Arizona Gift Clause Case Summaries (as of September 13, 2016)

     I.  Gift Clause.

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, except as to such ownerships as may accrue to the state by operation or provision of law or as authorized by law solely for investment of the monies in the various funds of the state.

Ariz. Const. art. 9 § 7 (Gift Clause).

     II.  Miscellaneous Gift Clause Cases.  (not all older cases represented)

 Industrial Dev. Auth. (Pinal) v. Nelson, 109 Ariz. 368, 509 P.2d 705 (1973).

The Industrial Development Authority of the County of Pinal (IDA) was organized pursuant to Ariz. Rev. Stat. § 9-1511.  It sought public bond revenue to loan to Magma Copper Company for the purchase and installation of certain pollution control equipment, with repayment of the public bonds to come from repayment by Magma of the loan.  IDA brought a special action when the Attorney General (AG) refused to issue an opinion that the bonds were legally conforming, in part due to the AG’s opinion that the legislation violated the Gift Clause.

                The supreme court granted relief, directing the AG to issue an opinion that the bonds were in conformity with the law.  The court noted that Arizona’s Gift Clause was derived from the similar provision of Montana’s constitution and cited a Montana pubic financing case as concluding that such public financing of facilities for air and water pollution in connection with a paper mill did not violate such a clause as long as there was a public purpose.

The courts of the great majority of jurisdictions who have considered the problem of whether such a method of financing is for a public purpose have concluded that it does serve a public purpose. . . .

. . .

The [Montana] Court in Fickes points out that the test to determine whether a loan or donation is prohibited by the constitution is whether the loan or donation is for a public purpose.  If there is a public purpose the loan or donation is not prohibited even though some organization derives special benefit from the project.  This position is in harmony with the holding of this Court . . . .

Id. at 373, 509 P.2d at 710.

●  City of Tempe v. Pilot Properties, 22 Ariz. App. 356, 527 P.2d 515 (1974).

The City of Tempe assembled approximately 100 acres to be used to attract a major league baseball team for Spring training.  It entered into a 99-year lease with BFI for $1.00 per year.  BFI caused the facilities to be built (with bank financing).  BFI entered into a 20-year lease with another entity for a Seattle team to use the facilities  and BFI assigned its interest to Pilot Properties.  The Milwaukee Brewers later replaced the Seattle team brought an action to declare the lease void (apparently to avoid its $50,000 per year sublease obligation).  Tempe then took the position that the lease with BFI was a violation of the Gift Clause, which was opposed by the bank that had provided financing for the facilities and Pilot Properties (BFI’s successor).

Based upon the language of the constitutional provision, Tempe argues that the leasing of 110 acres of city property to BFI for a rental of only $1.00 per year results in a ‘subsidy’ which is prohibited.  The Bank, on the other hand, argues two theories to uphold the lease: (1) that a substantial consideration was received by the City of Tempe under the lease which is not subject to judicial review and (2) the lease was executed for a ‘public purpose’ which removes it from the constitutional prohibition.

Id. at 360, 527 P.2d at 519.

The summary judgment declaring the lease valid was reversed on the basis that factual issues had to be resolved to make such a determination.

                We therefore hold that merely because a private individual or a corporation uses public funds or property for a ‘public purpose’ is not sufficient, in and of itself, to remove that use from the provisions of Article 9, s 7 of the Arizona Constitution prohibiting a ‘donation or grant, by subsidy or otherwise.’  Were we to hold otherwise and say that a ‘public purpose’ was the only ‘criterion by which the validity of and appropriation of public funds is to be measured, there would be hardly any limit upon the right of the state, county, city, or school districts to appropriate monies to a private corporation.’  . . .

                . . .

                We, therefore, hold that if the consideration received by the city for the BFI lease is ‘so inequitable and unreasonable that it amounts to an abuse of discretion,’ a gift or donation by way of a subsidy has been bestowed on BFI which is prohibited by the Arizona Constitution.  In making such a determination, the fair market rental value of the property, the benefits bestowed on the city by obtaining title to a stadium, and other factors dealing with consideration received would be material.

Id. at 362-63, 527 P.2d at 521-22 (emphasis added).

 Wisturber v. Paradise Valley Unified School Dist., 141 Ariz. 346, 687 P.2d 354 (1984).

