Refer a simple, clean, permanent state trust distribution formula
Prop. 123's expiration may be the scene of a train wreck in school finance.
I sense a train wreck coming in school finance. The location of the wreck would be the expiration of Proposition 123’s increased distribution from the state land trust fund.
In 2016, voters approved an increase in annual distributions from 2.5% of the fund’s average value over five years to 6.9%. This also settled a lawsuit over a couple of skipped inflation adjustments to state aid to schools that occurred as the state was coping with the aftermath of the housing bubble bursting, which seriously diminished general fund revenues.
However, the increase was for only 10 years, which runs out at the end of next fiscal year, in June of 2025. If nothing is done, the allocation reverts to the 2.5%. So, this November is the last regularly scheduled election for an alternative to a full reversion. The distribution formula is in the state Constitution, so requires voter approval for alterations. The reversion would, initially, cost public schools roughly $270 million in annual funding, growing over time.
The most appropriate course of action, substantively and politically, would be to refer a clean and simple measure making the existing 6.9% distribution permanent law, distributed as presently on a generally per-pupil basis.
Over the last 10 years, the average rate of return for the trust was 7.6%. Over the last 20 years, it has been 7.3%. While it is true that too high of a distribution cheats future students, too low of a distribution cheats current students. And it is clear that a 2.5% distribution was cheating existing students and would again if reinstated.
The existing 6.9% distribution hasn’t eaten into the trust’s principal a penny. It is below the 10-year and 20-year rate of return track record. Making it permanent law is unlikely to invade the trust’s corpus in the future, and minimally if it occurs at all. And that minor effect would be overwhelmed by additional income from future trust land sales and leases.
The simplest pitch to voters would be to make permanent what has existed, with only beneficial effects, over the last 10 years. The idea that the distribution formula should be revisited every decade is of recent vintage and a terrible practice. For the state’s first century, the distribution formula had no expiration date.
From statehood until 1998, trust proceeds could only be invested in fixed-income securities, and the interest was distributed to schools annually. In 1998, voters approved allowing up to 60% of the fund’s assets to be invested in equities, and a formula to deal with unrealized capital gains was adopted. That formula didn’t really work, and the idea of a 10-year experiment with a distribution as a percentage of the average trust value was adopted in 2012, starting with the inadequate 2.5% allocation.
Having an expiration date creates an unnecessary and undesirable funding cliff that will grow over time. Our politicians may not always be adroit enough to finesse the cliff. In fact, that may be true of the current crop, as explained below.
If a particular distribution formula proves over time to have problems, that can be addressed when it manifests itself. There’s no reason to create an artificial funding cliff, and stability in school finance argues strongly against one.
Our current crop of politicians aren’t doing the appropriate thing, substantively and politically, of referring a clean and permanent 6.9% distribution to voters. They are squabbling over the amounts and uses.
Senate Republicans want to keep the 6.9% distribution, but earmark 4.4% for teacher salaries. House Republicans are moving a referral that would reduce the distribution to 5.5% and reserve 3% for teacher salaries.
I’ve written before about the futility of attempting to increase teacher pay through earmarking. But let’s talk about policy. In a competitive education model, the ideal is to distribute funds on a per-pupil basis and have education providers compete for students based on how wisely they use their resources. A teacher pay earmark violates the principles of a competitive education model.
Legislative Republicans supposedly favor a competitive education model. Gov. Katie Hobbs probably does not. So, her proposal isn’t an ideological transgression. However, it violates every other norm of sensible policy and politics.
Hobbs would increase the distribution to 8.9% and create three buckets of earmarks. Her proposal also establishes a 4.4% bucket for teacher pay but, unlike the GOP proposal, teachers would share the bucket with other education professionals, such as counselors and librarians. That means that actual teachers would receive less under Hobbs’s proposal than that of Senate Republicans.
Under Hobbs’s proposal, there would also be a 1.5% bucket for other school staff, such as bus drivers and cafeteria workers. And a 0.5% bucket for security capital funding.
Hobbs’s plan mostly serves to highlight how hypocritical Democratic opposition to Prop. 123 was. The main arguments of Democratic opponents were that Prop. 123 would deplete the trust’s corpus and create a funding cliff. Unlike Prop. 123’s 6.9% distribution, Hobbs’s 8.9% is markedly above the return on investment trend line. And Hobbs’s scheme sports a 10-year funding cliff, as do the GOP legislative proposals.
Now for a deeper dive into the train wreck politics. Prop. 123 had everything, except for Democratic hypocrisy, going for it. Gov. Doug Ducey, who had almost puppet-master control over the business community, was the driving force behind a very well financed yes campaign. All education groups supported it. Yet it barely passed.
There is no one on the scene who could substitute for Ducey’s commanding role. If GOP legislators strong-arm their Prop. 123 extension to the ballot, they collectively would be lucky to raise a buck fifty for a yes campaign. And probably wouldn’t be inclined to raise even that.
Hobbs has some fundraising chops, but not anywhere close to being in Ducey’s league. If GOP legislators bang through their proposal, she’s unlikely to swing strongly behind a campaign to pass it, rather than invest her time and fundraising on a Democratic takeover of the Legislature.
There doesn’t seem to be much of an effort being made to effectuate a compromise between what GOP legislators are advancing and what Hobbs has proffered. Moreover, any conceivable compromise would be a convoluted mess, and much more difficult to sell to voters than a simple and clean measure making the existing 6.9% distribution permanent law. And a unity campaign behind a convoluted compromise is impossible to fathom.
The 2024 election will be a political war between Hobbs and GOP legislators for control of the Legislature. Whatever gets referred to the ballot regarding the state trust distribution formula is highly likely to be a political orphan.
There’s another, largely overlooked, part of the political equation. Whatever Arizona voters approve has to also be approved by Congress, since the distribution formula is also embedded in the Enabling Act making Arizona a state. If Kyrsten Sinema isn’t returned to the Senate, the deal-making skill set in Arizona’s congressional delegation will be sharply diminished. The more complicated the change, the more difficult the sales job. And the more complicated the change, the greater the potential leverage the delegations from other states might attempt to exercise over unrelated issues, such as allocating Colorado River shortages.
Simply making what has worked for 10 years permanent law might be approved by voters without much of a campaign being mounted in favor of it. And slip through Congress largely unnoticed.
I don’t know what political force can change the direction of the trains. But there is a path that leads to safe passage. The Legislature and the governor are not currently on it.
Reach Robb at robtrobb@gmail.com.