Are Arizona municipal development agreements at risk? Ask the City of Peoria and you just might hear that to be the case. A recent decision by the Arizona Supreme Court ruled that Peoria’s $2.6 million subsidy for a private university did not directly benefit residents and was thus unconstitutional.
The five-year legal fight between the Goldwater Institute and the City of Peoria focused on the City’s use of an incentive development agreement to bring a satellite campus of the Indiana-based Huntington University to its P83 entertainment district. In exchange for the city’s support, Huntington promised to spend $2.5 million to expand its programs at the Peoria campus, and enroll 150 students by year seven.
The question revolved around whether the City’s incentive agreement violated the Gift Clause of the Arizona Constitution which bars governments from giving money to private companies without an equal public benefit. Since the university was private and did not provide any direct benefit to Peoria’s residents, such as reduced tuition or public access to the facilities, critics argues the city’s incentives violated the state constitution. Ultimately, the Arizona Supreme Court agreed in a recent ruling in DARCIE SCHIRES, ET AL. V. CATHY CARLAT, ET AL.
Arizona courts are clear about a two-pronged test used to evaluate such incentive agreements. First, a court asks whether the challenged expenditure serves a public purpose. Second, if a public purpose exists, does the value to be received by the public far exceed the consideration being paid by the public. If so, it violates the Gift Clause by providing a subsidy to the private entity.
What does this mean for the future incentive agreements in Arizona? The status quo remains largely the same.
Incentive agreements are still a viable, economic development tool to attract and retain employment and economic generators. Arizona courts still acknowledge that government expenditures for certain development serves a public purpose. Indeed, the legislature has recognized the utility of such expenditures by authorizing cities to spend monies “for and in connection with economic development activities.” § 9-500.11(A). The key is to make sure the value to the public exceeds the dollars being paid.
Adam Baugh is a partner at Withey Morris, PLC where he has been practicing land use and zoning law since 2007. He is a seasoned and successful lawyer who regularly works with city councils, planning commissions, and neighborhood groups in representing landowners, developers and businesses in obtaining land use entitlements.