Cityscape • February 2022 • Updated Guidance on Financial Contributions to Nonprofit Organizations

It is common for city governments to make financial contributions to local nonprofit organizations that provide various public services. The main rationale for such use of city funds is to support a needed public service that cannot be provided directly by the municipal government. Recent and updated guidance from the Auditor of State supports this type of use of public funds while also guiding governmental entities to follow certain protocols in such situations.

Financial contributions to nonprofit organizations are often to those that provide services for animal shelters, food pantries, homeless shelters, domestic abuse centers, town festivals and more. Many cities cannot afford to offer such services directly as they may not have the capacity to adequately staff a department or have the necessary facilities and equipment. But, a critical service can be provided through a nonprofit organization that may have several area partners.

For cities currently participating in such arrangements or considering a partnership with a local nonprofit, there are a few important issues to understand, along with the guidance from the State Auditor.

• All city funds and resources must be used for public purposes. The Iowa Constitution requires this.

• The State Auditor’s opinion clarifies that payments by a city government for economic development purposes are generally allowed under Chapter 15A of the Code of Iowa. As the state code details, economic development can mean “private or joint public and private investment involving the creation of new jobs and income or the retention of existing jobs and income that would otherwise be lost.” Chapter 15A also states that a governmental body must “determine that a public purpose will reasonably be accomplished by the dispensing or use of those funds.”

• For other types of financial contributions to nonprofit organizations, the State Auditor’s opinion stipulates that the governmental entity should have a contract in place. The contract should cover the public service(s) provided either to the governmental entity or directly to the public, how much the governmental entity is paying, the total cost of the contract, and that the nonprofit organization must be able to provide to the governmental entity an account of their use of the public funds. Finally, like all contracts, the governing body of the governmental entity should formally approve it and state the public purpose.

Working with local nonprofit organizations can be beneficial to city governments and extend public services that may not otherwise be possible. Following the guidance from the State Auditor will help ensure such arrangements are done properly and protect governmental resources.