Cities funding CDCs

by Mike
(Illinois)

Last Reviewed: June 13, 2024

Visitor Question: Are there any restrictions on Cities or local units of government funding CDCs?

Editors Reply: There are no general restrictions on units of local government giving funding on an annual or temporary basis to community development corporations. But we need to keep two things in mind when we say that.

First, you need to be sure that there is no state law prohibiting such a thing. We haven't heard of that in the U.S., but of course new laws are passed every year. So if a CDC in your area is seriously contemplating receiving a grant from your local government, make sure that neither side is violating any state law.

Second, if a local government wants to give money to a CDC for a specific purpose, we suggest that both parties agree to either a contract or to something less formal that might be called a memorandum of understanding. A memorandum of understanding arguably could be enforced in the same way as a contract, depending on state law again, but it's usually a much friendlier document of no more than one page just stating in layperson's language what each party agrees to do.

Unfortunately, CDCs can and do disband as corporations, so part of the reason for having these agreements written down is to make sure there is some form of correspondence or a legal document spelling out the understanding. For instance, if the CDC does go out of business, does the city government have a claim to any assets it may own at the time?

In several states we have known of CDCs that have received short-term loans from units of local government as well. But we also know this is not legal in every state. We mention that because sometimes it can be helpful when the local government and the CDC have similar goals on a particular deal.

One of the real advantages of having community development corporations in the first place is that as private corporations, they can do some things that are not legal or not appropriate for local governments to undertake. So you want that city-CDC relationship to be both harmonious and mutually helpful in bringing about the revitalization of a particular geography.

But to return to your basic question, we are aware of numerous instances in which local governments either make regular, recurring grants annually to one or more CDCs to help fund operating expenses. In almost all cases the CDC needs to raise additional money though, so this is usually not a complete fundraising solution for the CDC.

We also are aware of many more examples of a unit of local government giving a grant to a CDC for a specific development project. This money may or may not come from the Community Development Block Grant or some other source of federal or state money that has been awarded to the local government rather than raised through normal local tax pathways.

We hope these observations can help you figure out how this might work in your own community.

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