SUPREME COURT OF ARIZONA
En Banc
MEYER TURKEN; KENNETH D. ) Arizona Supreme Court
CHEUVRONT; JAMES IANNUZO; JUSTIN ) No. CV-09-0042-PR
SHAFER; ZUL GILLANI; and KATHY )
ROWE, ) Court of Appeals
) Division One
Plaintiffs/Appellants/ ) No. 1 CA-CV 08-0310
Cross-Appellees, )
v. ) Maricopa County
) Superior Court
PHIL GORDON, in his official ) No. CV2007-013766
capacity as Mayor of the City of )
Phoenix; DAVE SIEBERT, in his )
official capacity as member of )
the Phoenix City Council and ) O P I N I O N
Vice Mayor; PEGGY NEELY, in her )
official capacity as member of )
the Phoenix City Council; PEGGY )
BILSTEN, in her official )
capacity as member of the )
Phoenix City Council; TOM )
SIMPLOT, in his official )
capacity as member of the )
Phoenix City Council; CLAUDE )
MATTOX, in his official capacity )
as member of the Phoenix City )
Council; GREG STANTON, in his )
official capacity as member of )
the Phoenix City Council; )
MICHAEL JOHNSON, in his official )
capacity as member of the )
Phoenix City Council; FRANK )
FAIRBANKS, in his official )
capacity as City Manager of the )
City of Phoenix; and CITY OF )
PHOENIX, )
)
Defendants/Appellees, )
and )
)
NPP CITYNORTH, L.L.C., )
)
Intervenor/Defendant-Appellee/ )
Cross-Appellant. )
__________________________________)
Appeal from the Superior Court in Maricopa County
The Honorable Robert E. Miles, Judge
AFFIRMED IN PART
________________________________________________________________
Opinion of the Court of Appeals, Division One
220 Ariz. 456, 207 P.3d 709 (App. 2008)
VACATED AND REMANDED
________________________________________________________________
SCHARF-NORTON CENTER FOR CONSTITUTIONAL LITIGATION Phoenix
By Carrie Ann Sitren
Clint Bolick
Attorneys for Meyer Turken, Kenneth D. Cheuvront,
James Iannuzo, Justin Shafer, Zul Gillani, and Kathy Rowe
FENNEMORE CRAIG, P.C. Phoenix
By Timothy Berg
Andrew M. Federhar
Theresa Dwyer-Federhar
Scott J. Shelley
And
GARY VERBURG, PHOENIX CITY ATTORNEY Phoenix
By Gary Verburg, City Attorney
Attorneys for Phil Gordon, Dave Siebert, Peggy Neely, Peggy
Bilsten, Tom Simplot, Claude Mattox, Greg Stanton, Michael
Johnson, Frank Fairbanks, and City of Phoenix
GAMMAGE & BURNHAM, P.L.C. Phoenix
By Lisa T. Hauser
Grady Gammage, Jr.
Cameron C. Artigue
Heather J. Boysel
Attorneys for NNP CityNorth, L.L.C.
SHERMAN & HOWARD, L.L.C. Phoenix
By Gregory W. Falls
Attorneys for Amicus Curiae National Federation of Independent
Business Small Business Legal Center
2
MARISCAL, WEEKS, MCINTYRE & FRIEDLANDER, P.A. Phoenix
By Gary L. Birnbaum
Scot L. Claus
Attorneys for Amicus Curiae Valley Partnership
DAVID R. MERKEL Tempe
By David R. Merkel
Attorney for Amicus Curiae League of Arizona Cities and Towns
TERRY GODDARD, ARIZONA ATTORNEY GENERAL Phoenix
By Rex C. Nowlan, Acting Section Chief
Charles A. Grube, Senior Agency Counsel
Attorneys for Amicus Curiae Kent Ennis
GLENN J. GIMBUT, CITY ATTORNEY San Luis
By Glenn J. Gimbut, City Attorney
Attorney for Amicus Curiae City of San Luis
BARBARA LAWALL, PIMA COUNTY ATTORNEY Tucson
By Regina L. Nassen, Deputy Pima County Attorney
Attorneys for Amicus Curiae Pima County Board of Supervisors
KIELSKY, RIKE & ELGART, PLLC Mesa
By Michael Kielsky
Christopher Rike
Attorneys for Amici Curiae Arizona Chapter of Americans
for Prosperity, Arizona Free Enterprise Club, Valley
Business Owners (and Concerned Citizens), Inc.,
and Art Segal
ARIZONA CENTER FOR LAW IN THE PUBLIC INTEREST Phoenix
By Timothy M. Hogan
Joy E. Herr-Cardillo
Attorneys for Amicus Curiae Arizona Center for Law
in the Public Interest
CRAIG D. TINDALL, GLENDALE CITY ATTORNEY Glendale
By Craig D. Tindall, City Attorney
Paul M. Li, Assistant City Attorney
Christina A. Parry, Assistant City Attorney
Attorneys for Amicus Curiae City of Glendale
DEBORAH W. ROBBERSON, SCOTTSDALE CITY ATTORNEY Scottsdale
By Robert B. Washburn, Deputy City Attorney
And
3
TOWN OF ORO VALLEY Oro Valley
By Tobin Rosen, Town Attorney
Attorneys for Amici Curiae City of Scottsdale and
Town of Oro Valley
________________________________________________________________
H U R W I T Z, Vice Chief Justice
¶1 The issue for decision is whether an agreement by the
City of Phoenix to pay a developer as much as $97.4 million for
the use of garage parking spaces violates the Gift Clause, Ariz.