The Paradise Valley School District entered into an agreement with the teachers’ association pursuant to which the president of the teachers’ association was exempt from teaching, but received a portion of his or her compensation from the district and the rest from the union.  The agreement required that the president provide services to the district in the form of informational meetings with various groups and the district superintendent.  A taxpayer group brought a special action challenging the agreement as a violation of the Gift Clause.  The  district contended that the duties performed by the association president for the district was saving it $5,800 to $15,800 annually, as it would have to hire a full time employee relations director to perform those tasks otherwise.  The supreme court affirmed the judgment in favor of the district.

                It is axiomatic that a governmental body may disburse funds only for a public purpose.  . . . The services performed by the Association President aid the District in performing its obligations.

Id. at 348, 687 P.2d at 356.

                The constitutional prohibition was intended to prevent governmental bodies from depleting the public treasury by giving advantages to special interests . . . or by engaging in non-public enterprises.  . . .  Of course, either objective may be violated by a transaction even though that transaction has surface indicia of public purpose.  The reality of the transaction both in terms of purpose and consideration must be considered.  A panoptic view of the facts of each transaction is required.  . . .  The public benefit to be obtained from the private entity as consideration for the payment or conveyance from a public body may constitute a “valuable consideration” but the Constitution may still be violated if the value to be received by the public is far exceeded by the consideration being paid by the public.  Of course, in reviewing such questions, the courts must not be overly technical and must give appropriate deference to the findings of the governmental body.

Id. at 349, 687 P.2d at 357 (emphasis added).

Acknowledging that many of the obligations imposed upon the Association President by Proposal 98 are duties which she might have performed in any event as Association President, it still seems obvious that the duties imposed upon her by the proposal are substantial, and the relatively modest sums required to be paid by the District not so disproportionate as to invoke the constitutional prohibition.  Of course, we do not sit as finders of fact.  The facts presented by the District in the affidavit of the Superintendent make a prima facia showing of proportionality.  The petitioners had an opportunity to present evidence on disproportionality of consideration; instead, at the beginning of the trial, they chose to submit the matter on the legal memoranda, the affidavit, and the words of the contract.  On this record it is apparent that they did not carry their burden and it is doubtful that they could have proved any serious disproportion in consideration.  . . .  It was not the burden of the District to prove that its contract was reasonable.  The burden of proof was on those who challenged that contract.  . . . We will not assume disproportionality of consideration.

Id. at 349-50, 687 P.2d at 357-58.

 Kromko v. Arizona Board of Regents, 149 Ariz. 319, 718 P.2d 478 (1986).

Prior to 1984, the University of Arizona operated the hospital associated with its medical school with funds it generated as supplemented by money from the university budget.  As reports projected unsustainable increases in the operation expenses, the Board of Regents entered into a conveyance agreement and lease with a newly established non-profit corporation to operate the hospital.  The non-profit corporation assumed existing liabilities of almost $12 million, agreed to pay $10.00 per year rent, and executed an “Education Agreement” that obligated it to maintain the hospital as a teaching hospital for the educational and research programs of the university.  In exchange, the non-profit corporation was conveyed the building on the leased land (land and improvements appraised at $50 million, but opinion does not identify allocation between those) and equipment valued at approximately $8 million.

The petitioner sought special action relief, challenging the lease as a Gift Clause violation.  The supreme court disagreed, combining its Gift Clause analysis with examination of a specific statute by which the legislature had authorized the Board of Regents to lease land to a non-profit for purposes of operating a healthcare facility.

                The purpose behind article 9, section 7 is to avoid the “depletion of the public treasury or inflation of public debt by engagement in non-public enterprise.”  . . .  “Public funds are to be expended only for ‘public purposes’ and cannot be used to foster or promote the purely private or personal interests of any individual.”

Id. at 320-21, 718 P.2d at 479-80 (citations omitted) (emphasis added).

                The evidence before this court supports that presumption.  By leasing University Hospital to a self-sustaining corporation, the need for public funds to recoup losses of between $20 million and $36 million per year has been eliminatedThus, substantial monetary benefits have in fact accrued to the Board and, therefore, the State of Arizona.  In addition, by leasing the hospital to a corporation over which it also retains sufficient control, the Board can guarantee the perpetuation of the critical educational relationship between the hospital and the University of Arizona College of Medicine.  Although this benefit is nonpecuniary, it nonetheless may be viewed as consideration.

                As we find that the agreement (1) serves a statutorily recognized public purpose, and (2) constitutes neither a donation nor a subsidy to a private corporation, we hold that the lease and conveyance agreement between the Arizona Board of Regents and University Medical Center Corporation is not in violation of article 9, section 7 of the Arizona Constitution.

