April 15, 1988
Mr. Fred Baatz
Director, Division of Community
Development Services
Governor's Office of Economic Development
Capitol Lake Plaza
Pierre, South Dakota 57501
Official Opinion No. 88-12
Loans of CDBG funds by cities and counties
Dear Mr. Baatz:
You have requested an opinion from this office with regard to the following factual situation:
FACTS:
The Governor's Office of Economic Development administers the Community Development Block Grant program. The state of South Dakota receives approximately $6,000,000 a year for the CDBG program from the United States Department of Housing and Urban Development. These funds are passed through to incorporated municipalities and organized counties for a range of community development activities. The communities and counties may pass these funds to other entities such as nonprofit corporations, other political subdivisions or for-profit businesses. Before funds may be distributed, the project must be an eligible activity and meet a national objective as defined in the Housing and Community Development Act of 1974, as amended.
A project that was funded in Aurora County is faced with an audit question on how the CDBG funds were passed on to a for-profit business. The state granted $178,000 to Aurora County to assist National Foods, Inc. to start an egg production unit. The county loaned $175,000 of the funds to the business under certain terms and conditions.
The Department of Legislative Audit has initially determined that counties are not authorized by state law to make loans. Legislative Audit has informed GOED that an official opinion is necessary to determine whether this is an audit finding.
Based upon those facts, you have asked the following questions:
QUESTIONS:
1. May cities and counties pass through federal grant funds received from federal and state agencies to for-profit businesses, nonprofit corporations and units of government in the form of a loan?
2. If not, what sections of the code would have to be amended to allow counties and cities to pass through CDBG funds as a loan?
3. If the cities and counties may make loans, are there any limitations on what the terms of a loan may be?
4. Are there any restrictions on how cities and counties may use the income from the loans made to for-profit businesses?
IN RE QUESTION NO. 1:
The analysis must begin with the proposition that a municipality possesses only that authority which is expressly granted by the Legislature, together with those powers necessarily implied from such a legislative grant in order to carry out those express powers. See Schryver v. Schirmer, 171 N.W.2d 634 (S.D. 1969). The same rule applies to county government. AGR 75-24.
The starting point for both city and county powers are similar statutes which authorize expenditure of grant funds, without the necessity of subjecting those funds to appropriations ordinances. With reference to cities, SDCL 9-21-9.1 provides:
Any funds made available after the final appropriation ordinance is adopted by a municipality from state, county and federal grants for expenditure by the municipality shall be paid into the municipal treasury and may be expended without specific provision in the appropriations ordinance of the municipality. In this case the governing body shall publish, in the official newspaper of the municipality, the purpose for which the expenditures were made and to whom the expenditures were made.
The pertinent county statute contains identical authority. SDCL 7-21-20.1 provides:
Any funds made available after the final budget is adopted by a county from state and federal grants for expenditure by the county shall be paid into the county treasury and may be expended without specific provision in the annual budget of the county. In this case the commissioners shall publish, in the official newspaper of the county, the purpose for which the expenditures were made and to whom the expenditures were made.
See also, SDCL 7-8-20(13).
Clearly, the Legislature contemplated that both municipalities and counties would be the recipients of federal grant funds. The question is whether expenditure of those funds in the form of a loan to the identified entities is permissible. In my opinion such loans are permissible.
This office has on several prior occasions opined that municipalities have the authority to make loans of certain funds, for specified purposes, including federal grant funds. In AGR 75-13, the city of Sioux Falls was told that it could make loans of Public Law 93-383 grant funds for private property development. In AGR 84-46 the city of Vermillion was informed it could utilize tax revenues collected pursuant to SDCL 10-52-8 to carry out SDCL 9-12-11 functions by making loans to industries willing to locate in the city. Municipalities also have limited loan powers for housing and development pursuant to SDCL 11‑7A‑3.
The most pertinent municipal power for purposes of this discussion, however, is the economic development power found in SDCL Chapter 9-54. It is clear under that chapter that a municipality has the authority to issue revenue bonds, and loan the proceeds by way of a revenue agreement to "any person, firm corporation or governmental entity" for the stated economic development purposes. SDCL 9-54-2. This office has previously expressed the opinion that a municipality may exercise these powers without the necessity of issuing revenue bonds, if other means can be worked out to finance a project. AGR 1967-68, p. 460. The federal grant would certainly be such an alternate means of finance, assuming, of course, the proposed use satisfies the eligibility requirements of Title I of the Housing and Community Development Act of 1974, as amended. See particularly, Section 105(17) of the Act. Therefore, it is my opinion that a municipality may pass through CDBG funds for eligible activities in the form of a loan.