Const. art. 9, § 7. Although we conclude that the agreement
quite likely violates the Gift Clause, because language in our
previous opinions could well have led the City to conclude that
the agreement was constitutional, we today clarify our Gift
Clause jurisprudence and apply our decision prospectively only.
I.
A.
¶2 CityNorth is the proposed commercial core of Desert
Ridge, a Phoenix master-planned community. CityNorth is
projected to contain office space, luxury hotels, residences,
several parking garages, and more than one million square feet
of high-end retail space.
¶3 CityNorth’s developer, NPP CityNorth L.L.C. (“NPP”),
approached the City of Phoenix, claiming it could not complete
the project as planned without financial assistance. The City
became concerned that absent such aid, the development might not
4
contain the full proposed retail component and potential sales
tax revenues would be lost, perhaps to neighboring Scottsdale.
¶4 In response to NPP’s request, the City Council adopted
Ordinance No. S-33743, which authorized the City to enter into a
“Parking Space Development and Use Agreement” (the “Parking
Agreement”) with NPP. The Ordinance contained findings, as
required by A.R.S. § 9-500.11(D) (2008), that tax revenue
generated by the CityNorth project would exceed the amount to be
paid to NPP under the Agreement and that without a tax
incentive, the project would not locate in the City in the same
time, place, or manner. The Ordinance provided, as required by
§ 9-500.11(H), that the City not enter into the Parking
Agreement until these findings were independently verified.
¶5 After a consultant verified the findings, the City and
NPP executed the Parking Agreement. The Agreement required NPP
to set aside, for 45 years, 2,980 parking garage spaces for the
non-exclusive use of the general public and 200 spaces for the
exclusive use of drivers participating in commuting programs.
Payments by the City to NPP were conditioned on the construction
of both the garage spaces and at least 1.02 million square feet
of retail space. The City was thereafter obligated to make
annual payments to NPP equal to half of certain privilege taxes
5
generated at the development, up to $97.4 million, for a period
up to eleven years and three months.1
B.
¶6 In August 2007, Meyer Turken and several other Phoenix
taxpayers and business owners (collectively, “Turken”) sued the
City to enjoin payments to NPP under the Parking Agreement.
Turken alleged that the Agreement violated the Gift Clause,
which provides:
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, or become a subscriber to, or a
shareholder in, any company or corporation, or
become a joint owner with any person, company, or
corporation . . . .
Ariz. Const. art. 9, § 7. Turken also alleged that the Parking
Agreement violated the Equal Privileges and Immunities Clause,
Ariz. Const. art. 2, § 13, and the Special Laws Clause, Ariz.
Const. art. 4, pt. 2, § 19.
¶7 The superior court granted summary judgment to the
defendants. In rejecting Turken’s Gift Clause arguments, the
1
The taxes specified in the Parking Agreement are
“construction transaction privilege taxes” and taxes “directly
related to the business activities of amusement, commercial
property rental, hotels and motels, job printing, publishing,
rental of tangible personal property, residential property
rental, restaurants and bars, retail sales, and use taxes.”
6
court relied upon the two-pronged test set forth in Wistuber v.
Paradise Valley Unified School District, 141 Ariz. 346, 687 P.2d
354 (1984). Wistuber provides that a governmental expenditure
does not violate the Gift Clause if (1) it has a public purpose,
and (2) in return for its expenditure, the governmental entity
receives consideration that “is not so inequitable and
unreasonable that it amounts to an abuse of discretion, thus
providing a subsidy to the private entity.” Id. at 349, 687
P.2d at 357 (internal quotations and citations omitted). The
superior court found that payments to NPP would serve a public
purpose and counted the anticipated increase in tax revenues
from the CityNorth development as part of the relevant
consideration.
