CityNorth: With Nordstrom Gone, Phoenix Fights for the Right to Bail Out Abu Dhabi

No doubt about it: Phoenix is broke. Mayor Phil Gordon is flying to Washington to beg for federal bailout bucks so frequently, he should probably register as a lobbyist.

So it's downright bizarre that, in the midst of this nightmare, city leaders are fighting desperately to give away $97 million to wealthy investors. Never mind all the neighborhoods in this burg that have lost senior centers, bus routes, and library hours — we're hoping to give our money away to an Arab emirate, a wealthy Saudi family, and even Michael "Dude, You're Getting a" Dell.

Reading that, you might guess that I've got new details about CityNorth. You'd be correct. And if you thought this deal was infuriating before, just wait 'til you read this.

Here's the backstory, nutshell version: Phoenix agreed to give Chicago-based Thomas J. Klutznick Company half the sales tax generated at CityNorth, Klutznick's new shopping center off the Loop 101 and 56th Street, for 11 years. But the giveaway was so over the top that it inspired state legislation to stop such subsidies in the future, a lawsuit from the Goldwater Institute, and, finally, an appellate court opinion that struck down the deal in no uncertain terms.

Clearly, this one stunk. That's why it's so weird that Phoenix continues to fight to keep it. Records show that we've spent $551,229 on legal bills to defend the subsidy.

We're not done yet. In February, the City Council voted to appeal the loss to the Arizona Supreme Court. The court will decide in June whether to give the case a hearing.

But as the economy continues to flail and we learn more about the backers of CityNorth, I think the Supremes' decision may get easier.

As it turns out, we're not simply trying to give our tax dollars to some guys in Chicago. We're also trying to line the pockets of some of the wealthiest investment groups in New York City, Saudi Arabia, and Abu Dhabi.

CityNorth's developer is, in fact, Klutznick. But, as is usually the case, the financing for this project is complicated.

Records show that Klutznick is developing CityNorth with one of the nation's top real estate development firms, Related Companies. And in December 2007, Related took on its first outside investors: Goldman Sachs, MSD Capital, the Olayan Group, and Mubadala.

We've all heard of Goldman Sachs, but the others are equally affluent. MSD Capital is computer titan Michael Dell's personal investment account. The Saudi Arabia-based Olayan Group was founded by Suliman Olayan, who was 38th on Forbes' list of the world's richest when he died in 2002. And Mubadala? That's an investment fund owned by the oil-rich state of Abu Dhabi.

The world economy is complicated, and it should surprise no one that international money is backing the CityNorth project. But the list of filthy-rich investors only makes it clearer why Arizona's Constitution bars public funds from going to private entities for private purposes.

If we can't afford to keep the city pools open and the parks maintained, we have no business giving away tax dollars to Michael Dell and Goldman Sachs.

And if the people can't afford bread, why the heck should they be forced to buy the rulers of Abu Dhabi a three-layer cake?

Last December, the Arizona Court of Appeals spanked the city of Phoenix so hard, the bruises should still be there today.

As the three-judge panel explained in its unanimous decision, the populists who wrote the Arizona Constitution didn't like the citizenry being taxed to make the rich richer. Their "gift clause" decrees that neither the state nor any municipality shall "make any donation or grant by subsidy or otherwise" to private parties.

As the Supreme Court explained in 1925, the idea was "to prevent the use of public funds . . . in aid of enterprises apparently devoted to quasi- public purposes but actually engaged in private business."

The "quasi-public" purpose on the CityNorth subsidy is tax dollars. The city has argued that its giveaway will allow developers to sign quality retail outlets (read: Nordstrom) that would otherwise land in Scottsdale.

Even if Phoenix must give away a staggering sum, the argument goes, we'll still end up with more revenue than we'd have without the development.

But that's not necessarily true. CityNorth sits in one of the toniest areas in Phoenix. Something commercial would surely have been built there, even without a subsidy.

Indeed, as the appellate judges noted, by the time Phoenix officials began negotiating with Klutznick, "the major infrastructure for the area had already been constructed." Doesn't sound like the fields would lie fallow without government aid.

And, as it turns out, even the promise of a massive infusion of government money can do only so much. Last week, the Phoenix Business Journal reported that Nordstrom is officially pulling out of the project. Company officials cited the bad economy.

Of course, the Phoenix tax giveaway wasn't predicated on Nordstrom's presence. Staffers know that to get around the gift clause, they have to pretend they aren't just handing over tax dollars to a developer. Typically, that means paying for sewer lines or other infrastructure.

But because this project was so far under way by the time negotiations began, the city had to couch its donation in convoluted terms: The city would pay for a parking garage that could be used by park-and-ride transit users.

Staffers barely bothered to pay lip service to the pretext. In its agreement with Klutznick, the city failed to ensure that public transit users would get prime spaces — or even dedicated ones. As the appellate judges wrote, "There may be times when guests, customers, employees, vendors, and suppliers of the shopping center will occupy all the spaces. The agreement also provides that CityNorth has the right to change which spaces are designated for city use."

In other words, we pay for a parking garage; CityNorth's owners get to do whatever they like with it.

Fortunately, the appellate justices saw through the smokescreen. "Simply asserting that [the city's tax remittances] are made to obtain 'public parking' does not mean the payments will serve a public purpose," they noted. "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."

As the justices concluded, "We think these payments are exactly what the gift clause was designed to prohibit."

Tom Simplot was one of two opposition votes to the CityNorth subsidy when it was up for approval in 2007 and, more recently, the only one to vote against appealing the case to the Supreme Court.

Simplot's been amused by news coverage suggesting that worthy public programs could be in trouble if the decision stands. (The Arizona Republic, bizarrely, wrote a story suggesting that cities could no longer give block grants to neighborhood groups in light of the CityNorth decision — as if helping a neighborhood has anything in common with giving zillions to developers.)

The hysteria is coming from the top, Simplot says. The city's attorneys "will tell you the sky is falling, that the world is going to end if we allow this decision to stand.

"Well, I for one read the opinion and, while I'm not an expert on this, what I read was the court's frustration with the extent of this incentive," he says. "They were saying, 'You guys went too far over the line. Somebody needs to bring you back.'"

Simplot has it exactly right. The appellate verdict doesn't strike down all subsidies; it strikes down this subsidy. And it strikes down this one for good reason. The city went too far. It gave away too much.

Don't take my word for it. Talk to Scottsdale Mayor Jim Lane. He's asking his city council next week to consider a "friend of the court" brief to the Supreme Court.

It's a gutsy move, because Scottsdale would be filing in opposition to Phoenix. It would be asking the court to let the verdict stand, to declare the subsidy unconstitutional.

Scottsdale has figured out what Phoenix refuses to admit: Giving away so much money on a deal this silly helps no one — except the developers and their investors, that is.

The sky really is falling in some parts of this city. But that has nothing to do with Klutznick and his backers not getting their payday. This giveaway was a bad idea when times were flush; now it's pure idiocy.

The appeals court gave us a get-out-of-jail-free card. Only in Phoenix would we rather spend tens of thousands rotting in our cell than use it.

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Sarah Fenske
Contact: Sarah Fenske