1. Prop 123 A Special Election May 17, 2016

2. Prop 123 Problems? Why? What and How? Voter choices?
These are the items to be discussed in this presentation.

3. Background The Arizona Constitution State Land Trust Fund
- Legislative directive
State Land Trust Fund
- Federal land and the 1910 Enabling Act
"the legislature shall make such appropriations to be met by taxation as shall insure the proper maintenance of all state educational institutions and shall make such special appropriations as shall provide for their development and improvement.”
State Land Trusts were created by the federal government at the time of the Northwest Ordinance of Arizona is one of the states which specifically benefitted by receiving federal land for the purpose of education (87% is for public schools). The 1910 Enabling Act set forth how monies derived from the sale, rent or transfer of the lands shall be used.

4. Missed Inflation Based Funding
Why Prop 123?
Voters passed Prop 301 in 2000
 Inflation factor adjustment up to 2 %
 Sales tax increase to 5.6 % through 2021.
Missed Inflation Based Funding
 FY 2011, 2012 and 2013
Lawsuit filed
Public sentiment about the importance of more adequate funding for K-12 education resulted in the passage by voters of Prop 301 in 2000.
Prop 301 required the Legislature to adjust the "base level education funding formula" for public schools each year in accordance with inflation.
The inflation factor specified an adjustment in the financing formula annually by up to 2 percent.
Prop 301 also provided a funding increase by raising the state sales tax from 5.0 to 5.6 percent through 2021.
A law suit was filed after the Legislature failed to adjust the base level education funding formula for FY 2011, FY 2012 and FY 2013 as directed by the voters in Prop 301. .

5. Why Prop 123 ………. State Supreme Court Ruling- 2013
 State violated the Voter Protection Act
 State must repay missed inflation funding
Superior Court Order
 Repay missed funding
 Pay average of $348million each year
through 2026
State failed to comply with ruling
Prop 123 is simply the proposed settlement between the parties in the lawsuit.
In 2013, the State Supreme Court ruled the Legislature had violated the voter mandate by only partially funding the inflation factor saying
…..Prop 301 could not be undercut by legislative action and the Legislature had run afoul of the Voter Protection Act and its limits on changes to laws approved by voters.
In Aug. 2014, the Superior Court ordered the Legislature to fund the student base level an average of $348 million per year through 2026.
The Legislature failed to follow the dictate of the court resulting in a standoff between the plaintiffs and the state.
Prop 123 is simply the proposed settlement between the parties in the lawsuit and shifts the decision to the voters rather than the Legislature.
This proposition shifts the burden of providing a solution to the education funding lawsuit from the legislature to the voters on May 17.
While it is clear that the necessary funds to meet the requirements of the law suit currently exists in the general fund surplus and the so-called rainy day fund, this legislative initiated proposition requires the voters to accept responsibility for meeting the K-12 schools needs by manipulating the funding process without any clear legislative plan for meeting future needs.

6. A Difficult Issue for Voters
 A complex issue requiring understanding of
the implications of Prop 123.
 Multiple arguments both in favor of and
against Prop 123.
 Like all public policies, there are intended
outcomes and unanticipated consequences.
 Impacts everyone – young and old.
COMPLEXITY: This is a very complex issue with many elements. Any voter, regardless whether for or against Prop 123, can identify both pros and cons for each side of the argument.
The state claims inadequate state revenue because of the recession but many believe a major factor has been the continuing enactment of tax cuts and tax credits which have contributed to the budget woes far beyond the recession. Some argue that the state budget surplus signals a healthier economy in the state and the state surplus should be used to replace the cuts.
Regardless of age, education funding needs in the state impact all citizens and not just young people or parents with school age children. An economically healthy economy is based on a sound system of public education for all. An educated citizenry is important to a democracy and an educated work force drives the economy.

