encumbered monies; unauthorized use; withholding

SB1807 - 572R - I Ver

REFERENCE TITLE:
encumbered monies; unauthorized use; withholding

State of Arizona

Senate

Fifty-seventh Legislature

Second Regular Session

2026

SB 1807

Introduced by

Senator
Gowan

AN
ACT

Amending section 35-151, Arizona
Revised Statutes; amending title 35, chapter 1, article 6, Arizona Revised
Statutes, by adding section 35-216; amending sections 42-5029 and
43-206, Arizona Revised Statutes; relating to state monies.

(TEXT OF BILL BEGINS ON NEXT PAGE)

Be it enacted by the Legislature of the State of Arizona:

Section 1. Section 35-151, Arizona Revised
Statutes, is amended to read:

START_STATUTE
35-151.

Encumbrance documents; issuance and disposition; exception

A. An encumbrance document shall be processed in
this state's accounting system before a budget unit issues a purchase order or
encumbrance document against appropriations to cover an obligation, actual or
anticipated, except that encumbrance documents are not required for:

1. Reimbursements to employees for travel or other
expenses incurred.

2. Gross payrolls and related employee expenses of a
budget unit.

3. Eligibility payments.

4. Required payments that are not discretionary.

5. Under procedures prescribed in the state
accounting manual of the department of administration, expenditures not
exceeding $5,000.

B. Copies of the encumbrance documents shall be
submitted immediately to or entered into the state accounting system of the
department of administration. The budget unit shall certify that the
proposed expenditure is authorized by appropriation and allotment and that the
amount involved does not exceed the unencumbered and unexpended balance of the
appropriation as recorded in the state's accounting system. If any
proposed certified expenditure is found to exceed the unencumbered and
unexpended balance or to be contrary to this chapter or any other law, the head
of the budget unit or the head's designee shall disallow the proposed
expenditure.� If the encumbrance is found to be in order, it shall be
immediately submitted or electronically transmitted to the department of
administration central accounting system, which shall not accept an encumbrance
in excess of the appropriation. The amount of the encumbrance shall
be set aside to be used exclusively to pay the claim when presented. If
an adequate appropriation balance is not available, the accounting system shall
reject the transaction.

C. The department of administration may require
encumbrances for all funds of this state, except for the investment of public
monies or permanent endowment funds, which are not appropriated but are held in
custody by the state treasurer.

D. An encumbrance document may not be approved by
or for any budget unit that will involve an expenditure of any amount in excess
of the unencumbered and unexpended balance of the appropriation or fund source
to which the resulting expenditure will be chargeable.

E. Except for an expenditure that is exempt under
subsection A of this section, an expenditure under section 35-191 shall
be encumbered regardless of the dollar amount of the expenditure.

f. If an ENCUMBRANCE document is
approved and the purchase order is completed, the amount of the ENCUMBRANCE set
aside to be used EXCLUSIVELY to pay the claim pursuant to subsection B of this
section shall be held until the monies are authorized to be released,
regardless of the provisions of section 35-190 relating to lapsing of
appropriations.

END_STATUTE

Sec. 2. Title 35, chapter 1, article 6, Arizona
Revised Statutes, is amended by adding section 35-216, to read:

START_STATUTE
35-216.

Violation of use of legislative appropriations; counties, cities
and towns; attorney general; violation; withholding of state shared revenues

A. Any member of the legislature may
file a complaint with the attorney general alleging a county, city or town has
spent a legislative appropriation for a purpose other than the purpose for
which the legislative appropriation was made.

B. The attorney general, in the
attorney general's discretion, may bring an action in the name of this state
to:

1. Enjoin the illegal expenditure of
public monies.

2. Recover illegally spent public
monies. The recovered monies shall be paid to the state treasurer to be
deposited in the fund from which the appropriation was made.

C. If the attorney general determines
that the county, city or town failed to return the full amount of misspent
public monies pursuant to subsection B of this section, the attorney general
shall:

1. Notify the state treasurer who
shall withhold and redistribute state shared monies from the county, city or
town as provided by section 42-5029, subsection M and from the city or town as
provided by section 43-206, subsection G.

2. When the full amount of the
misspent public monies are recovered, the attorney general shall notify The
state treasurer to restore the distribution of state shared revenues to the
county, city or town.
END_STATUTE

Sec. 3. Section 42-5029, Arizona Revised
Statutes, is amended to read:

START_STATUTE
42-5029.

