Court rules state must ask Congress to tap trust fund for schools

Gov. Doug Ducey or whoever succeeds him can’t conduct a future financial raid on a school trust fund account without first getting congressional approval, a judge has ruled. 

In a decision published Tuesday, Maricopa County Superior Court Judge John Hannah acknowledged that Congress did approve — belatedly — the 2016 measure pushed by Ducey to tap the trust to provide more immediate cash to fund K-12 schools. That resolved earlier litigation about the power of the state to change the funding formula without Congress first amending the Enabling Act that allowed Arizona to become a state and gave it lands it holds in trust for schools. 

But Hannah said those extra dollars run out in 2025. And legislative budget staffers estimate that will cut state aid to schools at that point by more than $237 million a year. 

What that means, the judge said, is that there “probably will be another attempt to change the distribution formula, relatively soon.” 

“And that effort probably will be undertaken without congressional approval, unless there is a court order that says the Enabling Act requires consent,” Hannah said. 

Now he is issuing such an order. 

Gubernatorial press aide C.J. Karamargin expressed disappointment. 

“Gov. Ducey does not want a future governor to be bound by judicial overreach,” he said. “And, in this case, that seems to be what’s going on.” 

But Karamargin said the governor and his legal staff were still reviewing the ruling on Tuesday before deciding whether to appeal. 

Gov. Doug Ducey( AP Photo/Ross D. Franklin, Pool, File)

Proposition 123 was Ducey’s plan to deal with a 2013 Arizona Supreme Court ruling that the state had ignored a 2000 voter-approved mandate to increase state aid to schools annually to keep pace with inflation. 

Ducey, who took office in 2015, declined to increase taxes to comply with that ruling. Instead he came up with a plan to tap into a special trust funds that consists of the money the state earns from the sale and lease of about 10 million acres of land Arizona was given by the federal government when it became a state. 

About eight million acres remain. 

Under normal circumstances, the beneficiaries of the trust — in this case, public schools — would get 2.5% of what is there. 

Ducey’s proposal, approved by voters at a special election in 2016 by a 51-49% margin, boosted that to 6.9% in a move the governor said would funnel an extra $3.5 billion into schools over a 10-year period. 

Michael Pierce (Photo by Carmen Forman/Arizona Capitol Times)

Phoenix resident Michael Pierce sued, contending that any change in the distribution required Congress to first amend the Enabling Act. There also was the fact that, in boosting withdrawals through 2024, it would leave less in the trust at that point than if the formula were not changed. 

Ducey disagreed. 

But facing litigation, he eventually did get congressional approval. And once that happened, the 9th Circuit Court of Appeals dismissed the case as moot. 

That, however, still leaves the question of what happens when the extra money runs out. 

Attorneys for the governor told Hannah there is no reason for him to consider that issue, at least not now. They said Pierce’s claim “is premised on a long line of ‘what ifs,’ which might occur at some future date that could be decades from now — or might never happen.” 

That argument actually worked in an earlier case where the 9th Circuit, citing that belated congressional action, concluded there was nothing more to litigate about Proposition 123. 

But Hannah agreed with Andrew Jacob, attorney for Pierce, that the governor’s argument misses the larger point. 

The judge said it is true that the original challenged conduct — Ducey proceeding with the fund transfers without congressional approval — did cease when federal lawmakers acted. But he said a claim becomes moot “only if the relevant events make it absolutely clear the allegedly wrongful behavior could not reasonably be expected to recur.” 

And that, Hannah said, is not the case here. 

“The facts here do not clearly show that Arizona state officials are unlikely to try again to change the distribution formula without congressional consent,” the judge wrote. 

John Hannah

In fact, Hannah said, the reverse may be a more realistic scenario. 

He said the Arizona Constitution makes it “very difficult” to raise taxes to make up for the lost revenues, given that it would take a two-thirds vote of both the House and Senate as well as gubernatorial consent. That, said Hannah, leaves a future version of Proposition 123 — and its increase in taking more money from the school trust fund — as “the most obvious alternative.” 

