability rates can be attributed to the Facility being a part of the state’s regulatory and statutory landscape.”

Ads tout that customers can purchase insurance priced to their driving habits. However, in North Carolina that is not the case: all drivers pay 9.8% higher premiums through a surcharge to cover riskier drivers in the Reinsurance Facility. Biliouris told the committee that the Facility covers 28% of premiums and 20% of policies. Even policies in the Facility pay the surcharge, which means many of them could be cheaper if an increase in premiums led to a larger reduction in the surcharge.  

Fully 78% of vehicles in the Reinsurance Facility are “clean risks,” meaning the associated drivers have no points on their driving record but have other factors, such as speeding tickets, accidents, or inexperience behind the wheel that make them more likely have a claim.

Legislators focused on ways to improve the broader market and reduce the need for the Reinsurance Facility.  

“I’m hoping we can do some things to accelerate this transition
and get it moving faster.”

Rep. Jake Johnson

Representative George Cleveland (R-Onslow) asked, “Can the Facility do its function as provided by law if clean risks were not allowed?”

“If there was more flexibility in the rates that companies could charge [in the voluntary market], they would likely not send that risk to the Facility.” Biliouris acknowledged. “If the Facility was able to determine the rates for any risk that came in,” it could. Such changes could result in lower premiums and surcharges for most drivers.

“I see a recurring problem, and that is that I believe insurance rates are insufficient,” Rep. Allen Chesser (R-Nash) said. “Is it a bigger problem that inadequate rates have been approved?”

“The drivers that are ceded to the Facility are primarily ceded because it was too much risk for the company to take on for not enough price,” Biliouris said.

Biliouris agreed with co-chair Harry Warren (R-Rowan), “If rates were raised…there would be a reduction in the number of policies ceded.”

Co-chair Rep. Jake Johnson (R-Polk) concluded that he saw a need for reform: “I’m hoping we can do some things to accelerate this transition and get it moving faster.”

Members of the House Oversight and Reform Committee will continue their attempt to get concrete answers from the Department of Insurance on the effectiveness of the North Carolina Reinsurance Facility (NCRF) in a hearing Tuesday, January 30, 2024, at 9 a.m.

In December 2023, the committee questioned Insurance Commissioner Mike Causey about auto insurance rates and the costs versus benefits of the Facility. Causey was unable to provide tangible justification, so, the committee has invited NCRF executive director Joanna Bilouris to address those unanswered questions.

The most prevailing question is: How does the NCRF contribute to the low rates that North Carolina drivers pay?

North Carolina has among the lowest rates in the nation, but it also operates a reinsurance facility, one of only two states to operate its residual market in this way. Twenty-five percent of drivers are in the Facility. Legislators aim to determine what part the Facility plays in those low rates amidst other factors such as liability law and fewer uninsured drivers.

“We expected more from Commissioner Causey in our last hearing but were left unsatisfied,” co-chair Rep. Jake Johnson said. “We anticipate Director Bilouris’s answers to what we’ve asked all along: ‘do our citizens pay more than they should for auto insurance?’ It’s our duty as a committee to investigate the necessity of a government program that may not be financially or practically beneficial to our state.”

“It’s really quite simple: show us evidence that having the Facility does what you say it does—is the Facility the reason North Carolina has low auto insurance rates,” co-chair Harry Warren said. “We can’t just take their word for it. Provide the numbers. We are not the lowest in the country, and those that are, don’t have a facility.”

House Oversight and Reform Committee members sought to get solid answers on the value of the North Carolina Reinsurance Facility—the state’s residual auto insurance market system for higher-risk drivers.

The Department of Insurance struggled to answer clearly whether the benefits of the facility outweigh its costs.

Although insurers do not make a profit on their ceded policies, Causey and DOI staff admitted that insurers are able to charge an administrative fee and make profits on other coverage connected to the ceded policy. When Causey said some companies sell all of their policies through the Facility, Committee Co-Chair Harry Warren asked how they could stay in business if they do not earn a profit from these policies.

North Carolinians paid $360 million in the fiscal year that ended in June to subsidize insurance companies selling policies through the Facility. The two surcharges for the current year are set at 13 percent of premiums, which is more than the combined nine percent premium increase over two years the Commissioner approved.

Rep. Allen Chesser questioned the second of those two charges, which is set to keep the Facility from losing money: “The fact that we have to charge a recoupment surcharge for a deficit, does that mean that the rate that we’re charging on those particular policies would be inadequate?”

