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Supreme Court hears CityNorth case; $97.4M in incentives challenged

Having heard arguments over the legality of a multimillion dollar incentive package designed to lure the development of a large shopping mall in north Phoenix, the Arizona Supreme Court is poised to decide the extent of local governments’ power to boost their economies and tax revenues.

On Sept. 30, the court considered whether the city of Phoenix violated a state Constitution provision guarding against public-private partnerships when it agreed to a tax-rebate package valued at $97.4 million to secure the construction of CityNorth, a massive shopping mall on the city’s northern outskirts.

The 1997 deal was struck down in December 2008 by an Arizona Court of Appeals panel that found the agreement violated a clause in the state Constitution that bans government gift-giving to private interests.
But just how the state’s strictly-written gift clause is to be interpreted is also on the line, as the city of Phoenix and CityNorth developers are asking the Arizona Supreme Court to reverse the appellate court’s findings that make it more difficult for local governments to provide incentives to lure businesses to their jurisdictions.

Prior to the appellate decision, local governments could count on escaping the gift clause’s clutches if their economic deals with private entities could promote valid public purposes, such as economic development and increased sales tax revenues.

Governments also were required, at least if challenged in court, to show the benefits they received from having offered incentive packages would outweigh their incurred expenses to secure deals with private entities.

Tim Berg, an attorney hired by Phoenix, urged the court to overrule the appellate decision that struck down the CityNorth deal and added a requirement that private entities could not “unduly” benefit from government-brokered deals.

At risk, Berg said, is “the power of government to engage in economic development for the betterment of its citizens,” such as job creation, and in the case of CityNorth, available parking, reduced air pollution, traffic reduction and the planned creation of an urban core similar to downtown Phoenix.

Berg was careful to remind the justices repeatedly that no tax rebates would be made available to the developer of the project, the Thomas J. Klutznick Company, without the full completion of 1.2 million square feet of sales tax revenue-generating retail space.

The city also gained hundreds of spaces of free parking at the CityNorth development at a fair market value price, he said.

Several of the court’s justices probed Berg in hopes of achieving the attorney’s views of what constitutes a clear distinction of a valid public purpose necessary for local governments to successfully navigate the gift clause.

On one occasion, Justice Andrew Hurwitz theoretically questioned whether a city could give a private entity $100 million for a hypothetical “widget” needed to stem a cholera outbreak when a suitable alternative could be purchased for $10.

Berg urged the court to adopt a “panoptic” gift-clause approach that defers discretion over incentive deals to the local governments that provide them. Governments, absent an abuse of power, should be left alone to weigh both tangible and intangible benefits, such as cultural improvements, when considering deals, he said.

“I don’t think you substitute judgment,” he said, “You weigh their judgment for an abuse of judgment.”

The strike against the CityNorth deal was defended by Clint Bolick, an attorney for the Goldwater Institute, who filed a 2008 lawsuit against the city of Phoenix on behalf of several small business owners.

Bolick attacked the claim that the city benefited from the free parking secured with the CityNorth deal, labeling the assertion “illusory” since any commercial business is required to have “adequate public parking.”

Moreover, many of the shopping development’s anchor tenants demanded free covered parking for shoppers in return for signing leases for retail space at CityNorth, he said.

“Here the city is subsidizing the developer to do something the developer really wants to do, which is build a shopping mall,” said Bolick, later adding that the city simply ignored the conclusion of a hired consultant who found that the city’s benefit was not worth $97.4 million.

Bolick further argued that such deals should be viewed first with skepticism by courts, and not deference to local governments.

Justice Michael Ryan questioned whether the gift clause would simply prohibit local governments from engaging in any forms of economic development with private entities.

Responding, Bolick said governments are free to engage in “roughly proportionate quid pro quo” deals that provide only “incidental benefits” to the private sector, such as the construction of a nonprofit hospital that was previously upheld by courts.

In contrast to the subsidizing of private construction of projects related to public health, education or other significant interests, the building of a “luxury shopping mall” with public help is “classically inappropriate,” Bolick said.

After the hearing, attorney Grady Gammage Jr., whose law firm is representing the CityNorth project, said any resulting opinion by the Arizona Supreme Court that would back the appellate decision would bring disappointing consequences for the state.

The added leeway for local governments to create deals and play a planning hand in development is critical to create more modern and urban centers to improve job quality and lifestyles, he said.

“Sure you’d build something (without government inclusion), but you wouldn’t build the same thing,” he said. “What you’ll build is the same thing we have been building in Phoenix for the past 50 years, which is the same big-box retail and the beige stucco homes.”

Attorney Tim Hogan of the Arizona Center for Law in the Public Interest, who filed an amicus brief siding with the Goldwater Institute, rejected the notion that Arizona’s cities would be helpless to lure development without greater freedom to offer incentives.

“It’s an area that is rife with creativity,” said Hogan.

Still, based on several comments delivered by justices, Hogan said he believed that some revamping of the Arizona Court of Appeals decision would be made by the justices of the Supreme Court in an effort to clarify the vague test prong that prevents private entities from “unduly” benefiting from government deals.

“Where’s the line there?” he said. “There is no bright line.”

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