Christopher Whitten | Arizona Capitol Times

Court rules state must help pay for local desegregation programs

A judge has slapped down a plan by Gov. Doug Ducey to balance last year’s budget and pay for his teacher pay raises by hitting up Tucson area residents for more taxes.

Tax Court Judge Christopher Whitten said the state acted illegally in trying to say that it would be taxpayers within the Tucson Unified School District who would be solely responsible for the cost of desegregation programs. Whitten said that the legislation adopted at the behest of the governor cannot trump the Arizona Constitution.

A spokesman for the governor would say only that he is reviewing the ruling. But unless overturned it means that the state owes the school district about $8.5 million.

But Sen. Vince Leach, R-Tucson, who helped push the plan, said he was disappointed by the ruling. He said that it means that taxpayers throughout the state have to underwrite the costs of desegregation programs not only in Tucson but in several other school districts throughout the state.

“You’re penalizing people that live in Lake Havasu City for a high tax rate in Pima County or Pinal County,” he said.

Pima County Administrator Chuck Huckelberry, however, had a different take on it. He said the ruling forces the state to live up to its constitutional obligations and not try to shift them to certain local taxpayers.

At the heart of the issue is a 1980 voter-approved constitutional amendment that caps primary property taxes − generally the basic operating costs of running government and schools − at 1 percent of a home’s full cash value. That’s a figure that is supposed to represent the market value of the property.

So on a $200,000 home, the maximum primary property tax can be no more than $2,000 for all levels of government.

That cap, however, does not cover secondary property taxes, things that voters impose on themselves like bonds and improvement districts.

But the cost of desegregation programs has always been considered a primary tax.

All that’s important because that 1980 constitutional provision says once a homeowner’s primary taxes hit that 1 percent figure, the state is responsible for the excess.

What Ducey proposed in crafting his budget − and what the Republican-controlled Legislature adopted was to move those desegregation expenses into the secondary tax category. That put the additional burden strictly on the local taxpayers, saving the state about $8.5 million that otherwise would need to be spent to keep the primary taxes for the Tucson Unified residential property owners below that 1 percent cap.

Whitten in his new four-page ruling, said lawmakers can’t just do that.

The judge pointed to a section of the Arizona Constitution which spells out what is exempt from that 1 percent cap, things like those voter-approved obligations and budget overrides. That list, he said, comprises everything that is a secondary levy.

What the 2018 law did, or sought to do, is add desegregation expenses to that list.

“The statutory label of ‘secondary taxes’ in then new (law) cannot trump the constitutional limit … found in the Arizona Constitution,” Whitten wrote.

More to the point, since desegregation expenses are not approved by voters, and not a secondary levy, the cost “is still subject to the constitutional 1 percent limit.” And that means anything above that limit has to be borne by the state as a whole.

The only reason the case got to court is that Pima County government is the agent for levying all taxes for all levels of government. And Huckelberry said he was not about to pass on those desegregation costs above the 1 percent cap to the homeowners in Tucson Unified School District.

“Our belief was that if we did that we would be levying an illegal tax, and chose not to do it,” he said.

What that decision also meant, however, is that TUSD did not get the extra $8.5 million it would have gotten had Pima County simply levied the tax that Whitten has since found is illegal.

“TUSD is short the money,” he said. “What that means is this $8.5 million now has to be paid by the state” to the school district, Huckelberry said.

This is actually the second time Whitten has slapped down efforts by the Ducey and the state to get out from its constitutional obligations to backfill local taxes when the local primary rate hits that 1 percent cap.

In 2015 legislators voted to empower the Property Tax Oversight Commission to decide how the extra funds needed for desegregation expenses should be divided among various local taxing districts. That panel could have concluded the entire obligation belongs solely to county government or even could have forced cities and community college districts to pony up some cash.

After that was struck down, Ducey and lawmakers came back last year with the effort to try to redefine desegregation expenses as secondary taxes and therefore not the state’s burden.

While Ducey would not comment, Leach said he will look for another method to keep the cost of desegregation programs entirely on local taxpayers.

