Getting tax dollars to you is the right thing to do. And it’s also legal.

TO: Clarinda Vail
FROM: Terry Goddard
DATE: July 2, 2020
SUBJECT: Distribution of Town surplus funds per capita to Town residents

Question presented: May the Tusayan Town Council use surplus Town funds to make an equal, per capita distribution to Tusayan residents?

Summary: Yes, the Arizona Constitution and statutes do not prevent such a distribution.  The gift clause in the Constitution prevents a special interest from getting a donation, grant, or subsidy from a public body.  But, since the proposed distribution would be in equal amounts and provided to all or nearly all the residents of Tusayan, not reserved for a select few, the gift clause may not apply.  Even if the gift clause is applicable, the proposed distribution is permitted if it serves the public interest or promotes economic development and is taken from Town surplus funds so it does not interfere with providing essential services and critical capital needs and is not prevented by budget limitations.

Legal Provisions:

  1. Article 9, Section 7 of the Arizona Constitution, gift or loan of credit; subsidies; stock ownership; joint ownership (commonly known as the “gift clause”): 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, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation, except as to such ownerships as may accrue to the state by operation or provision of law or as authorized by law solely for investment of the monies in the various funds of the state.
  2. Wistuber v. Paradise Valley Unified Sch. Dist., 141 Ariz. 346, 687 P.2d 354 (1984): The Paradise Valley School District agreed with the teachers’ association exempting the president of the teachers’ association from teaching but received a portion of his or her compensation from the district and the rest from the union. The supreme court affirmed the judgment in favor of the district as not being a use of public monies for private purposes prohibited by the gift clause, Ariz. Const.art. IX, § 7
  3. Turken v. Gordon, 223 Ariz. 342, 349, 224 P.3d 158, 165 (2010): 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. However, in this instance the tax benefit granted for a parking garage was determined not to provide sufficient value to the public entity and therefore was barred. 
  4. Ariz. Att’y Gen. Op. I13-004 (R13-008) July 23, 2013: While not ruling on the gift clause issue in the subject legislation, the Opinion discusses the gift clause and makes clear that it is designed to eliminate government favoritism and prevent governments from depleting public resources in favor of special interests. 
  5. Att’y Gen. Op. 120-007 (R20-007) April 23, 2020: A school district may use district funds to make health-related and other expenditures for families, students, and community members in response to an emergency health crisis such as the COVID-19 outbreak without violating the gift clause. Health-related expenditures in response to Covid-19 satisfies the “public purpose” requirement of the gift clause.  Plus, in the case of a non-contractual widespread payment from public funds to members of the public, the value received calculation is not applicable. 

The proposal.  In the current contest for Mayor of Tusayan, one candidate has proposed that a portion of the Town’s surplus funds be distributed in equal amounts to Town residents.  Her proposal has become a major issue leading up to the election.  The Town Attorney, “in response to inquiries from Town constituents” (who are not identified), has written a memorandum arguing that such a distribution would violate the gift clause of the Arizona Constitution. 

General analysis.  I did not find court cases in Arizona that considered whether a Town Council or any publicly elected body may distribute a portion of the Town’s surplus funds on an equal basis to all or a large portion of its residents.  Given the lack of Arizona precedent, if the next Town Mayor and Council decide to make the proposed distribution and it is challenged in court, this question will be judicially decided.  However, the clear language and intent of the gift clause and the cases interpreting the clause leave little doubt that, if the clause applies at all, it does not bar a general public distribution on an equal, per capita basis under the conditions discussed below.  The per capita distribution approach has recently gained prominence due to the Federal Government’s $1,200 stimulus payments in response to the economic impact of the Corona virus.

The gift clause does not apply.  The gift clause is intended to prevent a public body from giving special financial considerations to a specific private person or corporation.  “The constitutional prohibition was intended to prevent government entities from depleting the public treasury by giving advantages to special interests or by engaging in non-public enterprises.” John D. Leshy, The Making of the Arizona Constitution, 20 Ariz. St. L. J. 1, 96 (1988).

Significantly, all references in the gift clause are singular.  “No individual, association or corporation” may receive from a public body a gift or “or loan its credit in the aid of, or make any donation or grant, by subsidy or otherwise”.  Thus, the gift clause prevents financial arrangements (gifts, grants or subsidies) that benefit only a person or a corporation or an association.  The proposal to divide part of the Town’s surplus into equal lots for as many qualified residents as possible is the opposite of the special interest favoritism prohibited by the gift clause.  It is not exclusive as it promotes the general welfare.  It follows that the gift clause does not apply to the proposed distribution provided it is received by a large segment of the residents of Tusayan.

Even if the gift clause applies, it does not bar the proposed distribution.  Even if one takes the position of the Town Attorney that the gift clause is applicable to equal payments to the largest possible group of residents without favor or distinction, the proposed distribution is constitutionally permitted.

The gift clause prohibits any donation, grant or subsidy to an individual or corporation.  There are no exceptions mentioned in the Constitution.  However, courts have repeatedly held that donations, grants, or subsidies in the public interest are permitted, provided they do not unreasonably impact the funds for critical civic needs.  A subsequent clarification held that, when goods or services are involved, the deal must not only be in the public interest but not be “so inequitable and unreasonable that it amounts to an abuse of discretion, thus providing a subsidy to the private entity.” Wistuber v. Paradise Valley Unified Sch. Dist., 141 Ariz. 346, 349, 687 P.2d 354, 357 (1984)

The gift clause “is designed to …prevent governments from depleting public resources in favor of special interests. See Wistuber, 141 Ariz. at 349, 687 P.2d at 357 (internal quotations and citations omitted).  Therefore, the first step in whether the proposed distribution is permitted is a determination of whether the Town has sufficient surplus funds to allow the payment of the proposed distribution.  That is a question of fact beyond the scope of this memorandum.  Before making a distribution, the Town Council must verify that the funds to be used are over and above the money needed for essential civic operating expenses, critical capital projects and not prohibited by budget limitations.  Any funds that the Town should maintain for contingencies is a policy question for the Town Council.

