Judge turns off spigot for AG’s ‘slush fund’

For more than two decades, North Carolina’s attorney general has controlled a $2 million annual fund to dole out environmental grants. The fund did not evolve from state law or the legislative budget process.

Critics labeled it a “slush fund.” Yet the state’s highest court endorsed the fund — twice.

Now a Wake County judge has changed course. Citing a five-year-old state law, the judge determined that money tied to the fund since July 2019 should have supported North Carolina’s public schools instead.

If the decision stands, schools statewide could see environmental enhancements of $12 million.

The story starts in 2000. Major hog farm operator Smithfield Foods faced criticism from North Carolina’s environmental left. Concerns focused on flooded and ruptured lagoons spilling hog waste into waterways. Critics wanted state government to take legal action.

Attorney General Mike Easley, a Democrat running for governor, cut a deal with Smithfield. The company agreed to pay the state $2 million a year for 25 years. No one ever produced evidence of a quid pro quo. But neither Easley nor his successors took up environmentalists’ cause against Smithfield.

Easley’s successor, fellow Democrat Roy Cooper, had the first access to Smithfield money. Cooper’s state Justice Department kept a bank account separate from the state Treasury. Smithfield money funded the AG’s environmental grants.

As Cooper pursued his own run for governor in 2016, the conservative Civitas Institute launched a legal challenge against the Smithfield deal. A lawsuit argued that the annual payments amounted to penalties. The North Carolina Constitution requires that money to fund public schools.

Eventually, the New Hanover County school board took on the role of lawsuit plaintiff. Democrat Josh Stein became the defendant when he succeeded Cooper in 2017.

In April 2020, a 6-1 state Supreme Court ruling rejected the school board’s arguments. The court’s majority determined that Smithfield’s annual payments should be treated as gifts to the state.

While the case was pending, the General Assembly approved — and Cooper signed — a 2019 law requiring that gifts to the state must head to the treasury. A split state Appeals Court panel ruled in December 2020 that the law negated the deal allowing Stein to control Smithfield funds.

The state Supreme Court reversed the appellate panel in February 2022. The high court ruled that appellate judges had no authority to apply the 2019 law to the New Hanover County case.

Yet the high court opened the door to a new legal action challenging any funds Smithfield paid in 2019 and afterward.

Paul “Skip” Stam, the lawyer who led the original 2016 legal challenge, helped file a new lawsuit. This time, a Randolph County pastor named Jonathan Burris sued on behalf of his local school board.

Wake County Superior Court Judge Graham Shirley heard from Stam and the state’s lawyers on June 11.

“This case is the third attempt by Mr. Stam to seize money that has been designated to environmental grants,” argued Matthew Tulchin, the state special deputy attorney general representing Stein, Cooper, and state Controller Nels Roseland.

Stam responded that Stein continued to control the Smithfield money, even after the change in state law requiring the annual gift to head to the treasury. “The Attorney General has continued to ‘requisition’ the money from the treasury and distribute the money to his chosen grantees,” according to a court filing.

“Any money received by the State from Smithfield Foods pursuant to the Agreement must be appropriated by the General Assembly in such a manner as to protect Smithfield Foods’ purpose. The purpose of these payments is environmental enhancement,” Shirley wrote in an order filed on July 17.

The judge agreed with “slush fund” critics that the attorney general should not control the money. “Given the importance our Constitution and Supreme Court have placed on providing a sound basic education to the children of this State, the Court concludes that if funds of whatever nature are placed in such account, they must be used exclusively for maintaining free public schools,” he wrote.

“The Court Declares that all funds received from Smithfield Foods after July 1, 2019, must be used for the purpose of environmental enhancement in public schools,” Shirley concluded.

Stein could appeal, though the Smithfield deal is nearing its end. It’s also unclear whether he would prolong the legal battle as he campaigns this year to follow both Easley and Cooper into the Governor’s Mansion.

Regardless of the Smithfield case’s outcome, Shirley’s ruling could prove significant. It suggests dim prospects for state officials contemplating future slush funds that divert money from public schools.

Mitch Kokai is senior political analyst for the John Locke Foundation.