Can a city industrial development board route farm-rent income into local school workforce training programs?

Subject

Opinion No. 15-43, City's Use of Payments Received Through Industrial Development Corporation to Fund Workforce Training Programs, April 30, 2015

Plain-English summary

A city's industrial development board (IDB) owned vacant land it planned to develop for future industrial use, and was leasing the land to farmers in the meantime. The city wanted to use the rental income to fund a leadership-skills program in local schools designed to develop "soft skills" in the future workforce. Representative Moody asked the AG whether that was legal.

The AG identified two clean paths. First, an IDB has explicit statutory authority (Tenn. Code Ann. § 7-53-302(a)(8)) to donate property and rental revenues whenever the donation furthers the corporation's purposes. If the IDB's charter is broadly written, funding workforce training programs that prepare local labor for future industrial employers would normally fit. Cities have used this same authority for years to donate to local nonprofits whose missions overlap with the IDB's industrial-development mandate.

Second, when the IDB has earnings beyond what it needs to cover expenses, bonds, and reserves, statute (Tenn. Code Ann. § 7-53-308(a)) requires those net earnings to be paid back to the organizing municipality. Once the city receives those funds in its general fund, it can spend them on any lawful general-fund purpose, including school workforce-development programs.

Currency note

This opinion was issued in 2015. 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.

Common questions

What does an industrial development board do, exactly?

Tennessee's Industrial Development Corporations Act (Tenn. Code Ann. § 7-53-101, et seq.) lets municipalities form public nonprofit corporations to finance, acquire, own, lease, and dispose of property in pursuit of industrial development. IDBs are extremely common in Tennessee, especially for issuing bonds for industrial facilities and entering payment-in-lieu-of-tax (PILOT) agreements with employers.

Why was the IDB leasing land to farmers?

The opinion treats this as an interim use of land acquired for future industrial development. Leasing vacant industrial-zoned land to farmers as an income-producing holding strategy was treated as a "project" under the broad statutory definition of that term.

Is workforce training really an "industrial development" purpose?

Almost certainly, depending on how the IDB's charter is written. Workforce training that prepares local labor for industrial employers helps the IDB's core mission of attracting and supporting industry. The AG advised that this is a factual question, but noted the Act directs the statute to be construed "liberally" and previously opined that IDBs may donate rental revenues to separate nonprofits whose purposes are consistent with the IDB's public purposes.

What's the difference between the two paths?

The direct-donation path keeps the money in the IDB until donation and lets the IDB's board control where it goes. The net-earnings path routes money through the city's general fund, where the city legislative body controls appropriations. Both work; the choice depends on governance preferences and how restricted the IDB wants the use of the funds to be.

Can the city use IDB net earnings for any purpose at all?

For any purpose to which the city's general-fund money can lawfully be put. The opinion notes that earlier AG guidance treated PILOTs the same way: once they hit the city's general fund, the city may use them like other property tax revenues.

Is there any limit on what the IDB can donate?

Yes. The donation must be consistent with the IDB's purposes, and it cannot violate Tenn. Code Ann. § 7-53-308(a), which says no net earnings can "inure to the benefit of any individual, firm or corporation" except for payments to the organizing municipality. A donation to a local board of education does not breach that rule because a public school board is not a private "individual, firm or corporation."

Background and statutory framework

The Industrial Development Corporations Act (Tenn. Code Ann. § 7-53-101 et seq.) is Tennessee's enabling statute for IDBs. Tenn. Code Ann. § 7-53-102(a) sets out the broad legislative purpose of allowing municipalities to create public corporations to "finance, acquire, own, lease, and/or dispose of properties" to create employment opportunities and stimulate industry and commerce. Tenn. Code Ann. § 7-53-102(b) instructs that the Act be construed liberally.

