Editor’s note: This story was updated Friday morning.

The Carrboro Citizen doesn’t have a billion dollars of toxic assets on its books or a Rust Belt empire of idle manufacturing plants, but it nevertheless joined the ranks of businesses receiving government assistance Tuesday night.

At the May 19 public hearing, the Carrboro Board of Aldermen voted unanimously, and without debate or public comment, to loan its two-year-old community newspaper $50,000 at 2 percent interest, even though that paper is not profitable and has “no guarantee [it] can become profitable,” according to the hearing agenda. Citizen publisher Robert Dickson supplied a Carrboro condominium appraised at $240,000 as collateral. Dickson and his wife own the property.

Alderwoman Jacqueline Gist said she thought the loan was a “great idea.”

The Citizen is an integral part of our community, and the only newspaper that provides local coverage,” she said.

Others, however, have expressed concern that the loan, which comes from the town’s revolving loan fund, would constitute a conflict of interest, both for the Town of Carrboro and for The Carrboro Citizen, since the newspaper reports on city government and elections.

“In a way, it’s like somebody saying ‘Here’s money, do a better job of holding me accountable,’” said James Hamilton, director of the DeWitt Wallace Center for Media and Democracy at Duke University.

In these economic times, Hamilton added, media companies are experimenting with funding sources. It is important to monitor the results, such as changes in coverage, of these experiments, Hamilton said.

“I think this is an experiment to watch, not to prejudge,” he said.

Kelly McBride, ethics group leader at the Poynter Institute, a nonprofit journalism school that owns shares of the parent company of the St. Petersburg Times, said governmental financial support of media will likely cause problems if there are not strict rules dictating independence for news outlets, such as exist between the British government and the BBC.

“If a government subsidy was ever going to work, there would have to be some structure in place to keep the government from mucking around in the paper’s business,” McBride said. “And there’s no such structure in the United States.”

The Society of Professional Journalists’ Code of Ethics, widely regarded as standards of practice for the media, states that journalists should “avoid actual conflicts of interest, real or perceived” and “remain free of associations and activities that may compromise integrity or damage credibility.”

Dickson complained that the allegations of conflict of interest are “the usual points from the folks that sit in ivory towers and opine about such things.”

“I don’t think there’s any conflict of interest,” Dickson said. “No more than The News & Observer running ads for political candidates they’re covering. Newspapers have to do business with people they report on.”

There are mechanisms in place to guard against advertising’s influence over editorial content. Journalistic ethical standards state that there be clear distinctions between advertising and editorial content, with no assumption of favoritism. It could also be argued that political ads, which a newspaper has the right to refuse, do not carry the same weight as a paper’s monthly loan payments due to the Town of Carrboro.

There is no road map for this type of government-newspaper relationship, although it should be noted that private investors in media companies also can try to exert influence over a newspaper’s coverage.

Government has always played a role in the media, said Craig Aaron, senior program director of Free Press, a national media and technology watchdog group. “For me the question is, Is there any kind of firewall? You have to have some kind of structure that ensures you’re independent from influence, so the public can put trust in what they’re reading in that publication. You have to have a bright line there, but that’s not the same thing as saying, No support from the government ever, because our media industry’s long been supported by the government.”

From tax breaks to lowered postage rates, Aaron said, “We have always had media policies. The question that matters is, Who are they going to benefit?” Big media companies have routinely lobbied Congress and the Federal Communications Commission for policies that favor their businesses.

Aaron recently co-authored a report titled “Saving the News: Toward a National Journalism Strategy (PDF),” which advocates a variety of new funding models for journalism, including an expansion in government funding. “We spend $1.35 per capita on public media and Britain spends $80, so they have this world-class news organization, the BBC, with lots of reporters all over the world.”

Yet, Aaron stresses the importance of creating a system that insulates reporters and editors from politics. He cites the efforts of Ken Tomlinson, Republican chairman of the Corporation for Public Broadcasting under the Bush administration, who actively tried to purge PBS programming of what he perceived to be a liberal bias. “As soon as the government gets involved” in funding media, Aaron said, “it’s got to be kept as far away from content as possible.”

Gist downplayed any conflict.

“I don’t think there is one, because I know this board, and I know that paper,” she said.

However, it is uncertain how the dynamic could shift when new Board of Aldermen are elected, or if the paper’s ownership changed.

Dickson said the decision to approach the town, rather than a bank, was good business. With the nationwide credit crunch, banks are being cautious about lending money. The Town of Carrboro’s Economic Sustainability Commission’s loan criteria states that applicant “must be turned down by at least two banks.”

“I could get extremely attractive rates without having to go to a bank,” Dickson said of the town loan. “It’s hard to get commercial loans right now.”

Dickson said the loan is intended to help boost the paper’s circulation from 6,000 to 10,000 and expand coverage. He insisted the money was not a bailout to help a struggling business (many newspapers are currently finding it difficult to turn a profit). Dickson said he has already invested more than $200,000 of his money in the Citizen. As collateral for the loan, he put forward a Carrboro condominium he owns, appraised at $240,000.

Applications for loans from the Carrboro revolving fund are vetted by the town’s Economic Sustainability Commission, which then makes recommendations to the Board of Aldermen on the terms of the loan. In this case, the ESC halved Dickson’s initial request of $100,000 because it would have nearly exhaust the revolving fund; according to the May 19 agenda, the fund currently holds $167,112.

ESC Chairman Peter Lee said the board goes through a process similar to what a bank would in the case of a small business loan, except that it also considers the social value to the town. The ESC’s recommendation to approve the loan includes a note of The Carrboro Citizen‘s beneficial community impact, including free advertising to nonprofit groups. The recommendation estimates the Citizen‘s total financial contribution at $291,000.

A checklist submitted to the Board of Aldermen at the May 19 meeting showed that Dickson met 15 out of 16 relevant criteria to qualify for a public loan. The only one he didn’t meet was financial need; a notation indicated Dickson’s “high net worth” didn’t qualify as “need,” though it was used as a rationale for offering the loan. According to town documents, the revolving loan fund was created in 1986 for projects that result in the creation or retention of jobs targeted specifically to low- and moderate-income persons.

Board of Aldermen members indicated that the paper’s ambition to expand in a time of well-publicized decline in the national newspaper industry inspired them to approve the loan.

“It’s a great thing for Carrboro and a great thing for newspapers,” Alderman Dan Coleman said, before voting ‘yea’ on the loan.

Additional reporting by Fiona Morgan.

Related link: The Online Journalism Review offers a historical example of a municipal funding mode. The full piece is here; read on for an excerpt:

Los Angeles in 1912 had evening and daily newspapers, but it also had the first, and possibly only Municipal News. Financed by the city of Los Angeles, 60,000 copies were distributed by newsboys and to homes. It was under the control of a municipal newspaper commission, composed of three citizens who served without pay and who were appointed by the mayor. They were to hold office for four years and were subject to recall and removal by referendum.

The mayor, the city council, and political party that had more than 3% of the vote were guaranteed column space. Financial support came from an appropriation of $36,000 set aside by the city of LA. Ad revenue was a second stream of income, but the newspaper did not support any major
department store ads. Civic minded, it had a special student section.

The Municipal News was truly hyperlocalit didn’t truly compete with any LA papers because it didn’t cover national or state news or carry wires. Lee is unclear on how long it actually lasted, but was voted down by the city council due to cost.

Correction (May 22, 2009): This story incorrectly reported that the McClatchy Company took advantage of relaxed government rules on media ownership when it purchased the Knight Ridder newspaper chain.