A series of fund sweeps enacted by the Legislature have kicked off several lawsuits challenging lawmakers’ authority to recoup some of that money — and more legal battles could be on the way as the state prepares to sweep hundreds of millions more in 2010.
The most recent lawsuit, filed by a coalition of water and power districts on Feb. 19, seeks special action by the Arizona Supreme Court to review two fund sweeps included in the 2009 fiscal budget revision passed in January.
The Irrigation and Electrical Districts Association of Arizona and more than a dozen individual member districts are challenging the Legislature’s decision to pull $2 million from accounts operated by the Arizona Power Authority, which buys and sells power generated by Hoover Dam.
They contend the Legislature acted in error when it pulled $1 million from the Power Authority’s operating budget and another $1 million from the Hoover Uprating Fund.
The Power Authority’s fund is used to buy and sell Hoover-generated power, while the Hoover Uprating Fund exists to handle the finances of bonds issued by the agency.
Both funds are “beyond the authority” of the Legislature, according to arguments by attorney Robert Lynch, who submitted a special-action petition to the court on Feb. 19.
As a special action, the court has the discretion to hear the arguments or reject the case entirely.
Lynch urged the state high court to accept the case because only four months of the 2009 fiscal year remain and the Arizona Supreme Court has yet to rule on whether lawmakers have the authority to sweep money not associated with the general fund.
“No decision of this court has yet addressed an attempt by the Legislature to ‘sweep’ monies from statutory funds not supported by state appropriations and dedicated and obligated to specific statutory programs,” Lynch noted in the 22-page filing.
In total, lawmakers swept almost $600 million from special funds last month to help close a $1.6 billion budget deficit.
The lawsuit filed by the water and power districts seeks to prevent state Treasurer Dean Martin from collecting or demanding the $2 million from the funds operated by the Power Authority. It also seeks to prevent enforcement of the fund sweeps by Gov. Jan Brewer, as well as the transfer of the funds by the commission in charge of the Power Authority.
Lynch said the $2 million fund sweep might seem minimal, but the sweeps could have grave effects on the Power Authority’s operating contract with the federal Western Area Power Administration, and the security of its $49 million in bonds with maturity dates beginning in 2009.
The sweeps also could jeopardize existing energy contracts between members of the Irrigation and Electrical Districts Association of Arizona and the Arizona Power Authority, he said.
“It turns a seemingly small matter into a huge crisis,” Lynch said.
Martin was unavailable for comment.
Paul Senseman, a Brewer spokesman, said the governor is aware of the lawsuit but has yet to take a position on its merits.
Joseph Mulholland, the Arizona Power Authority’s executive director, did not return calls for comment.
The petition for special action resembles a September lawsuit filed by the Arizona Farm Bureau, the Western Growers Association and other agricultural interests challenging a legislative sweep of $160,000 from private industry funds collected to advance grain, citrus and lettuce research and marketing. That sweep was enacted last June, when lawmakers first met to craft a budget for fiscal 2009.
That case, Arizona Farm Bureau Federation v. Napolitano, is still being decided by Maricopa County Superior Court Judge Craig Blakey.
The League of Arizona Cities and Towns, which represents 90 municipal governments, was the second group to challenge the Legislature’s fund sweeps, filing a lawsuit in November against Martin and former Gov. Janet Napolitano after the state tried take $30 million from cities and redirect it to the general fund.
A major prong in the league’s argument was that the state’s budgetary authority is limited to overseeing appropriations that affect state agencies, institutions and public schools.
The court ruled Feb. 3 that the provision requiring the forced transfer was unconstitutional because it was included in the fiscal 2009 budget bills passed by the Legislature last year. The ruling, however, applied to funds tied to the state’s general fund, and it didn’t address the authority of the Legislature to sweep funds not associated with the general fund.
Considering the Supreme Court’s opinion in League of Arizona Cities and Towns vs. Martin, Lynch said he believed the sweep of funds held by the Arizona Power Authority “doesn’t pass muster” because the provisions amount to “putting substantive legislation into an appropriations bill.”
The three separate legal battles might be a signal of an onslaught of lawsuits challenging legislative sweeps of non-appropriated funds, said Martin Shultz, the vice-president of governmental affairs with Pinnacle West Capital Corporation.
“These funds don’t just happen,” he said. “They were created for a purpose.”
Utility giant APS, a subsidiary of Pinnacle West, sent a letter Feb. 19 to Brewer and legislative leaders stating that proposed fiscal 2010 budget reductions impacting the Corporation Commission could jeopardize the agency’s ability to regulate utilities.