Two provisions did the work in this opinion:

• Tenn. Code Ann. § 7-53-302(a)(8) authorizes an IDB to "[s]ell, exchange, donate and convey any or all of its properties, including, without limitation, all or any part of the rents, revenues and receipts of the corporation from its projects" if doing so furthers the corporation's purposes. Tenn. Att'y Gen. Op. 97-049 (April 15, 1997) had previously applied this to donations of IDB rental revenues to a nonprofit corporation.
• Tenn. Code Ann. § 7-53-308(a) requires net earnings (after covering expenses, bonds, and other obligations) to be paid to the organizing municipality. Once paid to the city, those funds become part of the general fund and can be used for any lawful general-fund purpose. Tenn. Att'y Gen. Op. 96-083 (June 5, 1996) reached the parallel conclusion for PILOT payments. The AG also cited Ala. Op. Atty. Gen. No. 96-00248 (July 2, 1996), reaching the same result under similar Alabama statutory language.

A local board of education and a local education agency are defined in Tenn. Code Ann. § 49-1-103. Donations made directly to a local board of education for workforce-training programs would fit within the AG's prior reasoning, provided the donation furthers the IDB's purpose.

Citations

• Tenn. Code Ann. § 7-53-101, et seq. (Industrial Development Corporations Act)
• Tenn. Code Ann. § 7-53-102(a) and (b) (legislative purpose; liberal construction)
• Tenn. Code Ann. § 7-53-202(a)(5) (charter must state corporation's purposes)
• Tenn. Code Ann. § 7-53-302(a)(4) (acquisition of property for projects)
• Tenn. Code Ann. § 7-53-302(a)(8) (sale, donation, conveyance of property and revenues)
• Tenn. Code Ann. § 7-53-305(a) (IDB as municipal instrumentality)
• Tenn. Code Ann. § 7-53-305(b) (PILOT agreements)
• Tenn. Code Ann. § 7-53-308(a) (net earnings paid to municipality)
• Tenn. Code Ann. § 49-1-103 (definitions of local board of education and local education agency)
• Tenn. Att'y Gen. Op. 97-049 (April 15, 1997)
• Tenn. Att'y Gen. Op. 96-083 (June 5, 1996)
• Ala. Op. Atty. Gen. No. 96-00248 (July 2, 1996)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2015/op15-43.pdf

Original opinion text

STATE OF TENNESSEE
OFFICE OF THE ATTORNEY GENERAL
April 30, 2015
Opinion No. 15-43
City's Use of Payments Received Through Industrial Development Corporation to Fund Workforce Training Programs

Question

Can an industrial development corporation use payments collected as receipts for farm rent from its agricultural lessees to fund workforce training and education programs administered by local schools?

Opinion

An industrial development corporation may donate funds to a local board of education pursuant to Tenn. Code Ann. § 7-53-302(a)(8), which authorizes industrial development corporations to donate rental revenues when such a donation is consistent with the corporation's purpose. Pursuant to Tenn. Code Ann. § 7-53-308(a), an industrial development corporation is required to pay its net earnings to the municipality with respect to which the corporation was organized. The municipality receiving the corporation's net earnings may appropriate these funds for use by local education agencies.

ANALYSIS

You have asked us about the powers of a city's industrial development corporation ("City IDB"), organized under Tenn. Code Ann. § 7-53-101, et seq. (the "Act"), which leases to farmers for agricultural purposes certain undeveloped land acquired for future industrial use. According to information provided, lessees pay rent directly to the City IDB, and this rental income is not pledged as security for any outstanding debt, or reserved for any other purpose. The city would like to use the City IDB's income from farm rent to fund a leadership development program administered by local schools in order to cultivate communication and other "soft skills" in the local workforce.

Industrial development corporations ("IDBs") are public nonprofit corporations created by municipalities in Tennessee. In authorizing the creation of IDBs, the legislature intended to allow municipalities to create public corporations to "finance, acquire, own, lease, and/or dispose of properties" in hopes of, inter alia, creating employment opportunities, and stimulating industry and commerce. Tenn. Code Ann. § 7-53-102(a). The IDB is a public instrumentality of the municipality forming it. Tenn. Code Ann. § 7-53-305(a).

