Arizona Court of Appeals Division One holds that agreements violate the Gift Clause of the Arizona Constitution where the agreement places no obligations or requirements on the private entity in exchange for receiving public funds.

This case arose out of challenges to provisions of two Memorandums of Understanding (“MOU”) between the City of Phoenix and the Phoenix Law Enforcement Association (“PLEA”) entered between 2010 and 2014.  Under each challenged MOU, the City paid PLEA $1.7 million in “release time, which is time police officers are released from police duties for the City to allow them to perform PLEA activities and business.” 

Challengers filed suit, contending that the release time provisions violated the Arizona Constitution’s Gift Clause, which prohibits the state and its subdivisions from giving money, loaning credit, or making donations or grants “to any individual, association, or corporation.”  The trial court enjoined the MOUs because the PLEA “was not required to ‘perform specific service or give anything in return’ for the release time.”  The trial court also enjoined any future agreements unless they met a number of requirements, including providing “a public benefit in obligatory language.”  The City and PLEA appealed. 

The Court of Appeals affirmed but vacated portions of the trial court’s order imposing requirements on future MOUs “because they [were] not properly part of the consideration analysis.”  The Court analyzed the release time provisions of the 2012-14 MOU based on a two-part test outlined in Turken v. Gordon, 223 Ariz. 342, 345 ¶ 7, 224 P.2d 158, 161 (2010), which provides that “the government may not provide public funds to a private entity unless (1) the expenditure is used for a public purpose and (2) the consideration received by the government is not ‘grossly disproportionate’ to the amount paid to the private entity.”  The Court did not analyze the “public purpose” prong because it concluded that its “resolution of the consideration prong is dispositive.” 

Determining the adequacy of consideration involves an analysis of “whether a contract obligates a private entity to perform specific duties in exchange for the expenditure.”  The Court concluded that “[a]lthough listing examples of uses for release time, the 2012-14 MOU release time provisions do not obligate PLEA to perform any specific duty or give anything in return for the release time, meaning the City receives no consideration . . . for its expenditure.”  Because of the permissive and non-binding language used to describe the duties of PLEA representatives, the Court found that the trial court “correctly enjoined . . . the 2012-14 MOU after finding that those release time provisions did not obligate PLEA to provide any specific duty in exchange for release time.”  The Court also noted that other promises made in the 2012-14 MOU which were highlighted by the City and PLEA did not save the release time provisions because they did “not obligate PLEA to perform any duties in exchange for the release time.”  The Court also dismissed the City and PLEA’s reliance on the 37-year history of using release time to improve employer-employee relations reasoning that the parties had “not shown that such course of dealing evidence can be used to establish consideration[.]”

Judge Howe authored the opinion of the Court, which was joined by Presiding Judge Thumma and Judge Gemmill.