Municipal Donations: Practices and Pitfalls
Texas Cities, both general law and home rule, have certain restrictions placed on them by the Texas Constitution when donating money or making investments into private companies (Tex Const, Art 11, Sec 3). The Constitution likewise prohibits the State from compelling investment or donation in the same manner. (Tex. Const. Art. 3, Sec 52). However, if a city desires to make a donation to a non-profit or charitable entity, may it do so?
Texas Courts have addressed these issues in a few limited circumstances. Generally, the Courts look at several factors to make a determination of whether the payment is a donation or payment to individuals or private companies. The first thing which should be addressed is does the City receive something of value for its payment. The Texas Supreme Court has stated that if a political subdivision is receiving return consideration for the payment of public money, the payment is not “gratuitous” and does not violate the Texas Constitution. Texas Mun. League Intergovernmental Risk Pool v. Tex. Worker’s Comp Comm’n, 74 S.W.3d 377, 384-4 (Tex. 2002) If there is a benefit to a private person or entity, the Courts may still say it does not violate the constitutional ban if the payment directly accomplishes a legitimate city or public purpose, even if an individual or private company benefits incidentally from the expenditure. Barrington v. Cokinos, 338 S.W.2d 133, 145 (Tex. 1960).
The Texas Supreme Court has said no exact definition of a public purpose exists. However, it has also said that unless the purpose is clearly not a public purpose, then the spending of public money is not going to be held to be invalid. The Courts are thus going to defer to the City’s officials, unless the public purpose is clearly a sham. Davis v. City of Lubbock, 326 S.W.2d 699, 709 (Tex. 1959).
If the City wishes to make a public donation, what steps should the City take to ensure that the donation is allowable? First, the City council should make a finding that the money being spent will be for a public purpose and should include some language as to how the expenditure serves the public. This language could be included in the recitals of the ordinance or resolution authorizing the expenditure.
Second, the City should list what benefit it expects to receive because of this expenditure. This may be a specific benefit or may be more generalized. Either way, the language stating the benefits of the expenditure should be contained in the ordinance or resolution authorizing the payment.
Finally, the city should retain sufficient control over the expenditure to ensure the public purpose is carried out. The Supreme Court did not elaborate on what type of control is needed or required. At a minimum, the City should require periodic reports on progress and an accounting on how the public funds are being used. This requirement should be included in any contract or agreement with the individual or entity that is receiving the funds. The City should also follow up and ensure that the funds are spent as promised, possibly conducting an audit on the expenditures (include this possibility in any contract or agreement if the amount is large).
While it is therefore possible to make a donation, as a caution, if the donation is for a large amount, there is a greater amount of public scrutiny typically associated with the spending of public funds. Cities should review those large expenditures carefully, both to ensure the public purpose is clear, and to ensure that sufficient oversight will exist.
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