What the Sunshine Investigation Actually Found: Business Leverage, Not Pay-to-Play

For more than two years, the Arizona Attorney General’s Office investigated allegations that Sunshine Residential Homes received favorable treatment from the Arizona Department of Child Safety after its owners made substantial political contributions benefiting Gov. Katie Hobbs and the Arizona Democratic Party.

The resulting investigative memo, dated August 20, reaches a clear conclusion: investigators found no evidence of a pay-to-play arrangement, no evidence of a quid pro quo, and no basis to charge Hobbs, Sunshine or anyone else with bribery or a related offense. The Criminal Division recommended declining prosecution and closing the pay-to-play investigation, while keeping the matter administratively open if assistance is needed with a separate Auditor General review.

That conclusion matters because the sequence of events was enough to generate considerable political attention. Sunshine and people associated with the company made large political contributions. Sunshine subsequently received significant increases in what DCS paid it to provide group-home beds. By 2024, Sunshine's $234 daily rate was the highest among comparable state providers.

But a two-year investigation of more than 100,000 documents, more than a terabyte of data, campaign-finance and procurement records, bank documents, state emails and chats, and 12 interviews did not establish a connection between the contributions and the rate decisions.

What investigators found instead is arguably a more interesting story about how a large government contractor used its market position to negotiate with the state.

Sunshine had something DCS needed

Sunshine was not simply one group-home operator among many. According to an internal DCS analysis cited in the memo, it had been "by far the largest provider" of non-developmental-disability congregate-care beds since 2019, accounting for roughly 20 to 25 percent of the state's total capacity in that category.

It also played an important role in housing sibling groups. Former DCS officials told investigators that Sunshine could quickly make additional capacity available when the agency needed it. Former DCS Director Michael Faust described CEO Simon Kottoor as a tough businessman who also cared about the children his company served and understood how to operate a profitable business.

That combination—scale, specialized capacity and the ability to respond quickly—gave Sunshine considerable negotiating power. DCS did not have an unlimited number of alternative beds available if Sunshine reduced its participation in the state system.

The federal government gave Sunshine an alternative customer

The most revealing part of the memo concerns the Office of Refugee Resettlement, or ORR.

When Kottoor sought a rate increase in 2023, according to former DCS Director David Lujan, he showed Lujan an email indicating that the federal government wanted Sunshine to provide group-home services at substantially higher rates. DCS officials understood the alternative to be credible because it had already happened elsewhere.

Federal ORR contracts had been paying substantially more for congregate-care beds. The memo cites a 2021 letter from then-Gov. Doug Ducey stating that ORR was paying more than $300 per day for some beds—about twice the average state rate at the time. In 2023, two providers, VisionQuest and Right of Passage, had already ended state contracts in favor of ORR work.

Sunshine therefore had a potentially powerful negotiating position: DCS needed its beds, particularly its sibling-group capacity, while Sunshine had another government customer willing to pay considerably more.

DCS Assistant Director Alex Ong told investigators that this was what changed the agency's consideration of Sunshine's repeated requests for higher rates. Earlier requests had not produced the same result. But when Sunshine began telling DCS that it could move beds to ORR, agency officials had to consider whether the state could absorb the loss. Their conclusion was that it could not.

A shrewd negotiating strategy

Viewed as a business negotiation rather than a political controversy, Sunshine's strategy was straightforward and effective.

A company seeking better terms is in a much stronger position when it has a credible alternative customer. Sunshine did not merely tell DCS that its costs had risen or that it wanted to earn more money. Its leadership could point to another buyer paying significantly higher rates and make clear that some of Sunshine's capacity could be redirected there.

That transformed the discussion from Should the state pay Sunshine more? to What happens if the state does not?

For DCS, the potential consequences included losing a significant share of available group-home capacity and, in particular, beds used to keep siblings together. The agency had already watched two other providers leave for federal contracts.

The memo describes Sunshine as using precisely this leverage. It does not describe that strategy as unlawful, nor does it find evidence that Sunshine invoked its political contributions when negotiating its rates. Instead, investigators concluded that Sunshine's rate increases were explained by its unusually strong position within the congregate-care market and DCS's concern that beds could be moved to the better-paying federal program.

That distinction is important. Political contributions and a favorable government contracting decision occurring near one another do not, by themselves, establish that one purchased the other. In this case, investigators specifically looked for the necessary evidence connecting the two and did not find it.

What happened inside DCS

The investigation did find that some DCS employees knew about Sunshine's political giving.

Former Assistant Director Robert Navarro told Lujan in early 2023 that Sunshine was likely to seek a rate increase and mentioned that its principals were donors to the governor. Navarro and Ong also discussed Sunshine's contributions in internal Teams messages.

But investigators found no evidence that those discussions originated with Hobbs or her office. Ong said he never received instructions or even a warning from the Governor's Office concerning Sunshine's donations. Lujan said the Governor's Office did not ask DCS to help Sunshine and that he informed the office about the rate increase only after it had occurred. Hobbs similarly told investigators through written statements that neither she nor her staff participated in DCS's rate decisions.

The memo addresses Navarro's statement that knowledge of Sunshine's contributions created "pressure" and reaches a specific conclusion: any such perceived pressure resulted from Navarro's own knowledge of the contributions, not pressure communicated by the Governor's Office.

Sunshine's increases were substantial—but not unique

Sunshine's rates did increase considerably.

Its average non-DDD rate rose from $149.99 per bed in 2019 to $195 following a mid-contract increase in May 2023, and then to $234 when its contract was renewed in April 2024. That represents a 56 percent increase from 2019 to 2024.

By 2024, Sunshine had the highest per-bed rate among the providers examined. But it did not receive the largest percentage increase. Two other providers received increases of 85 percent and 60 percent over the same period, although their final daily rates remained lower.

The Attorney General's investigation also identified broader reasons for rising rates. Provider rates had gone several years without increases, inflation had raised operating costs, numerous providers were seeking adjustments, and the state was competing against a federal program capable of paying substantially more.

Those conditions provided what the memo calls "substantial independent evidence" supporting DCS's decision.

The investigation's bottom line

The Attorney General's memo does not conclude that the circumstances were unworthy of scrutiny. The timing of major political contributions followed by favorable contracting decisions was sufficient to prompt a serious investigation.

But investigation is intended to determine whether an initial appearance is supported by evidence.

Here, investigators concluded it was not.

After two years of examining the underlying communications, financial information and procurement decisions, the Attorney General's Criminal Division found no evidence that Sunshine's contributions were exchanged for favorable treatment and no reasonable likelihood of obtaining a bribery conviction. The memo also notes that political contributions are constitutionally protected activity and that prosecuting the case without evidence of an actual quid pro quo would present significant legal problems. (Mailchimp)

The more concrete story revealed by the investigation is about bargaining power. Sunshine had become a large and operationally important DCS contractor. The federal government was offering substantially more money for similar services. Other providers had already moved capacity from the state to the federal system. Sunshine's leadership recognized the value of that alternative and used it to press Arizona for a better deal.

That may be a shrewd and aggressive business strategy. According to the Attorney General's investigation, however, it was not evidence of a pay-to-play scheme.

Read the full Arizona Attorney General investigative memorandum