The rationale behind Arizona's set of spending limits, including on schools

The idea was to create a circuit breaker on creeping governmentalism.

The set of spending limits overwhelmingly approved by voters in 1980 are getting the Rodney Dangerfield treatment, no respect.

That’s particularly true of the aggregate expenditure limit on school districts, which is being treated like a relic from an archeological dig, some mysterious totem bound up in superstition and incantation. 

As a relic myself – moreover, one who participated in this ancient ritual and believes that the animating principles are still sound public policy – I thought some words of explanation were in order.

The Arizona Agenda was correct that the political impulse came from passage of Proposition 13 in California, a clone of which began circulating as an initiative in Arizona. However, the legislature did much more than simply respond to public angst over property taxes, the political gale wind blowing from California. It took a much broader approach to restraining the growth in government spending.

Prop. 13 attempted to control property tax increases by capping residential  property valuations for tax purposes. But property was reassessed when sold. So, over time, adjacent homeowners might have widely divergent property tax bills.

To avoid such inequities, the legislature instead proposed, and voters approved, levy limits on the major property taxing jurisdictions: counties, cities, and community colleges. These entities can collect no more than an additional 2% in property taxes than they did the year before from property that has not been improved in the interim, plus whatever that rate yields applied to new improvements. Limit collections, not valuations, was the precept.

In addition to relieving public agitation over property taxes, the legislature chose to address the issue of what I called creeping governmentalism through the set of spending limits. Creeping governmentalism refers to the incessant tendency of government to expand its scope and reach. I was the government relations guy for the Arizona Chamber of Commerce at the time and probably the chief advocate of the spending limits outside the legislature.

In 1978, the legislature had referred, and voters approved, a limitation on state government spending expressed as a percentage of state personal income. State personal income growth, however, is fueled not only by population increases and inflation, but also by productivity improvements. There’s nothing about productivity gains in the private sector that increases costs for government.

So, the spending caps adopted in 1980 were based solely on population growth and inflation, the drivers of increases in the cost of current government services. There was flexibility built in. By an extraordinary majority, the governing boards of political jurisdictions can approve spending in excess of the limitation for a single year, although there are more restrictions on this option than there should be. In addition, voters can approve an increase in the base spending level of any amount, after which the population and inflation cap would again apply. 

The idea was to provide a circuit breaker on creeping governmentalism. If government wanted to expand its scope and reach, it needed to gain the explicit and specific consent of the governed. 

It’s fair to say that the set of spending limits has been a colossal failure at actually restraining the growth in government spending, except arguably for the counties. Although, even there, the levy limit may have played the larger role.

That, however, is not to say that they have not had some utility. They have supplied revealing and instructive benchmarks from time to time.

The League of Cities and Towns got a home rule option included for the limit as it applies to municipalities. These can be based on anything voters will approve. As a result, the default population and inflation limit applies to very few municipalities in Arizona.

However, the home rule option only lasts for four years. So, cities have to go back to voters every four years and tell them how much more they are spending than the population and inflation formula would have allowed. When Phoenix last renewed its home rule option in 2020, that was a whopping $1.4 billion.

Similarly, the need for the legislature to approve an exceedance of the aggregate expenditure limit provides a useful correction on the narrative about K-12 education funding over time. If the legislature had truly been starving the schools, there would be no need for an exceedance.  The only reason one is needed is because inflation-adjusted, per-pupil spending has increased considerably over time. 

There is another correction that should be made in this discussion. In 2002, voters exempted the proceeds from the education sales tax approved the previous election from the AEL. The tax was to expire after 20 years. The legislature voted to extend it directly rather than refer it back to voters.

The proceeds currently are regarded as now subject to the AEL. Some have depicted this as a conscious act by ill-motivated legislators to put the squeeze on district schools and create a crisis. That’s neither accurate nor fair.

The bill as enacted included a provision exempting the proceeds of the extended tax from the AEL. Since then, the question of whether such an exemption from a constitutional limitation could be enacted by statute arose in the context of the litigation over Prop. 208, the income tax hike to fund education. The Arizona Supreme Court found that it could not. So, contrary to the intent of the legislature, not in furtherance of it, the proceeds of the extended education sales tax now count against the limit and are part of the current controversy over enacting approval of an exceedance. 

The AEL was born out of distrust of the claims that were being made about how the school finance formula changes would provide a comparable spending cap on school districts as was being imposed on other taxing jurisdictions. The school finance formula was complicated with many variables that could be manipulated. Hence, the idea of an overall insurance cap based upon student population and inflation.

The AEL is now outdated, but not for the reasons commonly cited. Modern technology has produced productivity gains in the private sector, reducing unit costs not increasing them. Adopting it in the public sector isn’t justification for busting the population and inflation caps.

But the AEL is outdated in that it no longer is truly aggregate. At the time it was crafted, there were no charter schools or Empowerment Scholarship Accounts. There is no justification for holding school districts to its discipline while excluding other forms of state spending on K-12 education. 

It was irresponsible for the legislature not to include approval of an exceedance when the state budget creating the exceedance was adopted. It was irresponsible for Doug Ducey to vacate the big chair without getting approval for the level of education spending he left office bragging about. It is irresponsible for Republican leadership in the legislature not to have taken prompt action already. And it would be irresponsible for Republican legislators to hold approval of an AEL exceedance hostage to other measures. 

The idea behind the spending limits, including the AEL, was to create a circuit breaker, not a straitjacket. If there is a public consensus on higher spending, as there is for K-12 education, there should be a permanent fix, not an annual legislative drama. That requires a referral to the ballot from the legislature or an initiative. 

While I believe the circuit breaker approach to creeping governmentalism adopted in 1980 remains sound public policy, I doubt that it retains much of a constituency. Today, both political parties favor creeping governmentalism, just for different things.

Reach Robb at robtrobb@gmail.com.