The 2010 appropriations options include sweeping $376,000 from the utility regulation revolving fund, and implementing a $1 million reduction in its spending authority.
The APS letter notes that the regulation account is funded by an assessment on utility customers, and the fund was “never envisioned as an extra source of revenue for the Legislature to fund general government expenses.”
According to the Joint Legislative Budget Committee, fund sweeps included in the fiscal 2009 budget revisions pulled $598 million from individual accounts.
Combined with the original 2009 fiscal year budget passed in 2008, the total amount of fund sweeps rises to almost $940 million. Outlines presented by the House and Senate Appropriations committee chairmen would sweep $360 million from special funds in 2010.

With more than half-a-billion dollars of federal stimulus money expected to be earmarked for transportation projects in Arizona, state agencies and local governments are moving quickly to determine how to best put that money to use.
As much as $522 million from the American Recovery and Reinvestment Act could be coming Arizona’s way for transportation projects, according to Arizona Department of Transportation spokesman Matthew Burdick, though that number is not final. The projects could employ as many as 35,000 Arizonans, ADOT said.
While much of the $4.2 billion that Arizona is expected to receive from the stimulus package will come with requirements for matching funds or other strings attached, the transportation dollars don’t require ADOT or other government entities to spend any of their own money, Burdick said. The money, however, will not affect the state’s depleted general fund because ADOT operations are paid through other mechanisms.
Burdick said $157 million of the stimulus money is expected to go directly to counties and municipalities for use on roadways, while about $350 million would be used for highway projects across the state. ADOT has a list of about $1 billion in proposed “shovel ready” highway projects, and during the next several weeks the department will finalize recommendations to the Arizona Transportation Board, which ultimately decides which projects will receive the money.
“What it needs to have is it needs to basically be ready to go to construction, and what that means is … that you’ve met all the federal requirements,” Burdick said.
The only requirement attached to the transportation stimulus money is that 50 percent of the federal highway money must be used for projects that are obligated within 120 days, meaning they have met federal requirements such as environmental studies, according to ADOT spokesman Timothy Tait. The rest of the projects must be obligated within 180 after that.
Once the projects are obligated, the Transportation Board can solicit bids and award contracts to contractors.
“Once we award the bids, work is expected to start pretty quickly on most of these projects,” Tait said.
According to a pre-existing formula, 37 percent of the federal highway money will be used for projects in Maricopa County, while 13 percent will be used in Pima County. The remaining 50 percent will go toward highway projects in Arizona’s other 13 counties.
Regional governments in Maricopa and Pima counties will prioritize their lists of proposed projects to provide to the Transportation Board.
The Pima Association of Governments has a list of about $400 million in projects that could receive funding via Pima County’s share of the $157 million in local money. Many of the projects include pavement preservation, while others would repair bridges and freeway underpasses.
“We did our list beyond what would be available, just so we had some idea of what projects were there. And it’s prioritized by number, so we could just go down the list until we ran out of funds,” said PAG transportation planning manager John Liosatos. “These are all projects that were sort of in various stages of moving along. Some of them even have all their clearances. It’s just a matter of finding the money.”
Kelly Taft, a spokeswoman for the Maricopa Association of Governments, said MAG is categorizing projects based on whether they already meet federal requirements and could be ready to start as soon as the stimulus money is received. MAG will address its portion of the $157 million in March.
“Whether or not they can go in a hurry is really what they’re looking at,” she said.
Liosatos said the 120-day requirement applies only to the $350 million that is going to ADOT for federal highway projects, not to the $157 million that is bound for cities and counties. Local governments, he said, will have a year to spend the money.
The regional government groups also must prioritize the highway and freeway projects in their jurisdictions. PAG, for example, wants to add several traffic interchanges on Interstate 10 and widen State Route 86. MAG is emphasizing a number of widening projects for the Valley’s freeway system.
Though the transportation funds that Arizona will receive under the stimulus package will have no impact on the state’s general fund deficit, Gov. Jan Brewer is hopeful that the $522 million will have a positive impact on the state, according to spokesman Paul Senseman.
“We’re definitely hopeful that if it doesn’t create jobs, at a minimum it will hold some jobs in place and continue them and possibly have a ripple effect in other sectors,” Senseman said.