Remission and distribution of monies; withholding; definition

A. The department shall deposit, pursuant to
sections 35-146 and 35-147, all revenues collected under this
article and articles 4, 5 and 8 of this chapter pursuant to section 42-1116,
separately accounting for:

1. Payments of estimated tax under section 42-5014,
subsection D.

2. Revenues collected pursuant to section 42-5070.

3. Revenues collected under this article and article
5 of this chapter from and after June 30, 2000 from sources located on Indian
reservations in this state.

4. Revenues collected pursuant to section 42-5010,
subsection G and section 42-5155, subsection D.

5. Revenues collected pursuant to section 42-5010.01
and section 42-5155, subsection E.

6. Revenues collected pursuant to section 42-5061
from a remote seller.

B. The department shall credit payments of estimated
tax to an estimated tax clearing account and each month shall transfer all
monies in the estimated tax clearing account to a fund designated as the
transaction privilege and severance tax clearing account.� The department shall
credit all other payments to the transaction privilege and severance tax
clearing account, separately accounting for the monies designated as
distribution base under sections 42-5010, 42-5164 and 42-5205. Each
month the department shall report to the state treasurer the amount of monies
collected pursuant to this article and articles 4, 5 and 8 of this chapter.

C. On notification by the department, the state
treasurer shall distribute the monies deposited in the transaction privilege
and severance tax clearing account in the manner prescribed by this section and
by sections 42-5164 and 42-5205, after deducting warrants drawn
against the account pursuant to sections 42-1118 and 42-1254.

D. Of the monies designated as distribution base,
the department shall:

1. Pay twenty-five percent to the various
incorporated municipalities in this state in proportion to their population to
be used by the municipalities for any municipal purpose, except a municipality
shall use monies paid from revenues separately accounted for pursuant to
subsection A, paragraph 6 of this section and paid pursuant to this paragraph
for public safety before any other municipal purpose.

2. Pay 38.08 percent to the counties in this state
by averaging the following proportions:

(a) The proportion that the population of each
county bears to the total state population.

(b) The proportion that the distribution base monies
collected during the calendar month in each county under this article, section
42-5164, subsection B and section 42-5205, subsection B bear to the
total distribution base monies collected under this article, section 42-5164,
subsection B and section 42-5205, subsection B throughout the state for
the calendar month.

3. Pay an additional 2.43 percent to the counties in
this state as follows:

(a) Average the following proportions:

(i) The proportion that the assessed valuation used
to determine secondary property taxes of each county, after deducting that part
of the assessed valuation that is exempt from taxation at the beginning of the
month for which the amount is to be paid, bears to the total assessed
valuations used to determine secondary property taxes of all the counties after
deducting that portion of the assessed valuations that is exempt from taxation
at the beginning of the month for which the amount is to be paid.� Property of
a city or town that is not within or contiguous to the municipal corporate
boundaries and from which water is or may be withdrawn or diverted and
transported for use on other property is considered to be taxable property in
the county for purposes of determining assessed valuation in the county under
this item.

(ii) The proportion that the distribution base
monies collected during the calendar month in each county under this article,
section 42-5164, subsection B and section 42-5205, subsection B
bear to the total distribution base monies collected under this article,
section 42-5164, subsection B and section 42-5205, subsection B
throughout this state for the calendar month.

(b) If the proportion computed under subdivision (a)
of this paragraph for any county is greater than the proportion computed under
paragraph 2 of this subsection, the department shall compute the difference
between the amount distributed to that county under paragraph 2 of this
subsection and the amount that would have been distributed under paragraph 2 of
this subsection using the proportion computed under subdivision (a) of this
paragraph and shall pay that difference to the county from the amount available
for distribution under this paragraph. Any monies remaining after all payments
under this subdivision shall be distributed among the counties according to the
proportions computed under paragraph 2 of this subsection.

4. After any distributions required by sections 42-5030,
42-5030.01, 42-5031, 42-5032, 42-5032.01, 42-5032.02
and 42-5032.03 and after making any transfer to the water quality
assurance revolving fund as required by section 49-282, subsection B,
credit the remainder of the monies designated as distribution base to the state
general fund.� From this amount the legislature shall annually appropriate to:

(a) The department of revenue, sufficient monies to
administer and enforce this article and articles 5 and 8 of this chapter.

(b) The department of economic security, monies to
be used for the purposes stated in title 46, chapter 1.

(c) The firearms safety and ranges fund established
by section 17-273, $50,000 derived from the taxes collected from the
retail classification pursuant to section 42-5061 for the current fiscal
year.

