A Fiscal Analysis of Proposition 123 and Arizona’s Underinvestment in K-12 Education: an essential first step for K-12 funding

January 7, 2016

Child writing on paperPolicy Paper
January 7, 2016

A Fiscal Analysis of Proposition 123 and Arizona’s Underinvestment in K-12 Education:
an essential first step for K-12 funding
By Dave Wells, Ph.D.
Research Director, Grand Canyon Institute

Executive Summary
Under Prop. 301 passed by voters in 2000, the legislature was obliged to adjust per student base level funding for K-12 by the change in the GDP deflator or 2 percent, whichever was less. However, beginning in FY2010 and continuing through FY2013 it was instead frozen, leading to the Cave Creek v. Arizona lawsuit. In September 2013, the State Supreme Court sided with the plaintiffs and remanded the case back to the trial court to determine the appropriate remedy. Since the Supreme Court hadn’t fully defined what was owed to public schools that became the focus of the litigation.
Negotiations between the two sides reached an impasse in August 2015, but after the Governor’s office subsequently intervened by the end of October with lightning speed a proposed financial settlement in Cave Creek v. Arizona was made public Tuesday, Oct. 27, the legislature was called into Special Session on Wednesday, Oct. 28 and by Friday, Oct. 30, the settlement and a plan to fund it had passed both chambers and been signed by the Governor, giving virtually no time for public scrutiny. A May 17, 2016 special election on Proposition 123 will determine the final outcome.
The settlement, therefore, focuses around what public schools were owed under Prop. 301. A separate, but important issue, is addressing Arizona’s underinvestment in K-12 education. Of all the states, Arizona arguably has the worst K-12 funding record over the past two decades. Funding Prop. 301’s legal minimums is only a small part of that larger issue.
This proposal does provide a significant immediate increase of $300 million in educational funding, largely taken from the State Land Trust Fund. The proposal also gives the legislature more flexibility in funding K-12 education during fiscal downturns.
The proposal, however, does not represent new money into K-12 education. It should be viewed in terms of getting the state back to a legal minimum in funding K-12 education, while redefining that minimum in a more flexible manner to reduce the likelihood of a similar lawsuit. Nonetheless, Prop. 123, which implements the settlement, is an essential first step in addressing the state’s underinvestment in K-12 education.

Key findings include:
• The settlement funds 72 percent of the lost base level increase that was the subject of the lawsuit.
• The settlement provides half of the back payments that could have been owed public schools.
• The inflation adjustment is modified so that automatic inflation adjustments to educational base funding in the future will no longer automatically occur during times of economic distress. GCI expects at least one recession between 2015 and 2025, consequently,
o Rather than the $3.5 billion increase over ten years above base level funding that Gov. Ducey has promoted, the result will be closer to $3.3 billion
• While enhancing the payment from the state land trust fund, officially called the Permanent Land Endowment Trust Funds (PLETF) to 6.9 percent would not be appropriate permanently, it’s reasonable policy for ten years since the normal 2.5 percent flat disbursement rate is below the typical real rate of return on its assets.
• The 49 and 50 percent discretionary triggers on the General Fund expenditures to the Arizona Department of Education, which enable base level funding to be frozen or reduced, respectively, should have been tied to an economic trigger in the unlikely event it is reached.
• The settlement was not designed to address the broader issues of education funding. Simply returning to FY2007 levels will by FY2026 require more than $2 billion in annual funding beyond Proposition 123’s proposals.
o The 0.6 percent education sales tax is set to expire after F2021 creating an additional $800M funding gap that has not been dealt with.
o $1 Billion has been cut from K-12 from new construction, building repairs, soft capital and all-day Kindergarten.
o After 2025 when disbursements from the PLETF fall back to 2.5 percent annually, there will be a $200 funding gap for the General Fund to take on.
o Inflation-adjustments are not sufficient K-12 investments. On an inflation-adjusted basis, Arizona’s state-based investments in K-12 education have diminished from 20 years ago. Arizona arguably has the worst K-12 education funding record during that time. The settlement doesn’t significantly alter that reality, and the ramifications of diminished investment lower the quality of education in Arizona, limiting future potential economic growth.

Proposition 123 resolves the Cave Creek v. Arizona lawsuit. It represents a starting point, not a concluding point, for state investment in education. It prevents what could have been years of ongoing litigation, gives school districts greater certainty when planning minimum possible budgets, and puts the state back into minimum legal levels of education funding. However, it’s insufficient to make a marked improvement in educational outcomes. A surge of one-time additional funding above inflation will occur in FY2016, if approved by voters, but to improve student achievement will require investments beyond the legal minimums of Proposition 123