STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6116

January 12, 1983

CONSTITUTIONAL LAW:

Const 1963, art 7, Sec. 26--loans to private enterprises by city of federal grant funds involving pledge of the credit

A city may use repaid federal urban development grant moneys to make loans to private profit-making enterprises in accordance with federal law, regulations promulgated thereunder, and the grant agreement without violating Const 1963, art 7, Sec. 26.

Honorable Marvin L. Mickey Knight

State Representative

The Capitol

Lansing, Michigan

You have requested my opinion on the following question:

Const 1963, art 7, Sec. 26, provides:

Information supplied with your request, and subsequently obtained, indicates that the city was originally the recipient of federal Urban Development Action Grants (UDAG) under Title I of the Housing and Community Development Act of 1974, as amended; PL 93383, Title I; 88 Stat 633-653 (1974); 42 USC 5301 et seq. The grant moneys were awarded to the city for the purpose of making loans to specific private companies for purposes consistent with 42 USC 5301, supra. Your question deals with the proper use by a city of the money obtained through repayment of such loans by such companies to the city.

The purpose of the UDAG program, as set forth in 24 CFR Sec. 570.450(a), is 'to assist distressed cities and urban counties which are experiencing severe economic distress to help stimulate economic development activity needed to aid in economic recovery.'

Under section 119 of the Community Development Block Grant Act, added by PL 95-128; 91 Stat 1125 (1977), as amended; 42 USC 5318, a recipient applies to the Secretary of Housing and Urban Development for grant assistance under the Urban Development Action Grant (UDAG) Program to undertake activities which are consistent with the provisions of 42 USC 5301, supra, and the UDAG regulations. If the Secretary approves the award of grant funds to the recipient, the funds must be expended by the recipient in conformity with the requirements and provisions of the Grant Agreement. 42 USC 5301, supra, and the rules promulgated thereunder, provide for the termination of payments and recovery of misappropriated funds in the event that a recipient fails to substantially comply with 42 USC 5301, supra. 42 USC 5301, supra, and the rules promulgated thereunder envision a direct assistance program conditioned upon expenditures being confined to purposes permitted therein.

The UDAG funds are distributed through the Department of Housing and Urban Development by contract with the city. The city, upon receipt of the grant money, acts as a trustee for the federal funds. Therefore, in order to determine permissible uses of the grant money, whether at the initial loaning stage or upon repayment, each grant must be analyzed on its own terms.

A grant agreement, supplied by the city as typical, provides for 'Recipient's Use of Program Income' in section 2.04:

'Program Income' is defined in section 1.03 to include the UDAG percentage of '(ii) the repayment proceeds (including principal and interest) of any loan made in whole or in part with grant funds.' Thus, moneys received by a city on repayment of grant moneys may be used by the city only for 'community or economic development activities eligible for assistance under Title I of the Act.' These purposes include the 'provision of assistance to private, for-profit entities, when the assistance is necessary or appropriate to carry out an economic development project.' 42 USC 5301, supra, Sec. 5305.

Letter opinions rendered to the Honorable John T. Kelsey, on October 13, 1975, and to the Honorable Stephen V. Monsma, on August 31, 1979, concluded that cities may use federal funds for purposes provided in the federal enabling legislation without violating Const 1963, art 7, Sec. 26.

The Monsma opinion stated:

Since the grant money is awarded for specified purposes, as set forth in the grant, and as long as use of repayments of the grant is subject to use as provided in the grant, lending of the credit of the city within the purview of Const 1963, art 7, Sec. 26 is not involved. The money advanced is federal money administered by its agent, the city, for authorized purposes only.

It is my opinion, therefore, that a city may use repaid UDAG grant moneys to make loans to private profit-making enterprises without violating Const 1963, art 7, Sec. 26, as long as it does so in a manner which is consistent with 42 USC 5301, supra, applicable federal regulations thereunder and the Grant Agreement entered into by it as agent for the Department of Housing and Urban Development.

Frank J. Kelley