Arizona opinion: State rule omission is nonprofit bonanza

Sometimes the elimination of a single word from a regulation can mean a windfall of millions for a private actor with a nose for opportunity.

One Arizona state agency — the Department of Insurance and Financial Institutions — omits required words from a regulation. The unlawful omission has helped put tens of millions into the coffers of a tiny Washington, D.C., nonprofit publisher. With the proceeds, the nonprofit’s chief executive and a few favored trustees travel the globe and host foreign delegations back in Washington. It’s too crazy for fiction.

More troubling, the regulation’s omitted wording has allowed private actors to continually change Arizona state law. Looking for obvious chicanery written into regulations can be a thankless job. Wording is usually dense, convoluted and esoteric. It’s an acquired taste.

To understand what’s happening here, it’s instructive to look at a state agency that plays by the rules. In this case, the Arizona Department of Health Services.

In 2019, the Department of Health Services wanted to incorporate two privately owned codes into its regulations. Making copyrighted codes and standards enforceable in Arizona is allowed. It’s called “incorporation by reference.” But state agencies must, by law, follow certain administrative safeguards to protect the public. While not sexy, these guardrails are deceptively important for democracy in the Grand Canyon State.

The two copyrighted codes the Health Services Department wished to incorporate into law are owned by the Quincy, Massachusetts-based National Fire Protection Association and dryly known as the 2012 NFPA70 National Electrical Code and the 2012 NFPA101 Life Safety Code.

The agency was careful to comply with the Arizona Administrative Procedure Act, which requires a special notice-and-comment process, with postings in the state register, along with special wording in the proposed regulation that identifies the incorporated codes by location and date of publication. An enforceable rule in Arizona must also contain wording reminding Arizonans that the rule does not include any later amendments or editions of the incorporated matter.

In the resulting regulation, the enforceable editions of the electrical and life-safety codes are named by date (the 2012 edition for both). The regulation also contains the mandatory wording banning “future editions or amendments” from enforcement. This wording keeps the agency from violating the state’s constitution, which protects Arizonans’ due process and equal protection under the law. In plain English, the wording keeps the agency from handing open-ended government authority to private persons.

Contrast that with one Arizona state agency that has gone rogue — the Arizona Department of Insurance and Financial Institutions. On its own, the agency has enforced a copyrighted standard known as the “Uniform Standards of Professional Appraisal Practice” without specifying the edition. There are 24 different versions in circulation. The standards are published by an opaque 14-employee nonprofit publisher known as the Appraisal Foundation.

Because the incorporation fails to name a specific edition of the fluid standards and fails to provide the required regulatory warning that future editions and amendments are not included, the agency has allowed an out-of-state nonprofit to draft and amend Arizona state law in perpetuity. Also, the agency has enforced the standards — sometimes levying fines and revocations — simply on a bluff.

When queried, Tammy Seto with the Financial Enterprises Division of the Arizona Department of Insurance and Financial Institutions, deferred the matter to Nancy Inserra, a regulatory compliance officer. The latter sidestepped questions about the defective wording.

Arizona real estate appraisers have complied with the fluid standards without fully understanding the defect. The nonprofit has figured out how to monetize the arrangement, and Arizona property owners end up indirectly paying for the continual regulatory changes. The lack of transparency has also affected the soundness of investments held by the state’s pension funds and banks.

As a humorous aside, the tiny publisher engages in a theatrical process that has a beguiling likeness to a state or federal adoption: It solicits public input off an email list it sends around. It circulates discussion drafts. It gavels to order stage-managed “hearings” in hotel rooms around the country, and members of its paid panels make changes to what becomes binding law on Arizonans.

But the hotel hearings are no more relevant to state or federal law than the musings of backpackers in the Sonoran Desert’s spectacular Organ Pipe Backcountry or witty repartee overheard at a meeting of the Bishop Francis J. Green Knights of Columbus Council in Tucson. The hotel hearings don’t officially exist.

None of the paid panelists has taken an oath to faithfully execute the duties of any government office. (Also, as one might expect, there is heavy lobbyist infiltration of such panels.)

Strictly between us, the private standards don’t officially exist due to the defect. But no one has challenged the arrangement, so the charade goes on.