Daily Development for Monday, May 3, 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

MUNICIPAL LAW; GIFT OF PUBLIC FUNDS; Arizona court finds that benefits of anticipated future taxes cannot be taken into account in computing the value of benefits the municipality receives in exchange for money or other benefits conferred upon developer.

Turken v. Gordon, 223 Ariz. 342, 224 P.23d 158 (Ariz. 2010)

Developer proposed a huge commercial/retail development in Phoenix, which was very afraid that significant retail tenants would migrate to Scottsdale if they did not find a comfortable home in a nicely developed space in Phoenix. Thus, the city agreed to rebate to developer one half of a variety of business and sale taxes that would be generated at the development for a period of eleven and a half years. This amount was capped at the figure os $97.4 million, and the court used this cap figure frequently in discussing the benefit that the city was giving to the developer.

In exchange, the developer agreed to construct a parking facility with over 3000 spaces, of which 2980 parking spaces were to be reserved for use the retail development for 45 years. Two hundred spaces were to be used to facilitate park and ride for the city. The developer also agreed to build 1.02 million square feet of retail space.

In a taxpayer’s lawsuit, plaintiffs alleged that the deal constituted a gift of public funds in violation of the Arizona Constitution because the City was not getting back $97.4 million in public benefits from the developer’s activities. Instead the primary function o the arrangement was to provide a benefit to a private party.

The alleged "gift” of course was the rebate of tax monies, which should be used only for public purposes. In response to the argument that the development of the new Center was itself a public benefit, the court admitted that the development would provide other public benefits - denser development, decreased pollution, and the plaintiff argued that under Arizona precedent, anticipated tax revenues that applied generally to all taxpayers could not be viewed as a special benefit conferred on the city. But it concluded that the benefits of this project were primarily private, and not public in character. It apparently did not try to quantify the public benefits here or credit them in its equation of determining public benefit.

This left the parking garage, in which the City was getting 200 spaces and arguably the right for the public to use the other spaces, although limited to servicing the retail operations of the developer for 45 years. The court stated that if the value of this benefit, allowing some deference to the public agency’s judgment, was $97.4 million, then there was no gift of public funds. If the $97.4 million was substantially greater in value than the amount that the city was receiving, then the city was paying to much and there was a prohibited gift.

But, speaking of gifts, the court concluded that the court’s position on the "gift clause” had been somewhat misunderstood in the past (though it refused to take much blame for this) and noted that many other public agencies had not distinguished between benefits that had some public value but were primarily private and benefits that were primarily public in nature. To rule retroactively in this case might put many completed public projects in jeopardy of a constitutional challenge. Therefore, the court concluded that it would make its ruling prospective only.

Comment 1: Many states have "gifts of public funds” prohibitions in their constitutions - dating back to the bad old days when cities and counties lavished bonuses on railroad companies in exchange for promises for routings through their areas. Many such promises were not kept. But the money was gone. Even when they were kept, the local budgets were bankrupted by the lavish payments that were made.

Comment 2: Prior to Kelo, there didn’t seem to be much life in the jurisprudence over these cases, although there had been some activity, notably in Mississippi. Will this holding stoke the first in other jurisdictions as well?

Comment 3: What is the relationship between this case and the popular development tool of tax increment financing? First, as the court confessed here, if the area to be developed was already "blighted,” then perhaps there would be public benefit in redeveloping that area sufficient to support investment of public funds. Such is frequently the case in tax increment deals.

Where, as here, the city did not or could not make out a case that the land where this project was going was "blighted,” simply subsidizing a tax and job generating development project will not be enough to support the public component. And increased taxes also cannot be taken into account. Thus, the tax increment bond proceeds must be used to provide primarily public facilities - such as roads, sewers, and parking facilities that are not dedicated to a retail developer. Perhaps land clearance of the "blight” might also be permitted. In the editor’s experience there is sometime ambiguity on the question of whether parking facilities are indeed public. This case will sharpen the focus on that issue.

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