7. The What and How of Prop 123 lost inflationary funding. yrs.
 Ends the inflation lawsuit and provides part of
lost inflationary funding.
 Appropriates - average of $348 million/year for 10
yrs.
 Uses state land trust distributions for 59% of
payment; rest from general fund
ENDS: the inflation lawsuit by providing a portion of the lost funding authorized by voters with passage of Prop It addresses only the lost funding and does not address the additional cuts made to K-12 education during recent Legislative budgets.
APPROPRIATES: It does reset the base level funding for schools to 70 OR 72% of what the court determined the base level funding should have been if the inflation factor approved by voters had been funded properly from by the Legislature. It provides approximately $300 per student for the first five years and an additional $150 per student for the next five years, ending in 2026.
USES: The withdrawal rate from the Land Trust will be raised from 2.5 percent to 6.9 percent of the fund’s balance annually for 10 years. The controversy revolves around this higher withdrawal rate to pay off the lawsuit by dipping into the balance and ultimately penalizing future generations. It is hard to imagine the economy will grow at a sufficient rate to preclude any draw from the corpus (or principal).
The Joint Legislative Budget Committee projected that if withdrawals were left at 2.5 percent, the fund would grow from the current $4.8 billion to $9 billion by If withdrawals are raised to 6.9 percent, the JLBC says the principal would still grow, but less so. On the other hand, State Treasurer Jeff DeWitt has argued that 6.9 percent is too much. The universities draw 4 to 5 percent their land trust annually.
The change in the withdrawal rate from the State Land Trust will require approval from the federal government.

8. What and How ..... continued based monies needs.
 Provides 70 % of ordered missing inflation
based monies
 Permits schools to use funding for greatest
needs.
 Partially meets lawsuit intent –
increases base level funding per student based
on market factors.
PROVIDES: a potion of the skipped inflation payments directed by the Courts. It is a back-fill measure and does not address recent spending cuts such as the loss of teacher career ladders, all-day kindergarten nor text books and maintenance.
PERMITS: Charter schools and school districts can use the funding to meet their highest needs: there are no new mandates from the state
PARTIALLY MEETS: The legislature can cut back on this school funding. If there are large gaps in the land trust earnings or major economic slowdowns, neither of which are defined.
For every dollar withdrawal from the state land trust, there are only $.30 in new commitments from the general fund. The plan relies very heavily on borrowing from the future rather than on resetting basic budget priorities.
It pegs the funding for K-12 education to market forces rather than the real needs of K-12 education. It does not take into consideration the changing needs of students placed on schools by societal changes such as increased student populations or percentage of disadvantaged students in a district.

9. What and How ..... continued general fund.
 Provides additional monies:
-$300 per student for 5 years;
-then additional $150 per student for next 5 years.
-Use of calendar year enrollment for funding will
impact monies paid.
 Increases State Land Trust distributions
-from 2.5 percent to 6.9 percent each year for 10 years
-requires Arizona Constitution change
-requires federal approval of change to Enabling Act
 Caps K-12 funding at no more than 49% of
general fund.
PROVIDES:
Use of calendar year enrollment as basis for funding formula which was included in the fine print of the budget passed during the 2015 Legislative session further impacts school budgets negatively. Without solid data, it is hard to anticipate monies available and seriously short-changes the budgeting period.
INCREASES: The change in the percentage withdrawal for distribution of funds is not only a change in the Constitution, but will also require federal approval of change to the Enabling Act. Some argue it is not a sure thing and may result in legal challenges.

10. What and How ..... continued following suspension period.
 Permits temporary suspension of inflation factor
-if sales tax revenues & enrollment growth falls
below 2%.
 Mandates temporary suspension of inflation factor
below 1%.
 Requires inflation factor reset with compounding
following suspension period.
Even though the state may experience problems associated with income inflation, schools must meet the needs of a growing school population in Arizona. This provision relieves the legislature from seeking additional revenue sources to meet education ‘s increased needs. Example: It is projected that Arizona will have a 14 percent increase in young children in the next five years.
It does not protect the K-12 school districts from inflation, or from the problem of school population growth or the socioeconomic problems the children bring with them to the school and for which the school must address.
This protects the legislature from fluctuations in the revenue stream if there are no new revenue sources.
There are questions as to how inflation will be determined and whose data will be used? Who will determine employment growth?
It automatically suspends the inflation factor for any economic downturns during a fiscal year.
It prevents future lawsuits over inflation.
The trigger provides an out for the legislature. If the Secretary of the Treasury‘s investment creates a dip in trust fund earnings which are dependent on market forces. it allows the legislature to legally circumvent the intent of the lawsuit.

