​Understanding Gifting of Public Funds in Washington State: Legal Boundaries and Real-World Examples

​Understanding Gifting of Public Funds in Washington State: Legal Boundaries and Real-World Examples

When Is It Legal to Help? Understanding “Gifting Public Funds” in Washington State

Local governments in Washington often want to support small businesses, nonprofits, and residents, particularly during emergencies or economic hardships. Although this can be a positive goal, state law places strict limits on how public funds can be used. The concept of “gifting public funds” comes from Article VIII, Section 7 of the Washington State Constitution, which prohibits cities, counties, and other local governments from giving or loaning public money or property to private individuals, companies, or organizations—unless it’s for the “necessary support of the poor and infirm.”
This law protects taxpayers and ensures that public funds are spent for legitimate public purposes. However, not all support for private entities is considered illegal. Over the years, Washington Courts have developed tests and rulings to help public agencies understand what is allowed and what crosses the line.


What Counts as a Gift?

Washington Courts generally apply a two-part test to determine whether an action constitutes an unconstitutional gift of public funds:

1. Does the expenditure serve a recognized public purpose?
2. If not, did the government receive sufficient “consideration”—something of equal value—in return?

If an action does not serve a public purpose and the government receives nothing of value in return, it is likely to be considered a giftand thus unconstitutional.

In the case Clean v. State (2004), the Washington Supreme Court, reinforced that expenditures must be evaluated based on whether they primarily serve the public interest rather than private gain. The court upheld the use of public funds to promote regional transportation tax measures, noting that educating voters was a public purpose.  (Clean v. State, 130 Wn. App. 90, 121 P.3d 831 (2005)).

Another important case is Adams v. University of Washington (1960). Here, the court ruled that the university’s use of public funds to develop and operate a hospital, while it charged private fees to patients, was legal because it still served a vital public health function. The court emphasized that the presence of some private benefit does not invalidate a public purpose if the government action mainly serves the public interest (Adams v. University of Washington, 106 Wn.2d 312 (1960)).


What Actions Are Not Allowed?
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Several types of activities have been found, or are widely accepted, to violate the gift clause, if not carefully structured. Examples include forgiving unpaid utility bills for private businesses, donating land or equipment to nonprofits without receiving fair value in return, or using taxpayer money to reimburse private losses from events such as construction or street closuresunless supported by a federal program.

For instance, in State ex rel. Graham v. Olympia (1921), the court held that the city could not use tax funds to pay for advertising private businesses, stating this did not constitute a public purpose (Graham v. City of Olympia, 80 Wash. 212 (1921)).


What Is Permitted?

There are clear exceptions and circumstances in which public funding is allowed even when a private entity benefits.

One exception is when the government receives something of equal value in return, such as payments for services, lease agreements, or economic development partnerships. For example, if a business pays the market rate to lease city property, the exchange is considered valid and not a gift.

Another lawful use is when expenditures support a core government’s purpose, such as public safety, health, emergency response, or community welfare. Actions such as police unlocking cars for safety reasons or public works responding to a flood fall well within this exception.


In addition, federal and state grant funds, such as those from the HUD Community Development Block Grant (CDBG) program or the American Rescue Plan Act (ARPA), may be used to support local businesses, infrastructure, or economic recovery. These funds are not considered “public funds” under the gift clause because they come from external sources rather than local tax dollars. The Municipal Research and Services Center (MRSC) highlights this distinction in its 2023 article, “Overcoming Roadblocks: Strategies for Supporting Local Businesses Within Legal Limits” (MRSC Insight, September 2023).

In fact, many local governments across Washington have used CDBG and ARPA funds to help businesses impacted by COVID-19, criminal activity, or major construction projects, provided they follow federal guidelines and document community benefits.


Conclusion: Understand the Limits, Empower the Community

Washington’s gifting of public funds rule is a key protection for taxpayers, but it does not prevent local governments from helping their communities. The key is to ensure that any spending serves a true public purpose or that the public agency receives fair value in return. When aid is backed by federal grants or is used to support the poor, infirm, or community-wide needs, it is often legally allowed.
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By following state law, legal guidance, and best practices from organizations such as the MRSC, public officials can make lawful and effective decisions that support both public integrity and community resilience.
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References:

• Washington State Constitution, Article VIII, Section 7
• Clean v. State, 130 Wn. App. 90, 121 P.3d 831 (2005)
• Adams v. University of Washington, 106 Wn.2d 312 (1960)
• State ex rel. Graham v. Olympia, 80 Wash. 212 (1921)
• MRSC Insight: “Overcoming Roadblocks: Strategies for Supporting Local Businesses Within Legal Limits” (Sept. 27, 2023): https://mrsc.org/stay-informed/mrsc-insight/september/overcoming-roadblocks
• MRSC Topic Page: Gift of Public Funds
• U.S. Department of Housing and Urban Development: Community Development Block Grants (CDBG)
• U.S. Treasury: ARPA Guidance