¶8 The court of appeals reversed. Turken v. Gordon, 220
Ariz. 456, 207 P.3d 709 (App. 2008). That court read Kromko v.
Arizona Board of Regents, 149 Ariz. 319, 718 P.2d 478 (1986), as
engrafting a third requirement onto the Wistuber test: Under
“the realities of the transaction,” the challenged governmental
expenditure must not “unduly promot[e] private interests.”
Turken, 220 Ariz. at 467 ¶ 33, 207 P.3d at 720. The court of
appeals identified six questions as pertinent to that inquiry,
id. at 467-68 ¶ 33, 207 P.3d at 720-21, and concluded that
7
payments for the 2,980 parking spaces not reserved for commuters
violated the Gift Clause, id. at 472 ¶ 51, 207 P.2d at 725.2
¶9 The City and NPP petitioned for review. We granted
review because interpretation of the Gift Clause is an issue of
statewide importance. We have jurisdiction under Article 6,
Section 5, Clause 3, of the Arizona Constitution and A.R.S.
§ 12-120.24 (2003).
II.
A.
¶10 The records of Arizona’s constitutional convention
provide little guidance in interpreting the Gift Clause. See
John S. Goff, The Records of the Arizona Constitutional
Convention of 1910, at 483 (1990) (mentioning the Gift Clause
only to note a minor grammatical correction). Because our Gift
Clause was taken nearly verbatim from Montana’s constitution,
our early cases looked to that state’s decisions. In one such
case, this Court noted:
[The Gift Clause] represents the reaction of public
opinion to the orgies of extravagant dissipation of
public funds by counties, townships, cities, and towns
in aid of the construction of railways, canals, and
other like undertakings during the half century
preceding 1880, and it was designed primarily to
prevent the use of public funds raised by general
2
The court of appeals did not reach Turken’s other
constitutional arguments. Turken, 220 Ariz. at 461 ¶ 9 n.1, 207
P.3d at 714 n.1.
8
taxation in aid of enterprises apparently devoted to
quasi public purposes, but actually engaged in private
business.
Day v. Buckeye Water Conservation & Drainage Dist., 28 Ariz.
466, 473, 237 P. 636, 638 (1925) (quoting Thaanum v. Bynum
Irrigation Dist., 232 P. 528, 530 (Mont. 1925)).
¶11 Early Gift Clause challenges often also attacked
public expenditures under Article 9, Section 1 of the Arizona
Constitution (the “Tax Clause”), which requires that “all
taxes . . . shall be levied and collected for public purposes
only.” See, e.g., Proctor v. Hunt, 43 Ariz. 198, 201, 29 P.2d
1058, 1059 (1934) (“It is, of course, axiomatic that money
raised by public taxation is to be collected for public purposes
only, and can only legally be spent for such purposes and not
for the private or personal benefit of any individual.”) (citing
both the Gift Clause and the Tax Clause). Although the Gift
Clause does not itself mention public purpose, the public
purpose requirement has long been a fixture of our Gift Clause
jurisprudence, perhaps because Gift Clause challenges typically
involve the expenditure of tax funds. See City of Glendale v.
White, 67 Ariz. 231, 238, 194 P.2d 435, 440 (1948), overruling
City of Phoenix v. Michael, 61 Ariz. 238, 148 P.2d 353 (1944).
¶12 Our cases interpreting the Gift and Tax Clauses have
struggled to define “public purpose.” In a seminal Tax Clause
case, we noted that “[p]ublic purpose is a phrase perhaps
9
incapable of definition, and better elucidated by examples.”
City of Tombstone v. Macia, 30 Ariz. 218, 222, 245 P. 677, 679
(1926). This language is approvingly cited in subsequent Gift
Clause cases. See, e.g., White, 67 Ariz. at 236, 194 P.2d at
438-39; Maricopa County v. State, 187 Ariz. 275, 280, 928 P.2d
699, 704 (App. 1996).
¶13 Our Gift Clause jurisprudence has also emphasized that
“the term ‘public purpose’ . . . changes to meet new
developments and conditions of times.” White, 67 Ariz. at 236,
194 P.2d at 438. Our cases therefore find public purposes in
many contexts that might not have been familiar to our
Constitution’s framers. For example, in rejecting a challenge
to expenditures for a slum clearance program, we noted that
[i]f it be borne in mind that slum clearance projects
are means adopted by society for self-protection
against crime and disease, and that money spent to
prevent or eradicate these enemies is for the public
good and general welfare, even though the effect is
felt by a given class more than by the community at
large, it will be realized the sums spent are not a
gift or loan to anyone but an expenditure in the
interests of the general public.