Id. at 322, 718 P.2d at 481 (emphasis added).

 City of Casa Grande v. Tucker, 169 Ariz. 143, 817 P.2d 947 (Ct. App. 1991).

Tucker owned a 160 acre parcel.  He executed a contract with the City of Casa Grande in 1958 by which the City received an easement across a 15 feet wide strip to install and operate an outfall sewer line.  Part of the agreement permitted Tucker (or successors) to tie in to that sewer line for no charge, in the event the 160 acres was subdivided.  Tucker did subdivide the property as a mobile home park and developed it in four phases.  In 1976 he constructed one trunk sewer line and connected it to the City system.  In 1986, when he began phase four, the City imposed a capacity charge for connecting the remaining lots.  Tucker refused to pay; the City sued; the trial court granted summary judgment for the City; the court of appeals reversed and directed entry of judgment for Tucker.

“The city . . . argues that the constitution prohibits it from making a gift of public funds and contends that the consideration for the 1958 contract was inadequate.”  Id. at 144, 817 P.2d at 948.  The court noted that the capacity charge was included in a group of fees collectively identified as “residential connection charges” and pointed out that the City’s position that it had fully performed the contract was based upon acknowledgment that it could not collect a “connection charge.”  In addition to its contractual analysis, the court held there was no violation of the Gift Clause.

                Finally, the city argues that the contract is void because it violates the constitutional prohibition of its making a gift of public funds.  Ariz. Const. art. IX, § 7.  In making that argument, however, the city cites neither case authority nor any supporting evidence from the record.  Instead, it merely argues that because it could have obtained the easement through eminent domain proceedings, “[i]t is … unrealistic to assume that the amount paid in a condemnation action would have exceeded the cost of one acre of land since the easement would not constitute a full taking and since the sewer line would have added some value to the remainder of the property.”   That argument ignores the fact that no specific values have been included in the record and that courts do not ordinarily examine the adequacy of consideration, . . . nor do they assume disproportionality of consideration.  . . .  It also ignores the fact that the city received a sewer easement as a result of the agreement.

Id. at 146, 817 P.2d at 950.

 Arizona Center for Law in the Public Interest v. Hassell, 172 Ariz. 356, 837 P.2d 158 (Ct. App. 1991).

In 1985, some Arizona officials asserted that the state owned title to land in the beds of watercourses that were navigable when Arizona became a state in 1912.  Among other things, this threatened existing title assumptions.  In 1987, the State Legislature reacted by enacting HB 2017 which renounced the state’s interest in such land. A lawsuit was brought challenging the Act on various grounds, including violation of the pubic trust doctrine and the Gift Clause.  The summary judgment in favor of upholding the Act was reversed on appeal.

The court reviewed Wisturber and Pilot Properties and stated that to support a dispensation of public trust property, a court determines whether “public purpose and fair consideration” have been shown.  Id. at 368, 837 P.2d at 170.  The court accepted that the public purpose had been sufficiently demonstrated, but determined that the record did not establish whether fair consideration had been received.

                A public purpose, however, does not alone remove a challenged transaction from the prohibition of the gift clause.  There must also be consideration that is not “so inequitable or unreasonable that it amounts to an abuse of discretion.”  Wistuber, 141 Ariz. at 349, 687 P.2d at 357;  Pilot Properties, 22 Ariz. App. at 363, 527 P.2d at 522.

Id. at 369, 837 P.2d at 171.

                Appellees alternatively urge that H.B. 2017 produces adequate consideration for the state by establishing quitclaim fees, assuring ongoing receipt of property taxes, creating statutory public rights of access, and avoiding litigation costs.  These are benefits to be sure.  Yet we cannot judge their adequacy for a reason that brings us to a central defect of H.B. 2017.  Although the act attempts the wholesale relinquishment of Arizona’s equal footing claims to riverbed lands, the legislature acted without particularized information, and established no mechanism to provide particularized information, to support even an estimate of the value of those claims.

                We do not suggest that a full-blown judicial determination of historical navigability and present value must precede the relinquishment of any state claim to a particular parcel of riverbed land.  An administrative process might reasonably permit the systematic investigation and evaluation of each of the state’s claims.  Under the present act, however, we cannot find that the gift clause requirement of equitable and reasonable consideration has been met.

