Are the City of Russellville's payments to Arkansas Valley Alliance for Economic Development, which outsources work to the Chamber of Commerce, a legal use of dedicated sales-tax revenues?
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This page answers the general question as of 2015. Ezel answers yours: what it means for your facts, under current Arkansas law, with citations.
Plain-English summary
State Auditor Andrea Lea asked about a series of contractual arrangements among the City of Russellville, the Russellville Chamber of Commerce, and Arkansas Valley Alliance for Economic Development, Inc. ("AVAED"), a nonprofit. The City levied a one-cent sales tax, one-eighth of which was dedicated to economic development. The City paid AVAED $90,000 a year under a contract for economic-development advice. AVAED's two staff members were also employees of the Chamber of Commerce. The Chamber billed AVAED for the same two people's work, and AVAED paid the Chamber from the City's sales-tax money. Essentially, the City's money flowed through AVAED to the Chamber for the Chamber's own employees' salaries. On top of the $90,000 contract, the City also reimbursed the Chamber president for personal-sounding expenses (sporting event tickets, country club membership, civic club memberships, golf registration, meal expenses over per diem, golf-bag check fees, hotel room upgrades). None of those reimbursements were under any written contract.
The Auditor's six questions essentially asked: is this legal?
The AG declined to answer. Three reasons:
- Answering would require fact-finding. The AG would need to determine further facts and interpret a city resolution, the ballot language for the sales tax, the written contract between the City and AVAED, and possibly one or more oral contracts. The AG cannot act as a factfinder in formal opinions.
- The AG declines to interpret and apply local ordinances, resolutions, ballots, and contracts. That work is for local counsel and courts.
- The AG does not opine on questions that are the subject of pending litigation. The AG noted that similar arrangements were at issue in Lynch v. Stodola in Pulaski County Circuit Court.
But the AG provided several general principles a reader can apply to the facts.
The dedicated-purpose rule. A ballot for a city sales tax may designate uses, and the tax revenue can be applied only to those uses. Article 16, § 11 of the Arkansas Constitution: "no moneys arising from a tax levied for any purpose shall be used for any other purpose." Sections 26-75-208(c)(1) and -308(e)(1) carry the rule forward. Whether a particular expenditure fits within the dedicated purpose is a city council determination, reversible by courts only if "demonstrably arbitrary and unwarranted" (McAdams v. Henley, 1925).
The economic-development public purpose. Economic development is a legitimate municipal goal. Cities can use public funds to pursue it and can contract with nonprofits for that purpose. So a city's contract with an economic-development nonprofit, by itself, is not legally suspect.
The adequate-consideration rule. A city contract must be supported by adequate consideration. Whether consideration is adequate is fact-intensive. A city contract that pays without receiving adequate value is effectively a donation, and Article 12, § 5 of the Arkansas Constitution forbids cities from donating public money to private parties.
The subcontracting rule. There is nothing inherently wrong with a city contract under which the counterparty subcontracts performance to a third party. The arrangement between AVAED and the Chamber is not automatically illegal.
The election-spending limit. There are constitutional limits on a city's use of public funds to promote particular ballot outcomes. Whether a city's communication is permissible speech or impermissible electioneering depends on the facts.
The opinion is an example of an AG decline that still gives the requester useful framework. The Auditor can take the principles and apply them to whatever facts further investigation develops. The litigation in Lynch v. Stodola (and any follow-on case in Russellville) would resolve the specific dispute.
Currency note
This opinion was issued in 2015. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Background and statutory framework
The dedicated-purpose constraint on city sales tax revenue is constitutional. Article 16, § 11 of the Arkansas Constitution provides: "no moneys arising from a tax levied for any purpose shall be used for any other purpose." Statutes implementing this constitutional rule for municipal sales taxes include § 26-75-208(c)(1) and § 26-75-308(e)(1).
The donation prohibition in Article 12, § 5 is equally categorical: "No county, city, town, or other municipal corporation shall ... appropriate money for ... any corporation, association, institution, or individual." This is sometimes called the "no-donation clause." Cities cannot give public money to private parties. They can contract with private parties for services, but the contract must reflect a genuine exchange.
The adequate-consideration test ties the two principles together. If a city pays a private party more than the services are worth, or pays for services it does not actually receive, the excess is a donation. Whether consideration is adequate is fact-bound. Ward v. Williams (Ark. 2003) and other contract cases provide the framework, but the application is always case-specific.
McAdams v. Henley (Ark. 1925) is the leading case on judicial review of city-council determinations about dedicated taxes. The Arkansas Supreme Court will not disturb the city council's judgment about whether an expenditure fits within the ballot-designated purpose unless the determination is "demonstrably arbitrary and unwarranted." That high bar gives councils significant latitude but does not give them carte blanche.
The pending-litigation principle the AG cited (declining to opine on matters in litigation) is a standard practice. The Lynch v. Stodola case in Pulaski County involved arrangements that "appear to be similar in certain respects" to the Russellville facts. The AG declined to preempt a judicial resolution of those questions.
The AG's decline framework appears repeatedly in 2015 opinions (also in Op. 2015-063 on dam-release flooding). The structural limits on AG opinions push fact-intensive disputes into the courts, where parties can develop evidence and the judge can apply the relevant legal principles.
Common questions
Why didn't the AG just answer the questions?
Because answering required fact-finding the AG cannot do in a formal opinion, interpretation of local instruments the AG declines to interpret, and an opinion on matters in litigation. The AG provided general principles instead.
Are the Russellville payments to AVAED illegal?