E. If approved by the qualified electors voting at a
statewide general election, all monies collected pursuant to section 42-5010,
subsection G and section 42-5155, subsection D shall be distributed each
fiscal year pursuant to this subsection. The monies distributed
pursuant to this subsection are in addition to any other appropriation,
transfer or other allocation of public or private monies from any other source
and shall not supplant, replace or cause a reduction in other school district,
charter school, university or community college funding sources. The
monies shall be distributed as follows:

1. If there are outstanding state school facilities
revenue bonds pursuant to title 15, chapter 16, article 7, each month one-twelfth
of the amount that is necessary to pay the fiscal year's debt service on
outstanding state school improvement revenue bonds for the current fiscal year
shall be transferred each month to the school improvement revenue bond debt
service fund established by section 15-2084. The total amount
of bonds for which these monies may be allocated for the payment of debt
service shall not exceed a principal amount of eight hundred million dollars
exclusive of refunding bonds and other refinancing obligations.

2. After any transfer of monies pursuant to
paragraph 1 of this subsection, twelve per cent of the remaining monies
collected during the preceding month shall be transferred to the technology and
research initiative fund established by section 15-1648 to be distributed
among the universities for the purpose of investment in technology and research-based
initiatives.

3. After the transfer of monies pursuant to
paragraph 1 of this subsection, three per cent of the remaining monies
collected during the preceding month shall be transferred to the workforce
development account established in each community college district pursuant to
section 15-1472 for the purpose of investment in workforce development
programs.

4. After transferring monies pursuant to paragraphs
1, 2 and 3 of this subsection, one-twelfth of the amount a community
college that is owned, operated or chartered by a qualifying Indian tribe on
its own Indian reservation would receive pursuant to section 15-1472,
subsection D, paragraph 2 if it were a community college district shall be
distributed each month to the treasurer or other designated depository of a
qualifying Indian tribe.� Monies distributed pursuant to this paragraph are for
the exclusive purpose of providing support to one or more community colleges
owned, operated or chartered by a qualifying Indian tribe and shall be used in
a manner consistent with section 15-1472, subsection B. For
the purposes of this paragraph, "qualifying Indian tribe" has the
same meaning as defined in section 42-5031.01, subsection D.

5. After transferring monies pursuant to paragraphs
1, 2 and 3 of this subsection, one-twelfth of the following amounts shall
be transferred each month to the department of education for the increased cost
of basic state aid under section 15-971 due to added school days and
associated teacher salary increases enacted in 2000:

(a) In fiscal year 2001-2002, $15,305,900.

(b) In fiscal year 2002-2003, $31,530,100.

(c) In fiscal year 2003-2004, $48,727,700.

(d) In fiscal year 2004-2005, $66,957,200.

(e) In fiscal year 2005-2006 and each fiscal
year thereafter, $86,280,500.

6. After transferring monies pursuant to paragraphs
1, 2 and 3 of this subsection, seven million eight hundred thousand dollars is
appropriated each fiscal year, to be paid in monthly installments, to the
department of education to be used for school safety as provided in section 15-154
and two hundred thousand dollars is appropriated each fiscal year, to be paid
in monthly installments to the department of education to be used for the
character education matching grant program as provided in section 15-154.01.

7. After transferring monies pursuant to paragraphs
1, 2 and 3 of this subsection, no more than seven million dollars may be
appropriated by the legislature each fiscal year to the department of education
to be used for accountability purposes as described in section 15-241 and
title 15, chapter 9, article 8.

8. After transferring monies pursuant to paragraphs
1, 2 and 3 of this subsection, one million five hundred thousand dollars is
appropriated each fiscal year, to be paid in monthly installments, to the
failing schools tutoring fund established by section 15-241.

9. After transferring monies pursuant to paragraphs
1, 2 and 3 of this subsection, twenty-five million dollars shall be
transferred each fiscal year to the state general fund to reimburse the general
fund for the cost of the income tax credit allowed by section 43-1072.01.

10. After the payment of monies pursuant to
paragraphs 1 through 9 of this subsection, the remaining monies collected
during the preceding month shall be transferred to the classroom site fund
established by section 15-977. The monies shall be allocated
as follows in the manner prescribed by section 15-977:

(a) Forty per cent shall be allocated for teacher
compensation based on performance.

(b) Twenty per cent shall be allocated for increases
in teacher base compensation and employee related expenses.

(c) Forty per cent shall be allocated for
maintenance and operation purposes.

F. The department shall credit the remainder of the
monies in the transaction privilege and severance tax clearing account to the
state general fund, subject to any distribution required by section 42-5030.01.

