August 29, 2012

by: Patrick D. Kennedy, Esq., Melanie R. Walter and Maeve E. Cannon, Esq.

In this difficult economic climate many local governments are forced to make deep budget cuts to recover from unprecedented revenue shortfalls. Rather than letting these cuts damage schools, municipal halls, and local stadiums, some government officials are getting creative, looking for new ways to bring in revenue. One such method is giving businesses the opportunity to acquire naming rights, concessions and sponsorships on public property. This idea has spread rapidly across the nation, and today many New Jersey municipalities are offering various advertising opportunities to businesses in exchange for much needed financial support. This practice is controversial, and it poses a potential legal pitfall for local governments. As more of New Jersey’s localities participate in this new trend in public funding, it is essential that they understand and consider the state concessions laws’ role in this practice.

Advertising on public property first emerged in the last decade. In its early stages advertising on government property was more of a one-off or a stunt than a long-term strategy. In 2000, Pizza Hut sent the first advertising into outer space with a logo painted on a Russian rocket¹. In 2001, New Jersey became home to the first corporate sponsored public school facility when Shoprite of Brooklawn donated $100,000 in exchange for naming rights on the school gymnasium².

The idea rapidly gathered momentum following the economic crisis’ 2008 onset. The sides of buses, the DMV, fire trucks and prison holding cells were all potential marketing targets. In 2009, NJ transit announced it would take bids for naming and product-advertising rights to its facilities and locomotives³. This plan provoked intense competition among companies offering $50-60 million dollars for various rights. In other communities around the nation, townships are now using advertising on government websites to increase income, even switching from a “.gov” to a “.com” or “.org” to avoid federal constraints⁴. In one Florida county, advertising has expanded to allow pop-ups, though the community has decided to ban certain ads including those discussing politics, religion, sex, guns, gambling, alcohol and tobacco.

School districts have been a primary target for these campaigns. Colorado schools have permitted advertising on student report cards in return for $90,000 over three years⁵. These advertising opportunities, as well as ads on the bottoms of tests and school lunch menus, are generating interest because advertisers see an opportunity to get a few seconds of a parent’s undivided attention. Some schools have restricted these ads to educational companies or school supply sales, but another district placed pizza ads on the bottom of all tests⁶. Many school districts also place ads on school buses now that fifteen states have approved the practice. Schools also distribute supply lists sponsored by office supply stores, post ads at school entrances, or allow advertising and naming rights at school stadiums.

Dispute arises over whether allowing advertisement on public property is a good idea, or an over-commoditization of public goods. Advertising in schools is at the center of this debate. Consumer advocates say marketers hope to exploit children’s susceptibility to ideas, building customers for life. Others are concerned that this is an example of market values overriding democratic values; what is being sold is contrary to policy objectives like better childhood nutrition, gender equality, and self-esteem⁷. Advocates point to the financial straits local governments are in, and suggest that advertising is a better choice than cutting key services. Deals for naming rights at stadiums can range from $20,000 a year at local high schools to millions at public colleges with good teams⁸. A district with 250 buses can generate about $1 million over 4 years, while an ad on a government website can bring in over $100 per month⁹. Although this is not enough to completely close a budget gap, it is often enough to ensure that important programs can be salvaged. Thus, ensuring that the maximum possible public benefit is derived from an advertising opportunity is important; a goal that can best be achieved by fully complying with state laws requiring public bidding or competitive contracting for all public contracts.

