Attorney general declines an OK for tax spending on private economic development agency | Arkansas Blog

Friday, May 1, 2015

Attorney general declines an OK for tax spending on private economic development agency

Posted By on Fri, May 1, 2015 at 6:41 AM

Attorney General Leslie Rutledge declined in an official opinion yesterday to give a legal seal of approval of transfer of Russellville sales tax money to a private economic development agency that passes the money on to a local chamber of commerce

Andrea Lea, then a state representative from Russellville and now state auditor, had asked if the city's payment to the Arkansas Valley Alliance for Economic Development under a contract for "advice on economic development" is a legal expenditure. That agency in turn outsources the "work" to the Russellville Chamber of Commerce for its president and finance director. She also asked if that sales tax money could be used to promote renewal of a city sales tax due to sunset.

The attorney general declined to give specific opinions, because it would require a factual determination on a variety of issues, including interpretation of local laws. Furthermore, the matter is subject of pending litigation.

On the surface, the Russellville arrangement sounds little different than the contracts in Little Rock and North Little Rock to funnel tax money to chambers of commerce under nominal service contracts for economic development work. Circuit Judge Mackie Pierce has ruled these unconstitutional payments to a private organization and said, in effect, that the contracts are shams meant to provide a cover for tax subsides to private organizations.

The legislature has reacted by proposing a constitutional amendment for the 2016 ballot, which — in addition to expanding the state's ability to borrow money to pass out in corporate welfare to potential new businesses — would legalize sending taxpayer money to chambers of commerce, which largely operate as political lobbies for corporate interests.

An appeal of Pierce's ruling is likely. In the meanwhile, it puts a halt to payments in Little Rock and North Little Rock and puts a cloud over perhaps dozens of similar arrangements around the state, at least through the outcome of the 2016 election. They'll get no cover from the attorney general in the meanwhile, it would seem.

I know some Russellville residents have been unhappy about the situation there and talking about a parallel lawsuit to the one in Little Rock. Using tax money to promote a tax would not be popular generally among current legislators.

The Rutledge opinion said on the two key points:

The ballot in a city sales tax election may designate uses of tax revenues, which then can be applied only to those uses. It is up to the city council to determine legislatively whether a particular expenditure is within the ballot-designated purpose(s), and a court will not disturb its finding unless it is found to be “demonstrably arbitrary and unwarranted.” There are constitutional limitations on a city’s use of public funds to promote a particular legislative outcome (whether the legislative body is a representative one like the General Assembly, or the people themselves). Whether a city’s communication with its residents regarding a ballot question is protected speech or impermissibly partisan electioneering is a question that will depend substantially on the prevailing facts.

Economic development is a legitimate municipal goal, and a clear public purpose underlies a city’s use of public funds to pursue that goal. A city generally may for a public purpose enter into and perform a contract supported by adequate consideration. Contract consideration’s adequacy is a fact-intensive determination,[ as are the existence and terms of any oral contract alleged to exist. There is nothing inherently illegitimate about a city contract under which the counterparty subcontracts its performance obligations.

A city may not, however, “obtain or appropriate money” for a private person or entity.  It may not, in other words, simply donate money to a private party. And “donate,” for this purpose, includes paying money under a contract without receiving adequate consideration.

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