Atop ADOT’s list are a $33 million project to widen Interstate 17 from State Road 74 to Anthem Way; $168 for several widening projects on I-10 in Maricopa and Pinal counties; and a $45 million overhaul of U.S. 60 between 99th Avenue and Loop 303. Other proposals include $62 million for the Cordes Junction traffic interchange on I-17 in Yavapai County and $38 million for the Little Green Valley Roadway in Gila County.
In addition to the $350 million for federal highway and freeway projects and the $157 million for local governments, the stimulus package is also expected to bring $16 million for transportation enhancement projects, which include aesthetics, sidewalks, bicycle paths and lighting. Under federal requirements, 10 percent of such funds must be used for transportation enhancement, but that number has been lowered to 3 percent for stimulus money, Liosatos said.
“Those are projects that go above and beyond what you would normally do for a transportation project,” said Liosatos. “The TE, or transportation enhancement, funds could pay for a mural on the wall to make it more palatable for the traveling public. It could pay for money to put art on the bridge. But it also has some functional components. For example, if there is an area where there are no sidewalks for kids to get to school and they’ve got to walk through the mud, the monies can go for that as well.”
Less certain are two allocations of up to $100 million, wholly separate from the $522 million, which may be coming to local governments for transit and aviation projects. The transit projects, for things such as buses or Maricopa County’s light rail system, would be implemented at the local level and not through ADOT, Burdick said, unless cities and counties specifically request assistance from the agency. Tait said most of that money would go to local transit authorities or airports in the form of federal grants.
Among its transit and aviation priorities, PAG listed proposals such as $30 million to purchase new public transportation vehicles, as well as aviation projects such as a $10.7 million expansion of the main terminal apron at Tucson International Airport and $8 million for a new air traffic-control tower at Marana Regional Airport.
If construction begins on many of the proposed projects within the 120-day time frame, it would likely to add to the myriad orange cones that ADOT has been putting up lately, at least in Maricopa County. Numerous projects that are being paid for through Proposition 400, a half-cent sales tax to be used for transportation, have begun or will start construction soon.
Some projects, such as the addition of an HOV ramp connecting State Route 51 to Loop 101 in North Phoenix, already have been completed, while others, including the widening of I-17 in the North Valley and I-10 in the West Valley, are underway, Bur
dick said. Others are planned, including construction on Grand Avenue and the Red Mountain portion of Loop 202.
One project that is already under construction is on Loop 303 between I-17 and Happy Valley Road, where ADOT is turning the basic road into a bona fide freeway that will run from the far West Valley to the far northern portion of the metro area.
“In most cases they are widening and improving existing freeways. In one case, we… have started construction on an entirely new freeway for metro Phoenix, and that’s the work on Loop 303 in the Northwest Valley. The first segments of that new freeway are under construction right now,” Tait said. “It is a very extensive project. It’s about 42 miles of new freeway overall.”

Out of $4.2 billion available to Arizona from the federal economic recovery package, more than a third — about $1.5 billion — can be used for education.
The money will come from two main sources in the stimulus package — about $1 billion from a stabilization fund and nearly half a billion in secondary assistance.
On the surface, the requirements to qualify for the money seem clear enough, but then it gets murky.
Of the $1 billion in stabilization money intended to provide direct relief to the state, $832 million is dedicated to education. That is, the money can be used only for k-12 and higher education.
To get that money, Arizona’s budget for education must not fall below its 2006 funding levels. The money can be used to backfill earlier cuts to education. The intent is to achieve a level of funding for education that is equal to fiscal 2008 or fiscal 2009.
There is some flexibility. The federal government might waive the requirement for the state to maintain 2006 funding levels to qualify for the $832 million under certain conditions, such as when the state experiences a “precipitous decline” in revenue.
The Legislature’s budget experts said they are still trying to get answers regarding the waiver section of the stimulus plan, which uses vague terms to describe waiver conditions. But they said their interpretation is that the state would qualify for a waiver as long as it allocates the same percentage of funding for education than in the previous year.
For example, if the state were considering the fiscal year 2010 budget, the education pie of that budget must not be smaller than the education pie in the 2009 budget in order to qualify for the waiver.
The path to the rest of the stimulus money for education is even more convoluted.
Two weeks after Congress passed the $787 billion American Recovery and Reinvestment Act, Arizona’s own legislative experts were still trying to get their arms around it. Most Senate committees, for example, had to cancel meetings scheduled for the end of February regarding specific components of the package because staff members were not fully prepared.
