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AG finds city-chamber contract lawful
SEDONA, Ariz. – In a report issued Aug. 15, 2019, the Office of the Arizona Attorney General finds that the city of Sedona contract with the Sedona Chamber of Commerce and Tourism Bureau, and the city's administration of that contract, are consistent with the requirements of the Arizona Constitution.
From the report:
The Office concludes that although the payment structure established by the Agreement twice caused the City to pay more to the Chamber than was due to be paid under the Chamber’s City-approved budget, an illegal payment of public money did not occur because the City ultimately accounted for the overpayment through additional appropriations.
Sedona City Attorney Robert Pickels says he is not surprised. “The final report from the Attorney General’s Office confirmed what the city has always believed, which is that the agreement with the chamber is both well-designed and legally sound," he says.
The attorney general's report closes an investigation requested in July 2018 by then-Sen. Judy Burges, who represented cities in the Phoenix metro area. Burges asked for a state investigation into whether the city violated "gift clause" prohibitions in the Arizona Constitution by allocating a percentage of bed tax revenues for tourism marketing under its contract with the chamber. Shortly before the August 2018 mayor and council election, during which the contract was a hot topic, Burges withdrew her request.
Nonetheless, the Office of the Attorney General followed through with the investigation, with which the city cooperated fully. The report states:
The Office asked the City to provide a voluntary response, and the City fully cooperated with the Office’s review, including by providing a voluntary response and supporting materials. Those materials included quarterly and annual reports the Chamber submitted to the City, the City’s Comprehensive Annual Financial Report for fiscal year 2018, City meeting agendas and minutes related to approving the Chamber’s annual budget proposals, records of payments made to the Chamber by the City, the City’s bed tax accounting for fiscal years 2015-2019, and the Agreement itself. In addition, the Office conducted multiple phone calls with City personnel regarding the materials provided.
The key question of the inquiry was whether the city violated the "gift clause," which prohibits government entities from gifting funds to private entities. From the report:
Here, the Agreement appears to deal with a valid public purpose; the City’s payments to the Chamber are being made consistent with and pursuant to a valid state law. Accordingly, whether the payments provide an unlawful subsidy ultimately depends on whether the payments are grossly disproportionate. To that end, the key question is whether the payments to the Chamber are ultimately accounted for by the City, either through specific City appropriations or by contracted-for services provided by the Chamber.
The report concludes that the city of Sedona has lawfully entered into, and administered, its contract for tourism promotion and visitor services with the Sedona Chamber of Commerce and Tourism Bureau:
In each fiscal year since the Ordinance’s adoption, the City has paid the Chamber at least the total estimated amount of bed tax revenue at or below the Chamber’s submitted annual budget. However, in the situations where the City generated more-than-projected revenue, and thereby had a larger than expected “true-up” payment, overpayments were made to the Chamber above the approved line item budget. In both instances, the City took steps to manage the excess funds. In FY16, the excess funds of $180,009 were restricted for use and only released for the Chamber to purchase the Jordan Road property in FY18 on the City’s behalf. In FY18, the City exercised its contractual “hold-back” from the FY19 budget to reserve $268,900 of the estimated bed tax collection, thereby accounting for the $116,150 overpayment made for FY18.
The Office concludes that the Agreement between the City and the Chamber is not itself illegal or necessarily causes illegal payments of public monies under A.R.S. § 35-212. Although the pattern of overpayments resulting from greater-than-anticipated bed tax revenues created significant potential for a Gift Clause violation, the City appears to have mitigated that potential by reworking the Agreement to eliminate the automatic remittance of 55% of bed tax revenues to the Chamber. And because the City also took steps to effectively claw back funds that were overpaid, no basis currently exists for further action by the Office on this matter.