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Rumery v. Baier - 1/9/2013

Arizona Supreme Court Holds That A.R.S. § 37-527 Violates Article 10, Section 7(A) of the Arizona Constitution by Diverting up to Ten Percent of Certain Trust Land Proceeds to a Management Fund.

The 1910 New Mexico-Arizona Enabling Act granted more than ten million acres of land to be held in trust for designated public purposes, including eight million acres for the “support of the common schools.”  The Enabling Act, which is incorporated into the Arizona Constitution, places detailed restrictions on the sale of land and the use of trust funds to ensure that they are spent for the intended purposes.  The Constitution also provides that the “natural products and money proceeds of any of said lands shall be subject to the same trusts as the lands” themselves.  Ariz. Const. Art. 10, § 1.  Article 10, section 7 of the Arizona Constitution places further restrictions on the use of trust-land proceeds, including that there must be a separate fund for each designated public purpose and that the trust monies may not be spent for any purpose other than the designated purpose.

The trust lands for the support of the common schools are also governed by A.R.S. § 37-521.  Under the statute, funds from the sale of the land or the sale of products of the land must be deposited into the permanent state school fund.  A 2002 referendum amended the statute to specify how earnings must be used and to direct that excess amounts be deposited into a classroom site fund for use by school districts to fund operations.

The State Land Department administers the trust lands.  The Enabling Act and the Constitution do not specify how the Department is to be funded.  Until 2009, the legislature always appropriated funds for this purpose from the state general funds.  In 2009, the legislature enacted A.R.S. § 37-527, which allows up to ten percent of the proceeds of trust lands to be diverted to a newly-created trust land management fund, but requires the funds to be “used exclusively to manage trust lands.”  For fiscal years 2010 and 2011, $9,773,500 and $10.5 million, respectively, were diverted to the trust land management fund.

In 2010, two individuals and a school district sued the state Treasurer and Land Commissioner alleging, among other things, that A.R.S. § 37-527 violates Article 10, section 7 of the Arizona Constitution.  On cross motions for summary judgment, the trial court ruled in favor of the plaintiffs and ordered the Treasurer to deposit all trust land proceeds into the appropriate permanent fund.  The Commissioner appealed, and the Court of Appeals affirmed.

On review, the Supreme Court agreed with both lower courts.  The Court began its analysis with “Article 10, section 7(A)’s directive that ‘whenever any monies shall be in any manner derived from’ any of the state trust lands, ‘the same shall be deposited by the state treasurer’ into the permanent fund corresponding to the particular land grant.”  The plain language of this provision does not permit diverting proceeds from trust lands to use for land management.

Moreover, earlier cases interpreting the Enabling Act, including U.S. Supreme Court cases, hold that its provisions must be strictly construed and that the proceeds of trust lands must be used for the benefit of the specified beneficiaries and for no other purpose.  In other words, “courts may not permit use of trust lands or their proceeds in ways not expressly authorized, even if doing so would benefit the trust.”

The Court rejected the Commissioner’s argument that it should read an exception into Article 10, section 7(A) to allow trust funds to be used for fund management because that provision is explicit in requiring that all proceeds of the trust lands must be deposited into a permanent fund.  The Court also did not find persuasive the out-of-jurisdiction cases cited by the Commissioner.

Justice Bales authored the Court’s unanimous opinion.

Posted by: Kathy O'Meara

Posted On: 1/31/2013