The North Carolina attorney general’s office is defending its 25-year-old multimillion-dollar environmental grant program funded by Smithfield Foods. A Wake County judge ruled last year that $12 million from the fund should head to public schools.
Critics have labeled the program a “slush fund” resulting from Smithfield’s deal with then-Attorney General Mike Easley in 2000. The deal called for the company to pay the state $2 million a year. Smithfield faced public criticism at the time for a series of hog waste spills in North Carolina.
Current Gov. Josh Stein served as attorney general when Wake County Superior Court Judge Graham Shirley issued the 2024 decision against the AG’s office. Stein appealed that decision to the state Court of Appeals.
Lawyers for current AG Jeff Jackson submitted their opening brief to appellate judges Wednesday.
“This appeal concerns a longstanding environmental grant program that has benefited North Carolina for more than two decades,” lawyers from Jackson’s North Carolina Department of Justice wrote.
“Under that program, the Department of Justice has awarded grants to fund projects that safeguard our State’s environment, like conserving wildlife habitats and restoring shorelines,” the court filing continued. “The funding for the program comes from Smithfield Foods, which agreed to fund the program in a 2000 agreement. Smithfield’s funding of the program serves as a gift to the State. That gift has allowed Smithfield to attempt to rehabilitate its reputation, after it suffered years of bad publicity due to spills of its hog waste into the State’s waters.”
The state Supreme Court rejected earlier attempts to force the attorney general to transfer money from the grant fund to schools. A Randolph County taxpayer filed a new suit in 2023 after the high court’s latest ruling.
“A superior court agreed with the taxpayer, granting him summary judgment on the basis of several novel legal theories,” Jackson’s lawyers argued. “The superior court held that even though the grant program’s funding had not settled any civil penalties, the civil‐penalty clause still required that the funding be spent on schools anyway.”
“The court reached this surprising conclusion because the program’s funding had been kept in a state‐treasury account whose funds, the court believed, must be spent on schools under the civil‐penalty clause,” the court filing continued. “Separately, the court also held that the program’s funding had to go to schools under another provision in the constitution: the gift clause. That clause requires gifts that are given to the State without any purpose to be spent on schools.”
Jackson’s lawyers argued that the plaintiff taxpayer lacked standing to move forward with the lawsuit. They also challenged the trial judge’s ruling.
“The civil‐penalty clause does not require that the program’s funding be spent on schools, because that funding was never kept in the account where real civil penalties are kept before being spent on schools,” the court filing explained. “The gift clause is also inapplicable here, because the funding for the grant program was given to the State for the specific purpose of supporting the grant program.”
The fund’s critics will have a chance to respond before a three-judge Appeals Court panel decides the case.
The legal dispute involves $12 million Smithfield Foods has paid to the state since July 2019. Shirley determined in July 2024 that the money must be used to support North Carolina’s public schools.
Randolph County pastor Jonathan Burris had sued Stein on behalf of the local school board.
“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.
State lawmakers made no appropriations of the funds from 2019 to 2021. Since then, the money has been placed into an account designated for seized and forfeited assets. Yet Stein had access to the funds to pay for environmental grants chosen by his office.
“When the funds from the Smithfield Agreement were not appropriated for fiscal years 2019-2021, N.C. Const. Art. IX, § 6 mandates that these funds must be appropriated and used as required by that section but may only be used in a manner consistent with the purposes set forth in the Smithfield Agreement: environmental enhancement,” Shirley wrote.
“For fiscal years 2021-2025, the General Assembly was not required to appropriate these funds into an account for seized and forfeited assets,” the order continued. “The appropriation of the funds into an account for seized and forfeited assets does not convert the nature of the funds into clear proceeds of civil penalties, forfeitures, or fines. However, N.C. Const. Art. IX, § 7(b) states that ‘[m]Joneys in such State fund shall be faithfully appropriated by the General Assembly … to be used exclusively for maintaining free public schools.’”
“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,” Shirley 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.
“I am thankful that the NC Constitution, particularly Article IX, has won the day and that these funds will ‘be used exclusively for maintaining free public schools,’” Burris said in a statement to Carolina Journal when Shirley issued his decision.
Shirley heard nearly 90 minutes of arguments in the case in June 2024.
Burris sued in the place of the Randolph County Board of Education. He argued that money the attorney general has used for environmental grants since 2019 should have been used for environmental projects at North Carolina’s public schools, including Randolph County.
Attorney Paul “Skip” Stam represents Burris. A former top Republican state House leader, Stam is a board member of the John Locke Foundation. Locke oversees Carolina Journal.
“This case is the third attempt by Mr. Stam to seize money that has been designated to environmental grants,” argued Matthew Tulchin, a state special deputy attorney general, in the 2024 hearing. Tulchin represented Stein, then-Gov. Roy Cooper, and state Controller Nels Roseland.
The current suit deals only with money Smithfield has paid the state since 2019. The General Assembly approved a law that year clarifying that the Smithfield funds should be deposited in the state treasury.
“The money was deposited there, but it wasn’t kept there,” Stam argued to Shirley. The suit contends that Stein has been able to requisition money for his environmental grants without authorization from state legislators.
State attorneys responded that state budgets approved since 2021 have included the money. It has been designated for environmental grants.
Stam responded that the budget code indicates that the money was placed in a Seized and Forfeited Asset Fund. Article IX of the state Constitution requires that money of that type must head to public schools, Stam argued before Shirley.
