November 27, 2019

To Give or Not to Give: City Donations

The holidays are close at hand. This is the season for caring and sharing with hopes of Peace on Earth and Goodwill toward Men. It is also the time of year that the KLC Municipal Law Team gets a stocking-full of inquiries from our members after the city is approached by a group or organization seeking a monetary donation from the city for a worthy cause.

Individual charity is a wonderful thing. Cities could and should encourage employees to participate in worthy programs such as Angel Trees, Toys for Tots and the like. If you have ever contacted KLC, we will always say that “passing the hat” in city hall is fine.

However, if the donation is being sought from the city and the city decides to donate from public funds there are several factors to consider before cutting the check. Fortunately, a fairly recent attorney general’s opinion may provide the city some guidance in making this determination.

Will The City Benefit? The better angels of our nature hear the call to assist when disaster strikes. Unfortunately, unless the contribution can be shown to have a direct benefit to the city, a contribution to a hurricane-ravaged island or a city with tainted drinking water will set off red flags.

An example where no benefit to the gifting city was found is the case of Board of Ed. of City of Corbin v. City of Corbin, 192 S.W.2d 951 (Ky. 1951). That case dealt with the question of whether Corbin may appropriate funds ($500 a month) to supplement the salaries of teachers in an independent school district within the city. In deciding that the city could not make such a contribution, the court quoted Section 179 of the Kentucky Constitution in finding as follows:

‘The General Assembly shall not authorize any county or subdivision thereof, city, town or incorporated district, to become a stockholder in any company, association or corporation, or to obtain or appropriate money for, or to loan its credit to, any corporation, association or individual, except for the purpose of constructing or maintaining bridges, turnpike roads, or gravel roads: Provided, If any municipal corporation shall offer to the Commonwealth any property or money for locating or building a Capital, and the Commonwealth accepts such offer, the corporation may comply with the offer.’ Board of Ed. of City of Corbin v. City of Corbin, 192 S.W.2d 951, 952 (Ky. 1946). However, as we will see, the applicability of this case to a local school board may be in question because of a recent attorney general opinion. The broader theme of the case is still applicable however. The additional leeway now granted to a city as to a local entity must still be coupled with a very carefully crafted statement and defense of why the expenditure would serve a public purpose.

This constitutional provision of Section 179 prohibits a municipality from donating to another municipality, or even to the Commonwealth itself, except for the specific purposes recited therein.,,, “Whilst this provision of the Constitution does not prohibit a municipality from participating with another municipality in a function it is permitted or required to perform by itself, and by which its inhabitants will reap a commensurate benefit…nevertheless, it does prohibit a municipality from donating to a project from which no benefit may be received by it, or in which it may not independently engage.” Board of Ed. of City of Corbin v. City of Corbin, 192 S.W.2d 951, 952 (Ky.,1946). It is important to note that this opinion was issued long before the codification of KRS 82.082, the Home Rule Statute, as we will consider shortly.

To state the first level of inquiry in a simple manner, a city needs to consider whether the city receives a benefit from the appropriation. Furthermore, the activity must be one in which the city could independently engage.

If the city will not receive a benefit or is not legally authorized to engage in the activity, then the city cannot donate funds to another organization to perform the activity.

Common examples where a donation of this type is allowable would be money to the Humane Society to operate the animal shelter in the city or donations to a local YMCA for programs to benefit the citizens of the city.

Attach Strings To That Money! The city must either have control over the organization that is receiving the donation or exercise control over how the money is to be spent. If the city writes a check but does nothing more to control the outcome of the donation, the appropriation will likely be held invalid.

In an early attorney general’s opinion analyzing this issue, a city sought to give funds to a zoning legal defense fund. The Kentucky attorney general determined that, “a city cannot appropriate public funds to nonprofit corporations or to associations or individuals in absence of legislative authorization when it has no control of such organizations and no direct connection with them.” OAG 79-67.

If your city believes it will benefit from an appropriation, your city will need to spell out, in express terms, how the money is to be spent. What is the specific project? What is the time frame for completion? Most importantly, DEMAND ACCOUNTABILITY.

Make the appropriation contingent upon reports as to the status of the project. The city may even want to go so far as to have language that requires refunding of the money should the project not meet the standards and conditions established by the city. In a very real sense, this donation should be viewed as a contract. If the group fails to carry out their side of the contract, the city should not hesitate to hold them accountable.

Public Over Private Finally, the expenditure must primarily benefit the public at-large, rather than a private entity.

The Frankfort Internet Kiosk Case

A real-world example of this public purpose analysis is found in OAG 17-009, issued by the attorney general’s office on April 17, 2017. The City of Frankfort sought to appropriate money to the Frankfort Independent School District to create kiosks for citizens to access the internet throughout the city, upgrade technology to enable wireless internet at schools, and purchase advertising space to promote the local schools. The attorney general stated the city may perform any function within its boundaries that is in furtherance of a public purpose and not in conflict with the Kentucky Constitution or statutes. Thus the appropriations contemplated by the city were in furtherance of a public purpose and not in conflict with the Constitution or any statute.

Furthermore, the opinion noted that Section 156b of the Kentucky [MS1] Constitution and our old friend, The Home Rule Statute, KRS 82.082, operate to delegate all possible municipal powers to a city, except those specifically denied to them.

Next, the opinion considered the public purpose nature of the funds and concluded that, based on precedent, the appropriations to a public school for the benefit of education was in furtherance of a public purpose. Specifically, “[p]roviding internet access to students and their families outside of school and upgrading technology to provide wireless internet access within schools is reasonably related to promoting and enhancing the education received by students within the City and in the School District.” Thus, the money donated from the city to promote the schools encouraged not only enrollment in the schools, but also residency in the city, which creates both educational and economic benefits to the city and its residents.

This opinion may seem in conflict with the Corbin case, cited earlier in this article. But the opinion addressed this conflict and noted that the case was decided prior to the enactment of Home Rule authority of KRS 82.082and determined that “KRS 82.082 provides cities with the flexibility to address local problems, such as appropriating money to a coterminous school district to create kiosks for internet services for internet access, upgrade internet access at schools, and advertise to promote its schools.” The city gets the benefit of the appropriation to the school district. Specifically, the city gets the rewards of its citizens having a better place to access the internet, students with better internet access in schools, and increased school enrollment and residency in the city. So, the narrow conclusion of Corbin regarding donations to the local school district is distinguishable from current law due to the enactment of KRS 82.082. Additionally, Section 179 of the Kentucky Constitution does not expressly prohibit this appropriation in the City of Frankfort.

The conclusion and analysis by the attorney general in issuing this opinion could only be achieved because the City of Frankfort presented a carefully-crafted argument. In crafting the appropriation, the city explained WHY this expenditure program was to the benefit of the city and in the pursuit of a valid public purpose. Had the city simply cut a check to the school board, the results of this opinion could have been far, far different.

Anytime a city is considering a donation or appropriation to a private entity, the facts absolutely matter. The authority cited in this article shows the boundaries of the playing field in which our cities can operate in this area. If your city is approached with a request and you are not quite sure how close to stepping out-of-bounds you may be, please contact KLC Municipal Law at 800.876.4552. Chances are, we will be aware of another city that has been approached in a similar manner for a donation and how they structured the donation. That is, if they determined the donation would be to the benefit of the city, which is the very purpose of city government.