Overcoming Roadblocks: How Federal Funds Can Support Local Business

A local government and the for-profit businesses operating within the jurisdiction can have a significant relationship. Businesses depend on the local government to provide services and resources conducive to a healthy business environment. Local governments often view a healthy business sector as an essential part of overall community health.

When businesses experience interruptions or other hardships caused by ongoing criminal activity or public street construction projects, they might request financial compensation from the local government to offset these impacts. Alternatively, a local government might seek to financially assist businesses facing such issues as a measure of community goodwill or to ensure the economic health of a downtown corridor or business district.

Local community or political pressure can also motivate local governments to act, such as when local businesses complain to elected officials about a street construction project’s impact on customer traffic or parking or when business representatives voice concerns to the community about ongoing incidents of trespassing, vandalism, or theft that negatively impact business.

But local governments using public funds to assist private businesses, even during challenging times, can violate the state prohibition on gifts of public funds. Washington local governments have an alternative for providing business assistance, and this blog examines how local governments can use federal grants for such purposes.

Keep in Mind the Gift of Public Funds Prohibition

Article 8, section 7 of the Washington State Constitution prohibits local governments from gifting away their money “except for the necessary support of the poor and infirm.” Washington court decisions hold that no gifting violation occurs when a local government expenditure:

1. accomplishes a fundamental government purpose, or
2. is supported by adequate legal value that the local government receives in exchange.

Local government grants to private businesses do not support the poor and infirm, and while courts recognize some activities as fundamental government purposes (such as police community caretaking functions), giving monetary assistance to private for-profit businesses is not such an activity.

The legal value or “consideration” a local government receives in exchange for giving its money to a private business could also be questioned. Concepts such as “enhanced business goodwill” or “ensuring a thriving downtown business community” may be too nebulous to support legal consideration.

Court cases establish that local government payments are not unlawful gifts of public funds (see Eugster v. City of Spokane from 2007), but since private businesses generally have no legal claim for certain disruptive government activities (for example, see RCW 47.52.041 related to city road closures) or for alleged violations of legal duties the government owes to the entire community (such as a general obligation to address criminal activity), municipal payments to resolve business complaints about these issues may be legally invalid gifts. See Warburton v. Tacoma School District No.10 (1960).

The above demonstrates how Washington’s public gifting law restricts local governments from using their own funds to assist private businesses facing these disruptive issues. But does state law similarly restrict a local government’s using funds received from a federal government grant to assist businesses in this way?

No gifting violation when local governments use federal grant funds

In 1970, state representatives asked the Washington State Attorney General (AG) for an opinion on whether the state constitution’s gifting prohibition applied to a city’s use of federal funds received from a Housing and Urban Development (HUD) grant.

The AG concluded in AGO 1970 No. 24 that the state constitution’s gifting restriction did not apply to a city’s lawful use of federal HUD grant funds. The AG reasoned that the state constitution’s gifting prohibition only forbids a local government from improperly giving “its” own money, and that local governments act “only as a conduit” when receiving and disbursing federal grant funds.

The language and reasoning in AGO 1970 No. 24 authorizes local governments to use federal grant funds to financially assist businesses in ways that the state’s gifting prohibition would otherwise disallow. Two examples of federal funding that local governments can use to assist businesses facing financial hardships from construction impacts or ongoing crime problems are HUD Community Development Block Grants (CDBG) and American Rescue Plan Act (ARPA) funds.

Community Development Block Grant Program

HUD’s Community Development Block Grant (CDBG) program makes federal grants available to local governments for use in community development, which includes commonly recognized activities like housing rehabilitation and the development or upgrading of public infrastructure.

Allowable CDBG community development activities can also include providing “assistance to profit-motivated businesses” for economic development and job creation or retention activities. CDBG entitlement program eligibility requirements interpret “economic development” broadly to include a wide range of private and public endeavors to increase business activity. Arguably, local road construction work can impact business activity and development by reducing available parking or vehicle or pedestrian business access, and CDBG funds can be used to offset these impacts.

Local governments must follow federal guidance regarding proper use of CDBG funding but CDBG grants can be used to support private for-profit businesses if the support is tied to local economic development.

How are CDBG funds received and accepted?

The size of a jurisdiction’s population determines how local governments receive CDBG funds. Washington cities with populations of 50,000 and over (as determined by U.S. Census Bureau data) and qualified urban counties with populations of at least 200,000 are HUD “entitlement areas” that can apply for and receive CDBG funds directly from HUD.

Washington cities with populations under 50,000 can apply for and receive CDBG funds through the Washington State Department of Commerce, which maintains a list of cities, towns, and counties the state CBDB program serves.

CDBG fund acceptance may require approval from a jurisdiction’s governing body, either through a general adopting ordinance (see RCW 35A.11.040) or through a specific resolution (see Everett Resolution No. 7987 as an example).

Other considerations

Under 42 U.S.C. § 5304, program applicants may be required to give HUD a statement of community development objectives and proposed fund use to receive CDBG funds. CDBG amounts can vary depending on Congressional appropriations to the CDBG program.

24 C.F.R. § 570.207 restricts the use of CDBG funds for certain activities, such as acquiring or constructing government buildings, building new housing, or political activities. Additionally, depending on the proposed fund use, 42 U.S.C. § 5155 may prohibit giving CDBG funds to private businesses that have other financial resources (such as business interruption insurance) to cover losses.

American Rescue Plan Act (ARPA) Fund Use

Congress passed the American Rescue Plan Act (ARPA) in 2021. ARPA distributed over $240 billion in federal funds to localities through the Coronavirus State and Local Fiscal Recovery Funds (SLFRF) program.

Implemented by the U.S. Department of the Treasury (Treasury), this federal funding assists localities in recovering from the negative impacts of the coronavirus pandemic. Among the negative pandemic impacts Treasury recognizes are increases in local rates of crime that have occurred during the pandemic. Treasury guidance on local SLFRF use provides that localities can use federal ARPA funds “to address negative economic impacts of the pandemic that may aid victims of crime.”

The City of Seattle’s Storefront Repair Fund is one example of applying ARPA funding locally to assist businesses victimized by ongoing criminal activity. The Storefront Repair Fund is available to local businesses needing financial assistance to repair damage resulting from criminal acts of vandalism to business doors, locks, fences, gates, signs, or windows. Up to two separate $2,000 grants are permitted. To be eligible, businesses must have 50 or fewer full-time employees and must have experienced criminal acts during or after the pandemic (on or after March 1, 2020).

The deadline for localities to obligate ARPA funding toward an eligible expense or program is December 31, 2024. Localities seeking to assist businesses using ARPA funding must obligate the funds toward this business assistance purpose on or before that date. According to Treasury guidance, ARPA funds are “obligated” when a local government becomes required to pay for property or services it acquires (merely setting aside budget funds by itself isn’t enough). For more information, visit our blog, New Guidance for Obligating Remaining ARPA Funds.

Conclusion

Businesses facing financial difficulties from public construction projects or criminal activity can cause community hardships and political challenges. Legal restrictions on how a local government can use its own funds may leave businesses and government leaders with a frustrating perceived lack of solutions to these ongoing problems. Fortunately, a legal opinion from 1970 continues to allow localities the option of using federal financial assistance to businesses as a means to address these problems while avoiding violations of state law gifting principles.