“Here the governor has demonstrated power to determine whether the state of Arizona seeks and obtains congressional approval for changes to the School Trust Fund distribution formula,” the judge wrote. More to the point, Hannah said, the evidence shows that the only reason Ducey eventually went and sought congressional approval was to undermine the original federal court lawsuit. 

“The agreed-upon facts demonstrate a real possibility that the same thing will happen again,” Hannah wrote. “Under these circumstances, it would be unfair to the plaintiffs, and a substantial waste of judicial resources, to dismiss this case as moot and force the plaintiff to start over.” 

Ducey’s reaction to the latest ruling pales in comparison to the blast the governor lobbed at a federal judge who had reached a similar conclusion two years ago about approving the financial maneuver without first getting congressional blessing. 

“Judge (Neil) Wake puts on a robe in the morning and thinks he’s God,” the governor said at the time. “But he’s not.” 

And it got even more personal. 

“I want to tell you what everyone down at the courthouse needs to know,” Ducey said. 

“It’s time for Judge Wake to retire,” the governor continued. “He’s an embarrassment to the legal community.” 

As a sitting judge, Wake could not comment. But Patrick Ptak, Karamargin’s predecessor, said at the time that it was not unfair for Ducey to attack a judge who is legally precluded from responding to personal attacks. 

Wake got to the federal bench in 2004 after being nominated by Republican President George W. Bush and with the recommendation of the state’s two GOP senators, John McCain and Jon Kyl. 

Hannah was tapped for the state bench in 2005 by Democratic Gov. Janet Napolitano.  


Prop 123 illegal, federal judge rules

Gov. Doug Ducey (Photo by Katie Campbell/Arizona Capitol Times)
Gov. Doug Ducey (Photo by Katie Campbell/Arizona Capitol Times)

A federal judge ruled Monday that the funding scheme used by Gov. Doug Ducey to increase aid to schools is unconstitutional.

In a 35-page order, Judge Neil Wake said the federal Enabling Act that made Arizona (and New Mexico) a state in 1912 and gave it lands to hold in trust for schools allows the state to use only the interest off the money earned. The idea, Wake explained, was to preserve the body of the trust — and the future interest it would earn — for future generations.

But Wake said that Proposition 123, crafted by the governor as a method to settle a years’-old lawsuit over school funding, clearly ran afoul of that federal law.

“Nowhere in the history does anyone request or suggest that Congress give unfettered discretion to either state or that it was abdicating its oversight obligations under either state’s Enabling Act,” the judge wrote.

But Mike Liburdi, the governor’s attorney, said there is a provision buried in recent federal legislation which not only authorizes future payments from the trust that go into the school finance formula but effectively ratifies the $344 million in prior payments that Wake said Monday were illegally made.

“We’re not terribly worried,” said gubernatorial press aide Daniel Scarpinato.

But Wake isn’t the first one to raise the question. In fact, state Treasurer Jeff DeWit told lawmakers in 2016 — before the measure went to voters — that they can’t do what the governor was proposing.

Central to the issue is the nature of the trust.

The federal government gave Arizona 10 million acres when it became a state in 1912 with the restriction that it be held for the benefit of certain beneficiaries, mostly public schools. About 9.2 million acres remain.

There also is about $4.8 billion in the trust made up of the proceeds from sales and leases of the land.

Legislative budget staffers said at the time that, at current withdrawals, the fund would grow to about $9 billion by 2025. But with the additional funds taken out, the account is projected to be $6.2 billion instead.

What made that significant not only for DeWit but also Michael Pierce, who filed the federal court lawsuit, is their contention that such a radical change can be made only by amending the Enabling Act, something that was not done.

In agreeing with Pierce, Wake said it does not matter than the Arizona Education Association, the Arizona School Boards Association and the Arizona Association of School Business Officials supported Proposition 123.

“The schools’ current incentive to get extra money for their current needs is at odds with the interests of future Arizona students,” the judge said. “Congress’s conscious plan to vest all citizens with property rights in the trust was necessary to uphold the trust against collusive violations.”

Liburdi said he believes that when Congress consented just recently to give Arizona authority to take more money out of the trust it approved all of the what was in the 2016 ballot measure. And that, he said, means it gave retroactive approval to the money the state already has distributed.