“That shouldn’t be transferred to other people in the rest of the state,” he said.

Group tries to dodge fine for campaign finance law violation

A group that spent $260,000 attacking a 2014 foe of Doug Ducey in his first gubernatorial race is trying again to escape paying a fine for violating state campaign finance laws.

Attorneys for the Legacy Foundation Action Fund contend that the Citizens Clean Elections Commission lacked the power to impose a $96,000 fine for the commercials targeting former Mesa Mayor Scott Smith. They say there was no proof that the ad was done to advance the political fortunes of anyone else in the Republican gubernatorial primary.

Beyond that, the lawyers contend that the commission lacks the authority to enforce the campaign finance laws.

So far that argument has not held water. Maricopa County Superior Court Judge Christopher Whitten ruled in August that the lawyers for the fund were misreading the law.

Now the fund is seeking intervention by the state Court of Appeals.

This is actually the second time the Legacy Foundation Action Fund has challenged the ability of the commission to police campaign funding. An earlier claim was thrown out by the Arizona Supreme Court after the justices ruled that the fund waited too long to appeal the fine.

But in that ruling, Justice Clint Bolick said the group was free to pursue other, unspecified legal challenges. That led to the current litigation.

The case stems from a commercial that ran in early 2014 when Smith was pursuing the Republican gubernatorial nomination.

Produced by the Legacy Foundation Action Fund, it noted that Smith, who was mayor of Mesa, also was president of the U.S. Conference of Mayors. More to the point, it focused on some of the stands the conference had taken.

“They fully endorsed Obamacare from the start,” the commercial said. And it said the conference supported the Obama administration’s efforts to regulate carbon emissions and “backed the president’s proposal to limit our Second Amendment rights.”

On the screen were photos of Smith placed next to pictures of a smiling Obama.

Jason Torchinsky, one of the attorneys for the fund, argued there was nothing improper about the commercial.

More to the point, he said it was not designed to influence the election but simply to educate Arizonans about Smith. Torchinsky noted that the ad made no reference to Smith’s race against Ducey nor even to Smith’s status as a candidate.

The Clean Elections Commission, however, concluded otherwise, ruling that its true purpose was to affect the GOP gubernatorial primary. And what that meant, the commission concluded, was that the Legacy Foundation Action Fund, by virtue of attempting to influence an election, was required to publicly disclose the spending, which it did not.

That failure led to the $96,000 penalty – a penalty that the commission is still trying to get paid.

Now attorneys for the Legacy Foundation Action Fund are raising new arguments about why it was never required to disclose the spending and, by extension, why it doesn’t have to pay the fine.

Some of this is a rehash of the original arguments.

Attorney Brian Bergin argues that the commission, in concluding the purpose of the commercial was to affect the 2014 GOP primary, ignored the plain language of what viewers saw.

“The Arizona advertisement discusses issues: government spending, Second Amendment rights, and the regulation of carbon emissions,” Bergin wrote, while telling viewers the policies “are wrong for Mesa” and urging them to call Smith “and tell him to support policies that are good for Mesa.”

But Tom Collins, the commission’s executive director, said that ignores other facts.

He pointed out that the positions taken by the mayors’ organization – the ones that Legacy Foundation said it was educating Mesa voters about – all were taken before Smith became president of the group.

And then there was the fact that by the time the commercials aired Smith was no longer its president. But he was running for governor.

“Taken together, allegations (about Smith) that were not correct, the timing of the ad and other factors, there’s really no way to see the ad as anything other than what it is: an attack ad designed to urge folks to vote against Mayor Smith for the Republican gubernatorial nomination in 2014 because he was ‘Obama’s favorite mayor,’ ” Collins said.

And Whitten said he was legally bound to accept the commission’s findings about the purpose of the commercial.

Bergin also says there’s a key flaw in the commission’s case against his client. He contends that the commission is required to identify the candidate that the commercial was made “by or on behalf of.”

“Legacy is certainly not a candidate and was not working “on behalf of” any candidate,” Bergin said.

Whitten, in the ruling now being appealed, did acknowledge that the commission never identified on whose behalf Legacy was spending the money. But he said there’s no such requirement in the law.

