November 19, 2020
By Timothy Sandefur
In a hearing before a trial judge in Tucson yesterday, Goldwater Institute attorneys argued that Pima County officials violated the Arizona Constitution by giving out five separate multimillion dollar subsidies to the World View balloon company. This hearing represented the third stage of a lawsuit taxpayers filed four years ago, after the county’s Board of Supervisors agreed to borrow $15 million—using county property as collateral—to construct a headquarters building, balloon factory, and balloon launchpad for World View to send passengers on rides to the stratosphere at a cost of $75,000.
The original idea was that World View’s operations would spur the local economy. But the company scrapped its plans to operate passenger rides shortly after the deal was struck, and it scaled back its operations to send weather-sensing equipment into the upper atmosphere instead. Even so, it failed to launch a balloon until 2018, when its first effort exploded on takeoff, causing almost half a million dollars in damage to the facilities the county paid to build for World View. Not long after that, the company—which had promised the county to hire hundreds of employees, but never did—announced layoffs of those it had hired. After the COVID-19 pandemic struck, the company reduced its operations even more and ended up using its space-age balloon material to make medical equipment instead. The county suspended the company’s rental payments, meaning it continues to occupy the $14 million building for free.
Previous stages of the lawsuit argued that the county acted illegally by leasing the land to World View for below-market rates and by hiring the contractor and the architect to build the company’s facilities without going through the legally required competitive hiring process. A trial judge ruled against the county on the first issue, but that decision was overturned by the Court of Appeals, which declared that a law that lets counties spend money on economic development had the effect of repealing another law that prohibits below-market leases of county property. A trial judge also agreed with the taxpayers on the second point—that county officials disregarded the state’s laws governing how counties can hire contractors. “The record is clear,” the court said, that county officials “had no intention of pursuing a competitive bidding process,” as the law requires. County Administrator Charles Huckelberry simply “hand-picked” a pair of builders behind the scenes and gave them “a five month ‘head start’ over any other potential bidders.” That decision was vacated on appeal, however, on the grounds that taxpayers had sued too late.
Yesterday’s hearing involved the third part of the case, which argues that by building a tailor-made facility for World View at the cost of more than $15 million, Pima County violated the state Constitution’s “Gift Clause,” which reads, “Neither the state, nor any county…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….” Originally written in 1910 to bar state and local governments from subsidizing railroads and other businesses with taxpayer money, the Gift Clause forbids government from lending or giving away taxpayer money or other things of value to private enterprises.
- First, it extended a “loan of credit” to World View by borrowing $15 million (plus more than $4 million in interest) on the company’s behalf. The company is expected to pay the county back over a 20-year period through regular “lease” payments (now suspended due to the pandemic).
- Second, the county gave “subsidies” to World View by including in the contract a provision that lets World View buy the building at the end of that 20 years for only ten dollars—when the building will still be worth at least $14 million.
- Third, it set the “lease” payments that World View must pay for use of the building at below-market rates. In fact, the county admits that it never bothered to determine what the market rate for rent would be in the first place.
- Also, the county arranged to locate the World View headquarters on county-owned land in order to give the company a tax break. That’s thanks to state laws that say county-owned facilities are exempt from ordinary property taxes and are subject instead to another tax, called the government property lease excise tax (GPLET)—but “aviation” facilities are also exempt from the GPLET tax. In other words, the county saw to it that World View could avoid paying about $4 million in property taxes that any other firm would have had to pay.
- Finally, the county also built a custom-made balloon launchpad for World View at the cost of about $2.4 million—a facility that World View gets exclusive use of during the 20-year period.
In written and oral arguments presented in Pima County Superior Court yesterday, Goldwater lawyers argued that these five benefits violate the Gift Clause because the county gets little or nothing in return. Arizona courts have declared that while counties may buy goods or services from private companies, judges must ensure that the amounts counties pay must not be “grossly disproportionate” to what they get back. But here, taxpayers argue, the benefits Pima County gives World View are “grossly disproportionate” to what the company gives in return. The company must pay about $11.7 million in “lease” payments to use the building—but that is far below the actual market rate for rental. The company also pays nothing for its $4 million tax break, or the $2.4 million launchpad—and paying $10 for a building that will be worth $14 million is “grossly disproportionate” by any measure. (You can read the details here and here.)
Pima County’s lawyers did not dispute any of these facts but urged the court to disregard the specific details of the county’s arrangement with World View. The project, they claim, was intended to generate economic development, and in pursuit of economic development, the county was entitled to build the facility for World View so long as it arranged the deal so that it would come close to breaking even. The county does not argue that it actually does break even—it admits it only gets $11.7 million for a $14 million building, and nothing in exchange for the tax break or other valuables—but it argues that Arizona law only requires the county to get about 85 percent of its value back for the payments it makes. (It bases that number on a legal precedent that did not involve the Constitution’s Gift Clause.) Moreover, they insist, no existing precedent specifically says that counties may not lend millions of dollars of taxpayer funds to a private, for-profit business. But while that is true, it’s only because Arizona courts have never addressed that specific question before.
The hearing—which was held by telephone and lasted about two hours—was not recorded. The court is expected to issue its ruling within 60 days. You can learn more about the case here.
Timothy Sandefur is the Vice President for Litigation at the Goldwater Institute.