City Hall

CityNorth Subsidy Sent Back to Court of Appeals

The Arizona Supreme Court today unanimously reversed an appellate court ruling on the CityNorth case, saying it erred when it deemed the city of Phoenix's $97 million subsidy of the shopping center unconstitutional.

But the unanimous decision hardly settles the issue once and for all -- and is hardly a victory for the city.

Instead, it suggests that the appeals court justices erred not in logic, but thanks to some confusing legal precedents. While it allows the subsidy to stand for now, it sends the case back to the appellate court to weigh other unresolved constitutional questions.

And it establishes a precedent that, in the future, deals like CityNorth will not be permitted -- not unless the city can show that, for example, the parking garage at CityNorth really worth $97 million in tax incentives.

A little background: Phoenix promised developer Thomas J. Klutznick Company half of all sales tax revenue generated by the luxury shopping center -- up to $97 million in its first 11 years.

Technically, though, we weren't just giving the money to the developer; the city has always justified its giveaway by saying it paid for a parking garage, which city residents could use while utilizing a municipal park-and-ride.

But no spaces were earmarked for park-and-ride patrons. Their best use was probably just shoppers at CityNorth -- raising the question of whether the city was really paying millions for the garage, or whether it was just trying to help Klutznick lure luxury retailers to come to his development instead of rival projects in Scottsdale.

Landing those retailers, of course, would help the city's revenue stream -- and when city officials speak frankly, they've justified the tax giveaway in those terms.

But today's Supreme Court ruling appears to strike down just that kind of thinking.

Indeed, in today's unanimous decision, penned by Justice Andrew D. Hurwitz, the five Supreme Court judges say that indirect public benefits -- like, apparently, beating out Scottsdale for the sale tax from Bloomingdales -- aren't enough to justify a giveaway to a private party.

Previous courts who've held that, they say, have misread precedent.

"In short, although neither [of two Supreme Court precedents] 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," they say. Now that they've clarified, the justices seem to be saying, the appellate court must examine whether the direct benefit the city of Phoenix gets -- aka. those parking spaces -- is enough to justify the giveaway.

For the record, the Supreme Court suggests that the parking garage is not, likely, benefit enough to justify such a tax giveaway.

"We find it difficult to believe that the 3,180 parking places have a value anywhere near the payment potentially required under the Agreement," its opinion finds. "The Agreement therefore quite likely violates the Gift Clause."

But, oddly, the Supreme Court declined to strike down the subsidy. It sent the case back to the appellate court, saying the trial-court judge relied on what was precedent at the time, and that was okay. They seem to be saying their new clarified rules for tax giveaways only matter in future cases.

It left the appellate court to consider only a few constitutional issues that it originally set aside.

Still, that seems to spell a victory for the Goldwater Institute.

The libertarian think-tank brought the lawsuit in question, challenging the subsidy on constitutional grounds on behalf of local business owners. Maricopa County Superior Court Judge Robert Miles originally issued summary judgment for the city.

The appellate court reversed Judge Miles in 2008, ruling for the Goldwater Institute. The city and the developers then appealed to the state supreme court.

In their long-awaited 5-0 decision, the justices found that the appellate court wrongly focused on the question of whether the CityNorth subsidy "unduly promotes private interests" -- meaning that of the developer.

The supreme court justices felt that legal precedent compelled them to ask a different question, according to Justice Hurwitz's opinion. That question: "Does the expenditure, even if for a public purpose, amount to a subsidy because '[t]he public benefit to be obtained from the private entity as consideration . . . is far exceeded by the consideration being paid by the public'?"

Here's what Hurwitz's opinion had to say about that question: 

We adhere to that straightforward approach today. 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.

So the parking garage is now front and center. Is the $97 million the city offered in exchanged "grossly disproportionate"? The court seems to think not -- and even though it didn't strike down the subsidy today, it suggests that future such subsidies are off the table.

Incidentally, while the constitutional questions here are huge, it's somewhat fitting they sidestep CityNorth itself.

That's because, thanks to the terrible economy, CityNorth's subsidy might be moot anyway. The project is a virtual ghost town, and one in bankruptcy proceedings, to boot. Even if the appellate court ultimately rules for the developers and lets the subsidy stand, it may be too late for the development to get anything close the $97 million once promised by the city, simply because the project isn't generating enough tax revenue to get there.

Still, for the sake of future projects, we're glad to see the court grappling with these questions. Cities should welcome the clarity the court appears to be offering for future projects -- even if it's bad news for anyone trying to build the Taj Mahal of parking garages and get a subsidy to do it.

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Sarah Fenske
Contact: Sarah Fenske