Once a surplus has been verified and quantified, any donation, grant or subsidy authorized by the Town Council must have a public purpose, it must be in the public interest.

In interpreting the gift clause, courts have been reluctant to define the public interest. “The Court has recognized that “public purpose” is incapable of exact definition and changes in meaning to meet new developments and conditions”. Maricopa County v. State (Sherwood), 187 Ariz. at 280, 928 P.2d at 704.  In almost every case, however, the public interest has been defined to be the considered decision of the elected representatives.  The court has directed that substantial deference be given to the judgment of elected officials. Turken v. Gordon, 223 Ariz. 342, 349, 224 P.3d 158, 165 (2010) (“In taking a broad view of permissible public purposes under the gift clause, we have repeatedly emphasized 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.’”) (internal citations omitted).

A distribution must be in the public interest.  There are many considerations that might enter the Town Council’s determination of what public interest would be served by a per capita distribution, any of those below would be sufficient to meet gift clause requirements, although in some instances, qualification standards must be established by the Town Council:

  • In this time of the Covid 19 pandemic and the consequent economic devastation, virtually all Tusayan residents, particularly those employed in the tourism industry, will benefit from financial assistance.
  • If minor children are considered eligible for the distribution, their funds could be held in an educational trust to guarantee their higher education, serving an important educational opportunity public interest.
  • In a period of economic distress, a distribution will strengthen the ‘social safety net’, an important public benefit for lower income families.
  • To attract and retain the highest quality workforce for the area’s tourism industry, a distribution has the public benefit of offsetting the Town’s isolation and relative lack of community resources.

In a recent AG Opinion, cited by the Town Attorney’s memorandum, Attorney General Brnovich stated that a school board’s expenditure of public money for health-related purposes in response to Covid 19 would not violate the gift clause.  In his Opinion, he makes a strong case for allowing public funds to be used for direct assistance to members of the public.

Here, using school district money to make health-related expenditures (for example, to pay for services, supplies, or equipment) in response to COVID-19-a declared pandemic satisfies the first “public purpose” prong of the test. The Arizona Supreme Court has found that similar expenditures made for the health and welfare of the public are made for public purposes. (citations omitted)

The Attorney General also deals with whether distribution recipients owe an obligation to provide services to the Town.  In instances where the payment is part of the “social safety net” he concludes, recipients do not have to provide anything in return.

If a public health expenditure for COVID-19 purposes is not contractually based, and is instead in the form of direct assistance to the school’s community at large, the second prong of the Gift clause test may not apply. In such circumstance, the analysis of such “social safety net programs” may instead focus on whether “anyone who qualifies for public assistance may obtain it” and whether “large numbers” of persons do qualify.  (citations omitted)

As regards the distribution under consideration here, the Attorney General’s last concern is critical.  A key focus as to whether a public distribution is permitted under the gift clause is whether everyone who qualifies obtains a benefit and whether large numbers of persons will qualify.  Obviously, that is the case with the proposed distribution.

Economic Development is a permitted use of public funds.  As pointed out by the Town Attorney’s memorandum, Arizona law authorizes a city or town to expend public funds for “economic development activities.”  The statute, A.R.S. Section 9-500.11, defines “economic development activities as “[a]ny project, assistance, undertaking, program or study, … or other activity, that the governing body of the city or town has found and determined will assist in the creation or retention of jobs or will otherwise improve or enhance the economic welfare of the inhabitants of the city or town.”  The Town Attorney memorandum concedes, “The Town may continue to exercise such authority going forward when community needs during the COVID-19 outbreak are identified and public benefits can be identified. Funds could then be expended targeted at securing such benefits.”

The Town Attorney’s memorandum makes my point, if the proposed distribution is targeted to meet the community needs during this crisis, no viable argument against the pro rata distribution of Town surplus funds to relieve those needs remains.

As noted above in the public interest analysis, the proposed per capita distribution has substantial economic development benefits.  The residents of Tusayan are overwhelmingly involved in tourism which has been devastated by the Covid-19 epidemic.  A per captia distribution would support them as they wait for the return of tourism to the Grand Canyon.  Also, because of the sacrifices that employees in the Town must make given the long drive to shopping, entertainment and other activities, the payment can be a hardship bonus to make sure that employers in Tusayan have a stable supply of high-quality employees.  Congress obviously concluded that a per capita payment is an economic development boon when it enacted the $1,200 per capita stimulus payments in response to the economic devastation of the Corona virus.

Conclusion:  For the reasons stated above, the proposed per capita distribution to Town residents, since it involves all or almost all of the residents, is not the kind of special interest favoritism that the gift clause was designed to prevent and therefore the clause does not apply.  However, even if the proposed distribution is subject to the gift clause, it meets the public purpose requirement and is permitted under the Arizona Constitution if it is carefully crafted by the Town Council to:

  • Assure that the distribution is from surplus funds and does not interfere with the money needed for essential civic operating expenses, critical capital projects and is not prohibited by budget limitations.
  • State on the record what judicially recognized public purpose the distribution serves.
  • Divide the amount to be distributed equally among all qualifying residents; and
  • Define qualifying resident to allow as large a proportion of the Town’s population as possible to take advantage of the distribution and avoid any possibility that only a select few will benefit.