Audit Finds Pandemic Funds Properly Managed but Billions Still Undrawn

North Carolina’s latest financial audit of its $5.4 billion State Fiscal Recovery Fund shows the state complied with all legal requirements in handling federal COVID-19 recovery dollars — but it also reveals a striking reality: more than half of the money remains unspent as state agencies race against a federal deadline that could force the return of any unused funds.

The State Fiscal Recovery Fund Periodic Financial Audit, released by the Office of the State Auditor on Monday, analyzed how the Office of State Budget and Management (OSBM) accounted for, allocated, and disbursed funding between July 1, 2022, and June 30, 2024. The report was required under state law, which mandates biennial examinations of how pandemic recovery dollars have been handled.

The audit’s top-line finding was clear: auditors concluded OSBM properly followed state law, maintained required accounting standards, and distributed funds only when agencies documented their needs and complied with program rules. “All matters were done in accordance with law,” State Auditor Dave Boliek wrote in his transmittal to Gov. Josh Stein and legislative leaders.

But the report also highlighted a lingering challenge that now overshadows the state’s otherwise clean audit record: $2.95 billion — or 54% — of the federal recovery funds have not been drawn down by agencies, even though the money has already been allocated for specific initiatives.

The unspent dollars represent an enormous pool of infrastructure, broadband, public health, educational, and economic development projects that must move from planning to execution soon. Under federal rules, all funds had to be obligated by December 31, 2024, and must be fully expended by December 31, 2026, or the state will be forced to return them to the U.S. Treasury.

No Mismanagement Found

The audit repeatedly emphasized what it did not find. It uncovered:

• No improper allocations

• No unlawful expenditures

• No mismanagement of accounts

• No violations of the American Rescue Plan Act or state law

• No internal control deficiencies affecting the fund’s integrity

  
  

Auditors reviewed a large sample of allocations and disbursements across state agencies, public schools, community colleges, universities, tribal governments, and local government support organizations. They verified documents, examined financial entries, and retraced transactions to ensure compliance with every legislative requirement. All tested transactions met the standards set by state law.

The audit also reaffirmed that OSBM fulfilled its statutory duties: tracking federal dollars, administering allocations, ensuring proper reporting, and confirming that all funds remained in compliance with U.S. Treasury requirements.

Why Billions Remain Undrawn

Despite the clean audit, the report brings renewed attention to the significant portion of funds that have not yet been requested by recipients. Some agencies have been slow to draw down money tied to large, multi-year projects — especially water, sewer, and broadband infrastructure — which often require extensive planning, engineering, environmental approvals, and local government partnerships.

The North Carolina Department of Environmental Quality (NCDEQ) stands out most dramatically. Of the agency’s $1.9 billion allocation, it has not requested $1.7 billion, meaning 89% of its recovery funding remains in reserve. These undrawn dollars include:

• $528 million for State Drinking Water and Wastewater Reserve grants

• $326 million for the Viable Utility Reserve

• Additional funding for stormwater and infrastructure projects

  
  

The audit did not investigate or explain why NCDEQ has requested so little. Auditors explicitly stated that determining “why certain funds have yet to be disbursed” was outside the scope of the review.

A similar pattern appears at other agencies:

• The Department of Information Technology has not requested $687 million (94% of its allocation), mostly for rural broadband expansion programs.

• The Department of Health and Human Services has $201 million (40%) still undrawn, including funding for lead and asbestos remediation in schools and childcare facilities.

• The Department of Commerce has $54 million unrequested, much of it tied to economic development and rural downtown revitalization.

  
  

Auditors described the undrawn money as funding that recipients “have yet to request,” underscoring that OSBM cannot release funds until agencies meet all documentation, contracting, and program requirements mandated by state law.

Funds Fully Spent in Some Categories

Not every part of the pandemic recovery program is lagging. Some categories have already been exhausted.

The most notable example: state employee and local education employee bonuses. A total of $524 million was disbursed for pandemic-era bonuses and benefits for eligible workers across state agencies, public universities, community colleges, and local school districts. Every dollar allotted for this purpose has already been spent.

Funds for state-recognized tribes and Native American associations were also fully drawn and distributed. Federal dollars for operational continuity across state government — largely used to stabilize agency operations affected by the pandemic — are more than two-thirds spent.

A Deadline That Now Takes Center Stage

With all funds obligated by the December 31, 2024 requirement, the focus now shifts to the federal spending deadline. Any unspent money must be returned to Washington unless Congress authorizes an extension.

That creates significant pressure for NCDEQ, the Department of Information Technology, and other agencies with large undrawn balances. For major construction and broadband projects — some of which require lengthy procurement cycles, engineering work, or rural service partnerships — the 2026 deadline is tight.

State officials have acknowledged that federal timelines pose a challenge. In the audit report, OSBM told auditors that all funds were obligated before the federal deadline, but they also noted that any unspent money “will be returned to the U.S. Treasury” if not used in time.

What Comes Next

With the audit complete, state agencies are now in the critical execution phase of their pandemic recovery responsibilities. Several next steps will shape how — and whether — the remaining billions are spent:

1. Agencies Must Accelerate Project Timelines

Departments with infrastructure-heavy portfolios must now move quickly to finalize contracts, complete engineering, and launch construction to meet the federal spending deadline.

2. OSBM Will Continue Monitoring and Reporting

The budget office is required to maintain accounting records, oversee disbursements, and ensure continued compliance with U.S. Treasury guidelines. Additional reporting will occur between now and the final 2026 deadline.

3. A Final Performance Audit Is Still Required

State law requires a final performance audit of the State Fiscal Recovery Fund following the biennial financial reviews. That audit will examine not just whether the money was handled legally, but how effectively it was used and whether funded programs met their intended goals.

4. Local Governments and Partner Entities Must Submit Requests

Many unspent funds cannot be drawn until local governments or partner organizations complete their applications or document readiness for projects. With technical assistance funding still available, those entities may receive additional support to meet deadlines.

5. The General Assembly Could Revisit Allocations if Needed

While the state cannot redirect federally obligated funds without federal authorization, lawmakers may explore whether legislative adjustments are needed to help agencies expedite spending or address bottlenecks.

Audit Leaves Policy Questions for Elected Officials

The audit’s narrow scope means it did not answer broader questions about the pace of state project delivery. It did not evaluate staffing constraints, permitting delays, contractor shortages, or other potential factors that may affect state agencies’ ability to spend funds. It did not judge whether the funded programs were effective or whether the money was allocated in the most impactful way.

Those questions are left for policymakers, agency leaders, and future performance audits to address.

Clean Audit, but a Clock That’s Ticking

The November audit offers one major reassurance: North Carolina legally and properly managed every federal recovery dollar it has touched so far. But it also makes unmistakably clear that the challenge ahead is not one of compliance — it is one of urgency.

With $2.95 billion still undrawn and just two years left to spend it, state agencies now face the final and most demanding phase of handling the largest influx of federal funding North Carolina has ever received.

Whether the state can fully deploy those dollars before the 2026 deadline will determine not only the success of North Carolina’s pandemic recovery strategy but also whether billions in federal funds risk being returned unused.