Devoting Public Resources
to a Public Purpose

Why, you might ask, does it seem the MCCCD Legal Department often puts constraints on enthusiastically developed employee-incentive programs, or on agreements perceived as innovative between industry and the District? Is the Legal Department's role simply to be a "wet blanket?"

The answer is resoundingly "no."

In fact, the Legal Department doesn't particularly enjoy being a naysayer. But Arizona law does not grant public entities, which includes the District, free reign to spend funds on whatever they believe is in the public good. Instead, Arizona law restricts expenditures through a variety of constitutional, statutory, and regulatory provisions. And the Legal Department is responsible for protecting its client--the District--from running afoul of those provisions and becoming headlines in local newspapers.

One key law that limits the ways in which the District may spend money is Article 9, Section 7 of the Arizona Constitution, which states:

"[No]. . .subdivision of the State shall ever give or loan its credit in
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. . . ."

Since MCCCD is a "subdivision" of the state, the constitutional edict applies to us. (A majority of other states have similar provisions.)

The provision has been a part of the Arizona Constitution since the state's constitutional convention adopted it in 1910. It was a reaction to the loss of large amounts of public funds spent during the 1800's for railroads and other industrial projects that often failed to generate any public benefit.

A good example of public funding that went awry is the Narrow Gauge Railway Bonds, which were issued by the Pima County Board of Supervisors in 1883.

The railroad was supposed to connect Tucson to the mines in Globe, but the private promoter built only a fraction of it. The Board had issued more than $150,000 in bonds to support the project in exchange for stock in the railroad, which subsequently became worthless. Finally, after years of litigation, and the involvement of the United States Congress and the Territorial Legislature, the Arizona State Legislature in 1953 appropriated funds to retire the bonds.

What exactly does the Constitution's language mean? Well, there has been a considerable amount of litigation in Arizona seeking to determine that meaning. In fact, Arizona's constitutional provision has been litigated more often than similar provisions in other states. This prompted one commentator to remark that Arizona leads all other states in recognizing a constitutional mandate that every use of public funds or credit must return an adequate public benefit.

But not just any public benefit will do.

"Public benefit" or "public purpose" means that the expenditure seeks to achieve an objective that is within the specific powers and duties of the public entity doing the spending. The state legislature, in creating counties, cities, special districts, and community colleges, establishes those powers and duties in statute. In the case of the District and its colleges, the objectives generally must be educational or training in nature.

What kind of funds does the constitutional provision reach? At a minimum, it means everything that the District handles through its accounts, including state-appropriated funds, grants, donations, and bond proceeds. In certain situations, the reach may even be broader. For instance, proceeds and interest from industrial-development bonds issued by city development authorities are "public funds" subject to the constitutional provision, even though the bonds do not commit the credit of the cities to insure repayment. The tax-exempt nature of the bonds is enough to bootstrap them into being public.

Even if the expenditure of public funds is for a public purpose, there is still one more hurdle to cross. The amount theDistrict pays must be reasonable in view of what it will receive. If the District commits itself, both financially and in kind, to an individual, association or corporation--and the value of that commitment is more than what the District will gain--it will likely violate the Constitution.

Confused? These examples should help.

In this era of cities and counties entering into agreements to build sports complexes, an Arizona court in 1974 scrutinized whether a "fire-sale" deal involving the rental of public land and ownership of the stadium constructed on it violated the Constitution.

The decision in that case, and a later case interpreting it, spawned the rule that the public entity must receive fair and reasonable value in light of what it gives up.

A "donation" or "subsidy" may result if MCCCD shoulders too much of the risk under a contract for something it is purchasing. This holds true even if the contract resulted from a competitive procurement.

Over the years, the Arizona Attorney General has written many opinions about whether particular situations comply with the constitutional provision. He has addressed issues such as use of a public vehicle, sick leave, employee release time, travel expenses, and employee recognition awards.

The AG advised, for example, that a school board could not make cash or savings bond awards to students achieving perfect attendance...but it could reward them for academic achievements, because the latter was a purpose in keeping with the powers and duties of the board.

Analyzing what is and isn't appropriate under the Constitution isn't always easy. Just remember, the purpose of the constitutional provision is to prevent the depletion of public funds by giving advantages to special interests or engaging in nonpublic enterprises.

Published in the Spring 1998 Edition of In Brief