Can North Carolina's state revolving loan fund make loans to privately owned drinking water utilities, or does the state constitution's public-purpose limit on tax money block it?

Plain-English summary

A North Carolina public-water official asked whether the State could lend revolving-fund money to privately owned public water systems. The Attorney General's office identified a statutory barrier and a conditional constitutional route. Under G.S. § 159G-9 as it stood in 1997, eligible recipients were units of local government, so privately owned systems could not receive loans without specific legislative authority.

The opinion said article V, section 2 of the North Carolina Constitution did not prohibit public funds for such loans so long as the primary benefit was to the public. It drew on Maready v. City of Winston-Salem, which asked whether spending supported a governmental activity related to community needs and benefited the public generally rather than special interests. The opinion found promotion of public health through water-system regulation or construction to be a traditional government activity. It said that if the legislature determined loans to qualified privately owned systems would promote public health, it could devise a program for that goal. It did not decide that the public would be the primary beneficiary of every proposed loan.

The opinion recommended that an amendment or new statute state the program's purpose and intended public benefit. The text refers to an attached Institute of Government letter reaching the same conclusion; that attachment is absent from the stored copy and remains unverified.

Currency note

This opinion addresses the 1997 revolving-fund statute. Check current program eligibility and the facts of a proposed loan before relying on its statutory or constitutional analysis.

Common questions

Could the agency lend to a privately owned system under the statute considered in 1997?

No. The opinion said G.S. § 159G-9 restricted the existing program to local-government recipients, requiring specific legislative authority before private systems could be included.

Did the opinion declare all private-system loans constitutionally valid?

No. Its conclusion depended on the public being the primary beneficiary. The opinion said the legislature could design a program to promote public health.

What did the opinion recommend for new legislation?

It recommended stating the purpose and intended public benefit of an expanded loan program.

Source

• Landing page: https://ncdoj.gov/opinions/proposed-use-of-state-revolving-funds-for-loans-to-privately-owned-public-water-systems/

Citations

• N.C. Const. art. V, § 2(1), § 2(7)
• N.C. Gen. Stat. § 130A-313(10)
• N.C. Gen. Stat. § 159G-1 et seq., § 159G-9
• Safe Drinking Water Act (federal, 1996 amendments)
• Mitchell v. Industrial Development Financing Authority, 273 N.C. 137, 159 S.E.2d 745 (1968)
• Maready v. City of Winston-Salem, 342 N.C. 708, 467 S.E.2d 615 (1996)

Original opinion text

March 25, 1997

Ms. Jessica G. Miles, P.E., Chief
Public Water Supply Section, Division of Environmental Health
Post Office Box 29536
Raleigh, North Carolina 27626-0536

Subject: Advisory Opinion: The proposed use of state revolving funds for loans to privately owned, public water systems, N.C. Gen. Stat. §130A-313, N.C. Gen. Stat. §153G-9, and N.C. Const. Art. V, Sec. 2

Dear Ms. Miles:

In a letter dated March 3, 1997 an opinion was requested regarding the constitutionality of the proposed use of state and federal funds for loans to privately owned, public water systems. This advisory opinion will address the major issues that arise from the proposal.

Summary

We conclude that N.C. Const. Art. V, Sec. 2 does not prohibit the use of state funds for loans to privately owned public water systems so long as primary benefit is to the public. But the existing state revolving loan fund authorizing statute, N.C. Gen. Stat. §159G-1 et. seq., excludes all but units of local government from eligibility. Therefore legislative authority will be required to allow the proposed use of state funds for loans to privately owned, public water systems.

Background

The N. C. Drinking Water Act defines and regulates, for the benefit of the public health, "public water systems." The definition of a "public water system" is based upon the number of service connections or the number of persons served; whether the system is owned or operated by a unit of local government, corporation or private individual is irrelevant, see N.C. Gen. Stat. §130A-313(10). The state law is based upon the federal Safe Drinking Water Act. The federal act, as amended in 1996, authorizes the transfer of federal funds to a state and requires state matching funds to provide loans to "public water systems." Under this amendment, qualified, privately owned public water systems would be eligible to receive loans. Your letter indicates that the EPA will not exclude participation by a state that has statutory or constitutional prohibitions against funding private entities and your agency wishes to determine if the state has such prohibitions.

North Carolina currently has a state revolving loan and grant program to fund water and wastewater projects, see Chapter 159G of the General Statutes. N.C. Gen. Stat. §159G-9 defines eligible recipients as units of local government; therefore, privately owned systems are not eligible to receive loans or grants under existing the state program.

In addition, the North Carolina Constitution restricts the use of public money for private purposes. Article V, Section 2 (1) of the North Carolina Constitution reads:

(1) Power of taxation. The power of taxation shall be exercised in a just and equitable manner, for public purposes only, and shall never be surrendered, suspended, or contracted.

Article V, Section 2 also reads in subsection (7): (7) Contracts. The General Assembly may enact laws whereby the State, any county, city or town, and any other public corporation may contract with and appropriate money to any person, association, or corporation for the accomplishment of public purposes only.

Considering the statutory and constitutional background, the principal question raised is whether the North Carolina may use public money for loans to privately owned water systems.

Analysis

Interpretation of the Constitution is the province of the courts. The North Carolina Supreme Court has held that the power to appropriate money is no greater than the power to levy tax and both powers are subject to the constitutional prohibition against state revenues being used for private individuals or corporations. In the case of Mitchell v. Industrial Development Financing Authority, 273 N.C. 137, 159 S.E. 2d 745, (1968) the court held that the use of revenue bonds to attract private industry was unconstitutional because it primarily benefited individual companies. Since that decision the legal analysis for determining public purpose has evolved and the language of Article V, Section 2, (7), allowing contracts between government and private entities, was added. The most recent Supreme Court case reached a different conclusion and the Supreme Court upheld the use of development incentive projects to recruit industry, see Maready v. City of Winston-Salem, 342 N.C. 708, 467 S.E. 2d 615 (1996).

In Maready, the court used a two part analysis for determining if public funds were appropriately spent. First, the court must determine whether activities supported by public expenditures were within the scope of governmental involvement and were reasonably related to communal needs, and second the court must determine whether the activities benefit the public generally, as opposed to special interests or persons.

The court looked to the stated purpose of the challenged legislation and found that the statute was part of a comprehensive scheme to promote the general economic welfare of the citizens of North Carolina. The Maready court found that the promotion of economic welfare was an appropriate governmental activity and further that the specific use of incentive funds to construct water, sewer or other utilities fell within a traditional exercise of governmental powers. Thus the first prong of the test was satisfied. The court next considered whether the public was the primary beneficiary of the incentive program and determined that incentive expenditures should create a more stable economy by creation of employment, enlargement of the tax base and diversification. Even though private entities will benefit such benefit is incidental and results from the primary public advantage.

Conclusion

Therefore, the agency is not precluded by constitutional law from using government funds for improving privately owned public water systems. Promotion of public health through the regulation or construction of water systems has traditionally been an appropriate governmental activity. If the legislature determines that loans to qualified privately owned public water systems will promote public health, it may devise a loan program that seeks to further that goal.

As previously stated, the current state revolving loan fund does not allow private applicants and specific statutory authority will be required before privately owned public water systems may be considered for inclusion in the program. Any amendment or new statute should be drafted to state the purpose and intended public benefit of the expanded loan program.

Attached is a copy of a letter from Mr. Milton Health of the Institute of Government which reaches the same conclusion. If you have any questions please contact us.

Daniel C. Oakley
Senior Deputy Attorney General

Sarah Y. Meacham
Assistant Attorney General