AGO 1984 No. 10 - Mar 8 1984
OFFICES AND OFFICERS ‑- STATE ‑- AUDITOR ‑- MUNICIPAL CORPORATIONS‑- AUTHORITY TO AUDIT ECONOMIC DEVELOPMENT COUNCILS
Economic development councils created in response to (but not pursuant to) RCW 35A.11.060, RCW 35.21.680 or RCW 36.32.410 are not, themselves, municipal corporations or quasi-corporations for the purposes of audit under RCW 43.09.260; however, the State Auditor would nevertheless have the authority to examine the books and records of an economic development council (or any similarly situated private party) as an extension of his authority to audit those municipal corporations or quasi-municipal corporations which have provided funds to such organizations.
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March 8, 1984
Honorable Robert V. Graham
Olympia, Washington 98504
Cite as: AGO 1984 No. 10
By letter previously acknowledged you set forth certain information concerning economic development councils and then asked for our opinion on the following questions:
"1. Are EDC's a municipal corporation as defined by Washington State statutes?
"2. If EDC's are not a municipal corporation should they be designated as quasi-municipal corporations?
"3. If EDC's are municipal or quasi-municipal corporations does the Office of State Auditor have the duty and responsibility to perform a periodic audit of their financial activities?
"4. If EDC's are determined to be nonprofit corporations, is it lawful for the Office of State [[Orig. Op. Page 2]] Auditor to perform periodic audits to trace the receipt and use of financial contributions made by cities, towns and counties?"
We answer your first three questions in the negative and your fourth question in the affirmative for the reasons stated in our analysis.
Your letter initially refers to RCW 35A.11.060 and RCW 36.32.410. RCW 35A.11.060 provides as follows:
"The legislative body of any city or town is hereby authorized and empowered in its discretion by resolution or ordinance passed by a majority of the legislative body, to take whatever action it deems necessary to enable the city or town to participate in the programs set forth in the Economic Opportunity Act of 1964 (Public Law 88-452; 78 Stat. 508), as amended. Such participation may be engaged in as a sole city or town operation or in conjunction or cooperation with the state, any other city or town, county, or municipal corporation, or any private corporation qualified under said Economic Opportunity Act."
RCW 36.32.410, in turn (in virtually identical terms) grants the same authority to the legislative bodies of counties.1/
You then advised us that in response to this legislation numerous economic development councils (EDCs)‑-composed of city, town, and/or county officers and of representatives of private industry‑-have been created. Generally, the public bodies involved are also providing operating funds. You further noted that in a typical case, certain appointed or elected officers of the participating cities, towns or counties serve on the boards of directors of these economic development councils, which function as nonprofit corporations organized under the provisions of chapter 24.03 RCW.
[[Orig. Op. Page 3]]
You first have asked whether such economic development councils "are municipal corporations as defined [i.e., used] in Washington law."
The classic definition of the term "municipal corporation" was stated by the Washington Supreme Court inColumbia Irrigation District v. Benton County, et al., 149 Wash. 234, 235, 270 Pac. 813 (1928), as follows:
". . . A municipal corporation, in its strict and proper sense, is a body politic established by law partly as an agency of the state to assist in the civil government of the country but chiefly to regulate and administer the local and internal affairs of the city, town or district which is incorporated. Sometimes the term municipal corporation is used in a broader sense and includes public quasicorporations, the principal purpose of whose creation is an instrumentality of the state, but not for the regulation of local and special affairs of a compact community. Dillon on Municipal Corporations (5th ed.), vol. 1, § § 31 and 32."
Another treatise on the subject lists the following elements as being common to municipal corporations:
"1. Incorporation as such pursuant to the constitution of the state or to a statute.
"2. A charter.
"3. A population and prescribed area within which the local civil government and corporate functions are exercised. . . .
"4. Consent of the inhabitants of the territory to the creation of the corporation, with certain exceptions.
"5. A corporate name.
"6. The right of local self-government, although in most states this is held to be not an inherent right. . . ." (McQuillin, Municipal Corporations, 1971 Revised Volume, § 2.07b)
[[Orig. Op. Page 4]]
It will be readily seen, we think, that an economic development council (as above described) does not meet either of these classic definitions. Although an economic development council, when organized under chapter 24.03 RCW, is a body corporate with a charter and a corporate name, it has none of the other elements described by McQuillin. Such a corporation has neither "population" nor territorial limits, as those terms are understood; and, more importantly, an economic development council does not exercise civil government functions within a prescribed local territory.