Chief Actuary Rick Kohan replied, “There is a recoupment that people have to pay because they don’t collect enough money from people ceded.” Which he acknowledged could be simplified to “Yes.”

Additionally, Causey did not know how many members make up the Facility’s governing board. The commissioner, who makes the appointments, is also responsible for accountability.

In his closing statement, Co-Chair Warren said, “I think the discussion today has raised more questions than it answered.”

Another hearing may be necessary for the Reinsurance Facility and Department of Insurance to show if the Facility provides more benefits than costs for North Carolina.

Do North Carolina drivers pay more than they should for car insurance? Would a change in regulations lead to higher or lower rates?

These are among the questions the House Oversight and Reform Committee will seek to answer December 11, 2023, at 1 p.m. in the Legislative Building Auditorium.

The committee will hear testimony from Dr. Jonathan Murphy, assistant professor of economics at Nicholls State University in Thibodaux, Louisiana, and North Carolina Commissioner of Insurance Mike Causey.

The House Oversight and Reform Committee commissioned Murphy, a former Western Carolina University professor, to conduct a study of North Carolina’s auto insurance regulations and residual market.

The state’s residual market—the North Carolina Reinsurance Facility (NCRF)—is a group of insurers required to cover high-risk drivers. Currently a quarter of drivers fall into this category, higher than any other state.

Murphy will testify about North Carolina’s market and the benefits of moving the state to an assigned-risk system where drivers are assessed, and premiums are calculated based on risk. Using similar reforms in South Carolina as an example, he predicts that if North Carolina implemented the move, premiums would fall for drivers at all risk levels over time.

Causey will address his disagreements with Murphy’s report, the specifics of North Carolina’s insurance market, differences in insurance premiums across states, and other regulatory needs of the Department of Insurance.

“Auto insurance is an expense for anyone who drives,” said co-chair Rep. Harry Warren. “If North Carolinians are paying more than they should because of the system we have, it is our responsibility to understand why and to examine alternatives.”

“Price distortions distort behavior,” said co-chair Rep. Jake Johnson. “If a voluntary auto insurance market would create competitive premiums and promote safe driving, we owe it to our citizens to investigate such financial implications.”

Division of Employment Security (DES) Assistant Secretary Antwon Keith touted his agency’s efforts in correcting improper unemployment insurance payments and the timeliness of first-time payments in his testimony before the House Oversight and Reform Committee Wednesday. In response, State Auditor Beth Wood questioned that the recommendations from two audits by her office were being implemented.

Keith and Wood appeared before the committee to address those long-time problems and how the agency has worked to fix them.

“The thousands of North Carolinians laid off during the pandemic shutdown overwhelmed the system and brought new urgency to fixing those chronic flaws,” committee co-chair Rep. Jake Johnson (R-Polk) said. “Now that unemployment rates are again near three percent, it is a good time to improve the system.”

In the past, DES has complained that the federal improper payment rate relies on a small sample. “It needs to be re-evaluated,” Keith said but did not offer an alternative. Using the current methodology, however, North Carolina’s 16.67% improper payment rate is better than other southeastern states, Keith emphasized.

Reps. Allen Chesser (R-Nash) and Maria Cervania (D-Wake) pressed him on getting better estimates and better performance, regardless of the measure. Wood reinforced their point. “It’s not good enough for North Carolina,” she said. “We should be pushing to be better.”

Wood’s audit on improper payments found that DES had failed to prepare for the inevitable economic downturn or to implement recommendations from the U.S. Department of Labor. “The biggest issue we need to talk about was the lack of preparedness for what happened,” Wood said. “We don’t know when a disaster is going to happen, so I would have expected DES to be more ready than they were.”

Keith noted that 54,000 people filed for unemployment in one day in April 2020 due to Covid shutdowns. The agency also had to implement multiple new programs with little federal guidance and few guardrails. The federal Government Accountability Office reported in September that the laxest of these programs, Pandemic Unemployment Assistance, had up to $135 billion in outright fraudulent payments.

Another Auditor’s report on first-time payments found DES was slow with $438 million in benefit payments during the pandemic. Committee members and Wood herself emphasized that this was not simply a result of demand. Federal requirements state that 87 percent of these payments must be paid within 14-21 days. North Carolina has not met this standard since 2010.