G. Notwithstanding subsection D of this section, if
a court of competent jurisdiction finally determines that tax monies
distributed under this section were illegally collected under this article or
articles 5 and 8 of this chapter and orders the monies to be refunded to the
taxpayer, the department shall compute the amount of such monies that was
distributed to each city, town and county under this section. Each
city's, town's and county's proportionate share of the costs shall be based on
the amount of the original tax payment each municipality and county received.�
Each month the state treasurer shall reduce the amount otherwise distributable
to the city, town and county under this section by 1/36 of the total amount to
be recovered from the city, town or county until the total amount has been
recovered, but the monthly reduction for any city, town or county shall not
exceed ten percent of the full monthly distribution to that
entity. The reduction shall begin for the first calendar month after
the final disposition of the case and shall continue until the total amount,
including interest and costs, has been recovered.

H. On receiving a certificate of default from the
greater Arizona development authority pursuant to section 41-2257 or 41-2258
and to the extent not otherwise expressly prohibited by law, the state
treasurer shall withhold from the next succeeding distribution of monies
pursuant to this section due to the defaulting political subdivision the amount
specified in the certificate of default and immediately deposit the amount
withheld in the greater Arizona development authority revolving
fund. The state treasurer shall continue to withhold and deposit the
monies until the greater Arizona development authority certifies to the state
treasurer that the default has been cured. In no event may the state
treasurer withhold any amount that the defaulting political subdivision
certifies to the state treasurer and the authority as being necessary to make
any required deposits then due for the payment of principal and interest on
bonds of the political subdivision that were issued before the date of the loan
repayment agreement or bonds and that have been secured by a pledge of
distributions made pursuant to this section.

I. Except as provided by sections 42-5033 and
42-5033.01, the population of a county, city or town as determined by the
most recent United States decennial census plus any revisions to the decennial
census certified by the United States bureau of the census shall be used as the
basis for apportioning monies pursuant to subsection D of this section.

J. Except as otherwise provided by this subsection,
on notice from the department of revenue pursuant to section 42-6010,
subsection B, the state treasurer shall withhold from the distribution of
monies pursuant to this section to the affected city or town the amount of the
penalty for business location municipal tax incentives provided by the city or
town to a business entity that locates a retail business facility in the city
or town. The state treasurer shall continue to withhold monies
pursuant to this subsection until the entire amount of the penalty has been
withheld. The state treasurer shall credit any monies withheld pursuant to this
subsection to the state general fund as provided by subsection D, paragraph 4
of this section. The state treasurer shall not withhold any amount
that the city or town certifies to the department of revenue and the state
treasurer as being necessary to make any required deposits or payments for debt
service on bonds or other long-term obligations of the city or town that
were issued or incurred before the location incentives provided by the city or
town.

K. On notice from the auditor general pursuant to
section 9-626, subsection D, the state treasurer shall withhold from the
distribution of monies pursuant to this section to the affected city the amount
computed pursuant to section 9-626, subsection D. The state
treasurer shall continue to withhold monies pursuant to this subsection until
the entire amount specified in the notice has been withheld. The
state treasurer shall credit any monies withheld pursuant to this subsection to
the state general fund as provided by subsection D, paragraph 4 of this
section.

L. Except as otherwise provided by this subsection,
on notice from the attorney general pursuant to section 41-194.01,
subsection B, paragraph 1 that an ordinance, regulation, order or other
official action adopted or taken by the governing body of a county, city or
town violates state law or the Constitution of Arizona, the state treasurer
shall withhold the distribution of monies pursuant to this section to the
affected county, city or town and shall continue to withhold monies pursuant to
this subsection until the attorney general certifies to the state treasurer
that the violation has been resolved. The state treasurer shall
redistribute the monies withheld pursuant to this subsection among all other
counties, cities and towns in proportion to their population as provided by
subsection D of this section. The state treasurer shall not withhold
any amount that the county, city or town certifies to the attorney general and
the state treasurer as being necessary to make any required deposits or
payments for debt service on bonds or other long-term obligations of the
county, city or town that were issued or incurred before committing the
violation.

M. Except as otherwise provided by
this subsection, on notice from the attorney general pursuant to section 35-216
that a county, city or town misspent public monies, the state treasurer shall
withhold the distribution of monies pursuant to this section to the affected
county, city or town and shall continue to withhold monies pursuant to this
subsection until the attorney general certifies to the state treasurer that the
misspent public monies have been fully recovered.� The state treasurer shall
redistribute the monies withheld pursuant to this subsection among all other
counties, cities and towns in proportion to their population as provided by
subsection D of this section.� The state treasurer shall not withhold any
amount that the county, city or town certifies to the attorney general and the
state treasurer as being necessary to make any required deposits or payments
for debt service on bonds or other long-term obligations of the county, city or
town that were issued or incurred before committing the violation.