However, in both theColumbia Irrigation District case, supra, and the later case of Roza Irrigation District v. State, 80 Wn.2d 633, 497 P.2d 166 (1972) the Court acknowledged that in Washington a somewhat broader use of "municipal corporation" has been recognized. For example, as the Court in Roza pointed out, public utility districts‑-which do not meet the classic definition of a "municipal corporation" because they do not exercise traditional "governmental" functions‑-have been specifically labeled as municipal corporations by RCW 54.04.020. Similarly, port districts have been specifically characterized as municipal corporations by RCW 53.04.060. And in theRoza Irrigation District case itself the Court held that irrigation districts, which likewise vary from the classic municipal corporations, are nonetheless "municipal corporations" for purposes of certain statutes.
Thus, while only cities and towns truly meet the classic definition of a municipal corporation, the legislature and the courts in this state have extended the meaning of that term to cover other public bodies which exercise general or specific governmental functions‑-generally within a described local territory.2/
[[Orig. Op. Page 5]]
In this instance, we do not have sufficiently detailed information at hand to know precisely what economic development councils do. On the basis of the limited information you have given us, however, we would nevertheless conclude that economic development councils are not municipal corporations in even the broad sense used in this state‑-as they likewise clearly are not in the classic sense. Unlike a joint operating agency (footnote 2, above) they have not been labelled as such by the legislature. Moreover, although they may be nonprofit corporations organized under the general corporation law (chapter 24.03 RCW), such councils are nowhere recognized in state law as units of state or local government. Nor can we find any provisions in state law specifically authorizing cities, towns or counties to create economic development councils, or to delegate to them any governmental functions.3/
Since economic development councils are nowhere characterized in state law as municipal corporations, the only other possibility (given the proposition that these councils were apparently created in connection with some federal program) is that federal law somehow invests them with governmental powers.
Although corporations commonly are created under federal law for the purpose of administering federal programs, we know of no case in which the federal government has ever purported to create a municipal corporation within a state. Indeed, the United States Constitution appears to contain no grant of authority to Congress to establish municipal corporations within states, and the power to establish local governmental bodies and define their authority is one of the commonly recognized powers reserved to the states.
The state statutes you cited4/ grant authority to any city, town or county to ". . . take whatever action it deems necessary to enable the city or town [county] to participate in the programs set forth in the Economic Opportunity Act of 1964 (Public Law 88-452; 78 Stat. 508), as amended. . . ." We have reviewed Public Law 88-452 and note that certain of its provisions (Title 7, codified as § § 2981 to 2981C of 42 U.S.C.) make reference to [[Orig. Op. Page 6]] "community economic development programs" and to "community development corporations." However, while that federal legislation thus sanctioned the creation of such corporations and assigned certain functions to them in the carrying out of community development programs, nothing in the federal law required the creation of such corporations. And, more importantly, nothing in the federal law purported to assign to them any localgovernmental functions. Rather, those community development corporations were envisioned as private corporations created to receive federal funds and assist in the operation of certain federal programs.5/
Having thus concluded that economic development councils are not municipal corporations, we likewise conclude (in response to your second question) that, at least on the facts you have given us, they are not quasi-municipal corporations. The term "quasi-municipal corporation" is not one which is defined in state statute, nor has it been extensively used by the legislature. We do note that it was used in RCW 43.09.260, relating to municipal audits, but it was used there along with a number of other terms to emphasize the broadness of your audit responsibilities. We quote from that statute as follows:
". . .
". . . The term 'taxing districts' for purposes of RCW 43.09.190 through 43.09.285 includes but is not limited to all counties, cities, and other political subdivisions, municipal corporations, and quasi-municipal corporations, however denominated."
". . ." (Emphasis supplied)
Since no governmental unit in Washington is specifically defined as a "quasi-municipal corporation," it is likely that the legislature here merely intended to describe local government units which, though exercising certain governmental powers, did not exhibit all the classic characteristics of a municipal corporation.
[[Orig. Op. Page 7]]
McQuillin,supra, defines "quasi-municipal corporation" as follows:
". . . As the term is used herein, what is meant is a corporation created or authorized by the legislature which is merely a public agency endowed with such of the attributes of a municipality as may be necessary in the performance of its limited objective. In other words, a quasi-municipal corporation is a public agency created or authorized by the legislature to aid the state in, or to take charge of, some public or state work, other than community government, for the general welfare. 'Quasi-municipal' corporations are public in nature, but not, strictly speaking, municipal corporations. They are bodies which possess a limited number of corporate powers and which are low down in the scale or grade of corporate existence, and consist of various local government areas established to aid the administration of public functions. . . ." (McQuillin,Municipal Corporations, 1971 Revised Volume, § 2.13)
Under that definition of the term, the phrase "quasi-municipal corporation" is properly applied to those types of local government bodies sanctioned by state law which, though public in nature, do not exercise general governmental functions within a described local territory. Perhaps the term could also be applied to legal or administrative entities created by local governments to exercise joint powers (see RCW 39.34.030) or to public corporations whose creation is authorized by state law to assist some particular municipal corporation in the exercise of its functions (such as those created pursuant to RCW 35.21.710‑-see footnote 3, supra).