Id. at 369-70, 837 P.2d 171-72 (emphasis added).

We find that H.B. 2017 fails to provide a mechanism for particularized assessment of (1) the validity of the equal footing claims that it relinquishes; (2) the continuing value of land subject to such claims for purposes consistent with the public trust;  (3) equitable and reasonable consideration for claims that may be relinquished without impairing the public trust;  and (4) conditions that may be necessary to any transfer to assure that public trust interests remain protected.

Id. at 371, 837 P.2d 173.  The foregoing reasons were listed for holding the Act invalid under the Gift Clause.

 Maricopa County v. State of Arizona, 187 Ariz. 275, 928 P.2d 699 (Ct. App. 1996).

Land classified as agricultural receives a special valuation methodology that results in urban agricultural land being taxed based upon an assessed value that is far less than similarly situated non-agricultural parcels.  In 1989, the legislature adopted HB 2007, a variation on that methodology in use by some county assessors that required re-certification every 5 years to confirm the continuing application to a parcel of an agricultural assessment, and in 1991 a procedure permitting taxpayers who had failed to comply with that re-certification process essentially to do so retroactively and obtain reimbursement of taxes. The County challenged that the aforementioned refund mechanism violated the Gift Clause.

On cross-motions for summary judgment, the trial court initially ruled for the County that HB 2007 violated both the Gift Clause and due process. Upon motion for reconsideration, the trial court adhered to its Gift Clause ruling, but rejected the due process argument.  The court of appeals, however, concluded that the County had presented a plausible argument, but that it was not supported by any record made by the County in the trial court, and so the summary judgment was reversed for failure of the challenger to satisfy its burden of proof and make an evidentiary record to support the asserted lack of a public purpose for the Act.

                In Wistuber, the supreme court established the rule that a use of public money or property will not violate the Gift Clause if, taking a “panoptic” view of the transaction in question, a court concludes that (1) the use is for a public purpose, and (2) the value of the public money or property is not so much greater than the value of the benefit received by the public that the exchange of the one for the other is disproportionate.  . . .  A use of public funds or property that meets both these criteria will not contravene the Gift Clause even though particular persons or organizations benefit specially from such use.

Id. at 279-80, 928 P.2d at 703-04 (emphasis added).

                Our supreme court has said that “the term ‘public purpose’ is incapable of exact definition and changes to meet new developments and conditions of times….”  . . .  To ascertain “purpose,” we must employ the Wistuber court’s panoptic view;  that is, we must look at all the pertinent circumstances before coming to a conclusion.  . . . This latter statute reflects a legislative policy decision designed to address the encroachment of urban expansion into traditional farming areas, the public benefit of which decision the county has not challenged here.  We need no citation from the record to recognize that such expansion creates rising land values which in turn increase tax bills out of proportion to the economic results attainable through farming.  . . . We therefore conclude that section 42-141(A)(5) furthers a valid public purpose.

                . . .

The county’s arguments are also directed at the second Wistuber prong, whether the exchange of tax money for the public benefit is disproportionate.  . . .

                The county’s suppositions regarding the lack of public benefit in HB 2007 may sound plausible, but the record contains absolutely nothing to support them.

Id. at 280-81, 928 P.2d at 704-05.

 Defenders of Wildlife v. Hull, 199 Ariz. 411, 18 P.3d 722 (Ct. App. 2001).

Following the decision in Arizona Center for Law in the Public Interest v. Hassell, the Legislature acted again in 1992 and 1994 to relinquish state claim of rights in navigable waters.  The Arizona Navigable Stream Adjudication Commission was established, initially as an adjudicative body, and then converted to a fact-finding legislative advisory committee.  As a result of its work, the Legislature enacted SB 1126 which disclaimed the state’s rights to the bedlands of certain identified rivers or creeks.  Id. at 416, ¶7, 18 P.3d at 727.   Defenders of Wildlife sued, arguing that the Act violated both the public trust doctrine and the Gift Clause.

Part of the opinion explains that what constitutes navigable waters is governed by federal law and SB 1126 adopted a test for navigable waters that not only contradicted the federal test, but also practically foreclosed determining any waterbed to constitute navigable waters. The court of appeals set forth its own test for proving navigability of an Arizona watercourse.  Id. at 426, ¶55, 18 P.3d at 737.  As the test of SB 1126 conflicted with the federal test, and was deemed functionally identical to the assessment held in Hassell to be a violation of the public trust doctrine and the Gift Clause, SB 1126 also was declared unconstitutional.  Id. at 427-28, ¶63, 18 P.3d at 738-39.

