AZ Central – CityNorth decision to impact future development deals

by Michael Clancy – Feb. 1, 2010 12:00 AM
The Arizona Republic

Development agreements between governments and private parties will still be a major part of governmental economic policy, but future agreements will have to be structured in ways that make the public benefits clear and reasonable in the wake of a recent Arizona Supreme Court decision.

Lawyers, economic-development officials and others said deals with retail developers are likely to be the most in jeopardy as a result of the court’s decision last week in the CityNorth case.

But if anyone was hoping the court would abolish all such deals, they are likely to be disappointed.

The court said such projects might be OK if agreements setting up incentives, tax breaks and subsidies do two things: spell out what the government will get in return and provide enough in return that the amount of the government investment is not way out of whack.

In the case of CityNorth, the court said, 3,180 parking spaces probably were not enough to account for Phoenix‘s $97.4 million potential investment. It let the agreement stand, however, because of confusion arising from previous decisions.

Another deal attracting public scrutiny more clearly guarantees what each party brings to the table. Under the memorandum of understanding, which will be formalized when financing is arranged, the Chicago Cubs agree to buy the land for a new spring-training facility and transfer ownership to Mesa, while Mesa will build and own the stadium.

The Cubs will be responsible for stadium operations and upkeep, which had been a net expense for the city.

Mesa Mayor Scott Smith told reporters that lawyers for the city and the baseball team would need time to study the memorandum in light of the CityNorth case.

“We believe the agreement we have would satisfy the requirements,” he said.

Grady Gammage, whose firm represented CityNorth in the case, said he believes the judgment muddied the waters even further.

The court said governments could not consider “indirect benefits” when determining incentives. In the CityNorth case, it deemed indirect benefits to include the promise of jobs and tax revenue.

“These agreements are all about indirect benefits,” Gammage said. “The question is whether the investment exceeds the indirect benefits.”

Cities engage in dozens of incentive agreements, from the sale and leaseback of office buildings to repaying developers for infrastructure costs. Virtually every Valley city has a set of agreements completed, others in progress.

Clint Bolick, of the Goldwater Institute, who argued against the CityNorth incentives, said it was impossible to pass instant judgment on other such deals still in the works, adding that the details of those deals will make or break them.

In the case of CityNorth, additional guarantees from the developer, incorporated into the ordinance that approved the agreement, might have made a difference, Bolick said.

For Gammage, however, that difference is not meaningful. The CityNorth deal will not activate until the city has a steady stream of income, he said, and rewriting the agreement to obligate the developers would make no difference.

Tom Irvine, an attorney who has worked on similar agreements for government groups, said numerous past agreements would not have stood up to the court’s new, updated direction.

“Any pure retail subsidy would fail,” he said.

Some, in fact, fell apart even before any suit could be filed or any court could make a ruling, he said, citing a $36.7 million subsidy to developer Steve Ellman for a big-box-store-anchored shopping area at the old Los Arcos Mall location.

Last week’s decision, Irvine said, made clear that subsidies must have a public purpose and that what the city gets in return cannot be “outlandish.”

“If people do not try to beat the system, you can successfully negotiate economic-development agreements,” he said.

Sen. Ken Cheuvront, who was a plaintiff in the CityNorth case, said future subsidies will have to be “fine-tuned” so that governments do not “give away the house so they can build a garden.”

David Krietor, deputy city manager of Phoenix, who oversees economic development in the city, said Phoenix will continue to seek partnerships with organizations that help the city reach its goals.

“We are going to focus on projects that have a strong positive economic impact for the city of Phoenix and recommend strategic partnerships to the city council that are consistent with local, state and federal law,” he said.

Several people argued that the real problem lies in Arizona’s tax system.

As long as sales taxes dominate municipal revenue, cities will be forced to enter such agreements, they said.

“This does not happen in places with more diversified economies and a broader tax base,” Cheuvront said.

Gammage went further.

“The really frustrating thing is that other states let the government do economic development,” he said, citing New Mexico’s new incentives to build solar plants, train workers in green industries and provide tax credits and financing. “Here, it is a complete mess. Deciding this in a political manner is a more rational way to go about it.”

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