When (if Ever) Does a Payment Become an Illegal Gift of Public Funds?
Posted in Events

There was an interesting discussion at the IRWA Chapter 57 seminar last Friday, and it’s one that I have seen play out many times in many contexts, so I thought it was worth a short discussion here. The issue was when the illegal gift of public funds doctrine comes into play in the context of an eminent domain case (the text appears in Article XVI, section 6 of the California Constitution). The concept is simple: The government cannot give away public funds to a private person or company. The eminent domain scenario is all too frequent: A proposed settlement is for more than the property’s appraised value, rendering the excess payment a potential illegal gift.

Such payments do not violate the rule. Based on well-established interpretations of the "no gifts" clause, a payment does not qualify as an illegal gift if the expenditure is for a "public purpose."  Thus, for example, where the property owner claims a massive amount of compensation, either in terms of fair market value, damages, or both, and the agency negotiates a settlement that is higher than its appraised value, but lower than the agency’s possible exposure, the public purpose is the settlement of a larger claim, creating an easily identifiable benefit.

Even in a case where the maximum realistic exposure might not account for the entire payment, it is unlikely the payment would qualify as an illegal gift. The settlement may avoid:

  • A fight over possession, which could put the construction schedule at risk; or
  • A nasty public relations battle that could jeopardize another badly needed project (as just two examples).

In the end, as long as the agency documents what it is doing and why, it is unlikely any gift of public funds argument would ever succeed in an eminent domain case (and I’m certainly not aware of any court decision striking down an eminent domain payment as an illegal gift).

The discussion at Friday's seminar did include an interesting twist on this common scenario. The specific hypothetical involved relocation payments and, specifically, relocation payments that exceed the payments expressly recognized under the Relocation Act (either the federal or state versions). The panelists described one agency’s relocation plan that involved paying displaced homeowners an additional relocation payment representing a 20% down payment on a new home in situations where the owner is upside down on his or her house, meaning the payment of fair market value will not yield the owner money to be used as a down payment.

While some in the audience expressed concerns that this really does start to look like a gift, the answer likely remains the same (to my knowledge, nobody has challenged any such plan in court). As long as the agency documents the public purpose behind making the payments, no illegal gift occurs. In this particular example, the agency may not have been able to timely relocate all the owners absent these extraordinary payments. Making the payments may keep construction on schedule – a benefit that likely far exceeds the cost of the additional relocation payments.

Does this mean public agencies should always be willing to pay more than a property is worth – or make extraordinary relocation payments such as providing owners with a new down payment? Of course not. The point of this post is to address situations where the agency has decided that such payments are warranted under the circumstances, but where it feels constrained not to do so by the gift of public funds law.

  • Rick E. Rayl
    Partner

    Rick Rayl is an experienced litigator on a broad range of complex civil litigation issues.  His practice is concentrated primarily on eminent domain, inverse condemnation, and other real-estate-valuation disputes.  His public ...

California Eminent Domain Report is a one-stop resource for everything new and noteworthy in eminent domain in California. We cover all aspects of eminent domain in California, including condemnation, inverse condemnation, and regulatory takings. We also keep track of current cases, project announcements, budget issues, legislative reform efforts, and report on all major California eminent domain conferences and seminars.

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