 Turken v. Gordon, 223 Ariz. 342, 224 P.3d 158 (2010).

Part of a masterplanned community was to include CityNorth as a mixed-use commercial core, including office, retail, hotels, and residential components.  The developer, NPP, sought financial assistance from the City of Phoenix to meet the goal of at least 1 million square feet of retail space.  The City shared that goal, anticipating that otherwise potential sales tax revenue would be lost to a neighboring city without it.  The City and NPP entered into a Parking Space Development and Use Agreement, after approval by the City Council (and verification of findings by a consultant), that was intended to accomplish the mutual goal.  When ultimately reviewed by the supreme court, much focus was on what was an obligation or requirement of performance by the agreement, as opposed to a mere condition for something to occur.

The parking agreement required NPP to designate 2,980 garage parking spaces for non-exclusive use by the general public and another 200 spaces for exclusive use in commuting programs, over a period of 45 years.  As the supreme court pointed out, the agreement did not require NPP to build the parking garage and at least 1 million square feet of retail, but NPP’s receipt of sales tax revenue was conditioned upon those things occurring.  If those conditions did occur, then for a period of 11 years and 3 months, the City was to make payments to NPP that were equivalent to one-half of sales taxes generated by the CityNorth development, not to exceed $97.4 million.

A taxpayer group sued to enjoin the payments, arguing a Gift Clause violation.  The trial court granted summary judgment for the City and NPP.  The court of appeals reversed (holding that in addition to the two-part Wisturber test, Kromko added a third prong that a government expenditure not unduly promote a private interest, which was violated).  The supreme court vacated the court of appeals opinion and affirmed the dismissal of the Gift Clause count (remanding for determination of other challenges), but not because it held the Gift Clause was not violated.  To the contrary, the supreme court analysis suggested the Gift Clause probably was violated (a remand for factual determinations might have been needed for such an adjudication), but based upon what the court characterized as possible judicial-caused confusion as to what was legally permissible, which the parties had relied upon in preparing their agreement.  So the Turken opinion was specifically deemed prospective only in its application and the CityNorth parking agreement was allowed to escape the Gift Clause challenge.

In Turken, the supreme court reiterated the fairly broad, discretionary determination as to what constitutes a public purpose, the first component of the Wisturber test.  What constitutes a “public purpose” can change over time, and as to which the judiciary is to give deference to such a legislative determination.  Id. at 346, ¶¶13-14, 224 P.3d at 162.  Anticipated, indirect benefits were recognized as relevant to determining whether the public purpose element of the test was satisfied.  Id. at 350, ¶33, 224 P.3d at 166.  “We find a public purpose absent only in those rare cases in which the governmental body’s discretion has been ‘unquestionably abused.’”  Id. at 349, ¶28, 224 P.3d at 165.  The court rejected that satisfaction of the public purpose element was alone sufficient.   Id. at 346-47, ¶¶14-18, 224 P.3d at 162-63.  The second prong of disproportionality also had to be satisfied, which the supreme court clarified as a test of the adequacy of consideration, applying concepts of contract law (acknowledging that sufficiency of consideration is rarely examined in private party agreements).

The supreme court stated that Kromko did not add a third element to the Wisturber test.  The examination of whether a challenged transaction unduly promoted a private interest was characterized as an examination of the adequacy of consideration.  Id. at 348, ¶21, 224 P.3d at 164.  Reconfirming the applicability of the two-part Wisturber test, the supreme court restated the second prong as follows:

When a public entity purchases something from a private entity, the most objective and reliable way to determine whether the private party has received a forbidden subsidy is to compare the public expenditure to what the government receives under the contract.  When government payment is grossly disproportionate to what is received in return, the payment violates the Gift Clause.

Id. ¶22 (footnote omitted) (emphasis added).

                The term “consideration” has a settled meaning in contract law.  It is a “performance or return promise” that is “bargained for … in exchange for the promise of the other party.” . . . In other words, consideration is what one party to a contract obligates itself to do (or to forbear from doing) in return for the promise of the other contracting party. . . .

                . . . In contrast, our Gift Clause jurisprudence quite appropriately focuses on adequacy of consideration because paying far too much for something effectively creates a subsidy from the public to the seller.  . . .   The potential for a subsidy is heightened when, as occurred here, a public entity enters into the contract without the benefit of competitive proposals.