Humphrey v. City of Phoenix, 55 Ariz. 374, 387, 102 P.2d 82, 87
(1940); accord City of Phoenix v. Superior Court of Maricopa
County, 65 Ariz. 139, 146, 175 P.2d 811, 815 (1946) (citing
Humphrey in upholding a program to build temporary housing for
military veterans). Subsequent cases have taken a similarly
expansive view of public purpose. E.g., Indus. Dev. Auth. of
10
Pinal County v. Nelson, 109 Ariz. 368, 509 P.2d 705 (1973)
(rejecting Gift Clause attack on issuance of industrial
development bonds by public agency); Town of Gila Bend v. Walled
Lake Door Co., 107 Ariz. 545, 490 P.2d 551 (1971) (finding
public purpose in constructing water line serving only one
factory).
¶14 Our cases also emphasize that although determining
whether governmental expenditures serve a public purpose is
ultimately the province of the judiciary, courts owe significant
deference to the judgments of elected officials. For example,
we noted in White that the city council “should have some
latitude” in determining whether membership in the Arizona
Municipal League would provide public benefit. 67 Ariz. at 237,
194 P.2d at 439. Wistuber likewise stated that “courts must not
be overly technical and must give appropriate deference to the
findings of the governmental body.” 141 Ariz. at 349, 687 P.2d
at 357.
B.
¶15 Montana courts had concluded by the early 1970’s that
a public purpose alone satisfied their Gift Clause. See, e.g.,
Fickes v. Missoula County, 470 P.2d 287, 291 (Mont. 1970). In
1973, a panel of our court of appeals took the same position.
Heiner v. City of Mesa, 21 Ariz. App. 58, 64, 515 P.2d 355, 361
(1973).
11
¶16 This approach, however, threatened to reduce the Gift
Clause to something of a redundancy, because the Tax Clause
proscribes use of tax revenues for anything but a public
purpose.3 Moreover, reliance on public purpose alone left open
the possibility that government payments made under a contract,
even if for a public purpose, might so greatly exceed the
consideration received in return as to amount to a subsidy to a
private entity. For example, a city’s purchase of a garbage
truck would undoubtedly serve a public purpose. Purchasing the
truck for twenty times its fair value, however, would constitute
a subsidy to the seller.
¶17 A second panel of the court of appeals rejected the
Heiner approach in City of Tempe v. Pilot Properties, Inc., 22
Ariz. App. 356, 527 P.2d 515 (1974). Pilot Properties held that
in evaluating whether a contract between a municipality and
private party violates the Gift Clause, a court must find not
only a public purpose, but also assess whether “the
consideration received by the city . . . is so inequitable and
3
Because the Montana courts had construed that state’s gift
clause to permit any expenditures made for a public purpose, the
framers of the revised Montana Constitution omitted the clause
as unnecessary in light of other constitutional provisions
limiting public expenditures to public purposes. Montana
Legislature, Montana Constitutional Convention 1971-1972, at 583
(1979), available at http://montanacourts.org/content/
library/mt_cons_convention/vol2.pdf.
12
unreasonable that it amounts to an abuse of discretion,” thus
constituting a forbidden “gift or donation by way of a subsidy.”
Id. at 363, 527 P.2d at 522 (internal quotations and citations
omitted).
¶18 Wistuber resolved the conflict between Heiner and
Pilot Properties. Wistuber involved an agreement by a school
district to relieve the president of the teachers’ union from
classroom responsibilities while continuing to pay a portion of
her salary. 141 Ariz. at 348, 687 P.2d at 356. The agreement
was intended to provide sufficient time for the union president
to handle certain employee matters for the district. Id.
Although holding that the arrangement served a public purpose,
we rejected the notion that this ended the analysis. Id. at
348-49, 687 P.2d at 356-57. Rather, citing Pilot Properties, we
stated that although “[t]he public benefit to be obtained from
the private entity as consideration for the payment or
conveyance from a public body may constitute a ‘valuable
consideration,’” the Gift Clause is “violated if the value to be
received by the public is far exceeded by the consideration
being paid by the public.” Id. at 349, 687 P.2d at 357. We
found the consideration adequate in Wistuber because the duties
imposed on the union president under the challenged agreement
were “substantial, and the relatively modest sums required to be
13
paid by the District not so disproportionate as to invoke the
constitutional prohibition.” Id. at 350, 687 P.2d at 358.
C.