The question as it relates to county government is more problematic. Indeed, my predecessor expressed the opinion three years ago that a county was without statutory authority to make a loan to another political subdivision or a nonprofit group. See AGR 84-13. I do not disagree with that opinion in light of the factual situation in which the opinion was sought. There was in AGR 84-13, however, no need to examine county authority to deal with federal grant funds, or county powers in the area of economic development.
In addition to the general authority granted to counties to deal with federal grants cited above (SDCL 7-8-20(13) and SDCL 7‑21‑20.1), the Legislature has seen fit to confer upon counties the power afforded municipalities with reference to economic development. SDCL 7-18-16 provides:
All powers conferred upon municipalities under chapter 9-54 relating to the power to issue revenue bonds shall also be applicable to any county.
In my opinion, based upon these statutes, a county would have the authority to make a loan (revenue agreement) for economic development purposes to those persons described in SDCL 9-54-2 in the same manner as a municipality. AGR 1967-68, p. 460. See, e.g., AGR 80-35. Accordingly, even though no specific county statute contains a power to loan monies, it is my opinion that such power is necessarily implied to enable a county to carry out its expressly granted economic development power.
Therefore, my answer to your first question is Yes.
IN RE QUESTION NO. 2:
In light of the response to your first inquiry, I do not believe it is necessary to address this question.
IN RE QUESTION NO. 3:
Your third question is aimed at whether there are limits as to what terms and conditions would apply to such loans. I have reviewed SDCL Chapter 9-54, and it is my opinion that the governing body for either a city or a county has a great deal of discretion in determining the appropriate terms and conditions of such a loan. See SDCL 9-54-3.1; 9-54-4; 9-54-5; 9-54-8. Those statutes contemplate that whatever contract is issued would recover city costs, and could include payment of sums equal to the amount of taxes which would be due if the project were privately owned. See AGR 69-9. It seems implicit, even if bonds are not issued, that the term of the agreement cannot exceed 50 years. Otherwise, at least for purposes of state law compliance, the terms and conditions of the loan would be matters for negotiation within the discretion of the governing body.
It goes without saying that because these are grant funds from a federal agency, any federal limitations on use of the grant funds would have to be complied with. Federal regulations abound on the proper use and accounting of HUD funds, especially since the State has decided to utilize federal regulations in administering its program under 24 C.F.R., Subpart I, § 570.488 et seq, including OMB Circulars A-102, A-110, and A-87. Local government recipients are required by their grant agreement to comply with the applicable federal regulations, and with certain specified related federal statutes. Those federal requirements will undoubtedly help shape the terms and conditions of loan agreements with subrecipients of the grant funds.
I do not believe it would serve any useful purpose to detail the myriad of federal conditions which might apply at this point, as there could be major differences from project to project. The most effective control over the content of these arrangements would be the grant agreement and your Division's administration of that agreement.
IN RE QUESTION NO. 4:
Finally you inquire if there are restrictions on the use of the repayments of the loans to cities and counties. Assuming that the repayments or other income lie outside of the definition of program income as set forth in OMB Circular A-102, Attachment E, and further assuming that the grant agreement does not by its terms restrict use of those funds, the answer to your question lies primarily in state law.
All funds from whatever source received by a municipality, except as otherwise provided by statute, go into the municipal treasury. SDCL 9-22-1. Those funds are then expended by the governing body pursuant to the annual appropriation ordinance. The same general rule applies to county revenues. See SDCL 7-21-3; 7-21-6; 7-21-18; AGR 1933-34, p. 199. See also, AGR 85- 07.
Accordingly, it is my opinion that unless subsequent use of the grant funds is restricted by federal regulation or by the particular grant agreement with the local unit of government, the loan repayments would go into the respective governmental treasuries and would be subject to future appropriation within the budget laws. The funds would be available to expend as authorized for the particular local government as authorized by state law.
Respectfully submitted,
Roger A. Tellinghuisen
Attorney General
