Pima County Superior Court Catherine Woods denied Pima County’s motion to dismiss the Goldwater Institute‘s Gift Clause claim this week. Also this week, the Institute asked Judge Woods to cancel the World View lease and force the County to comply with a state law that requires an appraisal, public auction, and a minimum price when the County leases property.
Judge Woods found that the Goldwater Institute successfully explained its position that Pima County “’unquestionably abused’ its discretion in spending taxpayer money and lending its credit when Pima County officials took on $15 million in new debt, commenced the construction of the headquarters and balloon pad to be used by a private for-profit corporation that had an unproven ability to conduct its intended operations, failed to obtain competitive bids, committed to lease the premises to the private for-profit corporation at below market rates, and granted to that corporation the right to operate, maintain, and control access to the pad (which would include keeping any profits it makes from allowing other third parties to use the pad).”
The case will go forward and after hearing arguments on the merits of the case, Judge Wood will decide whether or not the County’s subsidy violates the state constitution.
Related articles:
Miller Exposes Goldwater Dim View Of Pima County’s World View Deal
Pima County World View Deal “Boggles The Mind”
According to the Goldwater Institute, during the hearing on whether or not the case would be dismissed, the County “admitted that it ignored this law, and Judge Woods has already ruled that the law applied. The County will have 30 days to respond to our request for the lease to be cancelled.”
The ruling reads:
Pending before the Court is Defendants’ Motion to Dismiss pursuant to Rule 12(b)(6), A.R.C.P. On August 22, 2016, at the conclusion of oral argument on the Motion, the Court denied the Motion as it pertains to Counts Two, Three and Four of the Complaint. The Court took the Motion under advisement as it pertains to the only remaining count, Count One. To resolve the matter, the Court has carefully reviewed and considered the Motion and the related Response and Reply, as well as the statements and arguments of counsel presented during oral argument. The Court also reviewed and considered the Defendants’ Notice of Supplemental Authority, lodged with the Court on September 13, 2016. For reasons stated more specifically below, Defendants’ Motion to Dismiss Count One is DENIED.
RELEVANT FACTUAL AND PROCEDURAL BACKGROUND
Non-party World View Enterprises, Inc. (“World View”) is a private, for-profit corporation that plans to conduct “near-space exploration,” utilizing high altitude balloon technology for purposes of space tourism, other commercial applications, and scientific research. See Complaint at ¶ 4. World View has not transported a single tourist, nor has it obtained permission from the Federal Aviation Administration to do so. On January 19 and February 9, 2016, Pima County and World View entered a “Lease-Purchase Agreement,” through which Pima County agreed to design and construct World View’s 135,000 square-foot headquarters on a 12-acre parcel of land owned by Pima County, at a cost not to exceed $14.5 million, and to further design and construct World View’s 700-foot diameter balloon pad on a 16-acre parcel of land owned by Pima County, at a cost not to exceed $1.5 million. Subject to World View’s purchase option, Pima County will own the headquarters. Provided that World View has fully performed its obligations under the lease, World View’s purchase option allows it to purchase the headquarters from Pima County for a sum determined based upon the timing of the purchase. In the meantime, World View will lease the headquarters from Pima County at what Plaintiffs claim are below-market rates. In the event of a World View default, the only remedy available to Pima County under the Lease is the right to terminate the Lease. The Lease gives Pima County no means to recoup its expenditures for design and construction costs, or the risk of loss of its loan collateral in the event of a World View default. Pima County bypassed competitive bidding requirements, both for the contracts to build the headquarters and balloon pad, and for the lease of the facility to World View. Instead of following the typical competitive bidding procedures, Pima County awarded the design and construction contracts to its pre-selected companies. Id. In order to pay for the construction of the headquarters and balloon pad, Pima County raised money by refinancing existing public debt and, in return, pledged several County-owned buildings as collateral to secure the new debt.
Also on January 19 and February 9, 2016, Pima County and World View entered an “Operating Agreement,” which concerns the use, maintenance, and control over the balloon pad. Although Pima County owns the pad, Pima County through the Operating Agreement granted to World View the right to use the pad without paying a fee, and also the right to operate, maintain, and control third-parties’ access to the pad. Plaintiffs in this action challenge the constitutionality of what they characterize as a $15 million gift and loan of taxpayer funds to a private entity, in violation of Arizona Constitution article IX, section 7 (aka the “Gift Clause”). They also claim that the Defendants in their official capacities on behalf of Pima County (hereafter referred to as “Pima County”) failed to follow applicable competitive bidding requirements and the competitive safeguards required under A.R.S. § 11-256.
Among other things, Plaintiffs seek declaratory judgment that (1) the terms and conditions of a Lease-Purchase Agreement constitute an unlawful gift of public funds and loan of public credit, and an unlawful lease in contravention of applicable Arizona statutes, (2) that the Operating Agreement constitutes an unlawful gift of public funds, and (3) that Pima County violated applicable state law and county ordinances in awarding design and construction contracts without competitive bidding. Plaintiffs also seek preliminary and permanent injunctions to prevent enforcement of the Lease-Purchase Agreement and Operating Agreement, and to prevent payments and expenditures of public funds under the terms of those Agreements.
