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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. 6427 March 16, 1987 CONSTITUTIONAL LAW: Const 1963, art 9, Sec. 18--pledge of credit by county through loans to private businesses COUNTIES: Use of federal revenue sharing moneys and interest on delinquent tax fund moneys for loans to private businesses A county may not expend federal revenue sharing funds to make loans to private businesses unless the federal statute expressly authorizes such expenditure. A county may not expend interest earned on moneys in a county delinquent tax revolving fund to make loans to private businesses. Honorable Paul Hillegonds State Representative The Capitol Lansing, MI 48909 Honorable Ed Fredricks State Senator The Capitol Lansing, MI 48909 OAG, 1985-1986, No. 6398, p 400 (November 5, 1986), concluded that a county could not use its general revenues to establish and maintain a revolving loan fund in support of private business. You have asked certain additional questions concerning such a revolving fund. As background to your questions, your letter of request states: "The county anticipates that the local share ($250,000) of the initial $500,000 capitalization of the loan fund would come from one of two possible sources, either from federal revenue sharing funds received by the County of Allegan from the federal government or, preferably, from interest earned on a Revolving Tax Fund established by the county with borrowed monies pursuant to MSA 7.142(1) [MCL 211.87b] which have been segregated and maintained separately from the county's general funds. "Once the source of the local share has been determined, the county would transfer the money to the Economic Development Corporation (EDC) of the County of Allegan which, in conjunction with staff services provided by the Allegan County Promotional Alliance, would administer the revolving loan fund. All loans would ultimately be made from the EDC to the borrower and the EDC would be the formal lender." Your first question has two parts which will be stated and considered separately. The first part of your question, as restated, is: Whether federal revenue sharing funds may be contributed by a county to a revolving loan fund to be used to make loans to private businesses? As noted in OAG, 1985-1986, No 6398, there are certain federal economic development funds which have been made available to municipalities which, pursuant to the federal program requirements, may be used to make loans to private businesses. See, OAG, 1983-1984, No 6116, pp 4, 6 (January 12, 1983). By contrast, general revenue sharing funds which are received by municipalities may be used only for such purposes as are authorized by law to be within the powers of the municipality. 31 USC 6704(a) provides that a unit of government to qualify for federal revenue sharing must establish that: "(3) the government will expend the payments so received in accordance with laws and procedures applicable to the expenditure of revenues of the government." To the same effect, see 31 CFR 51.42. While the encouragement of businesses is authorized by the Economic Development Corporation Act, MCL 125.1601 et seq; MSA 5.3520(1) et seq, through the use of such techniques as the issuance of revenue bonds, Mid-Michigan Farm & Grain Ass'n, Inc. v. Henning, 127 MichApp 735, 741; 339 NW2d 243 (1983), and the condemnation of private property by the right of eminent domain for subsequent transfer to a private corporation to build a plant, Poletown Neighborhood Council v Detroit, 410 Mich 616, 628-635; 304 NW2d 455 (1981), it is clear that counties may not be authorized to use their general funds to make loans to private businesses. For example, in OAG, 1973-1974, No 4851, pp 196, 197 (November 4, 1974), it was held that a county could not make a loan to a private hospital with its federal revenue sharing funds, inasmuch as such a loan would be contrary to Const 1963, art 9, Sec. 18, which has been recognized as applicable to counties: "The credit of the state shall not be granted to, nor in aid of any person, association or corporation, public or private, except as authorized in this constitution." See, Oakland County Drain Comm'r v City of Royal Oak, 306 Mich 124; 10 NW2d 435 (1943), as to Const 1908, art 10, Sec. 12, which is the predecessor to Const 1963, art 9, Sec. 18. It is my opinion, therefore, that federal revenue sharing funds may not be used by the county to make a contribution to a revolving loan fund to make loans to private businesses. The second part of your first question, as restated, is: Whether interest earned on a county's delinquent tax revolving fund may be contributed by a county to a revolving loan fund to be used to make loans to private businesses? The Uniform Accounting Procedures Manual for Local Units of Government in Michigan (Michigan Department of Treasury, 1984), p 171, gives a concise description of the delinquent tax revolving fund: "PURPOSE--This fund is used to account for money advanced by a county to pay other local taxing units and various county funds for their delinquent taxes. "CHARACTER--This fund is classified as an internal service fund because its function is to service other funds or units within the same county. "DISTINGUISHING FEATURES--This fund is found only in county government. The fund is reimbursed as delinquent taxes are collected. "ESTABLISHMENT AND AUTHORIZATION--This fund is provided for by ... [MCL 211.87b(1); MSA 7.142(1)(1) ]. It is established by resolution of the county board of commissioners. Michigan Compiled Laws sections ... 211.87c and 211.87d [MSA 7.142(2) and 7.142(3) ] authorizes counties to borrow money to establish this fund (borrowing must be approved by the Michigan Department of Treasury). "OPERATION AND PRESENT USE--Money for the operation of this fund is supplied by: (a) an advance from the county General Fund; (b) borrowing as provided for by ... [MCL 211.87c and 211.87d; MSA 7.142(2) and 7.142(3) ]; and (c) delinquent tax collections, including interest and collection fees. When a loan has been obtained, interest and collection fees must remain in this fund until the loan is repaid. Where no debt exists, General Fund advances or revenues may be transferred (returned) to the General Fund upon board authorization. "This fund is required by ... [MCL 141.421 et seq; MSA 5.3228(21) et seq] to have an informational summary of projected revenues and expenses." The creation of a delinquent tax revolving fund is authorized by MCL 211.87b(1); MSA 7.142(1)(1). The fund is to be segregated into separate funds or accounts