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
Jessica Miles, the chief of the Public Water Supply Section, asked the AG a federal-cooperation question. Congress had amended the Safe Drinking Water Act in 1996 to require states receiving federal drinking-water funds to allow loans to all qualified "public water systems," whether publicly or privately owned. The EPA was willing to honor state constitutional or statutory bars but wanted to know which states had them. Miles wanted to know whether North Carolina was such a state.
Senior Deputy AG Daniel Oakley and Assistant AG Sarah Meacham, for AG Easley, gave a two-part answer.
Statutory barrier exists. North Carolina's state revolving loan fund, codified at NCGS Chapter 159G, restricts eligible recipients to units of local government under NCGS 159G-9. Privately owned water systems do not qualify. To lend to privately owned public water systems, the General Assembly would need to amend Chapter 159G (either expanding eligible recipients or creating a parallel program for private utilities).
No constitutional barrier. The NC Constitution's public-purpose requirement under Article V, Section 2(1) and (7) does not block a properly-drafted loan program for private utilities. Under Maready v. City of Winston-Salem, 342 N.C. 708 (1996), the test is two-part:
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Are the activities supported by public expenditures "within the scope of governmental involvement and reasonably related to communal needs"? Promoting public health through regulation or construction of water systems is a traditional exercise of government powers. Yes.
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Do the activities "benefit the public generally, as opposed to special interests or persons"? When the State funds water system improvements, the primary beneficiaries are the public who drink the water; the private utility owner's benefit is incidental. Maready makes clear that incidental private benefit does not defeat the public purpose. Yes.
So if the General Assembly chooses to authorize loans to private water utilities, the Constitution permits it.
The opinion also reads against the 1968 Mitchell v. Industrial Development Financing Authority case, which had once held that revenue bonds for industrial recruitment were unconstitutional because they primarily benefited individual companies. Maready and the addition of NCGS Constitution Art. V, § 2(7) (allowing state contracts with private entities for public purposes) had substantially eroded Mitchell. By 1997, the AG could comfortably approve a private-utility loan program in principle.
The opinion's bottom line is procedural: the agency has no current authority to lend to private water utilities but can credibly tell EPA that no state constitutional impediment exists. The General Assembly needs to amend Chapter 159G, and any amendment should articulate the public purpose and the intended benefit. The opinion attached a letter from Milton Heath at the Institute of Government reaching the same conclusion.
Currency note
This opinion was issued in 1997. 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. North Carolina did substantially expand the Drinking Water State Revolving Fund's eligibility criteria after 1997 in response to federal Safe Drinking Water Act requirements. The current revolving loan and grant programs (under NCGS Chapter 159G) now include some private-utility eligibility. The constitutional analysis under Maready remains the framework, but anyone evaluating a current loan to a private water utility should consult the current Chapter 159G eligibility rules and any subsequent NC Supreme Court cases applying Maready.
Background and statutory framework
North Carolina's drinking water finance landscape in 1997 had several pieces that did not align.
Federal: The Safe Drinking Water Act amendments of 1996 (Public Law 104-182) created the Drinking Water State Revolving Fund, modeled on the Clean Water Act's CWSRF. Federal funds flow to states, which then loan or grant to local water systems. The 1996 amendments expressly permitted loans to all "public water systems" without regard to ownership. The EPA implementing regulations followed that statutory direction, with a caveat that states with existing constitutional or statutory bars to lending to private entities could honor those bars without losing federal funds.
State definition: NCGS 130A-313(10), part of the NC Drinking Water Act, defines a "public water system" by reference to service connections or persons served, without regard to whether the system is publicly or privately owned. So under NC's regulatory definitions, the term "public water system" already includes investor-owned utilities and small private systems.
State finance: NCGS Chapter 159G is the state's revolving loan and grant program for water and wastewater. NCGS 159G-9 defines eligible recipients as "units of local government," which excludes privately owned utilities even though they may regulate as "public water systems" under the Drinking Water Act. This is the statutory mismatch the AG opinion identifies.
State constitution: NC Const. Art. V, § 2(1) requires taxation to be "exercised in a just and equitable manner, for public purposes only." Section 2(7) permits the State to contract with private entities "for the accomplishment of public purposes only." These provisions create the public-purpose doctrine.
The doctrine's evolution is the key analytical framework. Mitchell (1968) was the high-water mark of suspicion toward state aid to private business: revenue bonds for industrial recruitment were unconstitutional because they primarily benefited individual companies. By 1973, the General Assembly amended Article V, § 2(7) to allow government-private contracts for public purposes. The doctrine moved toward greater permissiveness throughout the 1970s, 1980s, and 1990s, culminating in Maready (1996), which upheld substantial economic development incentive payments to private companies (industrial recruitment subsidies, water and sewer infrastructure tied to plant locations, etc.) on the rationale that the public's economic welfare was the primary beneficiary.
The 1997 AG opinion applies Maready to drinking water. The public health benefit of clean water is paradigmatic public purpose. Anyone who has read Mitchell and Maready in sequence should immediately see that a drinking water loan program would survive constitutional scrutiny under Maready's framework, even if Mitchell's shadow once would have created doubt.
That clears the constitutional hurdle. The remaining hurdle is statutory: the General Assembly has not yet authorized the loans. The AG's opinion is essentially a go-signal to the General Assembly: clean drafting will do the job.
Common questions
What is a "privately owned public water system"?
Under NCGS 130A-313(10), a water system is "public" if it has the requisite number of service connections or serves the requisite number of people, regardless of ownership. So an investor-owned utility, a small private water company, or a homeowners-association-owned system can all be "public water systems" if they meet the size thresholds. The regulatory term tracks customer reach, not ownership status.
What public benefit does state lending to a private utility serve?
Improved drinking water quality, reduced contamination risk, replacement of aging infrastructure, and compliance with federal Safe Drinking Water Act standards. Many small private utilities lack the capital to fund needed upgrades, and without state loans they may abandon service or operate substandard systems. State loans provide the public with clean water in places where local government is not the supplier.
Could the State just take over the private utilities instead of lending to them?
Yes, but that is a separate political and legal question. The 1997 opinion addresses the loan question because that is what EPA asked about. State acquisition of private utilities would involve different statutes (eminent domain, utility commission jurisdiction, etc.) and is not addressed here.
What does the General Assembly need to include in a statutory amendment?
The opinion gives loose guidance: "Any amendment or new statute should be drafted to state the purpose and intended public benefit of the expanded loan program." The drafting should expressly tie the loans to public health and water quality, articulate the eligibility criteria for private utilities, and provide any necessary safeguards (matching funds, repayment terms, ownership transfer restrictions if a privately-loaned system is later sold).
Does this opinion apply to wastewater as well as drinking water?
The opinion is framed around drinking water and the Safe Drinking Water Act. The constitutional analysis under Maready would apply to wastewater too, but the statutory landscape is different: the Clean Water State Revolving Fund follows different federal rules, and the NC statutes for wastewater financing are also in Chapter 159G but with different eligibility limits. Anyone considering a wastewater loan to a private operator would need a parallel statutory analysis.
Has the General Assembly since amended Chapter 159G to permit private utility loans?
The AG opinion suggested the General Assembly should amend the law. NC has since substantially restructured its water and wastewater state revolving funds (Drinking Water SRF and Clean Water SRF), and the eligibility provisions have evolved. Anyone working with a current proposal should consult the current Chapter 159G text and any agency guidance from the Division of Water Infrastructure (the successor to relevant 1997 era agency functions).
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