Hirshman v. Rothschild (Bid Preference Suit)

Posted on February 06, 2014 | Type: Case
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The City of Tucson recently enacted a discriminatory local bid preference ordinance, casting off the fundamental concepts of fairness, openness, and predictability in the public procurement process.  In doing so, the city raised costs for taxpayers in Tucson and throughout the state, guaranteeing Tucsonans will pay more for public services, while encouraging other cities to discriminate against Tucson businesses that seek to do work outside Old Pueblo.   

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Last step: File case with the Superior Court of Arizona in Pima County 
 

 

 

Why We Are Suing

When the government seeks to purchase goods and services it does so through a public procurement process.  Historically, that process is governed by laws and policies that seek to balance the government’s desire to get the lowest price possible with the goal of fair and transparent bidding open to the maximum number of bidders. 

For example, if the City of Tucson needs to purchase widgets for installation in City Hall, it will advertise its requirements in a request for proposal, allowing all eligible business to place bids on the request.  The broader the class of bidders, the greater the competition.  Tucson will then select the lowest and best bid, saving taxpayer money and ensuring that all qualified business are allowed to compete for public funds. 

Unfortunately, when politicians are injected in the process, they often manipulate what should be a fair and predicable framework into a tool for political advantage.  Such is the case with bid preference laws.

A bid preference is an advantage provided to certain favored businesses.  These can range from preferences for women or minority-owned firms to preferences for certain sized or types of businesses.  A local bid preference is a preference for firms that are located within the local area or whose owners are residents of the state or city awarding the contract.  The government entity will define what counts as a “local business” and then apply a discount, typically a set percentage, to bids from firms that meet the government’s definition.    

On June 12, 2012, the Tucson City Council adopted Ordinance Number 10992, a local bid preference law that applies to city contracts for goods and services. Tucson’s ordinance provides for three different local preferences.  “Type A” businesses – those businesses whose principal business offices are physically located within Pima County – receive a five percent preference over other businesses.  “Type B” businesses – those businesses whose principal business offices are located outside of Pima County but within Arizona – receive a three percent bid preference.  “Type C” businesses – those businesses that operate a franchise within Pima County and are owned by Pima County residents – are eligible for a one and a half percent preference.       

Under Tucson’s local bid preference ordinance, only businesses that meet these arbitrary criteria qualify for a preference, resulting in higher costs for Tucson taxpayers.  For example, assume the City of Tucson needs 10,000 widgets for a public works project.  Pursuant to standard procurement processes, Tucson advertises a request for proposals for the product.  Company A has its principal offices in Tucson and can produce the widgets for $100.00 each. 

In addition to the direct percentage increase, increased costs to taxpayers also occur because firms that do not meet the preference are discouraged from participating in the procurement process.  When a market is restricted in this manner, and there are fewer competitors driving costs down, prices increase.  And taxpayers end up paying the tab.    

Bid preference policies like Tucson’s also encourage other municipalities to retaliate with their own local preferences, creating a bidding war that drives up the costs for all Arizona residents.  In recent years local bid preference ordinances have been enacted throughout the state. In other words, there has been an increase in retaliatory legislation when cities like Tucson enact bid preferences.  The result, of course, is higher costs for all Arizona residents.  Additionally, local preferences put companies at a disadvantage when they seek to do business in other cities.  In this case, the door to public contracts will be slammed on Tucson companies that seek to do business outside the city when neighboring jurisdictions inevitably enact their own bid preferences. 

Tucson’s bid preference law has dispensed with fundamental notions of fairness and openness in government procurement.  In the process, the discriminatory policies have driven up costs for all Tucson taxpayers and put Tucson business at a competitive disadvantage.  Still worse, not only are Tucson’s bid preference policies exceptionally bad policy, they are also illegal.

Why We Can Win

Tucson’s bid preference law is unlawful under state statute and unconstitutional under both the federal and state constitutions. 

As a threshold matter, state law explicitly prohibits Tucson’s bid preference ordinance.  The State of Arizona provides a comprehensive statutory scheme for the employment of contractors on public works projects throughout the state. These state statutes govern public contracts.  Specifically, Arizona law mandates that “any county, city or town” “shall enter into a contract with the lowest responsible bidder whose proposal is satisfactory.” The subsidy provided under Tucson’s bid preference ordinance ensures that in projects where the preference is exercised, the contract will be let to someone other than the “lowest responsible bidder.”

Tucson’s bid preference ordinance also violates several provisions of the Arizona constitution. 

