Iowa’s Auditor of State, Rob Sand, recently issued a ""Best Practices’ Advisory to Governments on Working with Non-Profits” that recommends approaches for ensuring a public purpose is served when directing public funds toward a private non-profit. The Auditor’s Office has specifically included the review of these types of expenditures in their recent audit reports. See 2021 City Compliance Guide Supplement, pg. 5. Working to adhere to the State Auditor’s guidance when transferring public funds to non-profits will help prevent weaknesses and deficiencies in audit reports and thereby avoid public scrutiny, civil or criminal investigations, litigation, or the potential voiding of any problematic transfers.
Importantly, the advisory explains that governments are constitutionally “prohibited from making direct donations or in-kind contributions to non-profits.” Even if the non-profits perform government functions or other recognized public purposes, the concern of whether the taxpayer dollars will be put to those particular functions or purposes persists. However, included as the “Best Practices” are two valid means for legally transferring public funds to non-profits that help ensure the actual use of public funds by private entities serves a public purpose. Those approaches identified include:
1. Economic development agreements intended to create or retain jobs and income, governed by Iowa Code chapter 15A, and
2. Service contracts between the government and the non-profit.
The advisory also outlines special considerations and steps to take for each approach.
Under these approaches, cities and counties maintain a role in overseeing the use of the transferred funds through ongoing requirements that the non-profit account to the government and show compliance with any obligations or limitations imposed on the funds by the development agreement or contract. In the absence of these safeguards, the transfer appears more like a government donation or contribution that the Iowa Constitution disallows.
Chapter 15A Economic Development Agreements
When approving expenditures of public funds, the governing body “must determine that a public purpose is met and that the public purpose is not merely incidental to [a] private benefit.” 1990 Iowa Op. Att’y Gen. 79, 1990 WL 484880 (Iowa A.G. July 3, 1990). For 15A economic development agreements, the statute expressly states that economic development is a public purpose for which a city or county may provide grants, loans, guarantees, tax incentives and other financial assistance to or for the benefit of private persons. Chapter 15A goes on to define economic development as the creation of new jobs and income or the retention of existing jobs and income that would otherwise be lost. Therefore, governments may provide grants, loans, guarantees, tax incentives, or other financial assistance to a non-profit where the agreement aims to support economic development as defined above. Section 15A.2 requires the city council or board of supervisors to make a finding that dispensing the funds will serve that specific public purpose and provides several factors to weigh when making this determination, including: the generation of new economic opportunities, the increase of exports or growth of tourism, a return of public benefits, and avoiding job relocation from within Iowa.
Alternatively, governments may contract with non-profits for the provision of services, and the advisory offers a number of specific steps to best ensure the contract is both enforceable and serves a public purpose. These steps include putting the agreement in writing and including its approval in the council or board’s minutes, along with a finding of the public purpose served by the appropriation. The written agreement should avoid ambiguity relating to the obligations, especially pertaining to how much and when the government is paying. The non-profit should always be required to account to the city for its use of public funds. And when the non-profit’s services benefit the public generally, and not the government directly, that benefit should be documented in the contract as consideration, or a genuine part of the bargain. This last point stands to offer governments flexibility when contracting with non-profits working within the community.
The Iowa Supreme Court once described the public purpose provision of Iowa’s Constitution (which prohibits providing public funds for a private purpose) as “emphatically prohibitive.” Love v. City of Des Moines, 230 N.W. 373, 378 (Iowa 1930). As a result, the Auditor’s “Best Practices” aim to make cities and counties aware of the most reliable approaches to constitutionally appropriating public funds to private entities, including non-profits, for a public purpose. Economic development agreements and well-drafted service contracts, including 28E agreements, can provide an avenue for the city or county to identify and document a public purpose to be served by the public expenditure, and to implement mechanisms to account for the use of public funds by the private entity to ensure the money serves the identified public purpose. In certain circumstances, however, other approaches with well-documented findings regarding a public purpose may be used to provide public support to local private entities.
The Economic Development team at Ahlers & Cooney is available to assist our municipal clients in structuring, drafting, and approving economic development agreements or service contracts, as well as to answer other contract or public purpose-related questions. Please feel free to reach out to us whenever such a project or question arises.
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