11. Problems The Triggers by state law and by court
 No stability in state funding
 Sales tax growth can be altered
by state
 Could alter required funding specified in
law and by court
Under the settlement plan, the Legislature could cut back payments if:
a) Earnings of the Land Trust fall, b) state education expenditures rise above 49 percent of the state budget, or c) if state sales tax revenues and no-farm employment fall below 2 percent.
These triggers permit suspension of the inflation factor for economic downturns during a fiscal year regardless of education needs. Questions which need explanation include:
- How will inflation be determined and whose data will be used.
- How will employment growth be determined?
Even though the state may experience problems associated with income inflation schools must meet the needs of a growing school population in Arizona. This provision relieves the legislature from seeking additional funds by taxation.

12. Problems The 49% Cap on K-12 Funding over next 5 years impacts %
 Continued siphoning of monies away from General Fund impacts %
 Estimated 14% increase in young children
over next 5 years impacts %
 Altering of General Fund via tax cuts & credits impacts %
There is no rationale for a 49% cap on education expenditures. This trigger would allow the legislature to spend the remaining general funds for pet projects like: private prisons, charter schools, empowerment scholarships, tax cuts for corporations, etc. and, thus could increase the percentage of the state budget expenditures on K-12 funding
Politicians who don’t support public schools can play many games with the budget that will trigger this formula and remove the Legislative commitment.
It preserves the legislature’s ability to have discretionary funding for the reminding 51 percent of the general fund.
It also allows funding reductions if education costs are more than 49% of state budget beginning in fiscal year
The triggers are a threat to schools’ financial stability.

13. Problems C. Accelerates State Land Trust withdrawals
 6.9 % likely to reduce corpus & funding for
future
 Requires public vote to change Constitution
 Requires federal approval for a change in the
1910 Enabling Act.
 Depends on state land trust money rather than
general fund monies
 Another hole in funding in 2026
Under the current provisions of the trust fund, the schools are guaranteed a steady source of income at 2.5% from the trust funds earnings. This changes the constitutional provision of the trust fund and leads to uncertainty in the next 10 years. It is not clear that federal provisions of the state land trust can be altered by the legislature, which could in all probability lead to another lawsuit.
This trigger provides an out for the legislature in the event the Secretary of the Treasury’s investment creates a dip in trust fund earnings dependent on market forces. It allows the legislature to legally circumvent the intent of the lawsuit.
According to Arizona Treasury Secretary De Witt, taking an additional $2 billion out of the trust funds will short the fund $8 billion over 40 years. The money will no longer be available for education in the future.
The settlement plan allows the legislature to use future education money to partially pay their mandated debt.
It allows the legislature to use trust fund money as partial dollars to meet the court ordered inflation settlement of prop 301.

14. Problems D. Expiration of Prop 301 in 2021 hole in funding
 Loss of sales tax increase will leave big
hole in funding
 New hardship for public schools if no fill in
new funding gap
The loss of the sales tax increase included in Prop 301 will create another budget hole in That looming problem is not addressed by Prop 123.
Education still faces all the problems created by the Legislative cuts. Passing Prop 123 does not solve those problems. The Legislature must, in good faith restore recent cuts and also address future needs of education as called for in the State Constitution.
Further funding is desperately needed during the current Legislative session and the option of passing Prop 123 should not be used as the rationale to fail to address needed funding. Prop 123 simply provides money to cover the court ordered skipped inflation monies.

15. The Choice for Voters YES NO
If approved, inflationary back payments will go to public schools increasing per pupil spending approximately $278**
……continues to leave AZ funding almost 30% lower than national average for K-12 education funding. NO
If defeated, the court settlement standoff will resume and AZ public K-12 education spending will remain grossly underfunded.
** Contingent upon no further lawsuits being filed.
YES:
If approved, inflationary back payments will go to public schools increasing per pupil spending approximately $278 as long as no further law suits are filed questioning the constitutionality of the settlement plan.  The State Treasurer has signaled that he may file a law suit on the grounds that the settlement/proposition violates the Enabling Act of 1910.
Over the longer term, the settlement may set up or create a new funding crisis when the Prop 301 sales tax increase ends in FY 2021 and again in FY 2026 when Prop 123 monies end. It seems probable a new tax increase will be needed.
NO:
The standoff on the court settlement will resume until such time as the legislature either responds in compliance with the court order and the Constitutional provision to fund the schools properly AND/OR an acceptable mediation occurs to provide the back payments due to the schools.
The schools will remain grossly underfunded UNLESS the Legislature acts to restore the previous cuts.
It is imperative on voters to consider the implications and to try to forsee any unanticipated consequences for the short range but also the long-range funding of K-12 schooling.