On February 8 the Arizona Supreme Court issued a major new gift clause decision, linked here.
To encourage a private university to open a campus in Peoria, the City of Peoria provided various incentives totaling $2.6 million. These were challenged as a violation of the gift clause. The trial court and the Court of Appeals upheld the validity of the City’s expenditures.
In its February 8 Opinion in Schires v. Carlat, the Supreme Court held that the City’s payments violated the gift clause. Under existing law, the gift clause requires public expenditures to satisfy two tests: (1) the existence of a public purpose, and (2) adequacy of consideration.
While reaffirming that cities have broad discretion to identify permissible public purposes, the court narrowed the scope of what counts as adequate consideration under the gift clause. In essence, only “direct” benefits can be counted as consideration for public incentives. This includes goods and services that are provided by the private party, as well as the improvement of municipally-owned property. In contrast, indirect benefits are “valueless” under the gift clause. These include a private party’s expenditures to operate or improve its own business, as well as the creation of tax revenue and generalized economic benefits. In essence, the gift clause will now require a close nexus between public expenditures and benefits. Moreover, the Supreme Court emphasized that cities should receive no deference in their calculation of benefits—courts are free to make their own determination.
This new opinion is effective immediately. It will necessarily affect future discussions about government incentives, including how they are structured and documented. Pre-existing contracts should be protected from challenge for various reasons, including the statute of limitations.
If you have any questions about how this may affect you or your business, please contact Cameron Artigue.
