AZ Supreme Court Says No to Sweetheart Deals for Private Companies

In a major victory for taxpayers, the Arizona Supreme Court ruled unanimously today that the city of Peoria violated the state Constitution’s Gift Clause when it gave away nearly $2.6 million to two private businesses who promised nothing in return to the public, but only to run their own businesses for their own private profit.

In 2016, the city gave this money to Huntington University and its landlord Arrowhead Properties LLC, both private businesses, in hopes that these private companies’ operations would improve the local economy. But neither business promised to provide anything to the public in exchange for the millions of taxpayer dollars they received. Instead, to get the subsidy, Huntington University—a private, Christian college based in Indiana that offers only a Digital Media Arts program in Peoria—simply agreed to run its business: get accredited, offer classes, and enroll students, all things it would do anyway. Locals didn’t get any guarantee of admission, jobs at the college, reduced tuition, or even access to the college’s facilities. And Huntington’s landlord, Arrowhead, agreed to renovate its own building to house Huntington, all for private profit and private use. That doesn’t benefit taxpayers; it benefits these two private firms.

That’s why we sued the city on behalf of Peoria taxpayers. The state Constitution forbids the government from giving money away to a private company. The Goldwater Institute is the state’s leading enforcer of this “Gift Clause”—over a decade ago, we won a landmark victory in Turken v. Gordon, where the Arizona Supreme Court held that whenever officials spend taxpayer money, it must benefit the taxpayers directly. Hopes of future prosperity resulting from corporate welfare are simply not enough.

Today, the Supreme Court struck down Peoria’s handouts to Huntington and Arrowhead because giving away money simply to entice private businesses to locate in town, with nothing else in return, is precisely the sort of thing the Gift Clause was written to prohibit. The Court said that the deal was “no different than a hamburger chain promising to operate in Peoria in exchange for monetary incentives paid by the city in hope of stimulating the local economy.” After all, all private businesses “will usually, if not always, generate some economic impact and, consequently, permitting such impacts to justify public funding of private ventures would eviscerate the Gift Clause.”

What’s worse, Illegal subsidies like this discourage businesses from shouldering risks and instead encourage them to look to bureaucrats, who can dip into taxpayers’ wallets. If Huntington’s and Arrowhead’s efforts are successful, then they reap the reward. But if those ventures fail, the taxpayers—not the private companies—take the fall.

Cities have important jobs to do—like keeping people safe, solving crimes, and maintaining infrastructure. Putting resources toward projects that benefit the public, such as streamlining government permitting processes and providing better core services, contributes to true economic development. Instead, Peoria chose to dole out $2.6 million to its hand-picked favorites—an amount that could have funded more than half of the cost of the city’s police criminal investigations unit for an entire year.

Today’s unanimous ruling sends a powerful reminder to government officials across the state that they can’t spend taxpayers’ hard-earned money on sweetheart deals for select private businesses, but can only purchase goods and services that truly benefit the public.

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Christina Sandefur is the Executive Vice President at the Goldwater Institute.

This article first appeared on February 8, 2021 at the Goldwater Institute.