Legal Mechanisms of Public-private Partnerships: Promoting Economic Development or Benefiting Corporate Welfare?

JurisdictionUnited States,Federal
CitationVol. 23 No. 04
Publication year1999

SEATTLE UNIVERSITY LAW REVIEWVolume 23, No. 1SUMMER 1999

Legal Mechanisms of Public-Private Partnerships: Promoting Economic Development or Benefiting Corporate Welfare?

Nick Beermann(fn*)

I. Introduction

The Alvarez family and the rest of the sellout crowd attending the Mariners game cheered wildly as Ken Griffey, Jr. swung at the fastball, sending it flying out of the ballpark. This game meant a lot to Roberto Alvarez, it being his first ever at an outside, open-air professional baseball park in his forty-five years as a resident of King County.(fn1) He had planned to take his family to see this game for a long time, saving money by working overtime as a truck driver. However, between the cost of the concessions and the ticket prices, he seriously doubted that he would be able to buy his family a night out at a Mariners game again soon.(fn2) Nevertheless, he was enjoying this game in the new stadium, watching home runs being hit in the dimming lights of a beautiful Puget Sound sunset.

As a King County resident, Roberto should enjoy the game as well as the new stadium. After all, he has been paying for the stadium since 1995, when the Washington State Legislature passed the Stadium Act to ensure the continued viability of major league baseball as an institution in Seattle.(fn3) The Stadium Act imposed an additional 0.017% sales and use tax on all King County residents for construction of a new baseball stadium for the Seattle Mariners.(fn4) Only weeks before the Act's passage, King County voters rejected the same proposed tax in a countywide referendum.(fn5) Nevertheless, following the Act's passage, the King County Council authorized the creation of a public facilities district to implement the tax, among other things. Soon thereafter the construction of the new Mariners stadium began.(fn6)

The Washington Legislature's passage of the Stadium Act in 1995 was the culmination of a series of financial development arrangements between state and local governments and private entities. Indeed, 1995 proved to be a remarkable year for such arrangements, as evidenced by much publicized deals like the Pacific Place parking garage in downtown Seattle and the River Park Square in downtown Spokane. Like the Mariners stadium, both of these projects were largely financed with public money lent to private corporate interests, despite a state constitutional ban on such loans.(fn7)

As part of a growing national trend, these public-private arrangements, often called "partnerships," are touted as benefiting the local economies they serve, while at the same time providing private companies and entities a necessary means of financing development projects that would otherwise be unfunded.(fn8) Yet, despite their assumed or actual benefits, these partnerships have recently come under increased public scrutiny, both nationally and in Washington.(fn9)

The increased public scrutiny in Washington primarily derives from the Washington Constitution's prohibition on government gifting of public funds or extending credit to corporations.(fn10) Because of such prohibitions, many public-private partnerships have developed creative procedural and substantive legal mechanisms to serve their financing needs while avoiding constitutional scrutiny.

Procedural mechanisms, such as creating public corporations for channeling public funds to establish a public purpose for financing,(fn11) utilizing Federal Housing and Urban Development loans to avoid public scrutiny,(fn12) declaring development projects to be public emergencies to avoid the referendum process constitutionally guaranteed the public,(fn13) and granting a wide variety of tax subsidies to private corporations,(fn14) have effectively shut the taxpaying public out of the debate over how their tax dollars are spent, and spawned numerous lawsuits.(fn15)

Substantive mechanisms used by courts to determine the constitutional validity of development projects, such as whether public expenditures to private entities serve a fundamental governmental purpose and whether sufficient consideration exists in public exchanges of capital, only serve to further the public's nonparticipa-tion.(fn16) Moreover, given the recent zeal of state and local governments for entering public-private financing arrangements, and the Washington Supreme Court's failure to adequately address the problems created by these arrangements, it is likely that more lawsuits will be brought in the future.(fn17) The result of state and local government use of such mechanisms raises an important question: What is the proper role of public-private development?

This Comment explores this question by examining the legal mechanisms used in public-private financing arrangements in light of three recent public-private development projects in Washington: the Mariners stadium in Seattle, the River Park Square development in Spokane, and the Pacific Place parking garage in Seattle. These projects utilized a combination of legal mechanisms that allowed state and local governments to foster economic development and benefit private entities by circumventing the constitutional ban on the gifting of funds, despite widespread public opposition to the development.

This Comment argues that while the public may ultimately benefit economically from public-private partnership development, the legal mechanisms used in public-private partnerships to skirt the constitution violate the public trust by (1) precluding the public from obtaining information regarding these projects; (2) denying the tax-paying public their right to participate in public choices and spending decisions that affect them; and (3) severely impinging on the public's state constitutional right to the referendum process. Furthermore, by allowing these mechanisms to exist, the Washington Supreme Court only furthers the violation of the public's trust, while simultaneously weakening the role of the judiciary as a guardian of the democratic process. Because of the court's complicity, the only way much-needed reform will be achieved is through a well-educated state legislature that is more responsive to the majority of its constituency.

This Comment begins Part II with a historical analysis of the rise of public-private partnerships in Washington and how that rise corresponded to the development of the Washington Constitution's prohibition of the gifting of public funds or lending of credit to corporations. Part II also includes an analysis of how the Washington Supreme Court has interpreted these constitutional provisions since their development.

Part III illustrates the modern mechanisms of public-private financing vis-a-vis Washington's constitutional prohibitions by examining three recent public-private partnership developments: the Seattle Mariners stadium development, the River Park Square parking garage development in Spokane, and the Pacific Place development in downtown Seattle. Case studies illustrate the role of the Washington Supreme Court in facilitating such arrangements and allowing the financing mechanisms used in the arrangements to exist, despite the apparent conflict with the state constitution.

Part IV suggests the proper role of public-private partnerships in Washington. Furthermore, this section discusses how this area of law could be reformed by eliminating the constitutional proscription on public funding, implementing greater procedural safeguards, limiting the use of public-private partnerships, adopting a corporate model, better defining, or eliminating emergency clauses.

II. Background and History of Public-Private Financing

Arrangements in Washington

The first public-private partnership arrangements in Washington began with the advent of the national railroad system in the late nineteenth century. Like many other states desiring railroad access for purposes of trade and transportation, Washington entered into agreements with private railroad corporations to subsidize railroad development with public funds.(fn18) Such subsidies often involved direct payments of cash and municipal bonds or loans of credit to railroad corporations.(fn19) Despite the public nature of the loans, the public had little control over the marketing of the loans or the allocation of their taxpaying dollars. Railroad corporations receiving loan proceeds often sold the bonds issued to them in eastern markets at below market prices.(fn20) Moreover, many railroad lines financed by public funds were never built, and those that were built were often abandoned in response to changing markets or radical financial mismanagement by railroad monopolies.(fn21) As a result, many states incurred substantial financial hardship, with some states approaching near bankruptcy.(fn22)

In reaction to Washington's own public indebtedness from railroad subsidies, and as a "protection from enemies without and the protection of weak from the strong within," Washington enacted article VIII, sections 5 and 7 at the Constitutional Convention of 1889.(fn23) These provisions severely curtailed the ability of state and local governments to lend or give money to private entities and prohibited the public ownership of stock.(fn24)

The framers of the constitution feared the potential negative impact on the public if assets were given or lent to private entities. Furthermore, the transfer of public assets to private entities was considered an improper...

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