¶19 The opinion below concluded that “Wistuber did not
adopt [a] definitive two-prong test.” Turken, 220 Ariz. at 467
¶ 32, 207 P.3d at 720; see also id. at 466 ¶ 27, 207 P.3d at 719
(“[W]e conclude that the supreme court itself did not adopt that
test.”). The court of appeals focused on our statement in
Kromko that the Gift Clause mandates that “[p]ublic 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.” Id. at 462 ¶ 14, 207 P.3d at 715 (quoting
Kromko, 149 Ariz. at 321, 718 P.2d at 480). The court of
appeals interpreted Kromko as mandating a third inquiry: Do
“the means chosen by [the] public body to achieve a public
purpose violate the Gift Clause by unduly promoting private
interests”? Turken, 220 Ariz. at 467 ¶ 33, 207 P.3d at 720.
¶20 Although the language quoted from Kromko reflects a
core Gift Clause principle, that case did not modify the
Wistuber test. The language originated from Walled Lake Door,
107 Ariz. at 549, 490 P.2d at 555, which preceded Wistuber.
More importantly, our public purpose analysis in Kromko did not
turn on whether a governmental action “unduly” promoted private
interests. Rather, in concluding that the transfer of the
14
university hospital from the Board of Regents to a nonprofit
corporation served a public purpose, we focused on the existence
of public benefits, such as the corporation’s promise to
continue to operate the facility as nonprofit hospital open to
the public. Kromko, 149 Ariz. at 321, 718 P.2d at 480. We also
noted that the Board of Regents retained extensive control over
the corporation and that, upon corporate dissolution, the
hospital reverted to the Board. Id.
¶21 In focusing on whether a public expenditure “unduly
promot[es] private interests,” the opinion below effectively
adopted Justice Cameron’s Wistuber dissent, which proposed a
“primary/incidental benefit” Gift Clause test, forbidding
transactions in which the private entity is the primary
beneficiary. Wistuber, 141 Ariz. at 352, 687 P.2d at 360
(Cameron, J., dissenting); see Turken, 220 Ariz. at 469-70 ¶ 42,
207 P.3d at 722-23 (finding the Parking Agreement invalid
because it will “directly promote CityNorth’s private purposes,
with only indirect benefits to the City”). In Wistuber,
however, this Court rejected that approach in favor of a simpler
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”? 141 Ariz. at
349, 687 P.2d at 357. Kromko took a similar approach, analyzing
15
the adequacy of consideration issue only after finding the
requisite public purpose. 149 Ariz. at 321-22, 718 P.2d at 480-
81.
¶22 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.4 When government payment is grossly disproportionate
to what is received in return, the payment violates the Gift
Clause. We therefore analyze whether the Parking Agreement
violates the Gift Clause under the two-pronged Wistuber test.
III.
A.
¶23 No party questions that payments by the City under
the Parking Agreement would serve a public purpose. The parties
agree that providing parking is a legitimate public purpose and
that the City could have erected a parking structure of its own
without violating the Gift Clause. See Walled Lake Door, 107
Ariz. at 549-50, 490 P.2d 555-56 (rejecting Gift Clause
4
Wistuber did not, nor do we today, deal with non-
contractual public expenditures, such as direct assistance to
the needy. In such circumstances, the private party does not
promise to do anything in return, and there thus is no occasion
to analyze adequacy of consideration.
16
challenge because the municipality retained ownership of water
line). It follows that, rather than building a garage, the City
may instead pay for spaces inside the CityNorth garages for
public use.
¶24 The City contends that the Parking Agreement also
serves several indirect public purposes. It argues that because
NPP may have been unable to complete its planned retail
component absent the Agreement, the transaction will serve to
increase the City’s tax base. The City also asserts that the
Agreement will produce denser development, decreased pollution,
and employment opportunities for city residents.
¶25 While conceding that these goals were “legitimate
purposes for the City to pursue,” the court of appeals
questioned whether such “indirect” benefits, no matter how
substantial, can suffice to establish that the Parking Agreement
serves a public purpose. Turken, 220 Ariz. at 471 ¶ 47, 207
P.3d at 724. Our cases, however, do not draw this bright line.
¶26 In White, for example, we found a public purpose for a
municipality’s expenditure to join the Arizona Municipal League,
deeming it a “reasonable effort to learn the manner in which
complex municipal problems . . . are being solved in sister
cities of the state, thereby improving the quality of service
[Glendale] renders its own taxpayers.” 67 Ariz. at 240, 194
P.2d at 441. The benefits derived from League membership might
17
well have been characterized as indirect, but this court
emphasized that “[t]he trend of authority in more recent years
has been in the direction of permitting municipalities a wider
range in undertaking to promote the public welfare or
enjoyment.” Id. at 237, 194 P.2d at 439 (internal citations and
quotation marks omitted).