First, we address the question of whether an IDB may donate monies it receives from farm rent directly to a local board of education for use in administering workforce development programs. An IDB may "[s]ell, exchange, donate and convey any or all of its properties, including, without limitation, all or any part of the rents, revenues and receipts of the corporation from its projects" whenever such action is "in furtherance of the purposes for which the corporation was organized." Tenn. Code Ann. § 7-53-302(a)(8). An IDB's purpose may be found in its charter or certificate of incorporation, as required under Tenn. Code Ann. § 7-53-202(a)(5). IDBs may own, lease, and finance a wide variety of projects, including land that can be used in industry, or in nearly any type of commercial enterprise. Further, IDBs may acquire or lease real property in connection with "projects" anticipated for the future. Hence, the City IDB's current practice of leasing vacant land suitable for industrial purposes to farmers qualifies as a "project" under the Act.

A factual determination would have to be made as to whether a particular IDB's contemplated action is in furtherance its purpose. However, it should be noted that Tenn. Code Ann. § 7-53-102(b) directs that the Act be construed liberally. Provided an IDB has been formed for sufficiently broadly defined purposes and has not been formed to accomplish some specific and narrowly defined goal, using an IDB's rents to fund workforce training programs designed to develop skills attractive to local employers would likely be consistent with an IDB's purpose.

This Office has previously opined that Tenn. Code Ann. § 7-53-302(8) authorizes an IDB to donate its rental revenues to a separate nonprofit corporation, when the purposes of that corporation are consistent with the public purposes of the IDB. See Tenn. Att'y Gen. Op. 97-049 (April 15, 1997). Additionally, the donation must not violate Tenn. Code Ann. § 7-53-308(a), which provides that no part of the industrial development corporation's net earnings shall inure to the benefit of any individual, firm or corporation except for payments to the municipality with respect to which the corporation was organized.

Next, we turn to the question of whether an industrial development corporation can transfer or donate payments collected from agricultural lessees to its organizing municipality, so that the municipality may, in turn, distribute these monies to local schools to fund development and administration of workforce training programs.

Tenn. Code Ann. § 7-53-308(a) addresses the disposition of an IDB's net earnings and provides that if the IDB's board of directors finds that "sufficient provision" has been made for the full payment of expenses, bonds, and other obligations, "any net earnings of the corporation thereafter shall be paid to the municipality with respect to which the corporation was organized." (Emphasis added). Accordingly, an IDB is obligated to transfer back to its organizing municipality funds not being used for its operating purposes or held in reserve to pay other obligations. To effectuate a transfer of surplus funds to the city under this provision, the IDB's board must find that the monies to be transferred are net earnings in accordance with Tenn. Code Ann. § 7-53-308(a). After making this finding, the IDB should pay its net earnings to the city. Once these surplus funds are paid over to the city by the IDB, the city may then allocate them from its general fund for any use or purpose to which general fund monies may be properly put, at the discretion of the City's legislative body.

This Office has previously opined that a municipality may use payments paid to it in lieu of taxes ("PILOTs") pursuant to an agreement between an IDB and its lessee under Tenn. Code Ann. § 7-53-305(b) for any use to which property tax revenues may be properly put. See Tenn. Att'y Gen. Op. 96-083 (June 5, 1996). We reasoned that PILOTs reaching the municipality's general fund in this manner are not required to be put to any particular use because the PILOTs were intended to replace property tax revenues lost to a municipality as a result of the property becoming tax exempt. Likewise, the Act does not appear to limit a municipality's use of funds paid to it as net earnings from an IDB. Accordingly, the city's contemplated use of an IDB's net earnings for nonindustrial purposes is permissible.

HERBERT H. SLATERY III
Attorney General and Reporter

ANDRÉE SOPHIA BLUMSTEIN
Solicitor General

EUGENIA A. IZMAYLOVA
Assistant Attorney General

Requested by:
The Honorable Debra Moody
State Representative
205 War Memorial Building
Nashville, TN 37243

Footnotes:

1. The terms "local board of education" and "local education agency" are defined in Tenn. Code Ann. § 49-1-103. A local board of education is the board of education that manages and controls the respective local public school system. Tenn. Code Ann. § 49-1-103(1). A local education agency includes a county or city school system, a special school district, and other local public school system or district created by the general assembly.

2. The Alabama Attorney General reached a similar conclusion in analyzing statutory language virtually identical to the relevant portion of Tenn. Code Ann. § 7-53-308(a) regarding an organizing municipality's use of funds received as net earnings from an IDB. See Ala. Op. Atty. Gen. No. 96-00248 (July 2, 1996).