John Washington and Mark Stuart are suing Scottsdale, Ariz., for the city’s $1.5 million contribution toward renovations at the club, claiming that it violates the state constitution’s gift clause and the Scottsdale charter. The city is arguing that the cost of improvements is ultimately covered by golf fees rather than tax revenue.

Scottsdale is fighting a lawsuit filed by two residents who claim the city’s contribution toward improvements at the McDowell Mountain Golf Club constitutes an illegal subsidy, the Phoenix-based Arizona Republic reported.

Scottsdale City Attorney Bruce Washburn has asked the court to throw out the complaint, filed against Scottsdale and its top officials in mid-June, the Republic reported.

John Washington, a former Scottsdale mayoral candidate, and Mark Stuart, a business owner, sued Scottsdale after the City Council signed off on a deal to contribute $1.5 million toward renovations at the north Scottsdale clubhouse, the Republic reported.

The city issued $1.5 million in bonds, or $2 million with principal and interest. The renovations were completed in January, the Republic reported.

The U.S. Bureau of Reclamation owns most of the land beneath the 18-hole golf course and the clubhouse in the McDowell Mountain Ranch community. Scottsdale has a contract with the bureau to use the land, the Republic reported.

A private entity, White Buffalo Golf LLC, bought the course’s operating rights from SunCor Development Corp. of Tempe in April 2012, paying $2.2 million. White Buffalo includes PGA Tour pro Phil Mickelson, and Steve Loy, his former golf coach at Arizona State University, the Republic reported.

In court filings, Washington and Stuart argued that the city’s contribution toward club upgrades violates the state Constitution’s gift clause and the Scottsdale charter. The gift clause prohibits giving public money to private parties without getting a fair return. Similarly, Scottsdale’s charter bans subsidies unless there is a clear public purpose and the city receives a return equal to its costs, “If this isn’t a subsidy, then, short of just forking over money for nothing in return, I don’t know what is,” Washington.

“If this isn’t a subsidy, then, short of just forking over money for nothing in return, I don’t know what is,” Washington said.

The deal, finalized a year ago, allowed for partial city funding of the project. In exchange, White Buffalo agreed to pay Scottsdale a larger percentage of its gross sales—3 percent instead of 2 percent—for 20 years. The change was expected to generate an extra $30,000 or more a year for the city, the Republic reported.

Under a prior contract, White Buffalo had to pay for all improvements at the club and clubhouse. Washington argued that the change in the contract “drastically shifts the cost and risk from White Buffalo to the taxpayers.”

In June, Washington and Stuart filed suit against Scottsdale, Mayor Jim Lane and City Council members, and the city manager. On July 8, Washburn filed a motion to dismiss the complaint in Maricopa County Superior Court, the Republic reported.

Washburn declined to comment on pending litigation, the Republic reported.

The $2 million investment serves a public purpose, and “when the government is pursuing a public purpose, it does not have to get a return on its investment,” Washburn wrote in the filing.

Scottsdale will repay the bonds with proceeds from a fee on golf course revenue, said Lee Guillory, Scottsdale acting city treasurer. The revenue typically goes into a “Basin Management Fund,” used for course improvements. The fund also gets revenue from a fee charged on rounds of golf, the Republic reported.

For that reason, “the only taxpayer funds that were used to fund the clubhouse improvements were from issuing bonds,” Washburn said in a court filing. He argued that Stuart and Washington, as taxpayers, don’t have standing in the case. The cost of improvements is ultimately covered by golf fees, not tax revenue, the Republic reported.

But without the city’s guarantee to repay the bonds from sales taxes, Stuart said, the bonds could not be issued. The Basin Management funds “belong to the taxpayer, per existing city policy. Once funds are collected by the city, no matter from what source, they cannot be given away. That’s the essence of the gift clause,” Stuart said.

White Buffalo was obligated to pay for $353,000 of the project, plus a loan of $500,000 repaid by future golf fees from the Basin Management Fund, according to a 2012 report, the Republic reported.

Former Scottsdale City Treasurer David Smith, who wrote the report, recommended that White Buffalo abide by the original contract to pay for improvements, unless the company paid additional fees for the city to have an “acceptable return on investment.”

By tapping the fee revenue to pay debt service on the bonds, Smith said, the city is eliminating that cash flow into the Basin Management Fund, the Republic reported.