  • First, the preference violates the Arizona Equal Privileges and Immunities Clause because the ordinance is not rationally related to a legitimate government interest.  Specifically, the Arizona Constitution commands, “No law shall be enacted granting to any citizen, class of citizens, or corporation other than municipal, privileges or immunities which, upon the same terms, shall not equally belong to all citizens or corporations.” In order to survive scrutiny under this provision, a statute must be “rationally and reasonably related to furthering some legitimate governmental interest.” In this case, even assuming that economic protectionism is a legitimate government interest (an assumption that we and several courts do not make), Tucson’s bid preference ordinance is arbitrary and irrational because, among other things, it applies to the location of a corporation’s “principal place of business,” a factor that can have little to no effect on the conditions of the local economy.  Additionally, the ordinance was passed by the Tucson City Council and pertains only to municipal contracts, yet it applies to all Pima County businesses and makes arbitrary classifications based on franchisee residency and locations of businesses outside of Pima County but within Arizona.  Even assuming the most admirable of government interests, this ordinance fails to advance them.  A similar Arizona state bid preference law was struck down by the Arizona Supreme Court over twenty years ago.
  • Second, the Tucson bid preference ordinance is an unconstitutional “special law.”  The Arizona Constitution provides, “No local or special laws shall be enacted…Granting to any corporation, association, or individual, any special or exclusive privileges, immunities, or franchises.” An unconstitutional special law “applies only to certain members of a class or to an arbitrarily defined class which is not relationally related to a legitimate legislative purpose.” For the same reasons Tucson’s bid preference ordinance violates the Arizona Equal Privileges and Immunities Clause – namely, the creation of arbitrary classifications that do not advance legitimate government purposes – Tucson’s bid preference ordinance is an impermissible special law. 
  • Third, Tucson’s bid preference policies violate the Arizona Constitution’s Gift Clause.  Under the Arizona Constitution, “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…." A government expenditure does not violate the Gift Clause if there is a public purpose and in return for the expenditure the government entity receives consideration that is not “grossly disproportionate.” Significantly, indirect public benefits, such as an increase in taxes or putative job creation, do not count as consideration in exchange for the public expenditure. Every time Tucson exercises its bid preference, it is providing a taxpayer subsidy to the higher bidder enjoying the preference.  The only consideration Tucson receives in return are indirect, supposed benefits, such as an increased tax base or more “local” jobs.  Of course, the ordinance ensures no such benefits, and in fact, very likely has the opposite results.  But even if the result of the ordinance was an increase in these indirect benefits, the ordinance would fail because these purported, incidental benefits do not count as consideration in exchange for the public expenditure.

Tucson’s bid preference ordinance also violates the U.S. Constitution.  Specifically, the ordinance violates the Equal Protection Clause.  The Fourteenth Amendment’s Equal Protection

Clause prohibits any state or subdivision from denying any person within its jurisdiction equal protection of the laws. Like Arizona’s Equal Privileges and Immunities Clause, if laws create discriminatory classifications then those classifications must be rationally drawn to promote a legitimate government interest. The U.S. Supreme Court has squarely held that promotion of domestic business by discriminating against non-residents is not a legitimate state purpose.  As a result of Tucson’s blatant discrimination against non-residents and other businesses, the ordinance violates the Equal Protection Clause. 

Similarly, Tucson’s ordinance also violates the Privileges and Immunities Clause in Article IV of the U.S. Constitution.  The Privileges and Immunities Clause provides: “The citizens of each State shall be entitled to all the Privileges and Immunities of Citizens of the several States.” The U.S. Supreme Court has held that employment on public works projects falls within the protection of the Clause and residency alone is not a sufficient justification for discriminatory treatment between residents and non-residents. Tucson’s bid preference ordinance not only discriminates against outside businesses, it specifically discriminates against non-residents who own franchises in Tucson.  As a result, the ordinance violates the U.S. Constitution’s Privileges and Immunities Clause.         

In short, the City of Tucson’s bid preference ordinance is unlawful under state law and unconstitutional under the federal and state constitutions.  The Goldwater Institute is representing taxpayers to challenge this unlawful ordinance in court.    

A successful taxpayer lawsuit in this case will save taxpayers money, place all businesses in Tucson on a level playing field, and prevent retaliation in other Arizona cities contemplating enacting their own bid preferences. 

Case Logistics

            The plaintiffs in this case are Karl Hirshman and Richard Rodgers, Tucson residents who pay both property and sales tax to the city, as well as Bruce Ash, a local Tucson business owner who remits transaction privilege tax to the City of Tucson through his company, Campbell Fair.  The defendants are City of Tucson officials acting in their official capacities. 

The case was filed in the Superior Court of Arizona in Pima County on February 6, 2014. 

Plaintiffs seek an order ruling that Tucson’s bid preference ordinance is unlawful and enjoining any future utilization of it.  

Documents

Complaint (2/6/2014)

Media

Arizona Daily Star: Tucson sued over preference for local, not lowest, bidders
AP: Tucson sued for favoring area contractors  

The Legal Team

Jon Riches is an attorney at the Goldwater Institute’s Scharf-Norton Center for Constitutional Litigation.  Prior to joining the Goldwater Institute, Jon served on active duty in the U.S. Navy Judge Advocate General’s (JAG) Corps, where he represented hundreds of clients, litigated dozens of Court-Martial cases, and advised commanders on a vast array of legal issues.  

Clint Bolick is the Goldwater Institute’s litigation director.  He has extensive success before trial judges and appellate courts.  He has won two cases before the U.S. Supreme Court. He was named as a Lawyer of the Year in 2003 by American Lawyer magazine.

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