Arizona Supreme Court Revisits the Gift Clause in Shires v. Carlat
February 16, 2021 – In its decision issued on February 8, 2021, the Arizona Supreme Court held that expenditures of public funds by the City of Peoria made to induce a private university to establish a branch campus in Peoria violated Arizona’s Gift Clause. The Arizona Gift Clause, which is found in the Arizona Constitution, prohibits the donation or grant of public funds to private individuals or entities unless (1) it is for a public purpose, and (2) the value to be received by the public is not “grossly disproportionate” to the consideration being paid by the public. The case addresses important considerations in determining what may or may not be counted as consideration or value under the Gift Clause. It has important implications for all public entities in Arizona.
Peoria adopted a comprehensive economic development plan that included strategies to further higher education and technology and to reimburse eligible property owners for making tenant improvements to vacant commercial buildings in an underused area of Peoria. Importantly, economic development is a public purpose established by Arizona statute. Pursuant to its adopted economic development plan, Peoria entered into an agreement with Huntington University to open a campus in Peoria, offering it various incentives to do so, including a payment of up to $1,875,000 over three years if certain programs were developed and performance standards were met. In addition, Peoria reimbursed Arrowhead Equities, a private property owner, for the cost of improvements to a vacant building it would lease to Huntington University, contingent on the property owner meeting certain performance thresholds.
What did the Arizona Supreme Court say and why is it important?
- Prior cases held that whether there is a “public purpose” is a question for the public body to decide unless that public body has “unquestionably abused” its authority. The Court reaffirmed this principle.
- Prior cases held that courts “must give appropriate deference to the findings of the governmental body” when examining whether the public receives adequate consideration in return for expenditure of public funds. In its new decision, the Court states “We now disapprove that statement” and it is not even “appropriate, as the inquiry is an objective one and does not involve subjective policy decisions.” Going forward, courts will make their own findings regarding whether the consideration is adequate. Findings of the public body will be irrelevant.
- Even if the economic impact on the public body exceeds the expenditure of public funds, the Gift Clause may be violated. Huntington had agreed to open a campus, to refrain from offering similar programs in other Arizona cities for seven years, and to participate in “economic development activities”. Arrowhead agreed to improve a vacant building to house the campus. The Court said these are indirect economic benefits and may not be counted as consideration under the Gift Clause.
- The economic impact of taxes to be paid to Peoria as a result of the agreements with Huntington and Arrowhead may not be counted as consideration under the Gift Clause. The Court said those are “indirect benefits” and those taxes would be owed whether or not the agreements were entered into, thus reaffirming its prior holding in Turken v. Gordon.
- Finally, although the agreements entered into with Huntington included commitments to open a campus, refrain from offering similar programs in other Arizona cities for seven years, and participate in “economic development activities,” these agreements did not give Peoria anything, such as goods or services, an ownership interest in the campus building or reduced tuition for Peoria residents. No particular economic impact was promised and no enforceable agreement was entered into. In addition to providing “direct benefits” to the public body, economic development benefits to the public body must be specific and measurable and must be described in an enforceable agreement. This is consistent with the prior Arizona Supreme Court decision in Turken v. Gordon.
Peoria had created a strong economic development plan to bring needed economic development to an underused area of the city and to further educational opportunities in the city. However, the Arizona Supreme Court decided that most of the benefits the city would receive for its expenditures of public funds were “indirect benefits” and could not, therefore, be counted toward adequate consideration under the Gift Clause. Economic development agreements that describe and adequately quantify the direct benefits to be received will be more likely to survive a challenge. As the Court once again did not give examples of the types of benefits it determined to be “direct,” a careful analysis of the benefits will be necessary for each proposed agreement.
Review the Court’s opinion here.
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