A Pulaski County Circuit Court judge’s ruling last month that ordered the cities of Little Rock and North Little Rock to stop paying chambers of commerce and related entities for economic development programs sent shock waves through chamber offices across the state.
“Our economic development activity is currently on hold as we await the written ruling to determine what our next step needs to be,” Jay Chesshir, CEO of the Little Rock Regional Chamber of Commerce, told Arkansas Business last week.
Judge Mackie Pierce ruled from the bench on Jan. 5 on a motion for partial summary judgment in a case in which three residents of Little Rock and North Little Rock challenged the constitutionality of the payments. A written order is expected soon, and an appeal to the state Supreme Court is a given.
The city of Little Rock was set to pay a total of $300,000 this year for economic development services, and the city of North Little Rock has given the North Little Rock Economic Development Fund $250,000 annually since 2009.
Pierce said from the bench that the cities of Little Rock and North Little Rock can no longer make those kind of payments because the Arkansas Constitution prohibits municipalities from giving money to private businesses. Although a city can sign a contract for professional services, it can’t make a donation, contribution or investment in a private entity, he ruled.
“Without the contract funding [from the city of Little Rock], the chamber leadership will have to determine if this [economic development] is a service we can continue to provide,” said Chesshir, who wasn’t named in the lawsuit. “I think all chambers of commerce with similar agreements will have to make a decision regarding that activity.”
The cities maintain that they had contracts for services with the chambers and their entities for economic development services — and they were getting benefits under the agreements, so the arrangements were legal. But Pierce didn’t consider those arrangements a contract because the chambers were going to provide the economic development services with or without the cities’ money.
“It’s window dressing for something that is totally and completely … in my opinion violates the Arkansas Constitution,” Pierce said, according to a transcript of the ruling provided to Arkansas Business. “You can’t put lipstick on a pig and call it something else. It’s still a pig.”
Little Rock City Attorney Tom Carpenter, who argued the case for Little Rock, told Arkansas Business that the ruling could affect more than chambers of commerce — which is why the state Supreme Court needs to hear the case.
“The judge’s ruling is something that’s quite new,” Carpenter said. “When a party says they need something and gives consideration for it, and the things they say they need are done — if that makes an illegal contract, then we’ve got a lot of problems.”
Don Zimmerman, executive director of the Arkansas Municipal League, said many cities in Arkansas have arrangements with their chambers of commerce to provide economic development services. The association of cities, however, does not keep a record of which cities have such arrangements.
“There are a lot of people wondering what the impact of that case will be,” he said. Zimmerman said he’s waiting on the written order to get a better idea of the effect.
Randy Zook, president and CEO of the Arkansas State Chamber of Commerce & Associated Industries of Arkansas, declined to comment because the case isn’t settled yet.
Bruce McMath, a Little Rock attorney who represented the plaintiffs who sued Little Rock and North Little Rock, said that the ruling from the bench was clear. “The Constitution precludes subsidizing private corporations of any type for any purpose, and that’s what most of these are,” McMath said. “These are subsidies to fund the chamber’s development activities, and we don’t think the Constitution permits that, nor do we think it’s good government.”
The ruling has given hope to Russellville Alderwoman Freddie Harris, who has squabbled with Jeff Pipkin, who heads the Arkansas Valley Alliance for Economic Development Inc. and the Russellville Chamber of Commerce, over how tax money is spent on economic development.
She told Arkansas Business that the $90,000 contract her city has with the alliance is on hold because of Pierce’s ruling.
And she said she has met with McMath to discuss filing a lawsuit to determine whether the contract is valid. Pipkin told Arkansas Business that Russellville’s case is different than Little Rock’s because the alliance’s money comes from a sales tax dedicated to economic development, while the Russellville Chamber doesn’t receive public money.
John Wilkerson, an attorney who represents the city of North Little Rock, told Arkansas Business that he hopes both sides can come to an agreement about the arrangement between the cities and the chambers. “I certainly understand the plaintiffs’ concerns, especially after the ruling,” Wilkerson said. He said the cities want to provide for economic development, but the plaintiffs don’t want public money to be used. “I think there’s some middle ground that we can come to and move forward,” Wilkerson said.
But he said no discussions have taken place yet, so it was too early to talk specifics.
The case that resulted in Mackie’s ruling started with Jim Lynch of Little Rock.