                . . . Although anticipated indirect benefits may well be relevant in evaluating whether spending serves a public purpose, when not bargained for as part of the contracting party’s promised performance, such benefits are not consideration under contract law, . . . or the Wistuber test.  In evaluating a contract like the Parking Agreement, analysis of adequacy of consideration for Gift Clause purposes focuses instead on the objective fair market value of what the private party has promised to provide in return for the public entity’s payment.

Id. at 349-50, ¶¶31-33, 224 P.3d at 165-66 (emphasis added).

The court used repairing a sewer line as an example.  Despite immense potential indirect benefits (avoiding disease and death) satisfying a public purpose requirement, paying $5 million to contract with one contractor for what other contractors would have done for $5000, would violate the second requirement of the Gift clause test.  “The Gift Clause prohibits subsidies to private entities, and paying far more than the fair market value for the repair plainly would be a subsidy to the contractor.”  Id. at 350, ¶35, 224 P.3d at 166.

The supreme court was very focused on what NPP was obligated to do, and not merely what it might do, or what benefits to NPP were merely conditioned upon something that NPP might, or might not, cause to happen.

The Agreement is clear–the City has agreed to pay up to $97.4 million for the non-exclusive use of some 2,980 parking garage spaces and the exclusive use of 200 park-and-ride spaces.  NPP made no other promises.

                . . . NPP has no contractual obligation to build the retail component, characterizing retail construction as “a condition precedent of the City’s obligation to pay the Use Payment and not a covenant of the Developer.”

                As the City notes, the payments for the parking spaces under the Agreement are based on the taxes generated at the development.  But the Agreement does not obligate NPP to produce a penny of tax revenue for the City.  . . .

                In short, the only consideration flowing to the City from NPP under the Parking Agreement is the right to use the parking spaces.  Under Wistuber, the relevant inquiry is whether the amount the City has agreed to pay for use of those spaces is grossly disproportionate to what it will receive.

                The Parking Agreement obligates the City to pay up to $97.4 million for the parking spaces.

Id. at 350, ¶¶36-40, 224 P.3d at 166.

The supreme court clarified the second prong of the test to be that determining whether the consideration received by the governmental body is grossly disproportionate to that paid to the private entity, the examination is based on what constitutes consideration under contract law and does not include merely indirect public benefits.

By reiterating in Wistuber that a “panoptic” view is required, we did not mean to suggest that something that is not consideration under contract law is somehow transformed into such for Gift Clause purposes.

                . . .

                In short, although neither Wistuber nor Kromko held that indirect benefits enjoyed by a public agency as a result of buying something from a private entity constitute consideration, we understand how that notion might have been mistakenly inferred from language in our opinions.

Id. at 352, ¶47-49, 224 P.3d at 168 (emphasis added).

 Cheatham v. DiCiccio, 238 Ariz. 69, 356 P.3d 814 (Ct. App. 2015), vacated CV-15-0287-PR (Ariz. Sup. Ct., filed Sept. 13, 2016).

PLEA, a police officer’s advocacy organization (union), negotiated a Memorandum of Understanding (MOU) with the City of Phoenix, providing for certain paid leave time permitting police officers to perform PLEA activities at City expense.  The MOU was renewed or renegotiated every other year.

Taxpayers sought declaratory and injunctive relief that the MOU violated the Gift Clause because the public funds used to pay the officer’s leave time did not result in any public benefit; there were no reciprocal services benefitting the City.  “The City and PLEA argue that . . . the 2012-14 MOU release time provisions had a public purpose of developing a harmonious and cooperative relationship between the City and its employees and . . . that the City received consideration that was not grossly disproportionate to its expenditure.”  ¶12.  The trial court ruled for the taxpayers and enjoined the MOU leave time provisions.  PLEA and the City appealed.

The court of appeals affirmed the injunction (although it vacated part of the order as unnecessary or inapplicable).  “Because the release time provisions do not require PLEA to perform any specific duties, however, any benefit the City received from the release time was grossly disproportionate to the City’s $1.7 million payments to PLEA. Accordingly, neither the City nor PLEA has shown that the trial court erred in holding that the release time provisions violated the Gift Clause. For these reasons, we affirm the trial court’s injunction of the 2012–14 MOU release time provisions and prohibition of the City and PLEA from having release time provisions in their MOUs, unless mandatory language obligates PLEA to perform specific duties in exchange for the release time.”  ¶1.