¶27 Other decisions are to the same effect. Industrial
Development Authority of Pinal County involved an attack under
the Gift Clause on a public agency’s issuance of bonds, the
proceeds of which were loaned to a copper company to purchase
and install air pollution control facilities. 109 Ariz. at 371,
509 P.2d at 708. We found this an “expenditure in the public
interest,” id. at 373, 509 P.2d at 710, noting that the “obvious
public purpose sought to be accomplished . . . is the protection
of the health of the citizens of this state,” id. at 374, 509
P.3d at 711. In so ruling, we also noted that the issuance of
bonds for industrial development in general was consistent with
the Gift Clause. Id. at 373-74, 509 P.3d at 710-11; see also
Humphrey, 55 Ariz. at 387, 102 P.2d at 87 (rejecting Gift Clause
attack on slum clearance projects funded by bonds).
¶28 In taking a broad view of permissible public purposes
under the Gift Clause, we have repeatedly emphasized that the
primary determination of whether a specific purpose constitutes
a “public purpose” is assigned to the political branches of
18
government, which are directly accountable to the public. See,
e.g., Wistuber, 141 Ariz. at 349, 687 P.2d at 357; White, 67
Ariz. at 237, 194 P.2d at 439. We find a public purpose absent
only in those rare cases in which the governmental body’s
discretion has been “unquestionably abused.” White, 67 Ariz. at
237, 194 P.2d at 439.
¶29 In this case, we cannot conclude that the City Council
“unquestionably abused” its discretion in determining that the
Parking Agreement had a public purpose. The Agreement thus
satisfies the first prong of the Wistuber test.5
B.
¶30 When public funds are used to purchase something from
a private entity, finding a public purpose only begins the
constitutional inquiry. Wistuber also requires us to examine
the “consideration” received from the private entity. The Gift
Clause is violated when that consideration, compared to the
expenditure, is “so inequitable and unreasonable that it amounts
to an abuse of discretion, thus providing a subsidy to the
5
As the court of appeals correctly noted, the Gift Clause
public purpose requirement differs from the mandate under
Article 2, Section 17 of the Arizona Constitution that private
property be taken only for “public use” through eminent domain.
Turken, 220 Ariz. at 469 ¶ 37 n.17, 207 P.3d at 722 n.17; see
Bailey v. Myers, 206 Ariz. 224, 76 P.3d 898 (App. 2003)
(addressing “public use” under Article 2, Section 17).
19
private entity.” Wistuber, 141 Ariz. at 349, 687 P.2d at 357
(internal citations and quotation marks omitted).
¶31 The term “consideration” has a settled meaning in
contract law. It is a “performance or return promise” that is
“bargained for . . . in exchange for the promise of the other
party.” Schade v. Diethrich, 158 Ariz. 1, 8, 760 P.2d 1050,
1057 (1988) (citing Restatement (Second) of Contracts § 71
(1981)). In other words, consideration is what one party to a
contract obligates itself to do (or to forbear from doing) in
return for the promise of the other contracting party. Id.
¶32 Under contract law, courts do not ordinarily examine
the proportionality of consideration between parties contracting
at arm’s length, leaving such issues to the marketplace. See,
e.g., Sun World Corp. v. City of Phoenix, 166 Ariz. 39, 42, 800
P.2d 26, 29 (App. 1990). In contrast, our Gift Clause
jurisprudence quite appropriately focuses on adequacy of
consideration because paying far too much for something
effectively creates a subsidy from the public to the seller.
See Wistuber, 141 Ariz. at 349-50, 687 P.2d at 357-58; Kromko,
149 Ariz. at 321-22, 718 P.2d at 480-81. The potential for a
subsidy is heightened when, as occurred here, a public entity
enters into the contract without the benefit of competitive
proposals.
20
¶33 In finding that the Parking Agreement satisfied the
Wistuber test, the superior court viewed the relevant
consideration as not only the value of the parking places
obtained by the City, but also indirect benefits, such as
projected sales tax revenue. The court erred in that analysis.
Although anticipated indirect benefits may well be relevant in
evaluating whether spending serves a public purpose, when not
bargained for as part of the contracting party’s promised
performance, such benefits are not consideration under contract
law, Schade, 158 Ariz. at 8, 760 P.2d at 1057, or the Wistuber
test. In evaluating a contract like the Parking Agreement,
analysis of adequacy of consideration for Gift Clause purposes
focuses instead on the objective fair market value of what the
private party has promised to provide in return for the public
entity’s payment.
¶34 A hypothetical illustrates the point. Assume that a
municipality must repair a sewer line. If the line is not
repaired, disease will likely break out and spread quickly,
causing deaths and significant public health care expenditures.
