Thursday, June 2, 2016

A Libertarian View on Pima County's World View Deal

Posted By on Thu, Jun 2, 2016 at 4:00 PM

click to enlarge world-view-balloon-capsule.jpg

There has been much fretting over the suit that the Goldwater Institute has brought against Pima County over the deal it made with World View Enterprises. Let’s try to separate the hysteria over economics from the issue of legality.

Missing or Avoiding the Point

County Administrator Chuck Huckleberry (named in the suit along with three county supervisors), in a memo to the county supervisors dated April 4, challenged the assertions of the Goldwater demand letter and accused it of being politically motivated and trying to affect the outcome of an election. These charges appear to be based solely on the timing of the letter. In a May 4 memo to the county supervisors dated May 4. Huckleberry accused Goldwater of having “a clear bias against southern Arizona,” and cites economic development deals made by the cities of Mesa, Scottsdale, and Gilbert, which drew no suit from Goldwater, as evidence for that claim. During a question and answer session after a speech delivered in Tucson on May 18, Jim Manley, lead attorney for Goldwater on this case, was given the same challenge. He explained that the number of potential cases brought to Goldwater is overwhelming, and that their resources are limited. He said that there were two points that compelled them to take this particular case. One was the number and gravity of the laws violated, and the other was the number of people from Pima County seeking relief and willing to put their names on the line and act as plaintiffs.

Many business leaders also miss the point. A group of self described “chief executives of groups representing hundreds of business leaders” sent a letter to Darcy Olsen, head of the Goldwater Institute, asking that the suit be withdrawn. They argued passionately for the deal with World View, and claimed that the suit has already done damage to the economic prospects for southern Arizona and will do more of it proceeds. Echoing Mussolini (the original “public-private partnerships” guy), they stated, “We believe that sound public-private partnerships are critical tools in fostering a strong climate for economic growth and new job creation.” Well, their constituents just want a consistent level playing field, a little transparency, and equal opportunity when dealing with governments—exactly what the Goldwater suit will help to re-establish. If the signers of the letter really want Goldwater to back off, they might include some legal reasons for doing so. After all, Goldwater filed a legal suit, not a white paper on economic development policy. It is ironic that, by signing the letter, these leaders support the flouting of laws that were designed specifically to protect their constituents—the business owners of Pima County. Perhaps these “chief executives of groups representing hundreds of business leaders” should step down and seek jobs with Pima County. There they could plan in secret, pick favorites, and provide corporate welfare. That would be a much better fit for them.

Violations of Law Cited by Goldwater

Arizona Constitution’s “Gift Clause”

First is the violation of the Arizona Constitution’s gift clause. Paragraph 50 of the Goldwater filing states:

Article IX, section 7 of the Arizona Constitution (the “Gift Clause”) makes it illegal for Pima County to ‘give or loan its credit in aid of, or make any donation or grant, by subsidy or otherwise, to any individual, association, or corporation….

Huckleberry asserts that the deal involves no gift to World View because the funds will be paid back, and then some, by the end of the 20-year rent-to-own contract that is part of the deal. Read the “Gift Clause” again. I agree with Huckleberry that the deal does not hand World View a bag of money, but by mortgaging county buildings to fund the headquarters and launch pad, it clearly does “give or loan its credit in aid of” the World View “corporation.” Incidentally, what makes this gift a real sweetheart deal is the fact that World View need not secure any of the loan with any of its assets. All of the risk lies, well, elsewhere.

Virtually all the supporters of the deal claim that World View will help the economy and help create more jobs in the future, which is a public benefit in return for the deal, and therefore the deal is not a gift. Unfortunately, that argument will not fly in court. Huckleberry missed the point when he stated that there was no payback in Turken v. Gordon as there is in the World View deal. There was a cash gift in that case but no cash gift involving World View. No argument there. The World View gift was to “give loan or credit in aid of” World View, not to give $97 million to a developer as in Turken v. Gordon. The reason Goldwater cites Turken v. Gordon, a case involving the “Gift Clause” (that it won), was because the court established that the promise of future jobs or economic growth does not satisfy the requirement that the public benefit be tangible and of equivalent value. The court found that the only tangible public benefit from the deal was exclusive use of 200 parking spaces, the value of which did not approach $97 million. The point is that you cannot use the prospect of future jobs or economic growth to weasel your way out of a violation of the “Gift Clause.”

The arrangement regarding the ballon pad is arguably an even more egregious violation of the gift clause. The lease deal is for the headquarters building, the balloon pad will be retained by the county, but World View will have virtually total control over the $1.5 million asset. Competitors will be allowed to use the launch pad, but only in compliance with terms and requirements set by World View. As Goldwater said in its response to the Motion to Dismiss:
Defendants gave World View exclusive use of the Pad, including the power to control which of its competitors can use the Balloon Pad and on what terms. The County received nothing in exchange for granting this shift in power. There is no clearer gift than getting something for nothing. 

