Securities fraud lawyers take aim at cities

Goldwater Institute

by Nick Dranias
Goldwater Institute

Cities beware. The grandiose promises of economic growth and tax revenues from municipal bond-funded building projects are the latest casualty of the faltering economy.

Allstate Life Insurance has filed suit in federal court against Prescott Valley, Arizona for securities fraud in the sale of bonds for its multi-use event center, essentially a municipal stadium. The bonds were to be paid from operating and sales-tax revenues. The suit alleges that Prescott Valley knowingly overestimated projected revenues in order to sell the bonds to investors.

Similar allegations of fraud can be expected to increase as local tax and fee revenues continue to decline from optimistic projections. Allstate’s lawsuit may be the beginning of a trend in which cities become targets for securities fraud lawyers representing disgruntled investors in a down economy.

There is a principled way to minimize such exposure: Restrict cities to borrowing and spending money only on actual governmental functions. A long line of legal precedent defines “governmental functions” as those without which the government would cease to exist as a governmental body. Whatever vagueness may exist on the margins of this lawyer-tested definition, the concept obviously includes law enforcement and excludes convention centers, stadiums and water parks. Enacting a statute or charter amendment that limits city borrowing and spending to only governmental functions would go a long way in shielding cities from the unintended consequences of revenue projection inflation.

Nick Dranias holds the Goldwater Institute Clarence J. and Katherine P. Duncan chair for constitutional government and is the director of the Institute’s Dorothy D. and Joseph A. Moller Center for Constitutional Government.


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