The judge signaled some skepticism about the funding arrangement. “I don’t see anything … that specifically authorizes withdrawal of funds from the state treasury,” he said as Tulchin explained the funding arrangement.
The legal dispute stems from a multimillion-dollar deal Easley negotiated with Smithfield Foods during his successful run for governor in 2000. Easley’s successors as attorney general controlled the money completely until 2019.
Since that time, the money has been deposited in the state treasury. Stam argued that Stein continued to control the money through arrangements made with other state employees.
“There is still about $12 million in controversy (i.e., $2 million per year from 2020 to 2025),” according to a court filing from the plaintiffs. “The Attorney General has continued to ‘requisition’ the money from the treasury and distribute the money to his chosen grantees.”
Stein argued “that the money does not have to be appropriated by the General Assembly, nor does it have to go to public schools,” according to the court filing. Critics argue that Stein’s legal argument goes against Article V and Article IX of the state constitution.
Burris sued Stein in July 2023 on behalf of the local school board. A Superior Court judge transferred the case from Asheboro to Raleigh on April 15.
Burris, officially known as the “relator” in the case, is not seeking any money for himself. “[N]ot a single penny of Relator’s requested relief would find its way into his own bank account, as would a direct refund,” Burris’ lawyers wrote. “Instead, it will return to its rightful place, the Treasury, from where the General Assembly can lawfully appropriate funds to the public schools as the Constitution requires.”
The suit argues that Stein violated the state constitution when he “requisitioned” more than $5.1 million from the state treasury from July 2019 to November 2023. Stein requested that money after the General Assembly approved a law in 2019 treating future Smithfield payments as gifts to the state.
“When the Attorney General takes funds after a short ‘dip’ in the treasury before requisitioning them right back, his action is not a real ‘deposit,’” Burris’ lawyers argued. “It is akin to paying for groceries with a check and then, after cooking and eating dinner, stopping payment on the check before it is deposited by the grocer.”
Burris urged the court to “harmonize” Article IX of the state constitution, the original Smithfield agreement, and the 2019 state law. “That resolution is to use Smithfield’s funds to promote environmental enhancement, as and when appropriated by the General Assembly to the public schools for grants named ‘Smithfield Environmental Enhancement Grants.’”
A unanimous state Supreme Court ruled in 2022 in favor of Stein in an earlier suit targeting the Smithfield funds. At the time, the author of the high court’s opinion noted that a new lawsuit could challenge funds that reached state government after the 2019 law took effect.
Easley’s original deal with Smithfield Foods required the company “to pay each year for 25 years an amount equal to one dollar for each hog in which the Companies … have had any financial interest in North Carolina during the previous year, provided, however, that such amount shall not exceed $2 million in any year,” according to the lawsuit.
“From 2000 [through] 30 June 2019 the Attorney General deposited funds directly into an account solely within the Attorney General’s control,” the suit continued. “The Attorney General then disbursed the Agreement funds from his account to grant recipients selected in the Attorney General’s sole discretion.”
The General Assembly approved a law in 2019 — NC General Statute 147-76.1 — requiring “all funds received by the State, including cash gifts and donations, shall be deposited into the State treasury.”
After the law took effect, Stein “began depositing the Agreement funds into the State treasury a total of more than $8,150,000.00 through June of 2023,” according to the lawsuit.
A later court filing indicated total deposits topped $10.2 million by November 2023.
“Although the Attorney General began depositing Agreement funds into the State treasury, the Attorney General continued to ‘requisition’ Agreement funds from the Treasury to the Department of Justice for payments to his selected grant recipients,” the lawsuit alleged. “From 1 July 2019 to June 2023, the Attorney General has consistently requisitioned Agreement Funds without legal authority to do so.”
Burris’ lawyers argued that Stein’s actions violated the state constitution.
“Article V of the North Carolina Constitution provides that ‘[nJo money shall be drawn from the State treasury but in consequence of appropriations made by law,’” according to the lawsuit. “There are no ‘appropriations made by law’ for the drawing of Agreement funds from July 1, 2019 to the present.”
If the judge determined that an appropriation has occurred, the money should go to North Carolina’s civil penalty forfeiture fund, the suit argued. That fund benefits local school systems.
“The purpose of Article V is to ensure that the people, through their elected representatives in the General Assembly, have full and exclusive control over the allocation of the state’s expenditures. ‘The power of the purse is the exclusive prerogative of the General Assembly,’” according to the lawsuit.
“By drawing or abetting the drawing of Agreement funds from the State treasury without an appropriation, Defendants have violated Article V of the North Carolina Constitution and Chapter 143C of the General Statutes,” the plaintiffs argued.
Article IX of the state constitution focuses on education funding.
“This Court should declare that Defendants’ actions violated Article IX and deprived the public schools of these funds,” according to the lawsuit. “As part of that judgment, the Court should order all unappropriated funds placed in the State treasury after 1 July 2019 may only be appropriated to the public schools and require the Attorney General to return to the State treasury all the funds that it ‘requisitioned’ from 1 July 2019 to the present. The Court should order that such funds go to the Civil Penalty Forfeiture Fund to be used for environmental enhancement at K-12 public schools.”
The legal fight against the attorney general’s environmental grant fund started in October 2016. Francis De Luca, then-president of the Civitas Institute, went to court to have the proceeds of the fund declared a state penalty against Smithfield. As the case proceeded through the state’s legal system, courts ruled De Luca out as a plaintiff. The New Hanover County school board proceeded with the case after De Luca bowed out.
The Civitas Institute merged capabilities in 2021 with the John Locke Foundation.
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