On August 2, 2017 the Arizona Supreme Court issued its opinion in Arizona Chamber of Commerce & Industry v. Kiley, No. CV-16-0314-SA, 2017 WL 3272196. The primary issue was whether Proposition 206, a ballot initiative increasing the minimum wage and requiring mandatory sick leave, violated the Arizona Constitution’s Revenue Source Rule, which requires ballot initiatives that propose a mandatory expenditure of state revenue also identify a funding source. In a unanimous opinion, the Court held Proposition 206 did not violate the Rule because it applied only to private businesses, not the state, and thus caused only an indirect expenditure of state revenue rather than a mandatory expenditure.
In the November 2016 election, Arizona voters approved Proposition 206, a ballot initiative which raises Arizona’s minimum wage over a three-year period, then requires annual increases tied to the consumer price index. Proposition 206 also establishes earned paid sick leave for employees and tasks the Industrial Commission of Arizona (“ICA”) with enforcement. Both the minimum wage and sick leave provisions apply only to private businesses, not the state or federal government. The Arizona Chamber of Commerce, among others (collectively, the “Plaintiffs”), challenged Proposition 206 as violating three separate provisions of the Arizona Constitution: the Revenue Source Rule, the Separate Amendment Rule, and the Single Subject Rule. After the trial court denied a preliminary injunction against the implementation and enforcement of Proposition 206, the Arizona Supreme Court accepted special action jurisdiction to review its constitutionality.
The Revenue Source Rule
The Revenue Source Rule, article 9, section 23 of the Arizona Constitution, requires that ballot initiatives or referenda which propose a mandatory expenditure of state funds must also provide an increased source of revenue to cover those expenditures. As Proposition 206 did not provide any revenue increases, the Plaintiffs asserted that it violated the Revenue Source Rule because: (1) state agencies, although exempt from the minimum wage increase, would nevertheless be forced to increase their expenditures to private third parties who were subject to the increased minimum wage, and (2) the ICA, a state agency, was required to coordinate the implementation and enforcement of the sick leave provisions and would necessarily allocate state revenue to do so.
The Court rejected the Plaintiffs’ first argument, holding that the Revenue Source Rule applies only to initiatives or referenda which explicitly require an expenditure of state revenue or state actions that inherently require the expenditure of state revenue. An initiative or referendum which causes only an indirect expenditure of state revenue is not a “mandatory expenditure” within the meaning of the Rule, and thus does not violate the Rule. Even if state expenditures with private third parties increased because of Proposition 206, such expenditures are discretionary rather than mandatory and therefore do not implicate the Rule. As the Court pointed out, a contrary interpretation of the Rule would frustrate the initiative process because ballot measures would have to account for every conceivable state expenditure arising from the initiative, a herculean task given the state’s numerous and substantial dealings. However, the Rule is not triggered only by initiatives and referenda which require direct expenditures of state funds. Initiatives and referenda which expressly require a state action that inherently requires a non-discretionary expenditure of state revenues, such as an initiative mandating the creation of a new state agency, are also subject to the Rule.
The Court also rejected the Plaintiffs’ second argument, that sick leave provisions violated the Rule because the ICA had to implement and enforce them. While the sick leave changes require mandatory expenditures of state revenue—the ICA’s implement and enforcement of the provisions—Proposition 206 expressly provided a funding source: the ICA was to impose civil penalties on employers that fail to pay earned sick time to employees, and the Court concluded that satisfied the requirements of the Revenue Source Rule.
The Separate Amendment Rule and the Single Subject Rule
The Plaintiffs also challenged Proposition 206 under the Separate Amendment Rule, article 21, section 1 of the Arizona Constitution, and the Single Subject Rule, article 4, part 2, section 13 of the Arizona Constitution. The Separate Amendment Rule requires separate amendments to the constitution be submitted individually so voters can vote for or against each amendment separately. The Court concluded Proposition 206 did not violate the Separate Amendment Rule because the Rule only applies to constitutional amendments, and Proposition 206 enacted statutory, rather than constitutional, changes.
Similarly, the Single Subject Rule requires legislative acts embrace only one subject, which must be expressed in the title. The Court likewise concluded Proposition 206 did not violate the Single Subject Rule because the Rule applies only to legislative acts, not ballot initiatives like Proposition 206. The Court therefore rejected the Plaintiffs’ challenge to the constitutionality of Proposition 206.
Kiley provides additional protections to ballot initiatives and referenda. Indirect expenses the state incurs arising from the implementation of ballot measures such as training affected employees or contracting for goods and services are not mandatory expenditures of state funds and therefore do not implicate the Revenue Source Rule. In addition, ballot initiatives and referenda are never subject to the Single Subject Rule and are not subject to the Separate Amendment Rule if they enact statutory changes rather than constitutional amendments. However, supporters of ballot measures should be aware that they may not circumvent the Revenue Source Rule by enacting measures which inherently require non-discretionary expenditures of state revenue.
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