UPDATE 9/29/2023: In a recent blog post, LGC staff clarified the accounting treatment of Opioid Settlement Funds. And this PowerPoint presentation details the budgeting, expenditure, and financial reporting treatment of these funds, as described below.

As part of nationwide settlements (and bankruptcy resolutions) with major opioid manufacturers, distributors, and retailers, North Carolina local governments are expected to receive over $1.164 billion in funding over an 18-year period to address the ongoing impacts of the opioid epidemic in their communities (collectively “opioid settlement funds”). All 100 counties and the following municipalities will receive the opioid settlement funds: Asheville, Canton, Cary, Charlotte, Concord, Durham, Fayetteville, Gastonia, Greensboro, Greenville, Henderson, Hickory, High Point, Jacksonville, Raleigh, Wilmington, and Winston-Salem. The schedule of payments is available at CORE-NC: Community Opioid Resources Engine for North Carolina. The largest yearly payment, collectively over $159 million, is due this fiscal year.

Local governments executed a Memorandum of Agreement (NC MOA) with the State regarding the use of the funds and certain process, compliance, and reporting requirements. Additionally, the Local Government Budget and Fiscal Control Act and other related state law provisions govern the budgeting, contracting, accounting, disbursement, and management of these funds.

This blog post outlines the allowable expenditure framework and details the process requirements for approving and budgeting expenditures. Future posts will address reporting and other compliance requirements.

Opioid Settlement Funds are County and Municipal Revenues

Before turning to the specific accounting, budgeting, and other expenditure requirements, it is important to emphasize that the opioid settlement funds are county and municipal revenues; they are not state or federal funds. That means that federal compliance requirements DO NOT apply. (These monies should not be treated the same as American Rescue Plan Act funds, for example.) Similarly, the monies are not pass-through funds from a state agency. The North Carolina Department of Justice (NC DOJ) will be monitoring local expenditures of the opioid settlement funds to ensure compliance with the NC MOA, and providing support to local governments when needed, but will not dictate how local governments spend the funds.

A county or municipality’s governing board must determine the purpose(s) for which the opioid funds will be spent, consistent with the NC MOA and existing state law authority. And, of course, the opioid settlement funds must be budgeted, managed, obligated, and expended according to the state law provisions that govern the same for all local government revenues.

Accounting for Opioid Settlement Funds: Separate Fund but NOT Separate Bank Account

Upon receipt of the opioid settlement funds, a local government must account for the monies in a special revenue fund. It may not account (or budget) these monies in the general fund. A local government may, however, pool opioid settlement funds with cash from other funds for deposit and investment purposes. A local government will allocate the proportional share of any interest or investment gains (or losses) to the special revenue fund. See G.S. 159-13. And, according to the terms of the NC MOA, any interest or investment gains earned from opioid settlement monies must be spent according to the same restrictions as the principal in the special revenue fund. 

Allowable Expenditures for Opioid Settlement Funds

The opioid settlement funds (and interest and investment gains) are subject to expenditure restrictions specified in the NC MOA. It offers local governments two options:

Option A: A local government may fund one or more strategies from a shorter list of high-impact strategies to address the epidemic.

Option B: A local government first undertakes a collaborative strategic planning process and then chooses a strategy from the shorter list of Option A strategies or a longer list of strategies included in the national settlements.

There are resources available to help local governing boards identify and evaluate strategies at ncopioidsettlement.org.

Authorizing Expenditures for Opioid Settlement Funds

The NC MOA states that a local government may authorize expenditures of opioid settlement funds by either adopting a resolution or budget with specified information. Unfortunately, it’s a bit more complicated in practice. Because the opioid settlement funds are public funds, a local government must follow the Local Government Budget and Fiscal Control Act, G.S. 159, Art. 3, provisions related to budgeting. All county and municipal funds must be budgeted in an appropriate budget ordinance before they can be obligated and disbursed. See G.S. 159-8. A resolution is not sufficient to meet this requirement. On the flip side, the NC MOA requires certain info be included about each selected strategy that will not be reflected in a budget ordinance. That info must be provided in a resolution. So, despite the language in the NC MOA that suggests that a local government may either adopt the resolution or budget, a local government MUST DO BOTH. The governing board may adopt/amend the resolution and later adopt/amend the budget ordinance, or it may take these actions in the reverse order. But the board must do both before the monies are obligated or disbursed. (Note that there may be outdated resources related to the NC MOA that continue to suggest that a local government may use either a resolution or budget to authorize opioid expenditures. These resources are being updated. NC DOJ issued a memo in July 2023 outlining its new interpretation of the NC MOA to be consistent with state law budgeting requirements. It supersedes prior guidance from it or other partners. NC DOJ also updated its FAQs on the NC MOA, which addresses this and many other common interpretative issues.)