for each year's delinquent taxes. MCL 211.87b(1); MSA 7.142(1)(1). Borrowings on behalf of these separate annual funds are to provide that the proceeds of the collection of delinquent taxes pledged and the interest thereon are to be placed in a segregated fund and not be used for any purpose other than retiring the notes until the notes are paid in full. MCL 211.87c(4) and 211.87d(6)(c); MSA 7.142(2)(4) and 7.142(3)(6)(c). After the retirement of the notes for which the tax collection proceeds and the earnings thereon were pledged and any other obligations for which they may be pledged, any unexpended interest earnings would be available to the general fund at the discretion of the county board of commissioners, as provided in MCL 211.87b(7); MSA 7.142(1)(7): "Any surplus in the fund may be transferred to the county general fund by appropriate action of the county board of commissioners." Alternatively, MCL 211.87c(3); MSA 7.142(2)(3), provides that the county board of commissioners may use a portion of the surplus of the delinquent tax revolving fund for certain administrative expenses and fees of the county treasurer and the county treasurer's office. The surplus of the delinquent tax revolving fund is subject to the prohibition in Const 1963, art 9, Sec. 18, against lending of credit discussed above. It is my opinion, therefore, that a county board of commissioners is authorized to transfer any surplus, including interest earnings, in the county's delinquent tax revolving fund to the county's general fund by MCL 211.87b(7); MSA 7.142(1)(7), or to use portions of the surplus for certain fees and expenses of the county treasurer and the county treasurer's office in relation to the fund, but that such surplus, including interest earnings, may not be transferred by the county board of commissioners to a revolving fund to be used to make loans to private businesses. Your second question asks whether MCL 125.1627; MSA 5.3520(27), or MCL 123.872(1); MSA 5.3421(1), provides authority for the contribution by a county board of commissioners of either federal revenue sharing funds or the interest earned on a delinquent revolving tax fund to a revolving loan fund to make loans to private businesses. The Economic Development Corporation Act, MCL 125.1627; MSA 5.3520(27), provides, in pertinent part: "(1) Any municipality [including a county] and any agency or department thereof, or any other official public body, may do any of the following: "(b) Lend, grant, transfer, or contribute funds to the [economic development] corporation in furtherance of its public purposes. "(f) Lend, grant, transfer, or convey funds received from the federal or state government or from any nongovernmental entity in aid of the purposes described in section 2 [MCL 125.1602; MSA 5.3520(2) ], and the [economic development] corporation may accept these funds. "(2) Any state agency or department may do any of the following: "(a) Lend cooperation and assistance to the municipality and its economic development corporation. "(b) Disburse funds to an economic development corporation in accordance with the terms and condition of any grant or transfer of funds from the federal government or its agencies or any nongovernmental entity." OAG, 1975-1976, No 5047, p 495, 500 (June 11, 1976), concluded that MCL 125.1627; MSA 5.3520(27), was unconstitutional as violative of Const 1963, art 9, Sec. 18 and art 7, Sec. 26. While it has been recognized that federal funds which are specifically provided to a municipality for economic development purposes may be used to make loans to private businesses, in the discretion of the county board of commissioners, any grant of authority to the county board to use general revenues of the county, as discussed in the answers to the first and second parts of question 1 to lend money to private businesses, either directly or indirectly, would violate Const 1963, art 9, Sec. 18. Similarly, MCL 123.872(1); MSA 5.3421(1), purports to authorize the use of federal, state or local grants, or the proceeds thereof, to make loans to businesses if not prohibited by the terms of the grant: "(1) To provide a means and method to encourage and assist businesses in locating and expanding in this state, and if not prohibited by the terms of the grant, a city, village, township, or county may use a federal, state, or local grant or the proceeds of a federal, state, or local grant to make a secured or unsecured loan or to make a grant to a private person, to a corporation or other business association, to a city, village, township, or county, or to an instrumentality of a city, village, township, or county. "(2) A loan or grant made pursuant to subsection (1) may be used for local public improvements or to encourage and assist businesses in locating or expanding in this state, to preserve jobs in this state, to encourage investment in the communities in this state, or for other public purposes. "(3) The right to repayment of a loan made under subsection (1) may be assigned by a city, village, township, or county to an entity, agency, or authority created pursuant to law, or to a private corporation or association created to make and administer loans made under subsection (1)." With respect to this provision, OAG, 1985-1986, No 6398, stated: "Although MCL 123.872(1); MSA 5.3421(1), purports to authorize counties to use federal, state, and local grants to make loans and grants to businesses, Const 1963, art 9, Sec. 18, precludes counties from making such loans of general fund money to businesses. In addition, it is noted that MCL 123.873; MSA 5.3421(2), specifies that federal and state grant proceeds are not to be commingled with or become part of the general funds of a county or other municipality." It is my opinion, therefore, that neither MCL 125.1627; MSA 5.3520(27), nor MCL 123.872(1); MSA 5.3421(1), is valid authority for a county to use federal revenue sharing fund moneys or interest earned on a delinquent tax revolving fund in support of a revolving loan fund to make loans to private businesses, and to the extent that they purport to permit such expenditures, they are in conflict with Const 1963, art 9, Sec. 18. It is my further opinion that a county may recycle moneys which the county has received through an urban development action grants program which, as a matter of federal legislation, specifies that the proceeds may be used for loans to private businesses inasmuch as such moneys and the proceeds thereof were never part of the county's general revenues. Frank J. Kelley Attorney General
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