                  The government receives adequate consideration if it does not pay a “grossly disproportionate” amount for what it receives in return. . . .  Consideration “has a settled meaning in contract law. . . . [It] is what one party to a contract obligates itself to do (or to forbear from doing) in return for the promise of the other contracting party.” . . .   The private entity must provide the government with bargained-for consideration focusing on the “objective fair market value” of what the private party has promised to provide in return for the public funds expended. . . . The sufficiency of such consideration must be judged at the time of the transaction.

¶17 (citations omitted) (emphasis added).

In Turken, the Arizona Supreme Court made plain that the proper focus in assessing the adequacy of consideration is what the private entity “has promised to provide in return” for payments by the government. . . .  Accordingly, in Turken, the Court rejected the argument that indirect benefits, such as projected sales tax revenue, constituted adequate consideration. . . .

                . . . Unlike the detailed, mandatory contractual provisions upheld in Wistuber that specified in an enforceable manner what the association president was required to do, the 2012–14 MOU release time provisions do not require that officers in the full-time release positions perform any specific duties. Instead, the provisions provide examples about what release hours may be used for, . . . and what PLEA representatives may do, . . . . Unlike in Wistuber, no enforceable duties are specified for such efforts in the 2012–14 MOU.

                . . . Regardless, for the full-time release positions, the 2012–14 MOU simply provides a list of “[e]xamples of work performed by the release positions,” . . . with no language limiting the use of release time to these “examples” and no binding contractual language attached to these examples, such as “shall,” “must,” or “promises,” otherwise obligating PLEA to perform them in exchange for the release time.

                The 2012–14 MOU terms describing the PLEA representatives’ duties also are permissive and non-binding.

¶¶19-22 (emphasis added).  The court held that the lack of obligations supported enjoining the agreement.

 Cheatham v. DiCiccio, 240 Ariz. 314, 379 P.3d 211 (2016).

Phoenix Law Enforcement Association (“PLEA”) is a union for a category of Phoenix police officers.  Among other things, PLEA advocates for its members in contract negotiations and in representing members in judicial and quasi-judicial proceedings.  PLEA negotiated a Memorandum of Understanding (MOU) with the City of Phoenix, providing for certain paid leave time permitting police officers to perform PLEA activities at City expense.  The MOU was renewed or renegotiated every other year.

Pursuant to the MOU there are four different categories of release time:  (1) authorizing six full-time police officers to receive full pay and benefits and some annual overtime hours; (2) creating a bank of annual release time hours for other officers to be released from their police duties for certain association business, including negotiations with the City; (3) allotting annual paid leave for officers to attend PLEA events; and (4) authorizing officers to serve as legislative representatives and providing release time hours for officers performing that function to represent PLEA.  Some taxpayers sued the City challenging the  MOU release time provisions as violative of Arizona Constitution Article 9, § 7  — the Gift Clause.

After an evidentiary hearing, the superior court held there was a Gift Clause violation and entered an injunction against the MOU release time provisions.  The Arizona Court of Appeals affirmed the injunctive order.  238 Ariz. 69, 356 P.3d 814 (Ct. App. 2015).  The Arizona Supreme Court accepted review and vacated the lower court rulings.

The supreme court stated the purposes underlying the Gift Clause.  “The clause has two primary purposes – preventing the ‘depletion of the public treasury or inflation of public debt by engagement in non-public enterprise” and protecting public funds against use for “the purely private or personal interest of any individual.’” ¶9 (citation omitted).  The court also reiterated the two-pronged test for determining if there is a Gift Clause violation.  “The expenditure will be upheld if (1) it has a public purpose, and (2) the consideration received by the government is not ‘grossly disproportionate’ to the amounts paid to the private entity.” ¶10 (citation omitted).

The supreme court agreed with PLEA that the MOU and its release time was “a component of the overall compensation package negotiated between the City and PLEA on behalf of the police officers.” ¶14.  Nevertheless, the court held that such MOU benefits still were subject to satisfying the Gift Clause, but the court found the release time provisions did not constitute a Gift Clause violation because they served a public purpose (by specifying the wages, hours, and working conditions as part of the aggregate compensation package) and were supported by consideration that was not “grossly disproportionate” (because PLEA had obligations to the City under the MOU and the PLEA-member employees agreed to provide services under the terms and conditions of the MOU).  ¶¶18, 27, 33.   Two of the five justices joined in a dissenting opinion. ¶¶45-55.


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