Part of the problem is that while the actual language of the stimulus plan arrived in electronic form, it was in an unsearchable format, a dinosaurian document that was more than 1,000 pages long.
Making sense of it is a bigger challenge, according to legislative staff member who spent much of the past two weeks trying to decipher the code. One staff member told the Arizona Capitol Times that he would have been fired on the spot if he had drafted the stimulus’ language for Arizona’s lawmakers.
During a briefing on the stimulus package Feb. 19, legislative budget staff appealed to the Governor’s Office to provide a more comprehensive report on the federal stimulus money.
Much of the federal funds would be coursed through the Governor’s Office. In areas where the state needs to meet maintenance of efforts (MOE) requirements to draw down the money, it is the governor, for example, who certifies to the federal government that Arizona is meeting those standards.
Of the $1 billion in stabilization money, $185 million is for general-purpose spending. Arizona can choose whether to spend it on education or on other areas of government.
In addition, the Arizona Department of Education is poised to receive about $477 million, which is mostly for Title 1 and special education. The federal law prohibits supplanting state funding with federal funding, so while the money would help schools pay for some of their operations, it would not alleviate the state’s general fund shortfall.
Arizona needs to maintain its 2006 funding levels for education in order to qualify for 82 percent of the $1 billion in stabilization funding, yet that goal is more complicated than it appears at first glance.
The 2006 funding level is difficult to determine, partly because Arizona pays for its education system differently than other states.
For one, Arizona’s schools receive money from several sources, which include the state’s general fund, otherwise referred to as basic state aid, local property taxes and Prop 301, an initiative that increased the sales tax to help pay for education.
And right now, it’s unclear to budget analysts whether the state is required to count all funding sources for education or only the general fund money.
Another sticking point is that Arizona uses a system that accounts for school construction separately from school maintenance and operations. And it’s unclear whether the requirement to meet the 2006 funding level includes capital expenditures for that year, including construction of new schools.
Arizona established the School Facilities Board in 1998 as a result of an Arizona Supreme Court ruling to force the state to equalize capital funding for school districts statewide. The SFB has three components: a Deficiencies Correction Fund, a Building Renewal Fund and a New School Facilities Fund.
As of press time, budget staff was still trying to determine whether the funding-level requirement applies only to general fund money.
The answer is important because hundreds millions of dollars are involved. Also, the state allocated more funding to the School Facilities Board in fiscal 2006 than it did in fiscal 2009.
According to an analysis from the Joint Budget Legislative Committee, if only the general fund were calculated, then Arizona is $433 million above its 2006 funding level for K-12 education.
If money from the general fund, Proposition 301 and the School Facilities Board were factored in, then the state is $364 million above the 2006 funding level.
What that means is the state can cut $364 million or $433 million, depending on what funding sources are factored in, and still stay above the floor. In theory, the state would be able to cut that amount of state funding and use it for something else, while still qualifying for the education money in the stimulus package.
According to the same estimates, Arizona is about $70 million above the 2006 funding levels for universities and community colleges combined. But the Appropriations chairmen’s budget options list for fiscal 2010 includes a $313.5 million hit to the universities. Would this proposed reduction drop the state below the 2006 funding level for the universities?
If that reduction puts the state below the federal threshold, lawmakers are not likely to call for such a large reduction in higher education budgets.
The pulse among senior Republicans is that lawmakers would maintain 2006 funding to get the federal money for education, both K-12 and universities.
“I believe we will be taking all of the education money and put it into good use,” said Rep. John Kavanah, chairman of the House Appropriations Committee.
“I don’t think there is going to be any questions that we will maintain the ‘06 levels,” said Sen. John Huppenthal, chairman of the Senate Education Accountability and Reform Committee. “If we have to get to the ‘06 levels to bring in that money, I’m pretty confident that we will.”
“I would imagine judging from the votes that we need, that is what we are going to do,” said Sen. Jack Harper, a Republican from Surprise.”
The magic numbers in Arizona politics are 31, 16 and 1. That is, the House needs 31 votes to pass legislation, and Senate needs 16 votes. Ultimately, the governor has to approve it.

The House Government Committee voted along party lines to approve legislation that would add the State Treasurer’s Office to an existing list of government agencies able to contract their own attorneys separate from the Attorney General’s Office.
The bill, H2103, proposed by the committee’s chairman, Rep. Sam Crump of Anthem, was supported by the committee’s Republican members. Democrat Reps. Chad Campbell, Anna Tovar and Tom Chabin opposed the measure.