The AG didn't say either way. Whether they are legal depends on the facts: what the ballot language designated, what the AVAED contract requires AVAED to do, what AVAED actually does, and whether the payments are supported by adequate consideration.
What about the reimbursements outside the contract for sporting events, country club, golf bags?
The AG didn't address those specifically, but the same legal framework applies. Reimbursements without a written contract, especially for items that look personal rather than work-related, raise both the adequate-consideration question and the donation-clause concern.
Can the City spend dedicated economic-development sales tax money on this?
Only if the expenditure fits within the ballot-designated purpose. The city council makes the first call; a court reviews under the demonstrably-arbitrary standard.
What about using the sales tax to promote its own renewal?
The AG noted the existence of constitutional limits on using public funds for electioneering but did not draw a bright line. It depends on what the communication says (information vs. partisan advocacy) and the facts surrounding the city's outreach.
What is Lynch v. Stodola?
A pending Pulaski County Circuit Court case (No. 60CV-13-360) addressing arrangements the AG described as "appear[ing] to be similar in certain respects." The AG declined to opine in part because of the pending litigation.
Source
Original opinion text
Opinion No. 2015-005
April 30, 2015
The Honorable Andrea Lea
Auditor of State
Post Office Box 1342
STATE OF ARKANSAS
THE ATTORNEY GENERAL
LESLIE RUTLEDGE
Russellville, Arkansas 72811-1342
Dear Auditor Lea:
This is in response to your letter describing and asking for my opinion on the legality of certain arrangements and payments among the City of Russellville, the Russellville Chamber of Commerce, Arkansas Valley Alliance for Economic Development, Inc. ("AVAED"), and people affiliated with the Chamber and AVAED.
You state as background:
The City of Russellville levies a one-cent sales tax, and one-eighth of the revenues of that tax are dedicated to economic development. The city contracts with Arkansas Valley Alliance for Economic Development, Inc. (AVAED), a nonprofit organization, for advice on economic development matters. Please see attached Resolution No. 1382 and Agreement for Economic Development Services. Under the contract, the city pays $90,000 per year for AVAED's services, which include advising the city concerning the use of the sales tax revenues that are dedicated to economic development. The city's payments under the contract are made from the sales tax revenues that are dedicated to economic development.
The staff of AVAED consists of two employees, both of whom are also employed by the Russellville Chamber of Commerce: Mr. Jeff Pipkin (president of both AVAED and the Chamber of Commerce) and Ms. Suzy Griffin (administrative assistant for AVAED and finance director for the Chamber of Commerce). AVAED uses the money it receives from the city under the contract mentioned above to help pay these employees' salaries and expenses as president and finance director of the Chamber of Commerce. The Chamber of Commerce bills AVAED for work performed by Mr. Pipkin and Ms. Griffin, and AVAED pays the Chamber of Commerce from the funds received from the city. In the past, this has been done as part of a formal contract arrangement between AVAED and the Chamber of Commerce, but it is unclear whether a formal contract arrangement is in place today. In essence, AVAED outsources its duties under its contract with the city to the Chamber of Commerce so that the money flows from the city to the Chamber of Commerce with AVAED serving merely as a middleman.
In addition to the $90,000 paid under the contract, the city also reimburses Mr. Pipkin for certain other expenses, including tickets to sporting events, a county club membership, civic club memberships, golf registration fees, meal expenses over the per diem rate, mileage for travel in addition to a vehicle allowance, fees for checking extra luggage such as golf bags, and room upgrades at hotels. These reimbursements are not made pursuant to a contract or other written agreement, and they are paid using the sales tax revenues that are dedicated to economic development.
Your questions are:
1) Are the city's payments to AVAED under the contract a legal use of the sales tax revenues dedicated to economic development?
2) In general, are the city's payments to AVAED that are in addition to the contract amount a legal use of public funds? Are these payments a legal use of the sales tax revenues dedicated to economic development?
3) Are AVAED's payments to the Russellville Chamber of Commerce for the activities of the Chamber of Commerce's president and finance director a valid use of the sales tax revenues dedicated to economic development? Is it legal for the city to enter into a contract with AVAED if (1) the payments under the contract will be made using the sales tax revenues dedicated to economic development and (2) the city knows that AVAED will outsource the work to the Chamber of Commerce?
4) Can the sales tax revenues dedicated to economic development be used to promote a renewal of the city sales tax, which is set to sunset?
RESPONSE
I respectfully decline to give opinions on these questions. Answering them would require me to determine further facts, and then interpret a City resolution, a ballot, a written contract between the City and AVAED, and (possibly) one or more oral contracts. In giving formal opinions, the Attorney General's office is not equipped or authorized to be a factfinder. Thus, the Attorney General's office declines to interpret and apply local ordinances and resolutions, ballots, and contracts, because doing so involves significant questions of fact. Furthermore, I will not opine on questions that are the subject of pending litigation. Although the arrangements you describe are not, as far as I know, the subject of pending or threatened litigation, arrangements that appear to be similar in certain respects are at issue in Lynch v. Stodola, No. 60CV-13-360 (Pulaski County Circuit Court, Sixth Judicial Circuit, Seventeenth Division, Jan. 24, 2013). I will, however, briefly refer to legal issues and general propositions that are relevant to the questions.
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.
In sum, the questions you have submitted raise various legal issues that can only be resolved after significant fact finding. While I am consequently unable to provide answers, the foregoing will hopefully be of assistance in framing the necessary legal and factual review.
Assistant Attorney General J.M. Barker prepared this opinion, which I approve.
LESLIE RUTLEDGE
Attorney General
LR/JMB:cyh
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