“The statute does not explicitly demand names,” the judge wrote.

The trial judge also rebuffed Bergin’s contention that only the secretary of state has the power to enforce campaign laws and not the commission, which was created by voters in 1998.

“The purpose of the CCEC is to ensure that election laws are enforced without favoritism by partisan officials,” Whitten wrote.

No date has been set for the Court of Appeals to hear the case.

Judge rules AG missed deadline to sue regents

An artist’s rendering of the planned 330-room Omni Hotel in Tempe.

A judge has once again rejected efforts by Attorney General Mark Brnovich to challenge what he contends is an illegal deal by the Arizona Board of Regents to build a hotel and conference center.

In a ruling late Wednesday, Tax Court Judge Christopher Whitten does not address Brnovich’s contention that the deal violates the Gift Clause of the Arizona Constitution. That claim is based on the idea that the Arizona Board of Regents is effectively providing a subsidy to the private developer by paying for a conference center that the university would be able to use just seven days a year.

There’s also a separate legal question of having what amounts to a tax exemption for the hotel because it is being built on tax-exempt university property.

What Whitten does say is that the legal claim came too late, meaning he has no legal right to decide if Brnovich is right or wrong.

In a prepared statement, Larry Penley, president of the Board of Regents, praised the ruling − and the implications for similar developments.

“Leveraging our real estate provides an entrepreneurial opportunity to increase revenues to benefit students, the community and the state of Arizona,” he said.

Appeal to Come

Brnovich press aide Ryan Anderson vowed an appeal. He said the judge got it wrong in deciding the claim came too late.

And even if Brnovich ultimately loses, Wednesday’s ruling does not provide a clear legal path for the regents to engage in similar deals. It still leaves the door open for Brnovich to sue to block similar deals in the future at any of the state’s three universities − if he files suit on time.

Arizona Attorney General Mark Brnovich (Photo by Katie Campbell/Arizona Capitol Times)

Central to Wednesday’s ruling is the fact that lawsuits of this kind must be filed within a year of someone learning about a questionable legal practice. And Brnovich did sue on Jan. 10.

But the paperwork filed at that time dealt only with questions about the authority of the Board of Regents to enter into a deal to create a 330-room Omni hotel and a 30,000-square-foot conference center on land that is owned by Arizona State University.

It was only on April 3 that Brnovich amended the complaint to add the Gift Clause allegations.

Whitten said that means if the attorney general knew or should have known about the issue before April 3, 2018 − that one-year statute of limitations − he should have acted by then.

Whitten said the evidence shows that attorneys within Brnovich’s office circulated and discussed a report by the Arizona Tax Research Association as early as January 2018, which criticized the regents for leasing its property to private entities. That report, the judge said, opined that such transactions were “dubious” under the Gift Clause.

Whitten also noted that Rep. Athena Salman, D-Tempe, wrote an op-ed in the Arizona Republic that same month critical of the deal, though it focused more on the $21 million in tax breaks from the city of Tempe. That article, the judge said, also circulated within the Attorney General’s Office, with one of the lawyers there commenting that an element of the deal “sounds pretty suspicious.”

He acknowledged there were certain elements about the Omni deal which the Attorney General’s Office did not actually know about until after April 3, 2018, one year before the amended complaint was filed. That includes things like the number of days Arizona State University would have free use of the conference center.

But the judge said that didn’t matter.

“The statute of limitations … does not accrue when all the details of a claim became known to the plaintiff,” he wrote. “It accrues when enough details of the deal were known, or should have been, that the plaintiff could identify that a wrong had occurred and caused injury.”

And in this case, Whitten said, the key elements were known more than a year before Brnovich filed his amended complaint in April of this year. That specifically includes the fact that ASU would pay $19.5 million to build the conference center − a facility it would have use of without cost only seven days a year − and that the hotel operators would not pay property taxes because the facility was built on property owned by the regents.

ASU officials, in a prepared statement, said the school is “committed to transparency and welcomes inquiry from anyone at any time, including the attorney general, about our projects.” But it also took a slap of sort at Brnovich.

