7.3 Prohibition of Gift of Public Funds

Article XVI, Section 6 of the California Constitution prohibits a public agency from making any gift of public funds or from lending its public credit to any person. Article XVI, Section 6 also prohibits a public agency from becoming a stockholder in any private corporation. These provisions may affect redevelopment and other economic development activities where public finance transactions are used to provide benefit or inducement to private firms for the purpose of achieving economic advantages to the community and public private partnerships, especially when the viability of the financing depends upon the public agency’s credit.

California courts have, however, created a fairly broad “public purpose” exception to the prohibition, allowing California public agencies significantly greater flexibility than that allowed to public agencies in many other states. Under the “public purpose” exception, a transaction is not prohibited by Article XVI, Section 6 if there is a significant “public purpose,” even if there is incidental benefit to private individuals.122 Further, courts generally defer to legislative findings of public purpose if they are reasonable. If a proposed financing involves benefit to a private party, a public agency should review public benefits and, to the extent practicable, memorialize its public purpose determinations in the transaction documents or in the governing board resolution approving the transaction.

In County of Alameda v. Janssen, 16 Cal. 2d 276 (1940), the California Supreme Court described the analysis as follows: “In determining whether an appropriation of public funds or property is to be considered a gift, the primary question is whether the funds are to be used for a ‘public’ or a ‘private’ purpose. If they are for a ‘public purpose’, they are not a gift within the meaning of [the predecessor provision to Article XVI, Section 6]. The benefit to the state from an expenditure for a ‘public purpose’ is in the nature of consideration and the funds expended are therefore not a gift even though private persons are benefited therefrom. The determination of what constitutes a public purpose is primarily a matter for legislative discretion, which is not disturbed by the courts so long as it has a reasonable basis.”