Following a two year investigation, the Arizona Attorney General’s Office found no evidence that Gov. Katie Hobbs engaged in a pay-to-play scheme with a political donor who owns the state’s largest group home operator.
In 2024, the Arizona Republic reported the state awarded a nearly 60% pay rate increase to Sunshine Residential, a foster group home operator whose owner gave hundreds of thousands of dollars to the state Democratic Party and a dark money group affiliated with Hobbs during the governor’s 2022 campaign.
According to attorneys for Hobbs, Sunshine Residential, founder Simon Kottoor and others connected to the company gave a total of $580,840 to the state Democratic Party, Hobbs’ campaign, inaugural fund and a legal defense fund between September 2022 and May 2024.
The reporting prompted state Sen. TJ Shope’s (R-Coolidge) calls for Attorney General Kris Mayes to investigate allegations that Hobbs and Sunshine Residential engaged in an illegal quid pro quo, with the company exchanging hundreds of thousands of dollars in campaign contributions for increased payments from the Department of Child Safety.
Investigators concluded that was not the case.
“After two years and hundreds of hours of investigation, agents have not found evidence to substantiate a pay-for-play scheme involving Governor Hobbs and Sunshine,” Nick Klingerman, the Attorney General’s Criminal Division chief, wrote in a report released on Friday. “Accordingly, there is no evidence to establish a reasonable likelihood of conviction for bribery or any other related offenses.”
The rate increases
The governor never sat down for an interview with the Attorney General’s Office — eliciting criticism from Republicans and political opponents — choosing to instead send her campaign manager Nicole DeMont and a series of written statements.
Hobbs has long denied the allegations publicly and said she had no involvement in the decision to increase Sunshine Residential’s rates.
The Attorney General’s report largely backs up those claims.
Investigators looked into two pay bumps awarded to Sunshine Residential after Hobbs took office in 2023. The second increase saw the company’s per-bed rate increased from $195 to $234.
Based on conversations with DCS leaders and review of internal communications, investigators found that Hobbs did not advocate for the rate increase and was not informed about the change until after it was approved by the department.
Instead, they found that the state’s foster care system was heavily reliant on the beds provided by Sunshine Residential and couldn’t afford to lose them.
Former DCS directors David Lujan and Michael Faust both said Hobbs and the Governor’s Office did not put pressure on the agency to increase Sunshine Residential’s rates.
Lujan, who oversaw the agency during the rate increases, told investigators Kottoor complained about financial challenges facing Sunshine Residential and threatened to begin working for the federal government instead of the state.
Former DCS Director Michael Faust, who oversaw the agency before Lujan, told investigators that Kottoor is a “tough business guy,” who “genuinely cared about kids…but knew how to run a business…[and] make money.”
Ultimately Lujan, who was new to the job, told investigators he deferred to DCS assistant directors Alex Ong and Robert Navarro, who recommended a 30% rate increase to keep Sunshine Residential in the fold.
“Rather than the result of a bribe, the investigation has found that Sunshine’s rate increases appear as the result of its outsized leverage over DCS’ congregate care program,” according to the report.
Investigators also found that two other providers received larger rate increases than Sunshine Residential between 2019 and 2024.
Shope did not respond to a request for comment.
‘They’re donors to the governor’
But Kottoor’s political support for Hobbs did come up at least once during internal conversations at DCS about Sunshine Residential.
According to investigators, Lujan said Navarro, his assistant, brought up the contributions unprompted during a meeting in February 2023, saying the company was “probably going
to ask for a rate increase… and by the way they're donors to the Governor.”
Ong and Navarro also discussed the situation in internal agency chats, according to the report.
But investigators concluded that Hobbs and the Governor’s Office were not involved in those discussions: “While Navarro claimed that Sunshine’s donations ‘put pressure on, I think, everybody,’ the investigation has shown that any perceived pressure was a result of Navarro’s own knowledge of Sunshine’s contributions.”
Hobbs’ attorneys told the Attorney General' s Office that the governor’s staff takes a hands off approach to agency contracts.
“The Office of the Governor operates under a framework designed to keep state agency
procurement decisions in agency hands and to keep political and civic activity separate from official conduct,” Anne Chapman, an attorney representing the Governor’s Office, wrote in a letter on Aug. 17.
The Governor’s Office was so hands off, in fact, that Hobbs had no idea DCS awarded the rate increase to Sunshine Residential.
“Governor Hobbs did not even know that the rate-increase decisions were being made at
the time they were made,” Chapman wrote.
Reform
Though her office declined to bring charges in the case, Attorney General Kris Mayes said more needs to be done to prevent real or perceived conflicts of interest in the future.
“Declining prosecution is a conclusion about the legal standard for charging a case, but this case shows there is a need for legislative reform,” Mayes said in a statement. “The Legislature and the Governor have the power to ensure greater transparency with regard to political donations made by state contractors. I am urging them to work together and try again to pass legislation that does so.”
Hobbs has repeatedly vetoed Republican legislation sponsored by Shope in response to the controversy, which would have required companies that seek state contracts or grants to disclose “anything of value” they have provided to the governor, a gubernatorial campaign or other entities that supported the governor’s election or inauguration in the past five years.
Instead, the governor proposed a competing bill this year that would have stopped potential contractors from making large donations during the bid process.
But that proposal stalled in the Republican-led Arizona Legislature.
The fall out
Hobbs has faced ongoing attacks over Sunshine Residential from Republican Congressman Andy Biggs, who is trying to unseat her in Arizona’s upcoming gubernatorial election.
“Katie Hobbs is under criminal investigation,” the narrator says in a Biggs campaign commercial running on television and social media.
The Governor’s Office now says the report vindicates Hobbs.
“The report released today clearly states that there was no wrongdoing by the Governor or her office,” Christian Slater, a spokesman for the governor’s office, said. “As has been publicly reported multiple times and the Attorney General’s report now confirms: Governor Hobbs was not involved in, did not direct, and did not instruct any member of her administration regarding the rate increases the Department of Child Services approved.”
Biggs criticized Hobbs for failing to sit down with investigators and accused Mayes of bailing out her fellow Democrat.
“With today's report whitewashing obvious corruption, Arizonans can see why Democrat Katie Hobbs thinks she's above the law,” he wrote on social media.
Mayes’ decision isn’t the end of the story, though.
Shope also asked Maricopa County Attorney Rachel Mitchell to investigate the situation. And the Republican-led Arizona Legislature also tasked the Arizona Auditor General with looking into the contract.
A spokesperson for the Maricopa County Attorney’s Office said the Auditor General is taking the lead and could not provide a timeline for completion.
“Because the investigation is still open, we don’t have any additional comment,” Erin Pellett said.
The Auditor General did not respond to a request for comment.
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