AN ACT to clarify and strengthen the reporting requirements of non‑state entities receiving state funds.

The General Assembly of North Carolina enacts:

SECTION 1.  G.S. 143‑6.1 is repealed.
SECTION 2.  Article 1 of Chapter 143 of the General Statutes is amended by adding a new section to read:
"§ 143‑6.2.  Use of State funds by non‑State entities.
(a)	Disbursement and Use of State Funds. – Every non‑State entity that receives, uses, or expends any State funds shall use or expend the funds only for the purposes for which they were appropriated by the General Assembly. State funds include federal funds that flow through the State. For the purposes of this section, the term "non‑State entity" means a firm, corporation, partnership, association, unit of local government, public authority, or any other person, organization, group, or governmental entity that is not a State agency, department, or institution. For the purposes of this section, "unit of local government" has the meaning set out in G.S. 159‑7(15) and "public authority" has the meaning set out in G.S. 159‑7(10).
(b)	For the purposes of this section, the term "grantee" means a non‑State entity that receives a grant of State funds from a State agency, department, or institution but does not include any non‑State entity subject to the audit and other reporting requirements of the Local Government Commission. The term "subgrantee" means a non‑State entity that receives a grant of State funds from a grantee or from another subgrantee but does not include any non‑State entity subject to the audit and other reporting requirements of the Local Government Commission. The terms "State grant funds" and "State grants" do not include any payment made by the Medicaid program, the Teachers' and State Employees' Comprehensive Major Medical Plan, or other similar medical programs.
(c)	Compliance by Non‑State Entities. – If the Director of the Budget finds that a non‑State entity has spent or encumbered State funds for an unauthorized purpose, the Director shall take appropriate administrative action to ensure that no further irregularities occur and shall report to the Attorney General any facts that pertain to an apparent violation of a criminal law or an apparent instance of malfeasance, misfeasance, or nonfeasance in connection with the use of State funds.
(d)	The Office of State Budget and Management shall adopt rules to ensure the uniform administration of State grants by all grantor State agencies and grantees or subgrantees. The rules shall establish policies and procedures for disbursements of grants and for State agency oversight, monitoring, and evaluation of grantees and subgrantees. Such policies and procedures shall:
(1)	Ensure that the purpose and reporting requirements of each grant are specified to the grantee.
(2)	Ensure that grantees specify the purpose and reporting requirements for grants made to subgrantees.
(3)	Ensure that funds are spent in accordance with the purposes for which they were granted.
(4)	Hold the grantees and subgrantees accountable for the legal and appropriate expenditure of State grant funds.
(5)	Provide for adequate oversight and monitoring to prevent the misuse of State funds.
(6)	Establish mandatory periodic reporting requirements for grantees and subgrantees, including methods of reporting, to provide financial and program performance information. The mandatory periodic reporting requirements shall require grantees and subgrantees to file with the State Auditor copies of reports and statements that are filed with State agencies pursuant to this subsection.
(7)	Require grantees and subgrantees to maintain reports, records, and other information to properly account for the expenditure of all State grant funds and to make such reports, records, and other information available to the grantor State agency for oversight, monitoring, and evaluation purposes.
(8)	Require grantees and subgrantees to ensure that work papers in the possession of their auditors are available to the State Auditor for the purposes set out in subsection (h) of this section. 
(9)	Require grantees to be responsible for managing and monitoring each project, program, or activity supported by State grant funds and each subgrantee project, program, or activity supported by State grant funds.
(10)	Provide procedures for the suspension of further disbursements or use of State grant funds for noncompliance with these rules or other inappropriate use of the funds.
(11)	Provide procedures for use in appropriate circumstances for reinstatement of disbursements that have been suspended for noncompliance with these rules or other inappropriate use of State grant funds.
(12)	Provide procedures for the recovery and return to the grantor State agency of unexpended State grant funds from a grantee or subgrantee if the grantee or subgrantee is unable to fulfill the purposes of the grant.
(e)	Notwithstanding the provisions of G.S. 150B‑2(8a)b, rules adopted pursuant to subsection (d) of this section are subject to the provisions of Chapter 150B of the General Statutes.
(f)	The Office of State Budget and Management shall consult with the Office of the State Auditor and the Attorney General in establishing the rules required by subsection (d) of this section.
(g)	The Office of State Budget and Management, after consultation with the administering agency, shall have the power to suspend disbursement of State grant funds to grantees or subgrantees, to prevent further use of State grant funds already disbursed, and to recover State grant funds already disbursed for noncompliance with rules adopted pursuant to subsection (d) of this section. If the grant funds are a pass‑through of funds granted by an agency of the United States, then the Office of State Budget and Management must consult with the granting agency of the United States and the State agency that is the recipient of the pass‑through funds prior to taking the actions authorized by this subsection.
(h)	Audit Oversight. – The State Auditor has audit oversight, with respect to State grant funds received by the grantee or subgrantee, pursuant to Article 5A of Chapter 147 of the General Statutes, of every grantee or subgrantee that receives, uses, or expends State grant funds. A grantee or subgrantee must, upon request, furnish to the State Auditor for audit all books, records, and other information necessary for the State Auditor to account fully for the use and expenditure of State grant funds received by the grantee or subgrantee. The grantee or subgrantee must furnish any additional financial or budgetary information requested by the State Auditor, including audit work papers in the possession of any auditor of a grantee or subgrantee directly related to the use and expenditure of State grant funds.
(i)	Not later than May 1, 2007, and by May 1 of every succeeding year, the Office of State Budget and Management shall report to the Joint Legislative Commission on Governmental Operations and the Fiscal Research Division on all grantees or subgrantees that failed to comply with this section during the prior fiscal year, including the amount of State funds that were disbursed to each of those grantees or subgrantees during that fiscal year and the amount of State funds that were withheld.
(j)	Grantor State agencies shall submit a list to the State Auditor, in the format prescribed by the State Auditor, by October 31 each year of every grantee to which the agency disbursed State funds in the prior fiscal year, the amount disbursed, the amount disbursed to each grantee, and other such information as required by the State Auditor to comply with the requirements set forth in this section.
(k)	Civil Actions. – Civil actions to recover State funds or to obtain other mandatory orders in the name of the State on relation of the Attorney General, or in the name of the Office of State Budget and Management, shall be filed in the General Court of Justice in Wake County."
SECTION 3.  G.S. 147‑86.35(b) reads as rewritten:
"(b)	Any non‑State  entity as that term is defined in G.S. 143‑6.2 that receives, uses, or expends any funds from the Commission is subject to the applicable reporting requirements of G.S. 143‑6.2."
SECTION 4.  G.S. 143‑722(b) reads as rewritten:
"(b)	Any non‑State  entity as that term is defined in G.S. 143‑6.2 that receives, uses, or expends any funds from the Commission is subject to the applicable reporting requirements of G.S. 143‑6.2."
SECTION 5.  G.S. 143‑6.2(d), (e), and (f), as enacted by this act, are effective when they become law. The remainder of this act becomes effective July 1, 2005, and applies to appropriations and grants made for fiscal years beginning on or after that date.
In the General Assembly read three times and ratified this the 18th day of July, 2004.

	_____________________________________
		 Marc Basnight
	 President Pro Tempore of the Senate

	_____________________________________
		 Richard T. Morgan
	 Speaker of the House of Representatives

	_____________________________________
		 Michael F. Easley
	 Governor

Approved __________.m. this ______________ day of ___________________, 2004