Appraisal, Auction, and Rental Rates

In his memo to the supervisors, Huckleberry said, “...the County is not loaning money to World View, nor is it building a facility and “giving” it to World View. It is building a County-owned facility on County-owned land that will be leased to World View.” That statement does clear up some misunderstandings about the deal. Unfortunately, it also removes any doubt that the deal violates a number of Arizona Revised Statutes. As Goldwater points out, Pima County was required to hire an experienced appraiser to determine the valuation of the land and building under A.R.S. 11-256(B). It did not do so. World View also did not win the contract via a public auction with a bid that was at least ninety percent of the experienced appraiser’s valuation, as required under A.R.S. 11-256(C). Oh yeah, and Pima County did not give advance notice of a proposed lease as specified in A.R.S. 11-256(D). So, as Goldwater said in paragraph 79 of its filing, “The Lease-Purchase Agreement is void due to Pima County’s failure to comply with A.R.S. 11-256(B), (C), and (D).”

In its Motion to Dismiss, the County claims that it was acting pursuant to A.R.S 11-254.04, not A.R.S 11-256(B),(C), and (D). Well, we would hope that the County would obey both since both statutes are on the books, and there is no exemption from A.R.S. 11-256 written in to A.R.S. 11-254.04. In its response to the County’s Motion to Dismiss, Goldwater explained it this way:
The competitive safeguards of section 11-256 are easily reconciled with the economic development authority in section 11-254.04: the former creates basic safeguards for county leases, the latter gives counties the authority to lease property for economic development consistent with those safeguards. This reading harmonizes both statutes and is consistent with the history of the two sections.

Apparently, the county understood this in the past and complied with A.R.S. 11-256, the recent lease deal with Southern Arizona Raceway LLC is an example. The reason for the change in approach is not clear.

Mandatory Competitive Bidding

According to Goldwater, “Arizona statutes mandate a process of competitive bidding, contracting, and procurement in order to prevent favoritism, protect taxpayers, and promote government efficiency. See A.R.S. 34-603, -604, and Title 34.” There is an exemption for emergency situations, like natural disasters when equipment and supplies are needed immediately, and so forth. Pima County played the “emergency” card after at least six months of working with pre-selected winners Swaim and Barker Morrissey under the super-secret code name “Project Curvature” (I’m not making this up) because, well, World View wanted the facility ready in 2016.

Huckleberry also expressed concern that governments in New Mexico and Florida were trying to land World View so the County had to move immediately. Unfortunately, the desires of World View do not constitute an exemption from Arizona law, and it is probably not true that leaving the state was an option for World View. As it turns out, World View was awarded an Arizona Innovation Challenge grant to the tune of $250,000 from the Arizona Commerce Authority last year. Award recipients are required to sign a “legal agreement” which obligates them to “...various terms of compliance.” As the FAQ page of the Arizona Commerce Commission’s website puts it:
There will also be certain “clawback” clauses that will come into play to discourage certain activities by winning companies that would be counter-productive for the state of Arizona—to include, but not be limited to, moving the company’s operations out of the state, or being acquired by a company which moves the operations out of state and/or does not comply with reasonable reporting requirements. Most of the winning companies prior to the Fall 2015 AIC competition are held to a 3-year obligation term.   


Conclusions

This issue is not about World View Enterprises. I agree with many that see the company as an innovative, creative outfit that has a shot at success in the burgeoning space tourism industry, as well as remote sensing and other scientific applications. We all wish them well. We also wish that they would get their startup money from venture capitalists, or anywhere other than Pima County which is already cash strapped when it comes to providing basic services.

Speaking of which, World View recently announce that it did in fact recently received $15 million in venture capital. Maybe it could clear up all this controversy by declining the deal and replacing the $15 million from Pima County with the new venture capital investment. As Jim Manley put it, "News that World View has secured $15 million in venture capital funding should raise one question for Pima County taxpayers: If World View is now sitting on the exact amount of money the County borrowed to build World View a headquarters, why do taxpayers still have to foot the bill? The Goldwater Institute has been consistent that businesses should find private funding for their projects, rather than force taxpayers to subsidize their profits. Now World View is in an ideal position to repay the County and stand on its own two feet—it clearly doesn’t need to stand on the backs of taxpayers."

This governmental lawlessness is becoming so widely accepted that the County can’t seem to understand why locals would object to it flouting of a laundry list of Arizona Revised Statutes, and even a provision of the Arizona Constitution, or why the Goldwater Institute would work to help the law prevail. Even business groups, as mentioned before, would prefer to ignore those laws that protect their constituents.

Huckleberry ended his memo with the sentence, “Whether we like it or not, incentives are a fundamental element of economic development, job attraction, and increased community wealth.” He would have been more to the point if he substituted the words “it’s legal” for “we like it”.

He may be right about incentives, but what does that portend for the future? If private corporations move facilities to the highest bidders, then every city would lose since even the “winner” will have typically over extended itself reaching deep into the pockets of the taxpayers. Also, the relationship may not be that for which the city or county had hoped. If bribed, the business will not feel married to the city, but will be happy to enjoy a few favors until something better comes along. Corporations make decisions based on factors that enhance their ability to do business. A bribe is a very short-term enhancement.

There is hope. As many as 47 other states have “Gift Clauses” in their constitutions. This action by Goldwater may be used as a model in other states to help stop the corruption and lawlessness that seems to be rule these days. If it came to pass that other cities and counties no longer provided bribes to businesses to relocate as well, then instead of having a bunch of losers and one big loser (the winner of the bribe contest) we could work to make our communities nicer places in which to live, work, and do business. That way, everybody wins.

Jonathan Hoffman is the Weekly's resident Libertarian columnist.

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