Stressing that North Carolina should do better, Rep. John Torbett (R-Gaston) noted that the federal requirement is lacking. He asked, what if our payroll, bank account, or doctor’s diagnosis were only 87 percent accurate. “What about when you get in your car or truck, knowing that there’s an 87 percent chance it’s going to start and take you to where you need to go?” Torbett asked. “What about our schools? What if kids in our schools, we knew there was an only 87 percent right our kids would be educated?”

Wood faulted the heavy reliance on manual interventions that can take between 40 and 110 days to complete, far beyond the 21-day federal guideline. She tested the system herself and found a need for improvement in getting help. A claimant seeking help for to correct a mistake, such as a mistyped social security number, encountered a maze of options to select and information to give, only to end in a message that told callers the system was busy and to try again later.

Auditor Oversight

Members were interested in what it takes to merit a performance audit from the State Auditor. Wood responded, “We look at where there is a lot of money spend or impact [on the greatest number of North Carolina citizens].” She also commented on the importance of follow-up on her recommendation through legislative oversight committees. She noted that HB471 would put more onus on agencies to show they had taken steps to implement recommendations.

Members and Wood discussed the vulnerability of local governments and the options available to improve their financial oversight. Wood mentioned efforts by the recommended that these smaller towns and rural counties hire outside help, such as a CPA firm. Local government associations can provide assistance, she said.

In a surprise announcement closing the hearing, Auditor Wood said she would not seek reelection, but “that leaves us 14 months to kick some butt.”

Division of Motor Vehicles Commissioner Wayne Goodwin defended the DMV’s handling of two driver’s license controversies in his testimony before the House Oversight and Reform Committee Wednesday. Goodwin and Chief Deputy Commissioner Portia Manley told committee members the unusual process to select a driver’s license printing vendor was appropriate. Goodwin also addressed questions about a budget provision to extend the eight-year driver’s license renewal period to sixteen years.

Sixteen-Year Driver’s License Renewal Period

 The REAL ID Act of 2005 requires that state driver’s licenses cannot be valid longer than eight years. Goodwin said he did not realize this until after DMV made its legislative request in February 2023, but he was less than clear why legislators were not made aware of this. He said the original request was an attempt to reduce wait times at DMV offices. Goodwin did not directly address the portion of the provision that would allow unlimited online renewal of driver’s licenses, merely stating that a new photo is required every sixteen years.

Rep. Jeff McNeely (R-Iredell) pressed the timeline of awareness and communication.

McNeely, chair of the Transportation Committee, said he did not receive any communication asking that the provision be removed. Members of the committee asked for email communications to track the chain of requests.

“Lack of communication to the chairs is the problem,” McNeely said. “More eyes could have realized what was happening and made sure we corrected this. In the future we need to broaden our net as we cast it.”

Driver’s License Issuance Contract

Goodwin testified that appropriate procedures were followed in selecting CBN Secure Technologies as a new vendor to produce North Carolina’s driver’s licenses.

Only a small number of companies produce credentials that meet federal, state, and American Associate of Motor Vehicle Administrators (AAMVA) requirements. He explained that DMV chose to interview three of five companies that met its initial criteria. After site visits and presentations in Raleigh, DMV officials chose CBN based on their secure technologies.

Goodwin defended the process DMV used to select the company. Citing Session Law 2021-134 (HB650) that allows DMV to exempt five information technology projects from DIT oversight and requirements to increase the speed of technology modernization projects.

North Carolina General Statute 20-7(n)(4) requires that a driver’s license must contain a color photograph. Goodwin testified that CBN can print in color, but the company prefers black-and-white based on industry standards and security best practices. He said passports and “half” of U.S. state driver’s licenses are black-and-white.  Goodwin said DMV’s request to add the words “or monochromatic” was rebuffed by “DOT leadership.”

Rep. Allen Chesser (R-Nash) raised concerns about data security given the CBN Secure Technologies is a global company. He further urged caution and a full, unrushed vetting process because of the importance of security.

Goodwin reiterated that the process used for selecting CBN Secure Technologies was in accordance with state law and included representatives from multiple departments. “No one person made the decision,” he said. “The decision relied upon the 2021 law…[was] discussed at the meetings earlier this year, is also based on recommendations of subject matter experts, it tracked DOT procurement and RFP process, and followed the direction, approval, and blessing of then-Secretary Boyette and our legal team.”

More to Come

Committee members were not satisfied with Goodwin and Manley’s responses on either issue. They requested more documentation of the procurement process and of communications related to the legislative provision. Chairman Harry Warren said the Committee also hopes to have the Commissioner back to discuss customer service at driver’s license offices.