Legal Corner: Economic Development after City North

By: William Bock, General Counsel, League of Arizona Cities and Towns

January 2014

Recently I was asked by a city in Arizona if I could give them some ideas as to what they can do as a city to provide economic incentives to developers to get them to build projects in their community.

After the economic downturn, most everyone has been trying to survive dwindling budgets, cutbacks, layoffs, furloughs, and the like. Not much attention has been paid to development, because there hasn't been any.

But now that things seem to be picking up a bit, it is a good idea to take a look at what cities and towns can do to provide assistance in an effort to promote economic development.

Any discussion about economic development incentives must start by looking at the Gift Clause in the Arizona Constitution. That clause is found at Arizona Constitution, Article 9 §7, and reads as follows:

"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."

The language of the Gift Clause seems pretty clear that a city or town cannot give money to any individual or corporation. That, however, never stopped individuals or companies from asking for help. And many times, a person or company was asking for help from the government, and it seemed like the help would benefit the public as a whole. For example, when major league baseball teams were looking for a place to locate for spring training they asked cities to help in building the stadium. Clearly city help would benefit the private baseball team, but the tourism dollars generated, and the sales tax collected, would clearly help everyone in a city that could give such help. But that violates the Gift Clause-right?

Well, the early Gift Clause case law handed down by the Arizona courts basically said that such an expenditure would be legal and not violate the Gift Clause if giving the money or subsidy promoted a public purpose. In my baseball example, that would be the generation of other tourism business and increased sales taxes, increasing employment, etc.

That practice went on for some time, but then, in a case entitled Wistuber, the Court said that it is pretty easy, if you think long enough, for anyone to find some sort of public purpose in any expenditure of funds for a private individual or company. That court opined that in addition to the public purpose rule, there should also be another prong to a Gift Clause analysis. They said that each expenditure of money on a private individual or company must be analyzed like the consideration in any contract. In other words, is the city getting in return something that is of equal or similar value to what they were giving? Again, using my baseball example, if the city gave $1million to the baseball club to assist in building a spring training facility, is the city getting back $1million dollars of value from the increase in tourism, and increased sales taxes etc. The court did not require mathematical precision in this analysis, but required that every deal must consider both prongs-public purpose and consideration.

The Wistuber case was decided in the mid-1980's. From that point in time until 2010, cities and towns across Arizona engaged in economic development activities that involved giving money to private entities, as long as both prongs of the Wistuber test were met.

So what happened in 2010 to change all of that? A case called City North. Actually, the official name of the case is Turken v. Gordon. Phil Gordon was the mayor of the city of Phoenix. In northeast Phoenix, a large master planned community was being developed. One of the areas was a central business district called City North.

The developers of City North asked the city of Phoenix for some incentives for them to build a large 1.2 million square foot regional shopping mall at that location. The city of Phoenix, relying on the previous interpretations of the gift clause agreed to build a 3,000 space parking structure at the site, with parking available to the public as well as private shoppers, and with 200 spaces specifically dedicated for only public parking. In addition, and as an additional incentive for the developer to build the mall, the city offered to repay to the developer 50% of all retail sales tax collected at the mall over an 11 year period, with the amount not to exceed approximately $94 million.

The public purpose in all of this was to generate jobs, and to increase sales tax revenues, thus providing more funds for public services like police, fire, parks, etc. And when looking at consideration, the city's outlay of money was for the parking structure-several million dollars. In return, the city would receive half of the sales tax over the first 11 years ($94 million), and after that would receive almost $200 million every 11 years. It looked to everyone at the city that this was a good deal for the city-so the second prong of consideration was met.

But some in the public did not think so. They sued the city of Phoenix, claiming, among other things, that this deal violated the Gift Clause. The city of Phoenix won at the trial court level. Then the Court of Appeals reversed the trial court, and the Supreme Court agreed to hear the case.

