Contract considerations for school boards cbp

Impairment of Contracts,

Gift of Public Funds and

Binding Future Boards

Candyce B. Pardee Udall Shumway PLC

Southern Arizona Office

[email protected]

Impairment of Contracts

Arizona Constitution, Art. 2, Sect. 25.

United States Constitution, Art. 1, Sect. 10, Clause 1.

Impairment of Contracts “No bill of attainder, ex-post-facto law, or law

impairing the obligation of a contract, shall ever be enacted.” Arizona Constitution, Art. 2, Sect. 25.

“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.” United States Constitution, Article 1, Section 10, Clause 1.

There is no impairment… When the legislation predates the contractual

obligations of the parties

All parties to a contract are presumed to be aware of the law when they enter into a contract, thereby making the law part of the contract.

So if a law is passed before the contract is made, there is no “impairment to contract.”

Samaritan Health Sys. V. Superior Court, 194 Ariz. 284, 981 P.2d 584 (Div. 1, 1998)

If a contract exists before the change in the law… Legislation that changes the contractual obligation

between the parties by

Enlarging the obligation or

Reducing the obligation

In favor of one party against another

Is in violation of the “impairment of contract” statute.

Picture Rocks Fire Dist. v. Pima County, 152 Ariz. 442, 733 P.2d 639 (Div. II, 1986)

Scenario … The Arizona Legislature enacts legislation in November

which ends recall rights for Reduction in Force. District policies in effect at the time the employment contracts were written specifically allow for recall rights. The employment contracts may even say that employees are required to know and follow District policy.

What happens to employees who were let go under reduction in force (RIF) with three year call back rights in the prior two years?

What happens to employees RIF’d that year?

Gifts of Public Funds

Arizona Constitution, Art. 9, Sect. 7

The “Gift Clause” states… “Neither the state, nor any county, city, town,

municipality, or other subdivision of the state 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, or become a subscriber to, or a shareholder in, any company or corporation, or become a joint owner with any person, company, or corporation, except as to such ownerships as may accrue to the state by operation or provision of law or as authorized by law solely for investment of the monies in the various funds of the state.”

The “Gift Clause” was intended To prevent government from depleting the public

treasury by

disbursing public funds

for the private or

personal benefit of

private individuals,

corporations, or

associations.

McClead v. Pima County, 174 Ariz. 348, 849 P.2d 1378 (Div. II, 1992)

Public Funds Early courts, looking to both the Gift Clause

and the “Tax Clause,” Arizona Constitution, Art. 9, Sect. 1, held, “It is, of course, axiomatic that money raised by public taxation is to be collected for public purposes only, and can only legally be spent for such purposes and not for the private or personal benefit of any individual.”

Proctor v. Hunt, 43 Ariz. 198, 29 P.2d 1058 (1934)

Public Purpose “Public purpose is a phrase perhaps incapable of

definition, and better elucidated by examples.”

“The term ‘public purpose’…changes to meet new developments and conditions of times.”

City of Tombstone v. Macia, 30 Ariz. 218, 245 P.677 (1926)

City of Glendale v. White, 67 Ariz. 231, 194 P.2d 435 (1948)

Public Purpose and Consideration Courts evaluating whether a contract violates the

Gift Clause, must not only find a public purpose, but must also

Assess whether the “consideration received by the city…is so inequitable and unreasonable that it amounts to an abuse of discretion,” constituting a “gift or donation by way of a subsidy.”

City of Tempe v. Pilot Properties, Inc., 22 Ariz. App. 356, 257 P.2d 515 (1974)

Private or Personal Benefit “Does the expenditure, even if for a public purpose,

amount to a subsidy because ‘[t]he public benefit to be obtained from the private entity as consideration…is far exceeded by the consideration being paid by the public’?”

“When the government payment is grossly disproportionate to what is received in return, the payment violates the Gift Clause.”

Turken v. Gordon, 223 Ariz. 342, 224 P.3d 158 (2010), citing Wistuber v. Paradise Valley Unified School Dist., 141 Ariz. 346, 678 P.2d 354 (1984)

Turken v. Gordon, 223 Ariz. 342, 224 P.3d 158 (2010)

Scenarios…. Glendale expends funds to join the Arizona Municipal

League.

The City is sued; it claims “public purpose” as a defense for the expenditure.

The Paradise Valley Unified School District agreed (pre-legislative change!) to pay a portion of a teacher’s salary while allowing her to perform her duties as president of the teacher’s union.

City of Glendale v. White, 67 Ariz. 231, 194 P.2d 435 (1948)

Wistuber v. Paradise Valley Unified School Dist., 141 Ariz. 346, 678 P.2d 354 (1984)

A developer request the City of Phoenix provide funding for its development to be completed. The City agreed that in return for 2,980 public parking garage spaces and 200 additional spaces for carpool parking each year for a period of 45 years, the City would make annual payments to the developer equal to half of privilege taxes generated by the development (up to $97.4 million) for up to 11 years and 3 months as long as the developer built the parking garage and 1.02 million square feet of retail space in the development and an independent appraisal found the deal to be equitable.

