Arizona Supreme Court says cities must benefit from subsidies

PHOENIX — Arizona cities, counties and the state Legislature must ensure the public actually receives a real benefit in exchange for subsidies the government provides to lure businesses or they violate the state constitution’s gift clause, the state Supreme Court ruled Monday.

In a case that has wide ramifications for governments that have increasingly felt compelled to cut deals to lure new business, the high court said that providing subsidies must do more than provide greater economic activity, they must bring the city some real return on its investment or they are illegal.

The case decided Monday involved a $2.6 million subsidy the city of Peoria provided to the private Indiana-based Huntington University to open a campus in the city’s Arrowhead district.

Some of the money went to Huntington and some to the private company, Arrowhead Equities, that renovated an existing building to meet its needs.

Peoria had adopted an economic development plan designed to lure specific businesses into the city, including education providers. The West Valley city agreed to a deal with Huntington in 2015 where the university would get subsidies for opening a campus and agreeing not to do so anywhere else in the state.

But Peoria got nothing more than greater business activity from its investment, neither a stake in the buildings its money helped renovate nor other consideration.

The high court, in a unanimous opinion written by Vice Chief Justice Ann Timmer, said that doesn’t cut it.

“In effect, HU and Arrowhead’s promises are no different than hamburger chain promising to operate in Peoria in exchange for monetary incentives paid by the City in hope of stimulating the local economy,” Timmer wrote.

“A private business will usually, if not always, generate some economic impact and, consequently, permitting such impacts to justify public funding of private ventures would eviscerate the Gift Clause.”

The case was brought by the Goldwater Institute on behalf of a group of taxpayers.

“Today’s unanimous ruling sends a powerful reminder to government officials across the state that they can’t spend taxpayers’ hard-earned money on sweetheart deals for select private businesses, but can only purchase goods and services that truly benefit the public,” the Goldwater Institute said in a statement.

The city said in a statement that is has long championed economic development and the agreements it had with Huntington and Arrowhead “were developed using clearly defined performance criteria that were based on previously established law and legal precedents regarding the gift clause.”

That’s no longer the case, the city acknowledged.

“While this disappointing ruling may have a chilling effect on economic development programs across the state, the city will continue to ensure it is promoting positive economic development efforts within the legal framework as clarified by the court,” the city said.