Can an Arkansas city take out a short-term loan for a project and pay it back with grant money?

Plain-English summary

The City of Brinkley wanted to reseal a runway. The State of Arkansas had awarded a grant for the project. The city wanted to bridge the timing gap with a short-term bank loan under Amendment 78, then pay the loan off with the grant when it came in. State Senator Ronald Caldwell asked the AG whether that was permitted.

AG Leslie Rutledge said the answer depended on whether the grant money counted as "general revenues" of the city for Amendment 78 purposes. Amendment 78 lets municipalities incur short-term debt to acquire, construct, install, or rent property, but the principal and interest must be charged against and paid from "general revenues."

Neither Amendment 78 itself, nor the Local Government Short-Term Financing Obligations Act of 2001 that implemented it, defined "general revenues." No Arkansas Supreme Court case had filled the gap. The AG's reading was that funds the city can use for any proper purpose are general revenues, but funds restricted by law or grant condition to a specific purpose are not. Restricted grant funds look more like special revenues.

In Brinkley's specific case, the grant probably came from the Arkansas Department of Aeronautics Fund, which Ark. Code Ann. § 27-115-110(d) restricts to "building airports, civil airways, and other air navigation facilities." That made the grant restricted as to use, which made it not "general revenues" under Amendment 78. The AG concluded a city cannot use restricted grant funds to pay Amendment 78 debt.

There was a workaround: Amendment 65 lets cities incur debt secured by special-fund revenues other than assessments and taxes. The AG suggested in a footnote that, where a grant's terms permitted it, Amendment 65 might be available even where Amendment 78 was not. The relevant fact would be the language of the grant award itself.

Currency note

This opinion was issued in 2016. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

What is Amendment 78?
A 2002 constitutional amendment that authorized cities and counties to incur short-term debt for acquiring, constructing, installing, or renting property. The principal-and-interest payments must come from general revenues each fiscal year. The Local Government Short-Term Financing Obligations Act of 2001 (Ark. Code Ann. §§ 14-78-101 to -110) implemented the amendment.

What counts as "general revenues" for Amendment 78?
The AG's working test: funds that may be spent for any proper municipal purpose are general revenues. Funds restricted by law or by a grantor's conditions to a particular purpose are not general revenues. There is no statutory definition of the term, so the AG's interpretation was the available guidance.

Is a state airport grant "general revenues"?
Almost certainly not. The Arkansas Department of Aeronautics Fund could only be used for "building airports, civil airways, and other air navigation facilities" under Ark. Code Ann. § 27-115-110(d). That hard-coded restriction took the funds out of the general-revenues category.

Is there any other constitutional path the city could use?
Yes. Amendment 65 lets cities incur debt secured by "revenues (other than assessments for local improvements and taxes) derived from... any... special fund or source." A grant for a specific project could plausibly fit that "special fund or source" description, depending on grant terms. The AG flagged this only in a footnote and did not resolve it.

What if the grant comes without any restrictions?
Then the analysis would flip and the answer would likely be yes. But the AG noted that most municipal grants are made to accomplish specified purposes and so come with use restrictions. Unrestricted grants are the exception.

Background and statutory framework

Amendment 78 was approved by Arkansas voters in 2000 and went into effect in 2001. Section 2 permits municipalities and counties to issue short-term financing obligations, with the requirement that total annual principal and interest payments "shall be charged against and paid from the general revenues for such fiscal year." The implementing legislation is the Local Government Short-Term Financing Obligations Act of 2001, codified at Ark. Code Ann. §§ 14-78-101 to -110.

Neither the amendment nor the Act defines "general revenues." The AG built her interpretation by contrast with special revenues: revenues earmarked by statute or grantor conditions for a specified purpose. The AG cited her own prior opinions (2008-152 and 2007-182) for support.

Ark. Code Ann. § 27-115-110 governs the Arkansas Department of Aeronautics Fund. Subsection (d) restricts the fund to building airports, civil airways, and other air navigation facilities. Because that statutory restriction is hard-coded, ADA grant proceeds are unlikely to be available for general municipal purposes, and so unlikely to constitute Amendment 78 general revenues.

The AG's footnote workaround pointed to Amendment 65, Section 3(a), which allows cities to incur debt secured by "revenues (other than assessments for local improvements and taxes) derived from... any... special fund or source." A restricted grant fits more comfortably in that "special fund or source" frame than in Amendment 78's "general revenues" frame. Whether a particular grant award actually qualifies as security under Amendment 65 would turn on the grant's terms and on whether the grantor permits the use.

