Appeals court overturns $97.4 million CityNorth subsidy

By Linda Bentley | December 24, 2008

'Under these circumstances, we think these payments are exactly what the gift clause was intended to prohibit’
PHOENIX – In July 2007, Attorney Clint Bolick, litigation director for the Goldwater Institute’s Scharf-Norton Center for Constitutional Litigation, filed a lawsuit on behalf of six small business owners against the city of Phoenix for entering into an agreement with the Thomas J. Klutznick Company to build 3,180 parking spaces at the developer’s CityNorth retail center in north Phoenix, in exchange for $97.4 million in taxpayer subsidies, claiming it violated the gift clause of the Arizona Constitution.

The business owners represented were: Meyer Turken, owner of Turken Industrial Properties; Kenneth D. Cheuvront, owner of Cheuvront Wine and Cheese Cafe and Cheuvront Construction; Zul Gilliani, who owns an ice cream shop at Paradise Valley Mall; James Iannuzo, who owns Sign-a-Rama; Kathy Rowe who owns Music Together; and Justin Shafer, owner of Hava Java.

In April 2008 Maricopa County Superior Court Judge Robert Miles granted summary judgment in favor of the city of Phoenix and Klutznick.

A press release issued after the ruling quoted Klutznick’s counsel Lisa Hauser as saying, “This is the ruling we were expecting. The Goldwater Institute’s suit had no legal merit,” calling its claims “more media hype than legal substance.”

Phoenix Mayor Phil Gordon said the ruling “reaffirms that Phoenix acted correctly and smartly in making development pay for itself.”

Phoenix Vice Mayor Peggy Neely said she was pleased with the court’s ruling and stated, “CityNorth will generate $1.9 billion in annual economic activity and 19,000 new jobs to benefit the city and its residents.”

Neely also claimed no tax dollars were at risk.

Klutznick’s Vice President John Klutznick stated, “We are pleased that the Goldwater Institute’s legal claims were found to be as irresponsible as their public statements,” and said the project was the realization of more than 20 years of planning and investment.

While Miles concluded the monetary value to be received by the public would far exceed the cost to the taxpayers, there is no such public benefit exception to the gift clause ban, which states: “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 …”

Bolick said Miles’ ruling created such a gaping loophole in the Arizona Constitution “you could drive a Mack truck through it,” and promptly filed an appeal.

Following oral arguments on Nov. 25, the appeals panel took the matter under advisement.
On Tuesday, Dec. 23, the court issued its opinion, which found “the payments to CityNorth are prohibited by the gift clause of the Arizona Constitution, except for the payments made to set aside 200 ‘park and ride’ parking spaces.”

In a unanimous opinion, written by Judge Patrick Irvine, joined by Judge Lawrence Winthrop and Judge Philip Hall, the court concluded, “The payments directly promote CityNorth’s private purposes, with only indirect benefits to the city. Under these circumstances, the parking provisions of the agreement unduly promote private interests and violate the gift clause.”

Bolick said, "This ruling vindicates this important provision of the Arizona Constitution. No longer will cities and towns be able to give away our tax dollars to pay private businesses to pursue a profit … tax dollars should be paying for essential services, not for corporate subsidies."

Irvine noted the Arizona Supreme Court’s recognition of several purposes for the gift clause, which included “avoiding the depletion of the public treasury or inflation of the public debt by engagement in nonpublic enterprise,” as 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.”

Explaining the gift clause’s history, the Arizona Supreme Court stated, “It represents the reaction of public opinion to the orgies of extravagant dissipation of public funds by counties, townships, cities, and towns … and it was designed primarily to prevent the use of public funds raised by general taxation in aid of enterprises apparently devoted to quasi public purposes, but actually engaged in private business.”

According to the agreement, the city wouldn’t begin making payments of 50 percent of the sales tax generated by CityNorth to Klutznick until at least eighty-five percent of the 1.2 million square feet of the project’s retail space and at least 3,180 parking spaces were completed. Payments would continue for no more than eleven years and three months or until $97.4 million is paid, whichever occurs first.

While all parties seemed to agree the 200 park and ride spaces served a public use allowable under the gift clause, Irvine wrote, “This leaves us with the remaining 2,980 parking spaces that the city asserts it has obtained for free use by the public.”

However, because CityNorth reserved the right to control parking by prohibiting overnight use, vehicles other than passenger vehicles and use of carpool spaces on weekdays from 5 a.m. to 7 p.m. and other regulations, the court concluded the payments by the city were not intended to obtain parking spaces for use by the city but rather for use by others engaging in their own private activities.

“Simply asserting payments are made to obtain ‘public parking’ does not mean the payments serve a public purpose,” wrote Irvine, adding, “We must look at who will actually use the parking spaces and for what reasons. In this case, the ‘public’ that will use the spaces are actually the private customers of CityNorth, who will be parking their cars so that they can do business with CityNorth’s retail tenants.”

Responding to the city’s attempts to justify paying nearly $100 million in public funds to a private party to build a shopping center, Irvine wrote, “Under these circumstances, we think these payments are exactly what the gift clause was intended to prohibit.”

Noting the promotion of economic development, increased employment, an urban core, and an enhanced tax base were legitimate purposes for the city to pursue, Irvine said the court “must also examine the means by which the city seeks to further those purposes. Even if the potential benefits are great, they are not sufficient to overcome the prohibition in the gift clause against donations or subsidies to private persons.”