Hobbs's new Prop. 123 proposal has merit

The state is losing another education funding lawsuit.

One of the more stark examples of the dysfunction in state government is the failure of Democratic Gov. Katie Hobbs and legislative Republicans to agree on a replacement for Proposition 123.

Prop. 123 was drafted to settle a lawsuit filed by a coalition of school districts alleging that the state had failed to make mandatory annual inflation adjustments to operational funding. While the state had an argument – the inflation adjustment was skipped in some years but made up in later ones – the plaintiffs were prevailing as the case made its way through the courts.

The heart of the settlement was an increase in the annual distribution to schools from the state land trust from 2.5% of its value to 6.9%. Since the distribution formula is set forth in the state constitution, the increased draw was submitted to voters. Voter approval in 2016 also triggered an additional $625 million in general fund appropriations from other sources for K-12 education over the 10-year life of the proposition.

At the time, the concern was that the higher draw would invade the trust’s principal, eroding what it could generate over time. That concern proved to be misplaced. Over the last decade, the annual investment return for the trust has averaged 8.9%. The trust’s principal continues to be augmented not only by new sales and leases, but also by retained earnings above the distributed amount.

Prop. 123 expired last year, and the distribution reverted to the 2.5%. At this point, there is little concern about the effect of a higher distribution on the trust’s principal over time. A consensus proposal submitted to voters to return to the 6.9% would be unlikely to face meaningful opposition. Hobbs’s budgeteers estimate that, today, the 6.9% distribution would generate an additional $334 million, growing over time.

This time, the problem is that Hobbs and legislative Republicans can’t agree on how to spend the dough.

Legislative Republicans have wanted to put it all into an increase in teacher salaries. This violates school choice principles they profess to support. In a school choice model, the schools get the same money per kid and compete for students based upon the educational offerings they create. Some might tilt toward higher teacher salaries to attract a better faculty. Some might put a greater emphasis on facilities and enrichment programs. Dictating how resources are to be used shrinks the competitive playing field.

Of late, GOP lawmakers have also wanted to add constitutional protections for the universal voucher program they adopted before Hobbs became governor. This would probably doom the proposition electorally. I’m a strong supporter of a universal voucher program. But I’m also a political realist. Universal vouchers aren’t politically popular and inclusion would generate fierce, organized, and likely well-funded opposition that a straightforward return to a 6.9% distribution would not.

It also would attract a legal challenge on the grounds that the combination violated the single-subject requirement for constitutional amendments submitted to voters. I think such a legal challenge would prevail. Private school vouchers and a trust distribution increase to public schools are clearly two distinct policy choices.

Hobbs did not get off to a good start in this discussion. Her initial proposal was to increase the distribution to 8.9% and earmark most of the proceeds to salary increases for all school personnel – from teachers, to librarians, to janitors. Such a high distribution would likely require invading the principal from time to time. And Hobbs’s initial proposal also violated school choice principles – although, for her, not hypocritically so, since she doesn’t hold herself out as a school choice advocate.

In her most recent budget proposal, however, Hobbs proffers a new Prop. 123 replacement that is much more meritorious.

The state is losing another education funding lawsuit, this time dealing with capital expenditures.

In the 1990s, the Arizona Supreme Court held that the state’s then school capital funding approach, school district property taxes, violated the state constitution’s requirement that the legislature provide for a “general and uniform” school system. That’s because the ability to pass property tax backed bonds, and the available property tax base to assess, varied wildly between districts. After some legal hemming and hawing, the court ultimately said that the only way out was for the state to determine adequate facility standards for district schools and, with state funds, ensure that all district schools met those standards.

There is little question that the state isn’t adhering to the 1990s legal requirement. As the state dealt with various budgetary challenges, funding for major capital repairs and renovations to schools was treated as a discretionary obligation, not a mandatory one. In some years, it was nearly zeroed out. School districts have returned to relying on property tax bonds. The same inequalities that generated the 1990s Supreme Court decision have reappeared.

In Hobbs’s latest Prop. 123 replacement proposal, she retreats to the 6.9% distribution that has proved compatible with maintaining and growing the trust’s principal. Most of the additional funding would be distributed to schools on a per-pupil basis, in keeping with school choice principles.

A slice of the additional distribution, less than a third, would go to service a $1.5 billion bond to catch up on school repairs and renovations. These are the kind of long-term investments for which borrowing is fiscally prudent.

There needs to be more strategic thought given to what to do with school facilities in light of a declining student population. We don’t want to be spending $1.5 billion repairing and renovating schools that may not have enough students to occupy them. So, this is a proposal that should be approached cautiously.

However, if a bonding proposal of some size could make the current capital funding lawsuit go away, it would be prudent to include it in a Prop. 123 replacement, even if it resulted in an overinvestment in school repairs and renovations. There’s an outside chance that the current state Supreme Court would overturn the 1990s precedent if presented the same question in current circumstances. But that would be a big bet against long odds.

There is a small element of Hobbs’s new Prop. 123 proposal that is ill-advised. She would use $9 million of the additional distribution to fund staff at the School Facilities Division and the State Land Department. Staffing for the various tasks in state government should be subject to annual review and appropriation by the legislature. Moreover, the state land trust beneficiary is the schools, not the state government for associated administrative functions.

This is probably a forlorn hope, but legislative Republicans would serve the state by seriously considering Hobbs’s new Prop. 123 proposal. It’s more in keeping with school choice principles than their own previous bid. And if there are assurances that the bonding proposal would make the capital funding lawsuit go away, it would spare the state a lot of uncertainty and a potential big budgetary hit to a general fund not in a position to sustain it.

Reach Robb at robtrobb@gmail.com.