Legal Corner: Arizona Supreme Court Issues Gift Clause Decision
On February 8 the Arizona Supreme Court held the City of Peoria violated article 9, section 7 of the Arizona Constitution (the “Gift Clause”) by spending approximately $2.6 million to encourage a private university to open a campus in Peoria. Schires v. Carlat, No. CV-20-0027-PR, 2021 WL 538454 (Ariz. Feb. 8, 2021)(“Schires”).
The Gift Clause provides in part: “Neither the state, nor any county, city, town, municipality, or other subdivision of the state shall ever give or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation. . .” Ariz. Const. art. 9, § 7. In assessing whether a public expenditure complies with the Gift Clause, courts rely upon the two-pronged test set forth in Wistuber v. Paradise Valley Unified School District, 141 Ariz. 346 (1984). The Wisturber test provides that a public expenditure does not violate the Gift Clause if: (1) it has a public purpose and (2) the governmental entity receives consideration that “is not so inequitable and unreasonable that it amounts to an abuse of discretion, thus providing a subsidy to the private entity.” Id. at 349.
Facts in the Schires Case
In 2015, Peoria entered into an agreement with Huntington University, Inc. (“HU”), which required HU to develop and operate a university campus in Peoria’s P83 District, prohibited HU from offering similar programs in other Arizona cities for 7 years, obligated HU to meet specific “performance thresholds,” and required HU to participate in various economic development activities with Peoria. In return, Peoria agreed to pay HU up to $1,875,000 over a three-year period. To fulfill its obligations under the agreement, HU leased a building from Arrowhead Equities, LLC (“Arrowhead”). Peoria the entered into a separate agreement with Arrowhead, which provided that Peoria would reimburse Arrowhead up to $737,596 for renovating its building so long as Arrowhead met certain “performance criteria.” A taxpayer group of Peoria residents (represented by the Goldwater Institute) sued Peoria, alleging the city’s payments to HU and Arrowhead violated the Gift Clause. The trial court granted summary judgment in favor of the city and the Court of Appeals affirmed.
Applying the Wisturber test, the Arizona Supreme Court determined Peoria’s expenditures served valid public purposes. With respect to the second prong, however, the Court concluded the public expenditures were “grossly disproportionate” to the fair market value of the benefits received by the public, and thus, violated the Gift Clause. Here are a few takeaways regarding the Court’s analysis of the adequacy of the consideration:
- The Court refused to give any deference to a city’s assessment of the value, which is contrary to previous decisions. See, e.g., Turken v. Gordon, 223 Ariz. 342, 346 (2010); Cheatham v. DiCiccio, 240 Ariz. 314, 322 (2016).
- Courts must instead “identify” the fair market value of the direct benefits to the government entity and “determine proportionality.” The Court also described direct benefits as “tangible freestanding value.”
- The Court provided very little guidance as to the types of benefits that could be considered direct benefits or “tangible freestanding value.” It mentioned two examples: an ownership interest in a private building and reduced tuition for residents.
- The direct benefits and any “tangible freestanding value” must be described in “sufficient detail to permit valuation.” According to the Court, Peoria’s agreements failed to meet this requirement as HU and Arrowhead “simply promised to engage in their respective private businesses (educating and leasing).”
- Anticipated economic impacts, taxes generated from a development, and other “fiscal impacts” are “irrelevant” indirect benefits.
On February 12, the League hosted a virtual roundtable for the attorneys of the Arizona City Attorneys Association (ACAA) to discuss the potential impacts of the Schires decision. The League would like to thank ACAA President Mike Rankin for leading the roundtable, Mary O’Grady for sharing valuable insights about the Schires case, and all the attorneys who participated in the discussion. Over the next few weeks, the League will be collaborating with the Greater Phoenix Economic Council (GPEC), a working group of city attorneys, and other stakeholders to develop “best practices” for development agreements in light of the Schires decision.