School funding a ticking time bomb

Arizona schools are counting down to a March 1 deadline for the Legislature to override a cap on spending or face not being able to spend $1.1 billion already approved for them. 

The cap, known as the aggregate expenditure limit, is determined by a formula enacted in 1980 and since then, raising it has not been a point of contention. The limit typically increases as the state adds new residents and is also adjusted for inflation and enrollment. But the limit – which relies on the previous year’s enrollment – took a hit after K-12 public schools lost roughly 38,000 students last school year due to the Covid pandemic.  

Further exacerbating the problem is the inclusion of Proposition 301 dollars in the funds that count toward the limit. Voters approved the 0.6% sales tax for education in 2000, which would have caused funding to exceed the expenditure limit in the 2001-2002 school year. At that time, legislators referred the issue to the ballot, and voters approved exempting Prop. 301 revenues from the limit.  

However, when legislators renewed the 0.6% sales tax for education in 2018, they did not exempt it from the expenditure limit, which would have again required voter approval. The renewed measure went into effect July 1, 2021. The tax brings in more than $600 million a year for education.  

The $1.1 billion schools won’t be able to spend translates to about a 16% budget cut, said Chuck Essigs, director of governmental relations at the Arizona Association of School Business Officials. 

“This is the biggest problem I’ve ever seen,” Essigs said. “We have never had any problem come anywhere close to this reaching the magnitude of this problem.” 

Essigs was working in Arizona school finance when the current funding formula was adopted in 1980. If the formula used the current year’s enrollment or if Prop. 301 dollars were still exempt, schools would stand to lose several million dollars, not more than $1 billion, he said.  

Essigs said there was concern that some lawmakers wouldn’t vote to override the limit because of Proposition 208, an initiative voters approved in 2020 to levy an income tax surcharge on the wealthy. But Essigs emphasized that Prop. 208 dollars are not part of the fiscal year 2022 budget. He said he saw no connection between this year’s limit and Prop. 208.  

“If the Legislature were to override the limit in 2022, that doesn’t allow (Prop. 208) dollars to be spent in 2022,” he said. “Because of the way the income tax works, districts won’t start to get any of that money until the following fiscal year.”   

“The tax rates have already been set to fund the budgets that the districts have adopted,” Essigs said.   

As the deadline approaches, Sen. J.D. Mesnard, R-Chandler, said the situation with the aggregate spending limit was “in a state of paralysis” until the Prop. 208 ruling was resolved. Mesnard was a central player in crafting 2021 legislation to sidestep the tax on the wealthy that Prop. 208 would impose. He and House Majority Leader Ben Toma are now looking to repeal and replace the so-called flat tax, which would kill the referendum on it, the legislators acknowledged to The Associated Press last week.  

Mesnard told the Capitol Times there was “a lot of interest” in dealing with the aggregate expenditure limit. He said he was willing to vote to exceed or waive the spending limit “under conditions.”  

“Among other things, I need Prop. 208 to not be a factor,” Mesnard said. “I am certainly not supportive until that is the case.”  

Democratic lobbyist Geoff Esposito said he thinks legislators will eventually override the limit but not before the March deadline – which could prove catastrophic for some schools, he said.   

“We’ve had Republicans who have supported it before, but it is not only tied to the (Prop. 208) fight but to every other pet project that these conservative voices are going to want to leverage to get in education, from critical race theory to masks and vaccines,” he said.  

One Valley school superintendent said his district is in line to lose the ability to spend tens of millions of dollars this year if the Legislature doesn’t act. The superintendent said he has heard from colleagues in other districts who could be forced to close schools temporarily.   

“There have been conversations, and one district said that the impact on their district would be the equivalent of 77 days of instruction … I would argue that a district shouldn’t ask its employees to work without being compensated,” he said. 

The state budget the Legislature adopted for fiscal year 2022 automatically included money to fully fund the budget, and those dollars can’t be spent elsewhere because they’ve already been appropriated to education, Essigs said.   

If the Legislature failed to override the limit, Essigs asked what schools were supposed to do with the $1.1 billion they already had coming to them.  

“You’re not saying they can’t raise it; you’re just saying you can’t spend it,” he said. “That doesn’t seem to make a lot of sense.”   

Unlike district schools, charter schools are not subject to the limit because they didn’t exist in Arizona in 1980 when the formula was approved.  

Esposito said he believes legislators will eventually raise the limit because “it has to get done,” but not before “schools have to like, start telling parents that they’re going to be shutting down in April and to start to think of child care.”   

In August, the state’s Supreme Court ruled that Prop. 208 revenues were not grants and therefore not exempt from the spending limit.   

“(I)f the trial court finds that (Prop. 208) will result in the accumulation of money that cannot be spent without violating the expenditure limit, it must declare Prop. 208 unconstitutional and enjoin its operation,” Chief Justice Robert Brutinel wrote at the time.   

Stand for Children Executive Director Rebecca Gau said the Arizona Supreme Court’s decision regarding Prop. 208 doesn’t just affect Prop. 208. Stand for Children is one of the organizations that led efforts to get Prop. 208 on the 2020 ballot.  

“Unless that expenditure cap is dealt with permanently, one way or the other, either increased significantly or done away with, then we’re never going to be able to increase school spending to where it needs to be,” she said.  

Beyond overriding the limit, Essigs hopes the Legislature will be proactive in addressing the limit long-term because it’s not a one-year problem. As long as Prop. 301 dollars are included, the limit will be exceeded, he said.  

Essigs said he hopes lawmakers will consider the value of the 40-year-old formula.   

“First, do we even need that limit?” Essigs asked. “In the Constitution, it says that the Legislature shall adopt budget limits for every school district… It’s not like the Legislature can say, ‘Well, we don’t want to put limits on schools anymore.’ They’re required by the Constitution to do that.”   

If the Legislature decides the aggregate limit should continue to exist, Essigs said it should be modernized. To make changes or to rescind the limit, voters would have to approve a constitutional amendment. 

“Very rarely do you do something that’s proper and correct four decades after you do it.” he said. “The world changes.”  

Yellow Sheet editor Wayne Schutsky contributed to this report.