Several competent contractors are willing to do the repair for
$5,000. Under the City’s reasoning, the municipality could pay
a contractor $5 million without violating the Gift Clause
because the indirect benefits from the repair — saved lives and
avoided health care costs — exceed the $5 million payment.
21
¶35 We disagree that this should be the result. The Gift
Clause prohibits subsidies to private entities, and paying far
more than the fair market value for the repair plainly would be
a subsidy to the contractor. Similarly, if the City’s payments
to NPP under the Parking Agreement are grossly disproportionate
to the objective value of what NPP has promised to provide in
return, the consideration prong of the Wistuber test has not
been satisfied.
1.
¶36 We therefore turn to the consideration provided for in
the Parking Agreement. The Agreement is clear — the City has
agreed to pay up to $97.4 million for the non-exclusive use of
some 2,980 parking garage spaces and the exclusive use of 200
park-and-ride spaces. NPP made no other promises.
¶37 To be sure, the City’s obligation to make payments
under the Agreement does not commence until NPP has developed a
specified amount of retail space. However, the Agreement makes
plain that NPP has no contractual obligation to build the retail
component, characterizing retail construction as “a condition
precedent of the City’s obligation to pay the Use Payment and
not a covenant of the Developer.”
¶38 As the City notes, the payments for the parking spaces
under the Agreement are based on the taxes generated at the
development. But the Agreement does not obligate NPP to produce
22
a penny of tax revenue for the City. Rather, the duty of
CityNorth and its tenants to pay taxes arises from law
applicable to all, not out of contract.
¶39 In short, the only consideration flowing to the City
from NPP under the Parking Agreement is the right to use the
parking spaces. Under Wistuber, the relevant inquiry is whether
the amount the City has agreed to pay for use of those spaces is
grossly disproportionate to what it will receive.
2.
¶40 The Parking Agreement obligates the City to pay up to
$97.4 million for the parking spaces. The City argues that its
payments cannot be a gift or subsidy under the Gift Clause,
because they will be offset by tax revenues from the CityNorth
project. But this argument misses the point. Once collected,
these tax revenues are public funds. Whether the subsequent
expenditure of those funds is consistent with the Gift Clause
depends on what the City receives in return under the Parking
Agreement.
¶41 The City and NPP also argue that compliance with
A.R.S. § 9-500.11, which requires that anticipated tax revenues
exceed any tax incentives, establishes compliance with the Gift
Clause. Of course, as the court of appeals noted, statutory
compliance does not automatically establish constitutional
compliance. Turken, 207 Ariz. at 469 ¶ 37, 207 P.3d at 722.
23
But, more importantly, the argument conflates the different
requirements of the Gift Clause and the statute. The
Constitution requires that the consideration received by the
City not be grossly disproportionate to the amount paid to the
private entity. The statute imposes a separate and additional
requirement – municipalities entering into tax incentive
agreements must certify that the anticipated increase in tax
revenues exceeds the proposed expenditure. A.R.S. § 9-
500.11(D)(1). The statute may be satisfied even though tax
revenues are not consideration for Wistuber purposes.
Conversely, even when a transaction meets the second Wistuber
prong, the statute requires more – that anticipated tax revenues
exceed any expenditure.6
3.
¶42 Thus, the remaining question is whether the $97.4
million that the City has promised to pay far exceeds the value
of the parking places promised in return. Turken has conceded
that $97.4 million might well be a fair payment for exclusive
use of 3,180 spaces over the next 45 years. The Parking
Agreement, however, gives the City exclusive use of only 200
spaces. Nothing in the Agreement prevents CityNorth customers
6
Recent legislation bans municipal tax incentives for
relocating retail businesses in certain metropolitan areas,
including Maricopa County. A.R.S. § 42-6010 (Supp. 2008).
24
from filling up the other 2,980 spaces when other members of the
public might most want to use them.
¶43 We find it difficult to believe that the 3,180 parking
places have a value anywhere near the payment potentially
required under the Agreement. The Agreement therefore quite
likely violates the Gift Clause. However, because the superior
court viewed projected sales tax revenue and other indirect
benefits as consideration for Wistuber purposes, it never
separately addressed the value of the parking places. We are
not finders of fact, and our intuitions as to proportionality,
however strong, cannot substitute for specific findings of fact.
Thus, under normal circumstances, we would be constrained to
remand to the superior court.
4.
¶44 A remand, however, is not necessary in this case.
Although “[n]ormally our decisions in civil cases operate
retroactively as well as prospectively,” Lowing v. Allstate Ins.
