Phoenix Attorney Scot Claus discusses the section of Arizona’s constitution that prohibits state and local governments from giving financial gifts to private entities.
Ted Simons: The gift clause of the Arizona constitution prohibits state and local governments from giving financial gifts to private entities. The language seems pretty clear-cut -- but is it? Here to share his views is attorney Scot Claus, a partner in the Phoenix law firm of Mariscal, weeks. That firm filed an amicus brief on behalf of valley partnership in the City North case, which involved the Goldwater Institute successfully stopping Phoenix from providing tax subsidies to a retail developer. Thank you for joining us tonight on "Horizon." This can get cloudy and we talked to the Goldwater Institute and what they're saying this is not an equitable return for taxpayers. That that breaks the clause in the constitution. I want to get your response on that.
Scot Claus: Well, the gift clause is referred to as the gift clause for a reason. It prohibits municipalities, states or political subdivisions of the state from providing gifts to corporations or persons. It does not prohibit a municipality such as the city of Glendale or any other city in the state of Arizona, does not prevent the municipality from entering into a transaction with an individual or an entity, just like you can buy my car or house, the political subdivisions of the state can enter into transactions with entities or individuals so long as the transaction satisfies the parameters of the gift clause. And fortunately, for all of us and the lawyers and fortunately for the people doing these types of transactions, the Supreme Court articulated 27 years ago a two-pronged test to determine whether or not a transaction violates the gift clause and that's really the issue. The two prongs are easy. The two prongs are, first the transaction has to be for a public purpose and the courts are clear that municipalities, the legislature, the consular bodied of municipalities have to be given wide deference in determining what constitutes a public use.
Ted Simons: The second one is whether or not it's reasonable or rational: That's the second test?
Scot Claus: The second prong is whether or not the consideration given -- and this is the language from the case -- whether the consideration given is roughly proportional to the benefits received. It is not a mathematical equation and can't be -- the answer cannot be arrived at with mathematical precision. That's why the language of the test does not have mathematical precision to it. It requires an analysis of whether there is a rough proportionality between what a municipality is giving and what the other party to the transaction is giving up and what the municipality is receiving.
Ted Simons: So, opponents of this deal, including the Goldwater Institute, what they're saying, when you're giving, selling bonds and I don't want -- I know you don't want to speak specifically to the case. But overall here. When you're selling $100 million plus of bonds just to give to someone to go into an enterprise that already has had problems and been bankrupted -- what the whole nine yards -- that that is not reasonable and that is so far from equitable that it does violate the gift clause. At what point does rational and reasonable stretch too thin?
Scot Claus: I think you have to look at the language you just used in framing the Goldwater Institute's analysis. You said the Goldwater Institute is saying that the city of Glendale wants to give $100 million to an out-of-state investor. If the city of Glendale were giving $100 million to anybody, whether it's in this state, in Chicago, Canada, Timbuktu that, would likely be a violation of the gift clause because it would be giving $100 million. I don't know the details of the transaction and so I'm not going to comment on the details of the transaction, but my understanding is that there's not a gift of $100 million. It's a proposed transaction in which an incentive is being provided and the city of Glendale will receive a benefit roughly proportional to that $100 million that is being provided.
Ted Simons: Roughly proportional if the team survives, if the business stays afloat. If there's not a flee to Canada, two, five, 10 years down the line of a 30-year lease. Again, I know you don't want to get too tight on the details here, but in the grand scheme of things, again, a rationality and reason stretched too thin at times on these deals?
Scot Claus: There's no question that the court is required under the City North decision and the case that preceded it 25 years before the City North decision, that the court is required to analyze whether or not there's a rational basis for the consideration. It does not mean, however, that the consideration is flawed or that the consideration is deficient because one person or one subset of people would not recognize the same benefits that the particular legislative body recognizes. As long as those benefits are flowing from the transaction, and as long as those benefits are roughly proportional to the benefits being given by the municipality, then the consideration prong of the gift clause analysis is likely satisfied.
Ted Simons: Last question: Is -- is this gift clause of the constitution and this case, are these -- does this need to be refined a bit? Do we need better parameters or good the way it is because it gets people talking, thinking and trying to figure out?
Scot Claus: Remember, the gift clause was enacted in the Arizona constitutional convention in 1910, so it's been around for a while. I don't know that there's going to be a change to the Arizona gift clause itself.
Ted Simons: Not the clause itself, but the case law. Do we need to have it more refined.
Scot Claus: I think I disagree with the notion that it hasn't been refined. I disagree with the notion that the Arizona Supreme Court invalidated the particular transaction in the City North case. It didn't, it actually said that we're not going to apply our decision retroactively even to the transaction issued in this case. We recognize there is some confusion regarding our gift clause jurisprudence and so we are providing clarity. For prong one, there must be a public purpose and you must allow there to be deference given to the legislative body determining public purpose. And for prong two, there has to be consideration and it's a concept that the law knows because it's a concept that's involved in transactions that people are involved in. Not just municipalities. When I enter into a contract did with you, there has to be consideration. So they have actually clarified the analysis. The problem is that it's not the problem with the test. It's the problem with the facts that the test is applied to. Those facts are invariable, and that's -- that's why -- that's where the difficulty lies.
Ted Simons: All right. Thank you so much for joining us. We appreciate it.
Scot Claus: Thank you.
