The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us) STATE OF MICHIGAN FRANK J. KELLEY, ATTORNEY GENERAL Opinion No. 6874 October 2, 1995 STATE OF MICHIGAN: Requiring local units of government to return to the state program income generated by federal Community Development Block Grant funds Federal regulations give the state the authority to compel local units of government to return to it program income generated by federal Community Development Block Grant funds. Honorable Jim Berryman State Senator The Capitol Lansing, Michigan Honorable Art Miller, Jr. State Senator The Capitol Lansing, Michigan Honorable John Cherry State Senator The Capitol Lansing, Michigan Honorable Michael O'Brien State Senator The Capitol Lansing, Michigan Honorable Kenneth DeBeaussaert State Senator The Capitol Lansing, Michigan Honorable Jackie Vaughn III State Senator The Capitol Lansing, Michigan Honorable Henry Stallings State Senator The Capitol Lansing, Michigan Honorable Curtis Hertel State Representative The Capitol Lansing, Michigan Honorable Pat Gagliardi State Representative The Capitol Lansing, Michigan You have asked if the state has the authority to compel local units of government to return to it program income, which includes repaid loan funds and certain other sources of income, generated by federal Community Development Block Grant funds. As background information to your question, you advise that in 1981, the state entered into an agreement with the United States Department of Housing and Urban Development to administer the Community Development Block Grant Program for certain communities. You also advise that pursuant to that program the state, between 1981 and 1987, made grants to eligible communities which, in turn, loaned the grant money to eligible firms for projects approved by the state. The applicable 1982 federal regulations gave the state a choice with regard to the program income that includes repaid loan funds. It could require local units of government to return program income to the state or it could permit them to place the money in a revolving loan fund and use it to continue the program. The controlling regulations provided, at 24 CFR Sec. 570.494(b)(2) and (3), as follows: (2) The State may require recipients to return program income to the State. These funds may be derived from sources such as reimbursements to and interest from a recipient's loan program, proceeds from the disposition of real property, and proceeds from special assessments, to the extent the costs were initially paid with CDBG funds. (3) To the maximum feasible extent, the State shall require each recipient to disburse its program income not required to be returned to the State prior to requesting additional funds from the State to finance its CDBG-funded activities. [Emphasis added.] From the information you have provided, it appears that until 1988, the state, in accordance with these regulations, permitted local communities to establish revolving loan funds by keeping the program income, including the repaid loan funds. Those funds were then used to make additional loans to eligible firms in a manner consistent with state policy and federal regulation in existence at the time. In 1988, the state discontinued establishment of revolving loan funds. Recently the state advised communities that money contained in inactive revolving loan funds must be returned to the state. This course of action is based on 24 CFR Sec. 570.494(b)(2), quoted above. The authority of a state to require the return to it of program income, including repaid loan funds, is now found in 24 CFR Sec. 570.489(e)(3) (November 9, 1992), as follows: The state may permit the unit of general local government which receives or will receive program income to retain the program income, subject to the requirements of paragraph (e)(2)(ii) of this section, or the state may require the unit of general local government to pay the program income to the state. [Emphasis added.] It is my opinion, therefore, that federal regulations give the state the authority to compel local units of government to return to it program income generated by federal Community Development Block Grant funds. Frank J. Kelley Attorney General