Arizona Supreme Court Rejects Challenge to Proposition 206


On August 2, 2017, the Arizona Supreme Court released its written opinion rejecting the Arizona Chamber of Commerce and other business groups’ challenge to Proposition 206, also known as The Fair Wages and Healthy Families Act. The initiative was approved by 58 percent of the votes on the November 2016 ballot and is set to increase Arizona’s minimum wage incrementally from $10.50 per hour in 2018 to $12.00 per hour in 2020. Beginning on January 1, 2021, the Arizona minimum wage will increase each year as determined by the consumer price index. Proposition 206 also requires employers to provide mandatory sick leave of one hour for every thirty hours worked, with a cap depending on the number of personnel. However, Proposition 206 does not apply to state employees.

The Arizona Chamber of Commerce and various business groups filed suit seeking a declaration that Proposition 206 was unconstitutional on three grounds: (1) the initiative violated the Revenue Source Rule because it requires mandatory expenditure of state revenues without establishing an independent revenue source to cover those costs; (2) it violated the Separate Amendment Rule by addressing two separate topics: minimum wage and earned paid sick time; and (3) it violated the Single Subject Rule because a legislator would have to vote for the entire proposition, even if he or she did not agree with one of the two topics addressed.

The Revenue Source Rule requires any initiative that proposes a mandatory expenditure of state revenues to also provide for an increased source of revenues to cover those costs. If the new revenue source fails to fund the costs during any fiscal year, the legislature has the discretion to reduce the expenditure of state revenues to the amount of funding supplied by the identified revenue source.

Challengers of Proposition 206 argued that the initiative proposes a mandatory expenditure of state revenues in violation of the Revenue Source Rule because (1) the Industrial Commission of Arizona (ICA) is required to implement the sick leave provisions, and (2) other state agencies would be required to increase their expenditures to third parties in order to comply with federal law and existing contract provisions without an independent revenue source. Real-parties-in-interest countered, arguing that, because Proposition 206 did not directly require expenditures, the Revenue Source Rule did not apply.

The court rejected both arguments. In doing so, the court looked to the Revenue Source Rule, holding that a mandatory expenditure of state revenues does not occur if an initiative only indirectly causes an expenditure of state revenues. However, the court rejected the real-parties-in-interest’s assertion that the Revenue Source Rule only applied in instances where an initiative explicitly directs expenditure of state revenues. Instead, the court held that the rule also applies whenever an initiative inherently requires a non-discretionary expenditure of state revenues. The court did not provide any guidance on the difference between an indirect cause and an inherent requirement, though.

Turning to the challengers' contention that Proposition 206 violated the Revenue Source Rule because it requires mandatory expenditure of state revenues without establishing an independent revenue source, the court agreed that the initiative indeed mandated expenditure of state revenues. However, it rejected the challengers’ argument that Proposition 206 does not establish a sufficient independent revenue source. While Proposition 206 provides a funding source through the imposition of civil penalties on employers who fail to pay earned sick time, challengers asserted that the ICA would be required to act before any fines were collected. The court disagreed, finding that the Revenue Source Rule allows the legislature to reduce expenditure of state revenues during any fiscal year to the amount supplied by the fines.

Petitioners also alleged that Proposition 206 did not establish a sufficient independent revenue source for increased minimum wage and earned paid sick time to cover expenditures for nursing facilities other services providers currently contracted with the state under the Arizona Health Care Cost Containment System (AHCCCS). However, according to AHCCCS, nothing required it to increase rates merely because a provider’s labor costs increased. Moreover, challengers were unable to point to any existing contract requiring the state to increase payments due to the initiative. Thus, even though Proposition 206 will likely impact state revenues due to dealings with entities that are required to comply with its provisions, the initiative does not require the state to increase rates to AHCCCS providers, precluding application of the Revenue Source Rule.

Petitioners also challenged Proposition 206 on the ground that it violates the Separate Amendment Rule, which provides that if more than one proposed amendment to the Arizona Constitution is submitted, they must be submitted in a manner allowing for electors to vote on them separately. In other words, a proposed bill cannot contain more than one constitutional amendment. Despite acknowledging that the Separate Amendment Rule only applies to constitutional amendments, petitioners nevertheless request the court to extend the rule to apply to initiatives because (1) the Voter Protection Act put statutory initiatives on par with constitutional initiatives, and (2) Proposition 206 contained two separate topics (minimum wage and earned sick time). The court rejected petitioners' argument and refused to apply the Separate Amendment Rule.

Finally, the court rejected petitioners' argument that Proposition 206 violated the Single Subject Rule for similar reasons. The Single Subject Rule requires an act to cover only one subject and matters properly connected therewith. Much like the Separate Amendment Rule, the Single Subject Rule is narrowly construed and has long been recognized to apply only to acts by the legislature, not initiatives. Accordingly, the court refused to revisit its prior decisions and apply the rule to Proposition 206.

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