Apr 022014

By Nick Worth
A special $2 million loan from the Arizona Commerce Authority (ACA) to a foundation purchasing the Apache Railway has drawn the attention of lawyers from The Goldwater Institute, a non-profit public watchdog group.
According to a press release from Charles Siler, media representative for the institute, attorneys from the institute warned the ACA that the loan violates the state’s constitution, which prohibits special laws that provide government gifts, loans or subsidies to businesses.
A special report on the Apache Railway loan, titled Spotlight: Special favors make special loans found on the institute’s website states, “Legislators and economic policy experts are worried that leaders who oversee the Arizona Commerce Authority utilize its grant funds as special favors to businesses or political officials in exchange for potential campaign donations or local projects.”
The reason for the institute’s concern is that state law describes the ACA’s annual $25 million Arizona Competes Fund (ACF) as a “deal-closing” grant fund for businesses, designed to help lure employers to the state through grants and other incentives.
The institute’s attorneys argue the fund is not designed to be a source for loans, but rather for grants.
According to another report on the institute’s website by Emily Gersema, “State law requires that the agency use this fund to give grants to companies for expansion, or to relocate their operations to the state. The bulk of the fund comes from state income tax withholdings.
“Last summer, legislators and Gov. Jan Brewer made a special exception to the spending restrictions on the fund and approved a state budget bill provision that was tailor-made to give a loan to a Navajo County enterprise,” reads Gersema’s report. “As it turns out, the business in question was the Apache Railway Company, a small rail spur in Snowflake that currently employs eight people.”
In the institute’s Spotlight report, institute attorney Jonathon Riches said, “The Arizona constitution prohibits the government from bestowing favors on special interest groups or preferred localities. The loan commitment made to the Apache Railway Company is precisely the type of preferential treatment proscribed by our constitution.”
Riches used stronger language in the press release from Siler, which states, “Goldwater Institute attorney Jon Riches said the special loan to the Apache Railway is undoubtedly ‘a brazen example of cronyism.’”
He goes on to state, “The primary purpose of this provision was to prevent bureaucrats and lawmakers from playing favorites with taxpayers’ money.”
Snowflake Town Manager Paul Watson doesn’t see things that way.
“That money is designated to help companies expand or relocate,” said Watson. “It’s also supposed to help promote rural development and that’s what we’re trying to do.
“If we had wanted a grant instead of a loan, would they be doing this?” Watson asked. “We pursued the loan because it is secured. That way, if it fails, everybody will get their money back, including the state.”
Watson said the loan deal was put together very quickly because of time constraints associated with Catalyst closing the paper mill.
“We were under the gun,” Watson said. “Catalyst gave us very little time, so we had to work very quickly to come up with a mechanism to assure whoever bought that railroad that we would put together the mechanism to reimburse him for that amount.
“We worked diligently to put together a foundation to pursue the loan from the state and the federal grant,” Watson said. He noted that the Snowflake Community Foundation was formed with Steve Brophy and Watson as members, with Watson representing the Town of Snowflake.
Asked to respond to Riches’ remarks about the loan being “a brazen example of cronyism,” Watson said, “That’s absolutely not true.” He then quoted Riches’ statement, “The Arizona constitution prohibits the government from bestowing favors on special interest groups or preferred localities.”
“This isn’t a favor,” Watson said. “It’s an economic development strategy designed to keep the infrastructure in place, to hopefully replace the industry we lost.
“They’re sure twisting the intent of what we’re trying to do here,” he said of the institute’s attorneys.
Snowflake Councilman Tom Poscharsky said the presence of the railroad is crucial in attracting new industry to the area. He said the Town of Snowflake has been talking to several potential employers about locating in the area and all want the availability of rail transportation.
“In everything we’re working on, the railroad is important,” Poscharsky said. “This is the only place in the county that has a railroad that interchanges with the BNSF. I think it’s something we really need.”
“In my mind, if we hadn’t gotten the money it would have meant closing the railway,” Watson said. He added that the Town of Snowflake was already working with Brophy before the announcement of the Catalyst mill closing.
“Before this ever came about we had started working with Steve because of the land he owns between here and the paper mill that has the railroad running through it,” Watson said. “We were working with him to establish it as an industrial area.”
Poscharsky said the loan was needed in order to qualify for a Federal Rail Administration grant to complete the purchase of the rail line.
“We agreed to pay $6 million for it,” said Poscharsky. “The scrap value alone is worth over $10 million.”
Poscharsky said if the rail line infrastructure were lost, it would cost more than $50 million to replace it. The bridge over the Little Colorado River alone would cost $22 million to replace.
Riches told The Tribune-News that the institute’s concerns are strictly with the way the statute was passed.
“There’s a very good part of our constitution that prohibits special laws for certain counties, or locales, it’s not fair to other places,” said Riches.
“Our concerns are not about the merits of the rail itself,” he said. “Our concerns are with the way the statute was passed. It creates favoritism and that’s not constitutional.”
Riches said he was not sure what action The Goldwater Institute would take in the case.
“At this point we’re still waiting on the ACA to see if they’ll approve this loan and it appears that they will,” Riches said. “At that time we’ll have to explore what our options are.”
Asked about his comment labeling the loan “cronyism,” Riches defined the term as “delivering special favors to people or groups or geographical entities that might not be available to a wider population.
“In this case it appears a favor was delivered to a group of people that might not be available to others who don’t have those political connections,” Riches said.
The Apache Railroad loan is not the only ACA action being investigated by the institute. The institute has expressed concerns with a number of grants given by the ACA over the past few years, and also with the agency’s apparent lack of checks and balances that would protect taxpayers from political and financial abuse.
Institute officials have also raised some questions regarding potential conflicts of interest among board members.