The legislation was urged by State Treasurer Dean Martin, a Republican who has feuded with Attorney General Terry Goddard, a Democrat, over the legality of payments destined for Goddard’s office from funds recovered from a 2002 fraud case that cost various Arizona governments approximately $131 million.
Martin contends he should be granted the flexibility to hire outside counsel to help advise the State Treasurer’s Office on complex financial matters outside the expertise of the Attorney General’s Office.
Assistant Attorney General Greg Stanton lobbied against Martin’s contention, although unsuccessfully, by arguing that granting the treasurer the ability to seek independent counsel could lead to conflicting interpretations of state law.
“The state needs to speak with one voice when it comes to important matters of interpreting statute, legal issues and whatever is going on with litigation,” said Stanton, a former Phoenix City Council member. “The more state agencies with independent counsel, the greater the chance of conflicting interpretations,” he said.
He also said it was important to protect the integrity of a fund established to collect debts owed to the state.
By state law, 35 percent of recovered funds must be transferred to the account and the Attorney General’s Office is permitted to use the money to help pay expenses incurred during collection efforts.
“The purpose of this fund is to create a self-sustaining fund so that the attorney general doesn’t have to go back to the Legislature every year and ask for an appropriation for collection and bankruptcy attorneys,” Stanton said.
Stanton downplayed the political dispute between the Goddard and Martin, saying instead that the debate over the Treasurer’s Office’s access to outside counsel remains a matter of policy. He declined to address questions regarding the effectiveness of a state law that allows nine agencies to hire their own attorneys.
Likewise, Martin minimized the clash with Goddard, saying other factors are more important, such as securing the authority to hire expert private counsel without having to gain the approval of the Attorney General’s Office, which he said he has not been granted to him despite making several requests on different matters.
He also said private attorneys can be hired at rates cheaper than the 35 percent cut taken by the Attorney General’s Office from recovered funds, leaving a greater contribution to the state’s general fund.
On top of that, Martin said private attorneys cannot, by themselves, be used to escape or outmaneuver legal positions of Goddard that he may not agree with.
“If he (Goddard) issues an opinion, that stands, no matter who my attorney is,” he said. “The AG’s opinion has the force of law without a court case to test it.”
The issue of the treasurer’s access to independent counsel stems from a lengthy dispute between Goddard and Martin over a legal bill Martin’s office was asked to pay in return for money recouped in a national fraud settlement.
The fraud cost Arizona governments approximately $131 million. Two-hundred local Arizona governmental entities and many governments in other states invested in NCFE, which made loans to inner-city Medicare hospitals, before collapsing in 2002 in a fraud case involving $3 billion in lost investments.
After the legal battle, then-Chief Deputy Treasurer Blaine Vance refused to transfer payment for the attorney general’s legal services without written approval from the state solicitor general. But in June 2006, the state Treasurer’s Office agreed to pay the Attorney General’s Office $1.9 million for legal expenses associated with recouping the lost investments.
The payment was not disclosed to the state Board of Investment, which oversees the state’s investment portfolio.
The deal came months after agents with Goddard’s office seized computers, 15,000 pages of documents and other materials from the Treasurer’s Office as part of an investigation into allegations that then-Treasurer David Petersen had committed several felonies by using his office to promote character-building teaching materials sold by Character First.
Initially, Petersen faced charges of theft, fraud and conflict of interest. But weeks after resigning in October 2006, he pleaded guilty to a single misdemeanor count for failing to disclose a $4,200 commission he received for selling Character First products.
Martin, as a candidate running for treasurer in 2006, cast suspicion on the payment and criticized Petersen’s sentence, which included three years of probation, as a “slap on the wrist.”
Goddard has defended the payment repeatedly.
Upon taking office, Martin stopped issuing Goddard’s office a portion of the fraud settlement, which was being distributed to the state periodically. He also asked Maricopa County Attorney Andrew Thomas and Maricopa County Sheriff Joe Arpaio to investigate the former treasurer’s payment to the attorney general.
Martin has asked for separate legal counsel to review the deal and to conclude how much the Attorney General’s Office should be paid. The treasurer has pointed out on numerous occasions that a Texas law firm helped recover funds from the NCFE case, saying he is not sure whether Goddard’s office is entitled to the full 35 percent.
The state treasury lost $14.3 million to NCFE. So far, Arizona has recovered about 53 percent of $131 million in losses to various governmental entities, according to the Treasurer’s Office.