VOL. 17 ISSUE NO. 34   |   AUGUST 24 - 30, 2011

AUGUST 24, 2011

Judge calls CCUSD bond lawsuit ‘very interesting first impression case’

‘We live in a democracy; we don’t always get our way … Getting permission is expensive’

PHOENIX – Oral arguments in Friedman v. Cave Creek Unified School District were held on Tuesday before Maricopa County Superior Court Judge Elaine Willet, who took the matter under advisement.

The lawsuit, which was filed by the Goldwater Institute on behalf of CCUSD resident Jayne Friedman in April, asserts Section 34 of a session law passed in 2010, is unconstitutional, is a special law and violates a contract between the district and voters.

When the defendants raised the issue of standing, claiming Friedman did not live in the district when the bond measure was passed in 2000, the Goldwater Institute added district resident Rich Bail, who has lived in the district and voted in every election since 1998, to the lawsuit, to eliminate wasting time arguing over standing.

Voters approved bonds in 2000 for building several new schools, purchasing buses and grounds improvements.

In 2006, the CCUSD governing board voted to issue bonds to build a new high school. However, it is now five years later and no new high school has been built, placing the district in violation of IRS regulations, which requires bond proceeds to be expended and projects substantially completed within three years.

The district’s legislative liaisons approached Sen. Nancy Barto, R-Dist.7, who was a member of the Arizona House of Representatives at the time, to pass legislation in 2010, which she did as a floor amendment (Section 34) to the budget omnibus bill, allowing the district to divert unused bond money to projects preferred by the district rather than for projects specified in the voter publicity pamphlet.

On Tuesday, CCUSD Attorney Don Peters claimed the plaintiffs bore a heavy burden to prove a contract has been impaired and said it was a serious separation of powers issue.

Peters said the plaintiffs were asking the court to override the legislature and substitute its wisdom for that of our lawmakers.

He went on to say, “There is no contract. Contracts only bind people who consent,” explaining there were people who did not vote in favor of the bonds but are still bound by the majority of the vote.

“It is a question of public policy,” said Peters, adding, “We live in a democracy; we don’t always get our way.”

He also denied it being a special law and said parties could move in and out of the class. However, to become part of the class, he acknowledged a district must have bond proceeds left over from an election that took place prior to 2004.

Goldwater Institute Attorney Christina Kohn, representing the plaintiffs, argued the district asked the legislature to carve out a special law and under the special law clause, it fails all three prongs of the test when it need only fail one to be considered a special law.

Kohn said if one were to look up the legislative history, the purpose of the law was “to help Cave Creek” [Unified School District].

And because the law applies only to past bond elections, Kohn said no circumstances can allow anyone to enter the class, only districts that have leftover bond money.

However, that would also mean the only circumstances allowing districts to enter the class would be districts in violation of IRS regulations with respect to expending the proceeds of tax-free bonds.

Kohn said members could leave the class but no members could enter the class.

Noting the bonds were approved for a specific purpose, Kohn stated, “The defendant says we live in a democracy. We also live under a Constitution … The terms of the contract were spelled out in the publicity pamphlet. Voters accepted [CCUSD’s] offer and voted for the bonds.”

When the district decided to use the bond proceeds for renovations instead of the projects detailed in the publicity pamphlet, Kohn said it “substantially impaired its contract with the voters.”

And while she acknowledged the law does not create a contract or rights, it creates expectations.

She said the law does not allow the legislature to bestow special favors on limited classes, adding, “Even if we assume economic conditions is a legitimate public purpose, the district’s funding shortage is not an emergency.”

Stating the district could very well have gone back to the voters to ask if the money could be used for other projects, Kohn pointed out a few years ago the district did ask voters for money for renovation projects and it was rejected.

Countering Kohn’s argument that the district should have asked the voters, Peters said, “Getting permission is expensive,” and stated an election costs approximately $50,000.”

He said, “The contention that the legislature passed this law with CCUSD in mind does not make this a special law.”

What was interesting is Peters represented CCUSD as the lead plaintiff in a case against the state regarding Proposition 301, in which he argued the legislature must appropriate funds because voters passed the legislation to provide raises for teachers.

Quoting the Supreme Court, the court in that case held, “A promise to make an appropriation is not an appropriation … The utmost that can be claimed for the act under consideration is that it pledges the good faith of the state to the making of an appropriation.”

In that case, Peters argued the legislature violated Arizona Constitution’s voter protection provisions.

In essence, he argued the state had a contract with the voters.

However, due to the language in Proposition 301, the court concluded, failing to appropriate the statutory amount was a failure to do what the law requests, not what the law required.
Surprisingly, never brought up during Tuesday’s arguments, were the bondholders’ rights in all of this.

After all, Section 34, allowing CCUSD to divert bond proceeds to projects other than those approved by voters, was passed after the bonds were issued.

And, bond investors, if they knew, might balk at 20-year bonds, intended for new building construction, being used instead to paint existing buildings, for example.

Willet, in taking the matter under advisement, stated it was a “very interesting first impression case” for the court.

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