Pima County, through its Motion to Dismiss, seeks to dismiss all of Plaintiffs’ claims. As mentioned above, the Court previously denied the Motion to Dismiss as it pertains to Counts Two, Three and Four of the Complaint. Following are the Court’s findings and conclusions of law as it pertains to Pima County’s Motion to Dismiss Count One–the claim that Pima County violated the Gift Clause.
FINDINGS AND CONCLUSIONS OF LAW
“Motions to dismiss for failure to state a claim are not favored under Arizona law.” In determining a Motion to Dismiss pursuant to Rule 12(b)(6), the Court “must assume the truth of all well-pleaded factual allegations and indulge all reasonable inferences from those facts, but mere conclusory statements are insufficient.” “Dismissal is appropriate under Rule 12(b)(6) only if as a matter of law plaintiffs would not be entitled to relief under any interpretation of the facts susceptible of proof.”
The Gift Clause of the Arizona Constitution bars counties and other public entities from making any donation or grant, by subsidy or otherwise, to any individual, association, or corporation. Specifically, the Gift Clause 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.” The Gift Clause “was designed primarily to prevent the use of public funds raised by general taxation in aid of enterprises apparently devoted to quasi public purposes, but actually engaged in private business.” Our Courts have stated that “the evil to be avoided was the depletion of the public treasury or inflation of public debt by engagement in non-public enterprises.”
A governmental expenditure does not violate the Gift Clause if it meets a two-prong test: (1) it has a public purpose, and (2) the government payment is not grossly disproportionate to what the government receives in return. Thus, in this case, to prevail upon their claim that Pima County violated the Gift Clause of the Arizona Constitution in its dealings with World View, Plaintiffs must prove that the expenditure lacks a public purpose, or that Pima County’s payment or expenditure is grossly disproportionate to what it received in return from World View.
In determining whether a transaction serves a public purpose, “courts consider the ‘reality of the transaction’ and not merely the ‘surface indicia of public purpose.’” “A panoptic view of the facts of each transaction is required.” Determining whether a governmental expenditure serves a public purpose ultimately lies within the province of the judiciary; however, “courts owe significant deference to the judgments of elected officials. Stated another way, “courts must not be overly technical and must give appropriate deference to the findings of the governmental body.” In taking a broad view of permissible public purposes under the Gift Clause, the Arizona Supreme Court consistently emphasizes that “the primary determination of whether a specific purpose constitutes a ‘public purpose’ is assigned to the political branches of government, which are directly accountable to the public.” “We find a public purpose absent only in those rare cases in which the governmental body’s discretion has been ‘unquestionably abused.’” Pima County contends, as reflected in the Lease and Operating Agreement (which are publicly-available documents), that its expenditures for the World View headquarters and the balloon pad serve the public purpose of economic development, and that World View’s operations in Pima County would “have a significant positive impact on the economic welfare of Pima County’s inhabitants.” See Lease at § 1.8; Operating Agreement at §1.7. Even when acknowledging the significant deference owed to the judgment of elected officials, the Court here finds that the factual allegations within Plaintiffs’ Complaint and all reasonable inferences to be drawn from them, could lead to the conclusion that Pima County “unquestionably abused” its discretion in spending taxpayer money and lending its credit when, among other things, it took on $15 million in new debt, commenced the construction of the headquarters and balloon pad to be used by a private for-profit corporation that had an unproven ability to conduct its intended operations, failed to obtain competitive bids, committed to lease the premises to the private for-profit corporation at below market rates, and granted to that corporation the right to operate, maintain, and control access to the pad (which would include keeping any profits it makes from allowing other third parties to use the pad). As stated in Wistuber, supra, ultimately the determination of public purpose will consider the reality of the situation, and not merely surface indicia.
On the issue of whether Pima County’s commitment to expend tax payer funds was met with adequate consideration, “analysis of adequacy of consideration for Gift Clause purposes focuses … on the bjective fair market value of what the private party has promised to provide in return for the public entity’s payment.”
Case law interpreting the Gift Clause focuses upon the adequacy of consideration “because paying far too much for something effectively creates a subsidy from the public to the [private party]. “The potential of a subsidy is heightened when, as occurred here, a public entity enters into the contract without the benefit of comparative proposals.”
Taking the allegations in Plaintiffs complaint as true, and making all reasonable inferences from those facts, the Court finds that Plaintiffs have set forth sufficient factual allegations that would lead to the conclusion that the Defendants failed to receive adequate consideration in exchange for, among other things, expending tax payer funds and loaning its credit on the World View project, committing to lease the premises to World View at below market rates, and granting control of the balloon pad to World View.
In summary, the Court finds that Plaintiffs have alleged sufficient facts in their Complaint at Count One to state a valid claim for a violation of the Gift Clause.