Co., 176 Ariz. 101, 108, 859 P.2d 724, 731 (1993), “[w]hether an
opinion will be given prospective application only is a policy
question within this court’s discretion,” Fain Land & Cattle Co.
v. Hassell, 163 Ariz. 587, 596, 790 P.2d 242, 251 (1990). In
addressing retroactivity, we consider several factors, including
whether our opinion overrules settled precedent, “establishes a
new legal principle . . . whose resolution was not
25
foreshadowed,” or whether “[r]etroactive application would
produce substantially inequitable results.” Lowing, 176 Ariz.
at 108, 859 P.2d at 731.
¶45 We today overrule no prior decision. But we recognize
that the consideration prong of the Wistuber test has been
widely misunderstood during the past two decades and that our
cases have never squarely addressed that issue. The able trial
judge believed that indirect benefits satisfied the Wistuber
consideration prong and no party appears to have directly argued
to the contrary below. Moreover, various amici have claimed
that a number of public-private transactions were entered into
since Wistuber under a similar misapprehension.
¶46 To some extent, this confusion may have arisen from
our statement in Wistuber that “[t]he public benefit to be
obtained from the private entity as consideration for the
payment or conveyance by a public body may constitute a
‘valuable consideration.’” 141 Ariz. at 349, 687 P.2d at 357
(emphasis added). Despite this statement, Wistuber did not hold
that all public benefits constituted consideration. Rather, our
opinion focused solely on the value of the duties imposed on the
union president under the challenged agreement – the
consideration promised directly in return for the salary paid by
the school district. Id. at 350, 687 P.2d at 358. Nonetheless,
municipalities may have understood the “public benefit” language
26
to suggest a broader view of “consideration.” Cf. Kotterman v.
Killian, 193 Ariz. 273, 288 ¶ 51, 972 P.2d 606, 621 (1999)
(citing Wistuber for the proposition that “[w]e have upheld
giving when the state action served a public purpose and
adequate consideration was provided for the public benefit
conferred”).
¶47 Confusion may also have been caused by the statement
in Wistuber that a “panoptic view of the facts of each
transaction is required.” Id. at 349, 687 P.2d at 357. As
Wistuber noted, id., this language came from State v.
Northwestern Mutual Insurance Co., 86 Ariz. 50, 54, 340 P.2d
200, 202 (1959). That case involved the return of excess
premiums by a mutual insurance company to its members, including
a school district, in years during which claims were lower than
anticipated. Northwestern Mutual used the term “panoptic” in
rejecting the contention that the initial premium payments
violated the Gift Clause. Id. at 54-55, 340 P.2d at 202-03.
The language was thus meant to reject an overly technical view
of the transaction. By reiterating in Wistuber that a
“panoptic” view is required, we did not mean to suggest that
something that is not consideration under contract law is
somehow transformed into such for Gift Clause purposes.
¶48 The confusion may have been exacerbated by the
statement in Kromko that “perpetuation of the critical
27
educational relationship between the hospital and the University
of Arizona College of Medicine” can be counted as consideration.
149 Ariz. at 322, 718 P.2d at 481. Read out of context, this
language could suggest that indirect public benefits are
consideration. In Kromko, however, the perpetuation of the
educational relationship was directly contracted for in exchange
for the conveyance of the hospital to the nonprofit corporation,
id. at 320, 718 P.2d at 479, and thus plainly qualified as
traditional consideration.
¶49 In short, although neither Wistuber nor Kromko 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. We therefore believe it
appropriate to limit today’s clarification of the consideration
test to transactions occurring after the date of this opinion.
IV.
¶50 For the reasons above, we vacate the opinion of the
court of appeals. Because we apply our clarification of the
Wistuber consideration test prospectively, we affirm the
superior court’s dismissal of Turken’s Gift Clause claim.7 The
7
Turken’s supplemental brief sought attorneys’ fees in this
Court. But, even assuming arguendo that Turken was the
prevailing party, cf. Wagenseller v. Scottsdale Mem’l Hosp., 147
(continued...)
28
court of appeals did not reach Turken’s other constitutional
arguments, and we therefore remand to the court of appeals to
consider those issues in the first instance.
_______________________________________
Andrew D. Hurwitz, Vice Chief Justice
CONCURRING:
_____________________________________
Rebecca White Berch, Chief Justice
_____________________________________
Michael D. Ryan, Justice
_____________________________________
W. Scott Bales, Justice
_____________________________________
A. John Pelander, Justice
Ariz. 370, 394, 710 P.2d 1025, 1049 (1985) (holding that party
establishing important point of law may be considered as
successful for purposes of fee award even if it eventually does
not recover in the litigation), the request for fees was
untimely. See Ariz. R. Civ. App. P. 21(c)(1) (requiring request
for attorneys’ fees to be made in response to petition for
review). The court of appeals is free to consider the award of
fees to Turken on remand.
29