The decision that the Supreme Court handed down was a game changer in terms of economic development incentives. Basically, the Supreme Court changed the law as it related to the Gift Clause. They left the "public purpose " prong of the Wistuber analysis alone, but it was in the area of consideration that they made their change. An example that the Court gave in the opinion illustrates their new view.

"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 (Phoenix) 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. We disagree that this should be the result. The Gift Clause prohibits subsidies to private entities."

The bottom line of the decision is that a city or town can no longer use indirect benefits, like expected sales taxes to be generated from sales of merchandise, in order to comply with the Gift Clause. There must be some sort of direct benefit. The court in City North acknowledged that there had been some confusion about the meaning of prior cases construing the Gift Clause, and that many cities and towns had entered into deals similar to the City North deal. As a result, the court made its ruling prospective only, and allowed the City North deal to stand. But it basically prohibited such deals in the future.

This decision was rendered just as the Great Recession was in full swing. So there was not much, if any, development going on. But now that the economy is picking up a little, cities, towns, and developers are starting to look at ways to promote economic development. I am sure that many city and town planners are already trying to think of ways to promote economic development in this new world after City North.

I do not have any magic answers, but there are some things that I know have been used before, and that can be done to provide some help to spur development. They are, in no particular order:

  1. If a project needs infrastructure to be viable, a city or town could provide streets, sewer, water, etc., to allow the project to proceed.

  2. Cities and towns can use their planning and zoning powers to rezone properties to accommodate the needs of a project.

  3. Often land assembly is necessary for a project. If a city or town owns land in proximity to a proposed project, there could be a land swap with the developer.

  4. Expedited building plan review-to speed up the construction process

  5. Establish a Foreign Trade Zone-this allows for tax breaks for companies locating in those zones. Mesa most recently used the Foreign Trade zone to attract Apple to locate a facility in its city.

  6. GPLET (Government Property Lease Excise Tax). A.R.S §42-6201 et.seq. This is a plan that has the city or town become the owner of property, and then lease the property to a business. There are favorable tax situations for the lessee.

  7. In 2012, SB 1443 created ARS §41-1525 & 43-1074 which provides a tax credit for companies that make substantial investments that result in the creation of new jobs in a community.

  8. A city or town can use its bonding power to create bonds for infrastructure. Mesa most recently used some infrastructure bond money to provide streets for a new master planned community.

  9. Improvement districts. ARS 48- 571 et. seq. One such tool is the Enhanced Municipal Services districts.

  10. Development Agreements. Pursuant to ARS 9-500.05 cities and towns may enter into development agreements with a developer. This tool can be used to create a more positive situation for a developer. For example, a development agreement could be used to lock in vested zoning rights for a project that will take several or more years to develop. This would protect the developer from changes in zoning, and allow them to proceed with certainty.

  11. There are several Community Development Block Grant (CDBG) programs such as :

    1. EXPAND-an economic development program that helps businesses that commit to create jobs for low to moderate income persons but that need additional collateral to obtain bank or SBA financing.

    2. Management Technical Assistance Program-CDBG funded economic development program that helps businesses by paying for technical assistance in areas such as accounting, marketing, personnel management, etc.

  12. Some municipalities provide relocation assistance to prospective new employers. This could include helping businesses identify properties that might be suitable for acquisition and development, and helping them conduct due diligence to assist them in their decision making.
This is certainly not an exhaustive list of what can be done to provide incentives to a developer. I am sure there are other creative ideas out there, but this list does give some idea as to what tools cities and towns have to engage in economic development. The range of possibilities, however, was severely limited by the City North case. As with any legal issues, every city or town should work closely with your attorney as you consider these or other incentives for development, especially in these times after the City North decision.

If any of the readers of this article are aware of successful economic development tools that have been used in your community, it would be helpful if you could let me know what they are, and I can communicate those ideas in a future article. I can be reached at My phone is (602) 258-5786.

League of Arizona Cities and Towns
1820 W. Washington St.
Phoenix, AZ  85007
Phone: 602-258-5786
Fax: 602-253-3874

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