As you have described them, however, economic development councils do not exercise governmental functions. We thus conclude that they are not quasi-municipal corporations any more than they are municipal corporations.
Your third question asks whether the Office of the State Auditor has a duty and responsibility to perform a periodic audit of the financial activities of economic development councils‑-assuming that the councils are municipal or quasi-municipal corporations. Since RCW 43.09.260, as we just observed, includes all municipal corporations and quasi-municipal corporations within the purview of your audit functions, it would [[Orig. Op. Page 8]] readily follow that you would have the responsibility to audit economic development councils if they were municipal or quasi-municipal corporations. In response to your first two questions, however, we have determined that those councils are not municipal or quasi-municipal corporations. Therefore, RCW 43.09.260 does not authorize your office to audit them and, accordingly, we answer your third question in the negative.
We have, however, advised you informally in the past that there are circumstances under which your office can undertake to audit a private nonprofit corporation. We have said, for example, that you can enter into an interlocal cooperation agreement pursuant to chapter 39.34 RCW, to conduct such an audit on behalf of another public agency (federal, state, or local). Likewise, in those cases where a private nonprofit corporation operates exclusively or largely with state or local governmental funds and is required to obtain a periodic audit at its functions as a condition of the receipt of those funds, we have advised that you have authority to perform such an audit on the request of the private nonprofit corporation as an extension of your direct statutory authority to audit the funds in question.
In this instance, it is possible that an economic development council would fit into one of those categories. That does not mean, however, that all economic development councils are automatically subject to audit. Your authority to audit them is indirect and depends upon the circumstances of each case.
The last point is relevant to your fourth question; i.e., whether it is lawful for the Office of the State Auditor to perform periodic audits to trace the receipt and use of financial contributions to economic development corporations made by cities, towns and counties. Your direct statutory authority to audit (RCW 43.09.260, supra) empowers you ". . . to examine into all financial affairs of every public office and officer." That statute goes on to require you to examine the financial affairs of each taxing district periodically. On every such examination, you are to make inquiry as to
". . . the financial condition and resources of the taxing district; whether the Constitution and laws of the state, the ordinances and orders of the taxing district, and the requirements of the division of municipal [[Orig. Op. Page 9]] corporations have been properly complied with; and into the methods and accuracy of the accounts and reports."
Other provisions of the same statute empower your office to issue subpoenas and compulsory process in order to compel the attendance of witnesses and to require the production of books and papers.
Based upon the foregoing, we believe that your office would have the authority to "follow" public funds into a private corporation such as you have described, at least for the limited purpose of determining that the city, town or county in question has complied with the law and has properly accounted for its expenditure of public funds. Thus, you would have a limited authority to examine the books and records of an economic development corporation (or any similarly situated private party) as an extension of your authority to audit the municipal corporation (or quasi-municipal corporation) which has provided funds to the private corporation. We therefore answer your final question in the affirmative to that extent.
We trust that the foregoing will be of assistance to you.
Very truly yours,
KENNETH O. EIKENBERRY
JAMES K. PHARRIS
Senior Assistant Attorney General
*** FOOTNOTES ***
1/We also note that RCW 35A.11.060, supra, covers cities operating under the optional municipal code, while still another provision, RCW 35.21.680, covers the state's other cities and towns.
2/We also note that a joint operating agency established pursuant to chapter 43.52 RCW (of which the Washington Public Power Supply System is the only active example) is characterized in RCW 54.52.250 as a "municipal corporation." An operating agency is a form of joint undertaking by two or more cities or public utility districts (see RCW 43.52.360) and has no population or territorial limits as such. Operating agencies exercise governmental power, however, and the legislature may have used the word "municipal" to make it clear that operating agencies are units of local, not state, government.
3/Compare the authority granted in RCW 35.21.730 to cities, towns, or counties to ". . . [c]reate public corporations, commissions, and authorities to administer and execute federal grants or programs . . ."
4/RCW 35A.11.060 and RCW 36.42.410, together with RCW 35.21.680.
5/In addition, we also note in any case that large portions of Public Law 88-452 have been repealed and, specifically, we note that the provisions relating to community development corporations were repealed by Public Law 97-35, 95 Stat. 519 in 1981.