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Official Opinion 95-22

Official Opinion 95-22

April 28, 1995
To: 

Executive Director
Georgia Housing and Finance Authority

Re: 

The forgiveness of loans made by the Georgia Housing and Finance Authority under the Economic Development Incentive Loan Program violates state law.

This office has received inquiries regarding reports of the forgiveness of loans made by the Georgia Housing and Finance Authority ("GHFA") to certain local industrial development authorities and private businesses. In light of such inquiries, we have reviewed the Economic Development Incentive Loan Program (the "incentive loan program") to determine whether the forgiveness of loans made under the incentive loan program would contravene applicable provisions of Georgia law.

BACKGROUND

Information provided to this office indicates that six forgiveable loans, totalling $4,150,000, have been closed. Seven other loans have been approved by GHFA, but not closed. Sixteen additional loan proposals have been made or are under consideration. Typical loan transactions under the incentive loan program are structured in the following manner.

The incentive loan program is described as the "Georgia Department of Industry, Trade and Tourism's Economic Development Incentives Loan Program." The Department of Industry, Trade and Tourism ("GDITT"), in conjunction with the Office of Planning and Budget ("OPB") and local community representatives, selects the private businesses to receive a loan under the incentive loan program. GDITT, together with OPB and local community representatives and the private business receiving the loan, determines the loan amount, the term of the loan, the items or services to be financed, the conditions under which the loan may be satisfied, and the timing for the loan closing. The incentive loan program description states that "final determination of all business terms for each transaction is the responsibility of GDITT and OPB."

Funding for the loans comes from money appropriated to the Department of Community Affairs ("DCA") for "payment to the Georgia Housing and Finance Authority." These funds also include other GHFA programs operated with state supporting funds, such as flood relief, matching funds for the federal HOME program, the export loan guaranty program and the housing trust fund. DCA and GHFA enter into a contract each year for the disbursement of the funds, although the contract does not allocate a specific amount of money for a particular program. Under the typical loan transaction, GHFA loans the money to a local development authority. The local development authority then loans the money to the private business. GHFA, the local development authority and the private business are all parties to the loan agreement.

Funds are not disbursed to the private business until the business has made a purchase or expenditure for types of items or equipment which have been approved for purchase by GDITT. The business forwards the invoice for the purchase or expenditure to the local development authority for approval. The local development authority forwards the invoice to GHFA. If the appropriated funds have not already been transferred to GHFA, GHFA initiates an allocation request through DCA and to OPB for the funds required to reimburse the purchase or expenditure. The money is then transferred by GHFA to the local development authority and by the local development authority to the private business.

The agreements executed for the loan provide that the loan is forgiven if the private business meets certain performance goals, which usually involve job creation or job retention. GDITT determines the performance goals for the forgiveness of the loan, and the Commissioner of GDITT certifies that the performance goals for the forgiveness of the loan have been satisfied.

LEGAL DISCUSSION

The forgiveness of loans made under the incentive loan program is clearly outside the scope of the legal powers of GHFA. Under the Constitution, the granting of any donation or gratuity or the forgiveness of any debt or obligation owing to the public is prohibited. Ga. Const. 1983, Art. III, Sec. VI, Para. VI(a). This provision of the Constitution applies to the operations of public authorities. See 1983 Op. Att'y Gen. U83-7. It has been held that the forgiveness of a loan operates as a gift to the debtor/donee. See Croxton v. Barrow, 57 Ga. App. 1 (1937).

Governmental entities may only contract to perform those activities for which they already have constitutional or statutory authorization. See 1986 Op. Att'y Gen. U86-28. In the circumstances here involved, the public functions of GHFA do not coincide with the private business functions of the recipients of the loans under the incentive loan program. Compare 1986 Op. Att'y Gen. U86-28 (both local development authority and local chamber of commerce may promote and encourage trade and commerce), Haggard v. Board of Regents of the Univ. Sys. of Ga., 257 Ga. 524 (1987) (both the Board of Regents of the University System of Georgia and the University of Georgia Athletic Association, Inc. are authorized to provide athletic events for students) and 1993 Op. Att'y Gen. U93-14 (both government and the press have power to inform the public). GHFA is not authorized to carry on a private business enterprise such as manufacturing or industrial production, and cannot generally engage in the activities for which the loans made under the incentive loan program are to be used. Neither do the job retention or job creation benefits claimed to result from the incentive loan program accrue to GHFA in the sense that GHFA's public functions are otherwise performed or aided by jobs retained or created by the business activities of the private businesses receiving the loans. See 1993 Op. Att'y Gen. U93-14 and 1971 Op. Att'y Gen. 71-128 (incidental advantage to the public or to the state, which results from the promotion of private interests does not justify their aid by the use of public money).

I have found no statutory power of GDITT or OPB to determine the business terms or satisfaction of GHFA loans, or to administer an incentive loan program in the manner described. GHFA may not delegate to either agency, or any other, the underwriting of its loans, the determination of their terms or the determination of their satisfaction. See 1993 Op. Att'y Gen. 93-19 (DCA may not delegate the determination of grant eligibility) and 1980 Op. Att'y Gen. 80-99. Although GHFA is empowered "to make loans to enterprises" under O.C.G.A. § 50-26-18, GHFA is not statutorily empowered to forgive loans. In any event, a power to forgive economic incentive loans as here involved would contravene the prohibition against the forgiveness of debt set forth at Article III, Section VI, Paragraph VI(a) of the Constitution.

CONCLUSION

It is, therefore, my official opinion that it is beyond the power of GHFA to create forgiveable loans as it has in the incentive loan program and to delegate to other agencies responsibility for determining the terms and performance of GHFA loans.

GHFA must notify the local development authorities and the private businesses receiving these loans that the forgiveness feature will not be implemented because it is beyond the power of the governmental lenders. The borrowers may be allowed to repay all principal with accrued interest promptly after receiving such notice. Otherwise, the loans may be repaid as if made without the forgiveness feature and without the corresponding requirements imposed upon the borrowers as conditions for forgiveness. This reformation should be documented by appropriate agreements or amendments.

Prior to receiving the inquiries which led to my review, I had not been requested to give advice or assistance with regard to the incentive loan program, notwithstanding the obvious presence of significant legal issues. In fact, I became aware of the existence of the incentive loan program through the media.

I wish to emphasize that I am prepared to give priority legal assistance to keeping Georgia competitive in providing job opportunities for its citizens. Frequently, there are material and legal inducements which may be provided to private industry by governmental entities. New legislative initiatives may also be possible in order to provide for other inducements.

However, governmental economic incentives to private industry must be provided within the bounds of the law. Careful and structured legal assistance is necessary to assure that governmental assistance programs not only achieve the desired purpose, but also are operated in accordance with constitutional and statutory limitations. My staff is available to provide assistance upon your request with a view toward serving these goals.

Prepared by:

DANIEL M. FORMBY
Senior Assistant Attorney General