The following are the specific process requirements for authorizing an expenditure of opioid settlement funds:

1. Annual Meeting

The NC MOA requires that each county receiving opioid settlement funds hold at least one annual meeting open to the public and invite all the incorporated municipalities in the county to attend. The purpose of the meeting is to receive input from municipalities on proposed uses of the opioid settlement funds and to encourage collaboration among local governments. 

2. Authorizing Resolution

Once a local government determines how it wants to spend all or some portion of its opioid settlement funds, it’s governing board must adopt or amend an Authorizing Resolution. This is an added step in a local government’s normal budgeting and fiscal control process. The Authorizing Resolution:

1. Indicates that it is an authorization for expenditure of opioid settlement funds;
2. States the specific strategy or strategies the county or municipality intended to fund pursuant to Option A or Option B, using the item letter and/or number in Exhibit A or Exhibit B of the NC MOA to identify each strategy; and
3. States the amount dedicated to each strategy for a stated period of time.

The strategies and estimated amounts listed in the Authorizing Resolution may span multiple fiscal years and include expected opioid settlement fund distributions from future fiscal years. The governing board may periodically amend the Authorizing Resolution to reflect the addition of new strategies or changes to existing strategies. The North Carolina Association of County Commissioners has drafted an Authorizing Resolution template, which is available here. 

3. Report to NC-CORE

Within 90 days of adopting or amending its Authorizing Resolution, a local government must submit a local spending authorization report, with the following information:

• The date the resolution was adopted (or amended) by the governing board and the resolution number; and
• For each strategy authorized by the resolution, (1) the strategy name; (2) strategy letter and number from NC MOA Exhibit A or Exhibit B; (3) the total amount of funds authorized for the strategy; and (4) the estimated start date. Other optional information includes the end date; external entity implementing the strategy, and short description of the program, project, or activity.

The local government must upload a .PDF file of the Authorizing Resolution. A local government may access the report here. 

Additionally, if a local government elects to pursue Option B, it must upload the report and recommendations resulting from the collaborative strategic planning process within 90 days of their submittal to the local governing board for consideration.

4. Budget Ordinance

Either before or after adopting/amending the Authorizing Resolution, the governing board must appropriate the opioid settlement funds in a budget ordinance. Currently, there are two budgeting options—the annual budget ordinance or, for capital projects only, a capital project ordinance. A local government will receive distributions of opioid settlement funds over 18 years, through 2039. Regardless of the budget option it chooses, there is no requirement that a local government expend all the funds it receives in a single fiscal year during that year, or even during the 18-year period. A local government may carry-forward balances from year-to-year. The monies remain subject to the expenditure restrictions.

Annual Budget Ordinance

Appropriations for eligible programmatic strategies, personnel costs, and other operating expenses must be budgeted in a special revenue fund in the annual budget ordinance. Capital projects may be budgeted in the annual budget ordinance or a capital project ordinance. The annual budget ordinance must be balanced as adopted and amended for the fiscal year. That occurs when appropriations equal estimated revenues + appropriated fund balance in each fund. As detailed here, appropriations are made by department, function, or project. They are not broken down by strategy. Instead, multiple strategies may be aggregated in an appropriation to the department that will implement them. Estimated revenues should include the amount of opioid settlement funds the local government expects to receive and expend during the fiscal year. If a governing board wants to appropriate opioid settlement funds received in a prior fiscal year, it will do so as appropriated fund balance. Because the annual budget ordinance only spans a single fiscal year, a governing board may not appropriate opioid settlement funds it expects to receive in future fiscal years. (Note, though, as detailed above, a governing board may include strategies that will be funded with future opioid settlement fund disbursements in the Authorizing Resolution.) Further, if there are any appropriations that are obligated but not disbursed as of July 1, the governing board must re-appropriate the funds in the next year’s annual budget ordinance. And if there are any opioid settlement funds that are appropriated and not obligated during the fiscal year, they revert to restricted fund balance in the special revenue fund as of July 1.

