What Constitutes a Lawful Use of Public Funds?

It is not uncommon for a local government to be asked to donate something for charitable or related purposes. These requests can be varied, ranging from requests for outright cash donations, to sponsorship of tables at award banquets or speaking events, or perhaps for the sponsorship of display booths at local events.

In considering these types of requests, it is often asked whether a local government may lawfully use its funds for these types of purposes, or whether such use of public funds might be prohibited. The answer is usually that such donations are unlawful, but there are exceptions in appropriate circumstances.

Provided below is a discussion of the basic legal principles that govern expenditures of public monies, and some guidelines that can be applied whenever a local government considers a request for a donation, contribution or sponsorship.

A. Constitutional Prohibition Against Donation of Public Funds

When considering the permissible use of public funds under Michigan law, the analysis always begins with Article 9, Section 18 of our State Constitution, which provides as follows:
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. Const 1963, art 9, Sec. 18.

The provision has been interpreted as prohibiting the state, as well as any of its political subdivisions (e.g., a county, city, village or township), from giving anything away without consideration, that is, without receiving something of value in return. Alan v Wayne County, 388 Mich 210 (1972). In other words, outright donations of public funds for charitable or similar purposes is not permitted, no matter how worthy the cause may be.

That is not to say, however, that every expenditure made by a political subdivision is subject to a rigorous test, where there must be a one-for-one exchange of value. To the contrary, the courts afford a great deal of discretion to executive and legislative judgment in this regard, and generally will not disturb an expenditure or appropriation unless there has been a clear abuse of discretion. Under the “abuse of discretion” standard, a variety of expenditures of public funds have been upheld in situations where the value received in return was a very generalized public benefit. For example, in formal opinions, the Attorney General has approved the following expenditures of public funds or property:

An expenditure of $5,000 for preservation of a historical landmark. 1978 OAG No. 5402.
The sale of public land for only $1.00, on the condition that the grantee hold the land open for public recreational purposes. 1981 OAG No. 5860.
A township’s appropriation to a public library, if done pursuant to a contract providing that the library will provide service to township residents. 2002 OAG No. 7111.
An appropriation of state funds to a private non-profit organization that maintained Canadian habitat for waterfowl that migrate through Michigan. 1980 OAG No. 5664.
In addition, the courts have upheld other types of expenditures of public funds for generalized purposes, such as the use of municipal funds to pay membership dues in educational associations like the Michigan Municipal League (Hays v City of Kalamazoo, 316 Mich 443 (1947)) and the below-market value sale of public land for use as a National Guard armory (Sommers v Flint, 355 Mich 655 (1959)).

Thus, although public funds or property may be appropriated only in exchange for some recognizable benefit in return, the requisite amount of the return benefit is principally a matter of executive and legislative discretion, and will not be overturned in the absence of an abuse of discretion.

B. Public Purpose Only

As the above-noted authorities suggest, appropriations of public money are also subject to the additional requirement that they be made only for a public purpose. City of Gaylord v Gaylord City Clerk, 378 Mich 273 (1966). This requirement is, in part, a product of Const 1963, art 4, Sec. 51, which, when considered in conjunction with the traditional public policy of the state, limits the power of the Legislature, and of government generally, to only such acts and such governmental powers as exhibit a public purpose. Id. Accordingly, not only must a public body receive something of value in return for all appropriations, that something must provide a recognizable public benefit or otherwise serve a public purpose.

C. Statutory Authority for Expenditures

Most political subdivisions of the state have no inherent powers, and thus can exercise only such powers as have been expressly granted to them by the constitution or by statute. Therefore, when considering the validity of an expenditure made by a political subdivision, there must be, not only the receipt of consideration and a valid public purpose to be served by the expenditure, but there must also be underlying statutory authority for the expenditure.

Accordingly, provided that an expenditure by a political subdivision otherwise satisfies the requirement of being made in exchange for something of value, the next step is to evaluate the various Michigan statutes governing the type of political subdivision at issue. It should be determined whether there is a statutory enactment that expressly authorizes or at least reasonably contemplates the type of expenditure being considered. If so, the expenditure may be made; if not, the expenditure is probably unlawful.

D. Guidance for Evaluating Lawfulness of Requests for Contributions

Based on the above-stated principles, the following constitutes general guidance that can be applied to assist in evaluating the lawfulness of requests for donations or contributions of municipal funds or property:

1. Donations for Strictly Charitable Purposes. A local government should not make any outright donations (i.e., an outright gift made without any expectation of tangible value being returned) of public funds or property to be used strictly for charitable or similar purposes. For example, a local government should not make donations to an association that raises funds to fight a particular disease; to a church; or to any organization that exists only for eleemosynary purposes. This is true, no matter how worthy the cause might be.

2. Other Quasi-Charitable Contributions. Other types of contributions might be valid, even if bearing some quasi-charitable purposes, as long as the particular local government (not the public generally) receives a tangible benefit in return. There is a broad range of contributions of this type that could fall somewhere on the spectrum of lawful-to-unlawful. However, to provide some practical guidance, the following are some contrasting examples:

• Lawful: Contributing funds to sponsor a high school “career day,” at which a local government can, in return, install a display booth to advertise employment opportunities with the local government.
• Unlawful: Contributing funds to a local high school, so that the football team can buy new uniforms.
• Lawful: Sponsoring a dinner table at a banquet where local government employees or officials can hear a speech or presentation that would be helpful in performing their official duties.
• Unlawful: Sponsoring a dinner table at a banquet where local government officials or business people are honored for their achievements.

3. Contributions for a Generalized Public Purpose. As explained above, the opportunities for a local government to make a contribution that would serve only a generalized public-wide purpose are very limited. A local government should not make any expenditures of this type, unless it first consults with legal counsel to determine whether specific statutory authority exists. In most cases, there will be no statutory authority, such that the contribution usually will not be allowed.

We encourage you to contact one of the lawyers in our firm’s Local Government Law Practice Group, if you have a question regarding the lawfulness of any particular expenditure of public funds.