The State of New Jersey classifies a concession as the granting of a license or right to act for or on behalf of the contracting unit, or to provide a service requiring the approval or endorsement of the contracting unit, and which may or may not involve a payment or exchange, or provision of services by or to the contracting unit¹⁰. A concession is a type of contract whereby a vendor compensates a contracting unit for the vendor’s right to perform a service¹¹. A concession can also be a form of marketing¹². Naming rights and advertising are types of marketing concessions. Under the state of New Jersey’s Local Public Contract Law and Public Schools Contracting Laws, concessions must be either competitively contracted or issued pursuant to a formal public bid¹³. This means that every time a local contracting unit seeks to use naming rights, advertising, or sponsorship to increase public funds, that contract must be formally bid to ensure that the government is obtaining the best possible price in a competitive, fair way¹⁴. This requirement was clearly outlined in a series of New Jersey court decisions regarding concessions. In the Pied Piper case¹⁵, the court held that informal bids are not sufficient for concessions contracts because every such contract “shall be made or awarded only after public advertising for bids and bidding therefor[,]” consistent with the requirements of N.J.S.A. 40A:11-4 § 4. They based this on the fact that any contracting unit is bound by the compulsory bidding provisions of the Local Public Contracts Law¹⁶. Further, although it seems counterintuitive, the New Jersey Supreme Court has determined that local public contracts law is applicable to a contract even though there is no expenditure of public funds, only an acquisition thereof¹⁷. This means that a contract in which certain rights to a public facility are being sold in return for financial support from a private entity would still need to follow the public procurement laws to ensure that the amount of public funds acquired through the transaction is the largest, and that it is acquired in a competitive, fair way.

As communities consider whether to open their facilities and schools to advertising, they need to be aware of potential bidding requirements, and that informal bidding and single offeror discussions may not be enough to meet those requirements. A formal opportunity to submit a proposal may well be required, regardless of whether it’s for naming rights to a major sports complex or an advertisement in a middle-school cafeteria.

*Special thanks to Melanie Walter for her contributions to this article. Ms. Walter is a 2012 summer associate at Hill Wallack, LLP and will graduate in May of 2013 with her J.D. and M.P.P. from William & Mary School of Law and The Thomas Jefferson Program in Public Policy.
¹Proton Set to Make Pizza Delivery to International Space Station, SPACE DAILY (July 8, 2000) (Pizza Hut paid $1 million for a logo on the side of the Russian ISS Shuttle) http://www.spacedaily.com/news/pizzahut-00b.html.
²Kristin Graham, Grade School Gym Bags a Sponsor for $100,000, BALTIMORE SUN (Dec. 1, 2001). ³Mike Frasinelli, NJ Transit is Taking Bids for Naming, Product-advertising Rights to its Facilities, Locomotives, STAR LEDGER (June 7, 2011).
⁴Aisling Swift, Lee Clerk, Other Government Agencies Add Advertising to their Public Websites, NAPLES NEWS (May 29, 2012).
⁵Noel Brinkerhoff & David Wallechinsky, Colorado School Board Sells Advertising on Report Cards (Nov. 16, 2011) http://www.allgov.com/Unusual_News/ViewNews/ Colorado_School_Board_Sells_Advertising_ on_Report_Cards_111116.
⁶ Id.
⁷Alex Molnar, Fifth Annual Report on Commercialism in Schools, Commercialism in Education Research Unit, Education Policy Studies Laboratory, Arizona State University (Oct. 2002) available at http://www.asu.edu /educ/epsl/CERU/Documents/CERU-0210-09-RW.doc.
⁸Morgan Smith, Texas Schools Look to Advertising to Fill Budget Gaps, TEXAS TRIBUNE (Feb. 17, 2012) available at http://www.texastribune.org/texas-education/public-education/texas-schools-look-advertising-fill-budget-holes/.
⁹Supra at 4.
¹⁰N.J.S.A. 40A:11-2 (37).
¹¹ N.J.S.A. 40A:11-2 (21).
¹² N.J.S.A. 40A:11-2 (13).
¹³ N.J.S.A. 40A:11-4.1(j).
¹⁴Young v. West Orange Redev. Agency,125 N.J. Super. 440, 443 (App. Div. 1973).
¹⁵Pied Piper Ice Cream, Inc. v. Essex Cty. Park Comm., 132 N.J. Super. 480 (1975).
¹⁶Harms Exc. Co. v. Monroe Tp. Mun. Util. Auth., 118 N.J. Super. 496 (Law Div. 1972).
¹⁷ Kurman v. Newark, 124 N.J. Super. 89 (App. Div.), certif. den. 63 N.J. 562 (1973).