The City was sued. It defended based upon public purpose and the value of the consideration it would receive. Turken v. Gordon, 223 Ariz. 342, 224 P.3d 158 (2010)

The District occasionally holds “in-service” training and wants to provide bagels, fruit, bottled water and coffee to the staff members attending the training. The employee contracts and/or notices of appointment do not include that as a “de minimus fringe benefit,” the employees may receive incidental food or beverages.

The District wishes to make coffee and bagels available at Board meetings for the Board members. Members of the public attending help themselves to the coffee and bagels. Teachers in attendance at the meetings snag some coffee as well.

Gifts of public funds? To whom?

Op. Atty. Gen. I10-003 (R09-040)

In an effort to encourage outstanding employees, the District would like to institute an employee recognition program. Awards would be given for years of service, as a recognition of merit, and upon retirement. The proposed awards are of a nominal value (plaques, pen and pencil sets with District logos, lapel pins, and other similar mementos).

Gift of Public Funds?

A District wishes to provide cash or savings bonds for perfect attendance and/or for students demonstrating high academic achievement.

Gift of Public Funds?

Op. Atty. Gen. I97-003 (R96-027)

Op. Atty. Gen. I90-072 (R90-59)

Extra Compensation Clause

Arizona Constitution Article IV, Part 2, Sec. 17

The “Extra Compensation Clause” States: “The legislature shall never grant any extra

compensation to any public officer, agent, servant or contractor, after the services shall have been rendered or the contract entered into, nor shall the compensation of any public officer ... be increased or diminished during his term of office….”

The purpose of the clause Provide “certain, ascertainable compensation, free

from legislative caprice, for public servants who are paid from the state treasury.”

“[u]nless the power to change salaries of public officers during their term was taken from the legislature, much of the valuable time of that body would be consumed in either trying to appease the appetite of importunate constituents for increase of compensation, or to gratify the spleen or grudge of others….”

County of Greenlee v. Laine, 20 Ariz. 296, 180 P. 151 (1919)

McLead v. Pima County, 174 Ariz. 348, 849 P.2d 1378 ( Div. 1, 1993), citing Crawford v. Hunt, 41 Ariz. 229, 17 P.2d 802 (1932).

The “Extra Compensation Clause” is the Rodney Dangerfield of Constitutional Law… the “Gift Clause” gets all the respect…

The Gift Clause prohibits a school district from raising a teacher's compensation beyond the amount that the teacher previously has contractually agreed to accept in exchange for the performance of the teacher's duties. See Ariz. Att'y. Gen. Ops. I80-027, I83-065.

“[I]f a district teacher agrees to perform his duties at the salary rate specified in his written contract, the district may not pay the teacher an additional amount for the same services. Payment for services which a teacher is already legally obligated to perform would constitute a gift in violation of” the Gift Clause. I83-065.

McLead v. Pima County, 174 Ariz. 348, 849 P.2d 1378 ( Div. 1, 1993)

Taxpayer brought suit claiming increases to state employee retirement benefits; insurance benefits; and tax equity allowances for beneficiaries of retirees violated the “Extra Compensation Clause.”

Employees retired and therefore were not providing any additional services in exchange for the increased benefits.

Taxpayer challenged payments by Arizona State Retirement System, Elected Officials Retirement System, Police and Fire Fighters Retirement System and Corrections Officer Retirement System.

The Court held Because the retirement funds were made up from

employee contributions during the course of employment, with matching contributions from the State, County, City, District employers during the course of employment, these are not monies belonging to the State being paid from the state treasury but money owed by the State to the retirees from the retirees’ own contributions and the contributions of the retirees’ employers.

Binding Future Boards

In 1915, the rule was stated Board of political bodies may not enter into contracts which would

Illegally bind a successor Board to an agreement which

Is personal to the Board and which would

Prevent a successor Board from exercising its discretion

Town of Tempe v. Corbell, 17 Ariz. 1 at 9, 147 P. 745 (1915)

This rule was modified in 1922: “The general rule is that contracts extending beyond the term of the existing board (county board) and the employment of agents or servants of the county for such a period, thus tying the hands of the succeeding board and depriving the latter of their proper powers, are void as contrary to public policy, at least in the absence of a showing of necessity or good faith and public interest.”

Olmsted and Gillelen v. Hesla, 24 Ariz. 546 at 554, 211 P. 589 (1922)

The 1939 modification: A contract is not void

If the contract is for a particular and specified act

Even though its performance may extend beyond the term of the officers

If it was made in good faith

If it is in the public interest

The contract is void if it for the performance of personal or professional services for the employing officers.

Pima County v. Grossetta, 54 Ariz. 530, 97 P. 2d 538 (1939)

What is the “life of a board”? A Board whose members’ terms expire at different

times with elections held each year to fill the terms that expired, then the Board is a non-continuous body which is reorganized each year.

If a Board’s members are all elected at the same time and serve an identical term, then the life of the Board is the length of the term of office.

School District #69 of Maricopa County v. Altherr, 10 Ariz. App. 333, 458 P. 2d 537 (1969)

Today, Courts generally consider The contract is made in good faith and in the public

interest

The contract is not for the performance of personal or professional services for the employing officers.

