By Olivia Grady

The Arizona Supreme Court’s recent decision, Cheatham v. DiCiccio, highlights that Gift Clauses in state constitutions don’t always benefit unions, and they can stop taxpayer funding of unions.  

How do they do this?

Gift Clauses place limits on what the state government can spend taxpayer money on. Forty-six states have some form of a Gift Clause. An example can be found in Arizona’s Gift Clause (Article IX, Section VII):

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.

What was their intended purpose?

In the mid 1800s, railroads were an exciting new technology that could provide new business and economic growth, and states were eager to support them financially. However, building railroads was risky, and some railroad companies went bankrupt after the Panic of 1837, financially hurting the states that had supported them. In response, in the 1850s, the citizens of many states passed constitutional amendments, which became known as Gift Clauses, to prevent future losses.

Since this time, though, courts have provided a number of exceptions to the Gift Clause for funding of private organizations, most notably the “public purpose” exception. Some courts have found a public purpose in increasing employment, economic growth, or even for projects paid for by revenue bonds (purportedly not taxpayer dollars).

In this recent Arizona Supreme Court case, the main argument by plaintiffs (taxpayers) was that “release time,” time given to police officers to perform duties for their union while paid by the taxpayer, violated the state’s Gift Clause. The plaintiffs argued that this was taxpayer money supporting a private organization. The two lower courts agreed with the plaintiffs, but unfortunately, the Arizona Supreme Court did not.

Arizona allows taxpayer funds to support private organizations only if there is a public purpose and adequate consideration. While the lower courts found no public purpose in police officers participating in unspecified union activities instead of fighting crime, the Supreme Court found that these activities promote harmonious relationships between the officers and the state and that the union made the bargaining process over wages and employment more efficient. Further, the bargaining contract had adequate consideration because of the duties of the police officers, not the union.

However, sometimes, the unions actually use Gift Clauses to sue the state government to stop competition from nonunionized organizations, such as in school choice cases.

School choice is the idea that all parents should be able to choose where to send their children to school, not the government. School choice includes charter schools and scholarships and tax credits for a private school education.

Suing the state claiming violation of a state Gift Clause has been used by teachers’ unions to fight school choice.

For example, in 1999, Penny Kotterman, president of the teachers’ union in Arizona (Arizona Education Association) at the time, and others sued Arizona.  The petitioners claimed in Kotterman v. Killian that the state tax credit for individuals who donate up to $500 to school tuition organizations violated the federal and state Constitutions. School tuition organizations give scholarships to children who want to attend qualified private schools (including religious schools), but can’t afford to.

The petitioners argued that the state’s Constitution was violated because state funds were supporting private organizations: private schools. The petitioners argued that “a tax credit is the ‘functional equivalent of depleting the state treasury by a direct grant,’ while a tax deduction merely serves as ‘seed money’ to encourage philanthropy.” The Arizona Supreme Court disagreed, noting the many other credits to private organizations, such as churches, and that the primary beneficiaries of this program are not the schools:

The primary beneficiaries of this credit are taxpayers who contribute to the STOs, parents who might otherwise be deprived of an opportunity to make meaningful decisions about their children's educations, and the students themselves.

Further, the money isn’t state money because the government never controls it, and so, there is no gift to a private organization.

Kotterman also claimed that the federal Establishment Clause and state religious clause were violated because religious schools would receive funds. The Justices responded:

Where assistance to religious institutions is indirect and attenuated, i.e., private individuals choose where the funds will go, the Justices have generally been reluctant to find a constitutional impediment.

Since the school choice program didn’t violate the federal or state Constitution, the Arizona Supreme Court upheld the program.

Because there are so many ways that taxpayer money ends up in private organizations (i.e. Medicaid and Medicare), judges need to closely examine who the beneficiary really is. In school choice cases, the beneficiary is clearly the child who receives an education.