Lynch, 68, told Arkansas Business that the relationship between the Little Rock Regional Chamber of Commerce and the city of Little Rock has existed for years. Between 1993 and 2013, Little Rock paid the chamber $3.9 million, according to Lynch’s lawsuit.
Lynch, who is retired from an administrative job at the University of Arkansas at Little Rock, argued in the lawsuit that the Little Rock Regional Chamber of Commerce would have provided the economic development services to the city of Little Rock without the city’s funding.
“It’s really pretty simple, [the city of Little Rock] says it’s a contract for services, but it’s not,” he said.
Lynch said his complaints fell on deaf ears. “If you’re going to stop something like this that kind of gets embedded in the corporate/government back-scratching, it’s hard to get rid of,” Lynch told Arkansas Business.
So attorney McMath was hired to sue in 2013 the cities of Little Rock and North Little Rock to prevent them from paying their chambers and related economic development divisions. The named plantiffs were Lynch, Tony Orr of Little Rock and Glen M. Miller of North Little Rock. Lynch argued in the lawsuit that the cities were violating the state Constitution when it gave money to the chambers.
The payments to the chambers are “just a gratuitous gravy train,” he said. “The chamber refuses to disclose how they really spent the money, and who they spent the money on, or what they spent the money on. So it’s just a giveaway.”
Lynch and the plaintiffs also charged the defendants with illegal exaction — the taking of tax dollars for improper purposes — for making the payments. That portion of the lawsuit is pending.
McMath told Arkansas Business that he believes the cities and the chambers have the public’s interest at heart, “but it’s not the way things should be done.”
He said the mayors of both Little Rock and North Little Rock serve on the Little Rock Regional Chamber’s board of directors. So when the “chamber goes to the city with its hat in its hand, who is going to turn them down?” McMath said.
Carpenter argued in his court filings that the contracts are valid because the cities are receiving economic development services that the cities couldn’t provide.
And Little Rock Mayor Mark Stodola made that argument when he was deposed a year ago.
“If you look at the number of site visits, expansion, … the market research that’s necessary to do these things, I mean the city of Little Rock is not equipped to do that,” Stodola said. A transcript of Stodola’s deposition was filed as an exhibit in the case.
Stodola maintained that the city’s payments helped Little Rock and the region. “When Kiplinger’s ranks Little Rock as the No. 1 of the most livable cities in the United States, after having done the research, it suggests to me the money is very well spent in terms of what I’ve looked at since I have been mayor,” Stodola said in the deposition.
Stodola said that’s why the city has made annual payments of $100,000 to the Metropolitan Little Rock Alliance and $200,000 to the chamber for economic development services.
Chesshir told Arkansas Business that the money for the Metro Little Rock Alliance is used for marketing the region to outside companies looking to open a business in central Arkansas.
That budget is about $300,000 and is mostly funded with public money from the 12-county region.
“If the ruling states that those contracts are unconstitutional, then the Metro Little Rock Alliance ceases to exist,” Chesshir said.
The city of Little Rock, though, also had a $200,000 contract with the Little Rock Regional Chamber to provide economic development services.
Chesshir said the budget for the chamber’s economic development department is separate from the chamber’s budget. Each year the chamber raises money for its economic development division, and only about 20 to 25 percent of that money comes from public funds through contracts for services. The rest of the money is raised by private sources.
Chesshir was paid $228,718 in 2013, according to the Form 990 the chamber filed with the IRS. Terry Hartwick’s total compensation from the North Little Rock chamber was $151,010 in 2013, including salary and bonus totaling $123,032.
Joey Dean is the vice president for economic development for the Little Rock Regional Chamber of Commerce, and he also serves as the executive director of the Metro Little Rock Alliance. His salary in 2013 was $174,080.
Chesshir said the economic development efforts have been successful. Since 2005, Chesshir said, the chamber has announced more than $1.9 billion in capital investment, both from company expansions and new business coming to the region, which resulted in more than 13,700 jobs and more than $479 million in annual payroll.
But Chesshir said he doesn’t know how many jobs might have been lost in the region during that period.
“We don’t keep a winners and losers score card,” he said. “It’s just not something that we’ve ever done.”
McMath said he thinks the chambers can survive without the cities’ money.
He said chambers and their economic development programs have been around for decades. “So it’s not going anywhere,” McMath said. “It just may have to work with the city rather than working for the city.”