Opinion 88-79


This opinion represents the views of the Office of the State Comptroller at the time it was rendered. The opinion may no longer represent those views if, among other things, there have been subsequent court cases or statutory amendments that bear on the issues discussed in the opinion.

CONSTITUTIONAL LAW -- Gifts and Loans (applicability of prohibition to moneys received from federal government)

NEW YORK CONSTITUTION, ART. VIII, §1; GENERAL MUNICIPAL LAW, §99-h(2): A village may use "program income" derived from a federal Urban Development Action Grant to provide grants or loans to assist private developers in financing economic development projects eligible under the particular federal law without violating the gift and loan provisions of Art. VIII, §1 of the New York Constitution.

This is in reply to your letter concerning the use of "program income" derived from an Urban Development Action Grant (UDAG), the proceeds of which were loaned by a village to a developer to assist in financing the construction of a hydro-electric facility.

The UDAG Agreement provides that any income earned by the village from the disposition of grant funds, including the repayment of principal and interest of any loan, constitutes "program income". The UDAG Agreement and Closeout Agreement, the latter of which defines the rights and obligations of the village upon the completion of UDAG funded activities, both provide that "program income" received after the loan is made to the developer is deemed "miscellaneous revenue" which must be used for community or economic development activities eligible for assistance under Title I of the Housing and Community Development Act 1974 (PL 93-383, as amended). The Closeout Agreement further requires the village to maintain records as to the use of such miscellaneous revenue, and to report annually to the U.S. Department of Housing and Urban Development for 5 years following issuance of a Certificate of Project Completion.

The village anticipates using the "program income" to undertake directly economic development projects in and around the village (e.g., construction of a parking lot). The village also has caused to be created a local development corporation pursuant to Not-for-Profit Corporation Law, §§402 and 1411 and anticipates contracting with the corporation for the latter to provide various services in connection with economic development projects. In connection with the foregoing you ask:

(1) May the village use "program income" which is deemed "miscellaneous revenue" to grant or loan moneys to developers for projects identified by the local development corporation as appropriate uses under Title I?

(2) If so, may the village loan these moneys directly to the developer, or loan or grant them to the local development corporation which, in turn, would grant or loan money to the developer?

As to the use by the village of "program income" deemed "miscellaneous revenue", we note that General Municipal Law [GML], §99-h[2] authorizes municipalities, including villages, to apply for, accept and expend funds made available by the Federal government, pursuant to the provisions of any Federal law which is not inconsistent with the Constitution or statutes of this State, in order to administer, conduct or participate with the Federal government in programs relating to the general welfare of the inhabitants of the municipality. Article VIII, §1 of the State Constitution prohibits villages from giving or loaning village money to or in aid of any individual, or private corporation or association, or private undertaking.

In 1987 Opns St Comp, No. 87-9, p 15, we concluded that a city may loan federal grant money to a private developer and take back a mortgage on the property to be developed, provided that the arrangements are consistent with the Federal enabling legislation. In reaching this conclusion, we relied on Kradjian v City of Binghamton, 104 AD2d 16, 482 NYS2d 89 app dsmd 64 NY2d 1039, 489 NYS2d 1029 (1985) in which the court held that a city's loan of Federal grant moneys to a private developer to assist in financing the construction of a downtown hotel did not violate the the gift and loan provision of the Article VIII, §1 of the State Constitution. The court reasoned that:

"... the city is participating in a Federal program, created by Federal statute, administered by a Federal agency and funded by Federal sources. The city's participation, authorized by State statute (General Municipal Law, §99-h, subd. 2), is intended to promote urban expansion and growth so that as to attract investments and create permanent job opportunities for low and moderate income persons. Under these circumstances, we see no gift or loan of municipal funds in violation §1 of the Article VIII of the State Constitution". [citation omitted] 104 AD2d at p 18, 482 NYS2d 91 (emphasis supplied).

Thus, Federal grant moneys retain their character as Federal money while a municipality is participating in a Federal program which permits the moneys to be loaned to a private entity and are, therefore, not subject to the gift and loan provision of Article VIII, §1 of the State Constitution (see 1987 Opn No. 87-9, supra; see also 1980 Opns St Comp, Nos. 80-589 and 80-744, unreported; 1974 Opns St Comp, No. 74-1120, unreported; 1978 Atty Gen [Inf] 139).

The UDAG and Closeout Agreements in question require the village to use program income received after the completion of the recipient activities, deemed "miscellaneous revenue", "for activities eligible under Title I of the Housing and Community Development Act of 1974, as amended".  In our opinion, as long as this Federal requirement remains applicable, use of such program income for Title I activities constitutes continued participation in the underlying Federal program, with the effect that, the program income retains the character of Federal funds. Therefore, we conclude that if permissible under Title I, the village may use the program income to provide grants or loans to assist private developers in financing economic development projects without violating the gift and loan provisions of Article VIII, section 1 of the State Constitution. We express no opinion, however, as to the types of activities eligible under Title I.

As to the participation of a local development corporation in administering UDAG program income deemed "miscellaneous revenue", in Opn No. 87-9, supra, we concluded that because UDAG grant moneys retain the character of Federal funds, where a city loans UDAG grant money to a developer, the city could assign loan repayments to a local development corporation without violating Article VIII, §1 of the State Constitution, so long as that arrangement is permissible under Federal law. Similarly, in our opinion, the village may grant or loan such program income to a local development corporation which, in turn, would grant or loan the money to private developers for Title I projects, provided that the arrangement is permissible under Federal law. We express no opinion, however, as to whether such an arrangement is permissible under Federal law.

Finally, we note that in view of the recordkeeping and continued reporting required by the Closeout Agreement, the village may wish to consider incorporating recordkeeping, reporting and auditing requirements into any agreement with the local development corporation to ensure compliance with the Closeout Agreement and that program income is being used for Title I purposes.

July 13, 1988
Linda Weir, Clerk/Treasurer
Village of Carthage