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Appeals court decision may end ‘slush funds’ for governor, executive branch

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The N.C. attorney general can’t keep and distribute money from a settlement over hog waste that leaked and overflowed from lagoons.

A split 2-1 panel of the N.C. Court of Appeals, in an opinion issued Tuesday, Dec. 15, ruled money resulting from a settlement between Smithfield Foods and the N.C. attorney general must flow into the state treasury.

The ruling effectively ends the attorney general’s hog settlement “slush fund,” says Mitch Kokai, senior political analyst for the John Locke Foundation. It could also end any similar deals in the future involving officials in the state’s executive branch.

Daniel Gibson of the Stam Law Firm in Apex represented the plaintiffs, now the New Hanover County Board of Education. He leans toward agreeing with Kokai.
“I certainly hope so,” Gibson said to the end of the slush funds. “You can definitely argue that it is.

“I think this is about more than just this case.”

The N.C. Constitution provides a framework for such settlements, in this case a “gift” as defined by the state Supreme Court, and for distribution through the General Assembly. The governor, a day before this same case reached oral argument before the state Supreme Court, signed into law House Bill 200, requiring that gifts to the state be placed in the treasury.

The settlement has to be maintained, said lead attorney Skip Stam, and the purpose of the gift is for environmental enhancement.

The Appeals Court majority agreed, referring to Article 9, Section 7 of the N.C. Constitution, which is clear that money, such as that from the hog waste settlement, shall remain in the county and will maintain free public schools. The General Assembly will control the fund.

Judge John Tyson, writing for himself and fellow Judge Phil Berger Jr., agreed, saying the state’s courts haven’t permitted members of the executive branch “to exercise unbridled appropriation or expenditure of unbudgeted public funds.”

“The Attorney General is not only the State’s chief law enforcement officer but a steward of our liberties,” wrote Tyson. “The stated purpose of the public funds being used for environmental purposes was not changed by the statute, which mandates the location and depository where the public money is to be deposited and held. All funds due or held under the agreement must be paid and deposited into the State treasury, rather than into a private bank account under the exclusive control and discretion of the Attorney General.”

The gift, in this case, amounts to about $12 million, totaled over the course of the past year, plus the next five years, Stam says.

“The way you can maintain the purpose of the gift for environmental enhancement, and also use it for public schools, would be if the Assembly were to appropriate this for environmental enhancement at public schools.

“There’s plenty of need for that,” Stam says, “so I think that would be very welcome for public schools and, of course, that includes charter schools. That’s sort of the significance of it.”

The Appeals Court’s ruling arrives after Stein and his predecessor, former attorney general and current Gov. Roy Cooper, used the settlement money to fund their own environmental priorities. That amounted to millions of dollars that could have benefited the state’s public schools.

“We lost the first part of it, and that involved about $6 million or 7 million, and we’re very disappointed,” Stam said. “But today is a day of joy and happiness.”

A big win for good government, he says.

“For our client, New Hanover Board of Education, we wanted to get them more money for their schools, and we partially accomplished that. We were asking that it all go to the civil penalty and forfeiture fund, which is a very small funding source for the public schools, but it’ll be going through the General Fund, and 40% of the General Fund goes to K-12 schools, anyway. So, this is a win for the schools, as well.”

The Civitas Institute’s former leader, Francis De Luca, filed the original lawsuit, now called New Hanover Board of Education v. Stein. Stein, the N.C. attorney general, was recently re-elected to a second term. Civitas recently united with the John Locke Foundation, forming a policy powerhouse to create, innovate, and advocate for freedom-forward solutions throughout the state and region.

The Appeals Court took a second look at the case after the state Supreme Court issued its own ruling in April. The state’s highest court had agreed with Stein that the money flowed from a voluntary agreement with Smithfield and its subsidiaries rather than a legal settlement producing a penalty. That distinction allowed Stein to maintain control of the money, rather than forcing the funds into the state treasury for distribution to local school districts.

The appellate decision Tuesday offered somewhat of a surprise twist in the case.

“For most observers, I think this ruling appears as a bit of a curveball,” said Kokai. “When the  state Supreme Court ruled 6-1 in April in favor of the attorney general, most people thought the issue was settled. But this ruling effectively would end the slush fund and force the money back into the state’s coffers where it belongs.”
Stein can appeal again to the highest court.

“It’s entirely possible that Attorney General Stein will push to send the case back to the Supreme Court, where four of the justices who ruled in his favor in April remain on the bench,” Kokai said. “They could make up a majority in a new ruling in the case.”

“But beyond the numbers, the case could force justices to choose between schools and an environmental slush fund,” he added. “As they ponder their judicial futures, given the conservative attitudes voters displayed in last month’s judicial races, the political calculus could point toward a different type of ruling.”

In the mid-to-late 1990s, millions of gallons of swine waste overflowed containment lagoons after storms and spilled into North Carolina waterways. The waste contaminated the waterways and impacted groundwater supplies.

The state Department of Justice’s Environmental Division, the appellate opinion says, filed a number of lawsuits against swine farms from which waste had overflowed. After months of negotiations, then-Attorney General Mike Easley and the companies entered into an agreement under which the companies “agreed to lead the development and implementation of environmentally superior swine waste management technologies in North Carolina” and to pay for those costs.

The attorney general, the opinion says, retained sole authority under the agreement to award and distribute funds held in a private bank account to organizations of his choosing, with the funds to be “used to enhance the environment of the State.” The A.G. developed the Environmental Enhancement Grant Program to receive requests and facilitate the administration of these funds.

The 2019 legislative language about state use of gifts, as well as the new Appeals Court decision, should mitigate similar slush funds in the future.

In addition to the hog settlement, the 2019 law and new court ruling could help prevent another case similar to the governor’s Atlantic Coast Pipeline “mitigation fund.” In 2018, Cooper, a Democrat who’d faced opposition from his base over the pipeline project, negotiated the $57.8 million fund with pipeline developers Duke Energy and Dominion Energy.

Like the hog settlement money that he had controlled for 16 years as attorney general, the pipeline fund would have avoided the state treasury and legislative appropriations. Instead the governor would have exercised complete control over the pipeline fund. It was supposed to help counties that would be affected by the pipeline, Cooper said, and would be spent on economic development and environmental repairs.

The General Assembly passed a law determining that any money from Duke and Dominion should instead fund local schools. No money ever flowed into the pipeline fund. The Atlantic Coast Pipeline was eventually canceled.

John Locke Foundation senior political analyst Mitch Kokai contributed to this story.