Citations

Statutes: Ark. Const. amend. 78, § 2; Ark. Const. amend. 65, § 3(a); Ark. Code Ann. §§ 14-78-101 to -110 (Supp. 2015); Ark. Code Ann. § 27-115-110 (Repl. 2010).

Cases: none cited.

Prior AG opinions cited: 2008-152, 2007-182.

Source

• Landing page: https://arkansasag.gov/divisions/opinions-foia/attorney-general-opinions-search/

Original opinion text

STATE OF ARKANSAS
ATTORNEY GENERAL
LESLIE RUTLEDGE
Opinion No. 2016-008
June 6, 2016

The Honorable Ronald Caldwell
State Senator
120 CR 393
Wynne, AR 72396

Dear Senator Caldwell:

This is my opinion on your questions about the scope of Amendment 78's provisions on short-term municipal financing:

1. Can Amendment 78 be interpreted to allow a city to use a short-term loan to fund a city project, which would then be repaid with grant funds?
2. Can the City of Brinkley [in reliance on Amendment 78] borrow money from a bank to fund a runway re-sealing project and then pay off the loan with funds from a state grant awarded for the project?

RESPONSE

In my opinion, the answer to both your questions is "no" if, as I expect is usually the case, the grant funds at issue are restricted as to use. If, on the other hand, the particular grant funds may be spent for any municipal purpose, the answer to both your questions is likely "yes."

DISCUSSION

Amendment 78 permits municipalities and counties to incur short-term debt to provide funds to acquire, construct, install, or rent property. It provides that "total annual principal and interest payments in each fiscal year" on such debt "shall be charged against and paid from the general revenues for such fiscal year...."

The answers to your questions thus depend on whether the grant funds at issue are "general revenues" of the city for purposes of Amendment 78. The term "general revenues" is not defined in Amendment 78. Nor is it defined in Amendment 78's implementing legislation (the Local Government Short-Term Financing Obligations Act of 2001) or in any decision of the Arkansas Supreme Court interpreting Amendment 78.

In my opinion, as a general matter and in view of the plain meaning of the words used, funds that may be used by a municipality for any proper purpose are Amendment 78 "general revenues," while amounts that are restricted as to use are in the nature of special revenues, and are not Amendment 78 "general revenues."

While there is no authoritative definition of the term, and certain fact situations might present difficult questions, it seems to me that the term "general revenues" does not include grant funds that, by law or by condition imposed by the grantor, must be used for a specified purpose (such as runway resealing). Your second question refers to a state grant, which may be an Arkansas Department of Aeronautics (ADA) grant from the ADA Fund. See Ark. Code Ann. § 27-115-110 (Repl. 2010). The ADA Fund must be used "for the sole purpose of building airports, civil airways, and other air navigation facilities...." Ark. Code Ann. § 27-115-110(d). Given that rule, it seems unlikely that a city could devote ADA grant proceeds to the city's general purposes.

I realize that using money to pay construction costs directly, and using money to pay debt incurred to finance construction costs, are substantially the same in real economic terms (leaving aside interest costs). Thus, grant proceeds used to pay debt incurred to improve a runway will, at least in one sense, have been used to pay for the runway improvements. But grant proceeds will not constitute "general revenues," in my view, unless the grantor and the law permit the grant proceeds to be used for any municipal purpose, even one unrelated to the improvement project or the debt. And while it is certainly possible for a grant to be awarded without "strings" with respect to the money's use, it is my general impression that most grants to municipalities are made to accomplish one or more specified purposes and are accordingly restricted as to use.

I thus conclude that grant funds that are restricted as to use are not "general revenues" within the meaning of that term in Amendment 78 and cannot be used to pay Amendment 78 debt.

Amendment 78 is not, of course, the only constitutional basis for cities to incur debt. Amendment 65 permits cities to incur debt "the repayment of which is secured by... revenues (other than assessments for local improvements and taxes) derived from... any... special fund or source other than assessments for local improvements and taxes." Ark. Const. amend. 65, § 3(a). It is possible that the terms of a grant would permit a city to use grant funds to repay debt incurred to finance costs of a project that might otherwise have been paid directly from grant funds. In such a case, it seems likely that such grant funds would be deemed to be "derived from [a] special fund or source other than assessments for local improvements and taxes," and thus available to secure debt issued under Amendment 65.

Sincerely,
LESLIE RUTLEDGE
Attorney General