“At no time did he bother to inquire,” the statement reads.

Brnovich, for his part, is undeterred by the ruling.

“Any time you take on the establishment, it’s never an easy fight,” he said in his own prepared statement. “We will continue to fight for Arizona taxpayers, for greater transparency and fiscal accountability from our public universities.”

That issue of transparency came up earlier this year in a review by the Auditor General’s office of the practices of the regents in leasing out their property for commercial use. That report concluded there was a lack of proper oversight and limited transparency, creating a “risk of inappropriate use of public resources.”

Previous rulings

The appeal Brnovich promises will address more than just Whitten’s ruling on the timeliness of the Gift Clause claim.

Earlier this year Whitten threw out other parts of the challenge by Brnovich, including whether state universities can lease out the land they own for private, for-profit operations.

The judge said Arizona law gives the Board or Regents the authority to buy, hold and sell real estate. That power, he wrote, specifically includes the power to enter into leases of the land it owns.

And in this case, Whitten said, the deal to create the hotel and conference center on land that is owned by Arizona State University clearly is a lease.

The judge also would not let Brnovich claim that, by seeking to void the deal, he is enforcing laws to ensure that all property is being properly taxed.

“As a matter of law, the property on which the Attorney General seeks to collect tax is constitutionally exempt from taxation,” Whitten wrote, because it belongs to the universities and the regents. “There is no tax owing, and nothing for the Attorney General to enforce.”

Supreme Court to let AG argue case against regents

The Arizona Supreme Court is going to give Attorney General Mark Brnovich one more chance to try to sue the Board of Regents over what he contends is an illegal deal to build a hotel and conference center.

In a brief order, the justices said they will hear his argument that he did not wait too long before challenging the arrangement as a violation of the Gift Clause of the Arizona Constitution. They also will allow him to argue that, timing or not, he has separate and independent authority to bring suit at any time against the regents for making a deal to evade taxes and for exceeding the board’s authority to enter into leases.

But even if he wins at the Supreme Court, that’s not the end of it. All that would do is allow him to go back to a trial judge to actually try to prove his claims.

The fight is over a plan to exempt from taxes a parcel that Arizona State University owns at the southeast corner of Mill Avenue and University Drive.

Construction already has started to build a 330-room Omni hotel and a 30,000-square-foot conference center. And there is a formal groundbreaking ceremony scheduled for September 17.

Brnovich says the deal amounts to a gift of public money.

He said ASU is paying $19.5 million to build the conference center even though the contract allows the school to use it without paying rent just seven days a year. And he said the school agreed to pay about $30 million to construct a 1,200-spot parking garage but will “gift” Omni 275 of the spots that the hotel gets to use exclusively and keep the revenue from the spaces.

And then there’s the issue that, by having the hotel built on property owned by the university, it escapes having to pay property taxes.

The deal does call for some “payments in lieu of taxes.” But Brnovich contends that still will leave local schools and governments short of what they would otherwise have received if the property were on the tax rolls the same as any other commercial property.

Attorneys for the regents have defended the policy they have approved to allow for such deals – and not just at ASU – saying it brings in money to help underwrite the costs of running the system.

Arizona Attorney General-elect Mark Brnovich

Only thing is, Brnovich has never had a chance to make his case about the Gift Clause. Tax Court Judge Christopher Whitten ruled in 2019 that he waited too long after learning about the terms of the deal before filing suit.

That decision was upheld by the Court of Appeals.

Aside from the Gift Clause claim, the appellate judges noted that state law specifically empowers the regents to enter into leases for real and personal property.

The appellate judges also took a swat at Brnovich for trying to sue under a statute that deals with people holding office illegally. The attorney general, they said, was trying to use that to instead claim that the regents were illegally exercising that power.

There is one other issue that will be decided: whether Brnovich – meaning taxpayers – has to pay the legal fees of the private attorneys hired by the regents. Whitten already awarded nearly $1 million in fees from just the trial court proceedings.

It is unlikely the Supreme Court will hear the case before Thanksgiving.

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