Although there is significant variation in budget formats across local governments, the legal budget ordinance must include estimated revenues, appropriated fund balance (if needed), and appropriations by fund. To illustrate, assume a local government has identified two strategies so far—hire an opioid settlement fund coordinator in the general administration department ($92,000 salary / benefits) and implement naloxone distribution program in the Sheriff’s Office ($340,000). The local government intends to use $200,00 from the budget year’s opioid settlement fund disbursement and fund the remainder from fund balance from last year’s disbursement. Here is how it would be presented in the annual budget ordinance:

OPIOID SETTLEMENT SPECIAL REVENUE FUND
Estimated Revenue
Opioid Settlement Funds               $200,000
Appropriated Fund Balance
Opioid Settlement Fund Balance   $232,000
Total Revenues                             $432,000
Appropriations
General Administration                  $092,000
Sheriff’s Office                               $340,000
Total Appropriations                    $432,000

The governing board also may appropriate other revenues in the general fund to these same departments to contribute to the costs of the strategies.

Capital Project Ordinance

If the governing board chooses an eligible capital project strategy, it may alternatively budget it in a capital project ordinance. See G.S. 159-13.2. A capital project ordinance may be used for any project involving the construction or acquisition of a capital asset. The advantage of this budgeting vehicle is that it spans for the life of the project, instead of a single fiscal year. That means that the governing board may include as estimated revenues opioid settlement fund revenues it expects to receive in future fiscal years to balance the appropriations for the project. And, as with the annual budget ordinance, a governing board may appropriate opioid settlement fund balance to cover remaining project costs. The opioid settlement monies budgeted in a capital project ordinance are accounted for in a multi-year special revenue fund.

For those unfamiliar with capital project ordinances, here is a template for opioid settlement fund capital projects that can be adapted by local governments.

Grant Project Ordinance NOT ALLOWED

There is another budgeting option authorized by G.S. 159-13.2—a grant project ordinance. It is a multi-year budget for programs and projects funded with grants. A few years ago, the legislature amended the definition of grant project to include “settlement funds for operating or capital purposes as defined by the grant contract.” Although the legislative intent may have been to allow a local government to use this option for opioid settlement funds, unfortunately they are not part of a “grant contract.” This budgeting option is thus NOT CURRENTLY AVAILALBE for opioid settlement funds. It is possible that the legislature will amend the law to specifically allow a multi-year budget ordinance for the opioid settlement funds. As a practical matter, that would be the best budgeting option. But unless and until the legislature grants that authority, a local government must budget the opioid settlement funds in the annual budget ordinance or, for capital projects only, a capital project ordinance.

Because of the confusing statutory language, some local governments may have adopted grant project ordinances for their opioid settlement funds. If a local government obligated and/or disbursed opioid settlement funds budgeted in a grant project ordinance before July 1, 2023, it was a budget violation, and it may result in an audit finding. But the NC DOJ and the Local Government Commission (LGC) staff are aware of this issue, and they have provided assurances that this technical violation will not raise red flags for them. If a local government did not obligate or disburse opioid settlement funds before July 1, 2023, there is time to correct the budget issue. Before obligating and disbursing the opioid settlement funds, the governing board must re-budget them in one of the authorized budget ordinances. And future appropriations should be made through a proper budget ordinance.

Obligating and Disbursing Opioid Settlement Funds

Once the governing board adopts the Authorizing Resolution and adopts or amends the appropriate budget ordinance, the local government may obligate and disburse the opioid settlement funds according to its normal contracting, preaudit, and disbursement processes. Generally, the monies should be disbursed directly out of the special revenue fund either in the annual budget ordinance or the capital project ordinance. The monies should NOT first be transferred to the general fund. There is an exception for certain personnel costs. If a local government employee’s salary/benefits are paid out of the general fund and a portion of that employee’s time will be spent directly implementing an eligible strategy, a local government may transfer the proportional share of the employee’s salary/benefits costs from the special revenue fund to the general fund to allow for payroll payments from just one fund. Similarly, opioid settlement funds may be transferred to the general fund and used to cover the portion of a local government’s audit costs attributable to the opioid settlement funds. (Note, however, that the NC MOA does not allow opioid settlement monies to be used for general administrative or overhead expenses.)