M.

N.
For
the purposes of this section, "community college district" means a
community college district that is established pursuant to sections 15-1402
and 15-1403 and that is a political subdivision of this state and, unless
otherwise specified, includes a community college tuition financing district
established pursuant to section 15-1409.
END_STATUTE

Sec. 4. Section 43-206, Arizona Revised Statutes, is amended to read:

START_STATUTE
43-206.

Urban revenue sharing fund; allocation; distribution; withholding

A. The urban revenue
sharing fund is established. Through fiscal year 2022-2023, the
fund consists of an amount equal to fifteen percent of the net proceeds of the
state income taxes for the fiscal year two years preceding the current fiscal
year.� Beginning in fiscal year 2023-2024, the fund consists of an amount
equal to eighteen percent of the net proceeds of the state income taxes for the
fiscal year two years preceding the current fiscal year.� The fund shall be
distributed to incorporated cities and towns as provided in this section,
except that a city or town shall receive at least an amount equal to what a
city or town with a population of fifteen hundred or more persons would
receive. The transfer of net proceeds prescribed by section 49-282,
subsection B does not affect the calculation of net proceeds prescribed by this
subsection.

B. Each city or town shall share in the urban
revenue sharing fund in the proportion that the population of each bears to the
population of all. Except as provided by sections 42-5033 and
42-5033.01, the population of a city or town as determined by the most
recent United States decennial census plus any revisions to the decennial
census certified by the United States bureau of the census shall be used as the
basis for apportioning monies pursuant to this subsection.

C. The treasurer, on instruction from the
department, shall transmit, not later than the tenth day of each month, to each
city or town an amount equal to one-twelfth of that city's or town's
total entitlement for the current fiscal year from the urban revenue sharing
fund as determined by the department.

D. A newly incorporated city or town shall share in
the urban revenue sharing fund beginning the first month of the first full
fiscal year following incorporation.

E. On receipt of a certificate of default from the
greater Arizona development authority pursuant to section 41-2257 or 41-2258,
the state treasurer, to the extent not otherwise expressly prohibited by law,
shall withhold from the next succeeding distribution of monies pursuant to this
section due to the city or town the amount specified in the certificate of
default and immediately deposit the amount withheld in the greater Arizona
development authority revolving fund.� The state treasurer shall continue to
withhold and deposit the monies until the authority certifies to the state
treasurer that the default has been cured. The state treasurer may
not withhold any amount that is necessary, as certified by the defaulting
political subdivision to the state treasurer and the authority, to make any
required deposits then due for the payment of principal and interest on bonds
of the political subdivision that were issued before the date of the loan
repayment agreement or bonds and that have been secured by a pledge of
distributions made pursuant to this section.

F. Except as otherwise provided by this subsection,
on notice from the attorney general pursuant to section 41-194.01,
subsection B, paragraph 1 that an ordinance, regulation, order or other
official action adopted or taken by the governing body of a city or town
violates state law or the Constitution of Arizona, the state treasurer shall
withhold the distribution of monies pursuant to this section to the affected
city or town and shall continue to withhold monies pursuant to this subsection
until the attorney general certifies to the state treasurer that the violation
has been resolved. The state treasurer shall redistribute the monies
withheld pursuant to this subsection among all other cities and towns in
proportion to their population as provided by subsection B of this section.�
The state treasurer shall not withhold any amount that the city or town
certifies to the attorney general and the state treasurer as being necessary to
make any required deposits or payments for debt service on bonds or other long-term
obligations of the city or town that were issued or incurred before committing
the violation.

G. Except as otherwise provided by
this subsection, on notice from the attorney general pursuant to section 35-216
that a city or town misspent public monies, the state treasurer shall withhold
the distribution of monies pursuant to this section to the affected city or
town and shall continue to withhold monies pursuant to this subsection until
the attorney general certifies to the state treasurer that the misspent public
monies have been fully recovered.� The state treasurer shall redistribute the
monies withheld pursuant to this subsection among all other cities and towns in
proportion to their population as provided by subsection B of this section.�
The state treasurer shall not withhold any amount that the city or town
certifies to the attorney general and the state treasurer as being necessary to
make any required deposits or payments for debt service on bonds or other
long-term obligations of the city or town that were issued or incurred before
committing the violation.

END_STATUTE