By Howard Fischer
Mail | X: @azcapmedia

PHOENIX — Gov. Katie Hobbs wants to tap into proceeds of the state land trust to raise salaries for teachers as well as school support staff.

But by how much remains unclear.

In a proposal released Tuesday, the governor wants lawmakers to put a measure on the ballot to extend Proposition 123. That plan, first approved by voters in 2016, allows the state to use money in the trust to provide more education dollars.

Authorization is expiring in 2025. And legislative Republicans already have unveiled a plan to extend it for another decade, but this time using the proceeds to fund a promised $4,000 pay hike for teachers.

Hobbs wants to go even farther. She wants to increase the amount of money the state siphons out of the trust from the current 6.9% a year — the figure the Republicans want to continue — to 8.9%. Hobbs said that would generate an average of $761 million a year over its 10-year life.

Of that, about $347 million a year would go to “educator compensation.”

But unlike the GOP plan, schools would not be required to use all of that for salaries.

“It is not an across-the-board salary increase,” said press aide Christian Slater. Schools could use that any way they want within the category of compensation, which Slater said could include paying for health insurance or retirement.

Nor would it require schools give all teachers the same amount. That would allow a district, for example, to decide to put all of the funds into raising salaries for beginning teachers.

“It’s designed to allow neighborhood schools to decide what’s best for their needs,” Slater said.

But the governor’s plan has something not being pushed by Republicans: additional dollars to boost salaries for support staff, such as librarians and guidance counselors. Rep. Matt Gress, R-Phoenix, one of the architects of the GOP plan, said they were excluded because the biggest shortage is in teachers, not bus drivers.

Hobbs also wants $39 million for school safety and security. And she wants to set aside about $257 million a year to continue general education funding — something not in the Republican plan.

What makes that crucial is the current Proposition 123 adds more than $420 million a year to K-12 funding. If the GOP plan to extend the diversion uses all that to increase teacher salaries, that reduces available general education dollars.

Gress insisted that won’t happen, with the state able to cover those costs out of its regular tax revenues.

Hobbs isn’t buying it, what with the state facing a deficit this fiscal year and next — and possibly for years into the future. So the governor wants to ensure $257 million of that anticipated $761 million annual distribution would continue to be earmarked for K-12 funding, regardless of the state’s revenue collections.

Gress said he wants to review the proposal in depth.

“My No. 1 priority is to raise pay for classroom teachers,” he told Capitol Media Services.

“We have a teacher shortage,” Gress continued. “Surely that’s something we would be able to find bipartisan agreement on.”

As to increasing the withdrawal from the land trust to 8.9%, he said that needs to be “carefully studied” to ensure the funds are “sustainable and responsible.”

“That’s the best way to actually make good on these commitments,” Gress said.

For his part, Senate President Warren Petersen said he welcomes Hobbs into the discussion. But the Gilbert Republican also said the governor really has no say in the matter.

That’s because any plan to extend or expand Proposition 123 would have to go to voters. And only the Legislature can put issues on the ballot, a decision that bypasses the governor.

Inherent in both the GOP plan and the one advanced by Hobbs is the belief there essentially is free money to be had for education.

The federal government gave Arizona 10 million acres when it became a state in 1912 with the restriction that it be held for the benefit of certain beneficiaries, mostly public schools.

Some of that has been sold off for development. About 9.2 million acres remain, available for lease for farming, commercial and grazing. Earnings from the trust go to the beneficiaries. And schools also get 2.5% annually from what is in the trust.

Proposition 123 increased the amount of money that can be taken from the corpus — the body of the trust — each year to 6.9%, with the proceeds earmarked to supplement available K-12 funds.

Voter approval for that diversion expires in 2025.

The Republican plan would keep that same 6.9% distribution, but with the dollars transferred to that $4,000 pay raise for teachers.

Hobbs, for her part, insists taking 8.9% out of the body of the trust won’t hurt it.

Her office produced no actuarial studies on Tuesday. But she said there is currently nearly $8 billion in the trust and it has grown an average of 7.24% annually, even with the funds withdrawn by Prop. 123.

“We can increase compensation for educators and make schools safer for our kids, all without raising taxes on Arizonans,” she said in a prepared statement. “Or we can let billions of dollars accrue in a bank account and do nothing to address our immediate needs.”

If that argument sounds familiar, it is the same one aides to Gov. Doug Ducey advanced in pushing the original Prop. 123.

“The money would be better used in our schools than on Wall Street,” said Dan Scarpinato, who was Ducey’s press aide. “But right now this money isn’t benefiting anyone by sitting in a bank account.”

State Treasurer Kimberly Yee, whose office administers the trust account, agreed with the Democratic governor on one point. She said there is $8.2 billion in the trust.

Yee told Capitol Media Services, though, what the governor wants to do makes no fiscal sense.

“It’s unsustainable,” she said. “It would break the bank.”

More to the point, Yee, a Republican, said the state would be taking out more money each year than the trust earns, meaning an ever-decreasing balance in what is supposed to be a permanent endowment to benefit education.

“They have not coordinated or consulted with our office with respect to our projection, our long-time research into what the current economy is, inflationary factors,” she said.

But it’s not just the governor’s plan the treasurer finds problematic. She said even the GOP plan to continue with a 6.9% would harm the trust, though to a lesser extent.

“Wall Street forecasters in general predict a 5.45% return for the next decade,” Yee said, on the kind of portfolio of investments the state currently has.
“If we were to continue at a 6.9% distribution or higher, it would dip into the corpus” of the trust, she said.

Yee said her research shows a safe annual withdrawal would be in the 4% to 5% range.

“I believe that’s prudent,” she said.

“I believe it’s consistent with what most endowments distribute across the globe,” Yee said. “And it also falls in line with IRS guidelines of a 5% payout for private-type endowments.”