Arizona Supreme Court holds that the sufficient consideration prong under the Arizona Constitution’s Gift Clause is an objective inquiry, requiring a governmental entity to receive a fair market value return that is proportional to the consideration it paid, without deference to the entity’s assessment of value.

To encourage economic development, the City of Peoria contracted with a private out-of-state university to open a campus in an underused area.  The university agreed to offer certain programs in building space leased from a private landlord and participate in development activities to attract other industries.  In exchange, the City agreed to pay the university up to $1,875,000 to develop the campus and reimburse the landlord for necessary renovations.  Taxpayers in Peoria sued, alleging that the City’s payments violated article 9, section 7 of the Arizona Constitution (the “Gift Clause”).  The superior court granted summary judgment for the City, and the Arizona Court of Appeals affirmed.  The Arizona Supreme Court reversed.

The Gift Clause prohibits public funding going to non-public enterprises.  To comply with the Gift Clause, a government expenditure must serve a public purpose, and the consideration the public paid must not far exceed the value received.  As to the first prong, the Arizona Supreme Court agreed that the City’s expenditures had a public purpose.  The Court reiterated that it gives significant deference to a governmental entity’s determination regarding an expenditure’s purpose unless the entity has unquestionably abused its discretion. 

However, the Court held that the economic impact from the City’s agreements was merely an “anticipated indirect benefit” that did not satisfy the second prong.  The City did not receive adequate consideration because neither the university nor the landlord promised to provide the City with any specific economic benefit — they simply agreed to engage in their respective businesses.  Although the Court of Appeals had deferred to the City’s determination that it would receive an equitable economic return, the Arizona Supreme Court disapproved of its prior statement in Cheatham v. DiCiccio, 240 Ariz. 314, 322 ¶ 35 (2016) that “courts must give due deference to the decisions of elected officials” in applying the “consideration” prong.  Rather, the Supreme Court held that the inquiry is objective; courts must determine the fair market value of the benefit the public received and assess whether that benefit is proportional to the expenditure.  Gross disproportionality violates the Gift Clause.

Justice Timmer authored the opinion of the Court.