The contract is not an unlawful delegation of board authority

The contract does not otherwise violate public policy

before deciding whether to uphold a contract that extends beyond the life of a Board or whether to void the contract.

Scenarios…. Town council entered into a one-year contract with an

individual to provide street sprinkling and cleaning services for the town. Newly elected council members took office the next month. The contractor was ordered to stop providing the service and another person was employed. The original contractor sued for breach of contract. The defense was that the contract was an invalid attempt to bind a successor board.

Town of Tempe v. Corbell, 17 Ariz. 1, 147 P. 745 (1915).

The county highway commission entered into a contract to employ an engineering firm for the period of time necessary to oversee the highway improvement projects approved by the voters at a bond election. The construction program could not be completed for at least three years. The terms of office for the commissioners expired within three months of entering into the contract. One issue was whether the contract was enforceable because it extended beyond the term of office of the commissioners.

Olmsted and Gillelen v. Hesla, 24 Ariz. 546, 211 P. 589 (1922)

County board of supervisors entered into a contract with the United States government to obtain a highway right-of-way, with the agreement that the U.S. would construct a road on the right-of-way and maintain it for two years, after which the county would maintain the road indefinitely to the satisfaction of the United States Secretary of Agriculture.

Plaintiffs claimed agreement illegal because it attempted to bind future boards.

County of Apache v. Udall, 38 Ariz. 497, 1 P.2d 343, (1931).

A city council entered into a contract to provide city water to residents of a subdivision located outside of the city limits at the same rates charged for water inside the city limits. Twelve years after entering into the agreement, the city added a 50% charge to the rates charged outside the city limits in order to “equalize” the rates between those living within the city that paid city taxes and those without who did not. The residents of the subdivision claimed that this violated the contract. The defense was the contract illegally attempted to bind future boards.

City of Tucson v. Sims, 39 Ariz. 168, 4 P.2d 673, (1931).

A county board of supervisors, with the approval of the county attorney, entered into contracts with several attorneys to act as special counsel in a number of specific cases. The county attorney retired, and the new county attorney, in a declaratory relief action, sought to have the contracts declared void because “they extended beyond the terms of the existing board of supervisors and that of the county attorney, who consented thereto.”

Pima County v. Grossetta, 54 Ariz. 530, 97 P.2d 538 (1939).

School district governing board, because of rapid growth and a serious shortage of classrooms, coupled with inadequate bonding authority to construct an additional building, entered into a contract with a local builder to construct a school building at cost and lease it to the district on a year-to-year basis, with the agreement that when there was sufficient bond capacity, the issue would be presented to voters with the recommendation that voters approve bonding to purchase the building. The board eventually placed the issue before the voters, but some member of the board campaigned against approval. The voters failed to approve the purchase. The contractor sued for damages. The defense was the contract was unenforceable because it attempted to bind a future board.

School District No. 69 of Maricopa County v. Altherr, 10 Ariz. App. 333, 458 P.2d 537 (1969)

City council enters into a contract to furnish sewer treatment services to a mobile home park located outside of the city limits at the same fee charged inside the city. Six years after entering into the agreement, the city adopted an ordinance, increasing the fee charged outside the city to ten times that charged within the city. In the lawsuit, the city claimed that that agreement was unenforceable because it functioned to bind future councils.

Copper Country Mobile Home v. City of Globe, 131 Ariz. 329, 641 P. 2d 243 (App. 1981).

A fire district board of directors entered into a five-year employment contract with the fire chief. Seventeen months later, two new members were elected to the Board. The board terminated the employment contract “without cause”. The fire chief filed an action based on breach of contract and a 42 U.S.C. § 1983 claim that he had been deprived of a property right in continued employment.

The defense was the contract was an invalid attempt to bind a successor board.

What if contract was with an employee to manage fire services provided outside the district boundaries on a subscriber basis?

Tryon v. Avra Valley Fire Dist. 659 F. Supp 283 (D. Ariz. 1986)

Several city councils entered into contracts with two utility companies to sell sewage effluent for use as a nuclear reactor coolant. The agreement extended for 67 years. One issue to be decided by the court was whether the contract was valid, even though it bound succeeding councils.

City of Phoenix v. Long, 158 Ariz. 59, 761 P.2d 133 (App. 1988)

During the height of the electric industry deregulation, the Arizona Corporation Commission entered into an agreement with a major electrical utility company, which required the company to file a future general rate case and required the Corporation Commission to set future utility rates so that the company would be allowed the full recovery of certain deferred costs. One of the arguments made by the challengers was that this contract, by guaranteeing what the future rates would be, unlawfully attempted to bind future commissions.

Arizona Consumers Council v. Corp. Com’n, 200 Ariz. 85, 22 P.3d 905 (App. 2001)

Questions?

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Thanks to: Russell H. Burdick

Northern Arizona Regional Behavioral

Health Authority

1300 S. Yale St.

Flagstaff, AZ 86001

1.928.774.7128

“Binding Future Boards” 2004 presentation, Arizona Association of Counties

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