Trust lands: Arizona's biggest little-known K-12 funding source
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Trust lands: Arizona’s biggest little-known K-12 funding source (+ Infographic)

Arizona State Trust Land Within Cave Creek Town Limits.

At a time when more than 50 Arizona public schools are seeking more support from their local communities through bonds and overrides, many Arizonans are also examining two proposals to increase the percentage of revenues from the state trust land investment fund that are used to help support public K-12 education.

As of March 2015, the state land trust permanent endowment fund’s value was $5.2 billion, up significantly from its value of just over $1 billion in 1999. Its rate of return over the years has been more than 6.7 percent.

“This issue of trust lands being a funding source for education is important,” said Janice Palmer, director of governmental relations and public affairs for the Arizona School Boards Association. “As you look into the future and as you look into the needs around the state, we need to be making sure that our asset is being well run.”

Infographic by Lisa Irish/AZEdNews
Click here for a JPG of this infographic.

Two proposals

In June 2015, Gov. Doug Ducey unveiled a proposal that would increase the percentage of investment proceeds from the state trust land investment fund from the current 2.5 percent to 10 percent for five years, then keep it at 5 percent for the next five years to provide $2.2 billion in additional education funding over 10 years.

In response, State Treasurer Jeff DeWit sent a letter to legislators on July 15 opposing Ducey’s plan, saying it is inconsistent with legal requirements to sustainability.

Then in August, Arizona Senate President Andy Biggs and Speaker of the House David Gowan released their proposal to provide $5 billion to public schools over 10 years. Their proposal would increase the percentage of earnings from the state land trust investment fund, and also continue the $74 million one-time addition to basic state aid which began in the last budget and add another $100 million, both accounted for separately and adjusted for 1.6 percent annually, and shift some money from the state’s First Things First program.

Trust lands: Arizona's biggest little-known K-12 funding source (+ Infographic) JanicePalmerOnInflationFundingLawsuitAtLawConference

Janice Palmer, director of governmental relations and public affairs for Arizona School Boards Association, talks about how state trust lands help fund Arizona’s K-12 public schools at a law conference held in Scottsdale on Sept. 9, 2015. Photos by Mike Barcia/Arizona School Boards Association

The governor initially said his proposal would appear on the 2016 general election ballot, and, if approved by voters, funding would not flow until fiscal year 2017. Although there was no immediate call by the governor for special session, it remains a possibility.

The conversation has changed in recent weeks as people have advocated that the state’s K-12 public schools need the money now and the governor has said a special session is on the docket, Palmer said.

ASBA has not taken a position on the governor’s proposal.

“We have not endorsed this proposal, as the details have not yet been developed. We will evaluate the terms when they are created,” said Tim Ogle, executive director of ASBA.

“Be assured, if it’s good for kids, we will be at the table participating in discussions,” Ogle said.

Who benefits from state trust lands?

When Arizona became a state in 1912, Congress granted more than 10 million acres to the State of Arizona with the provision that any revenues earned from the sale or lease of the land be put in a trust primarily for the state’s public education system.

The public sees state trust lands as places for everyone to use, but each parcel of trust land has a specified beneficiary. In Arizona, “87 percent of these lands are held in a public trust to benefit K-12 public schools,” Palmer said.

“We have about 9.2 million acres left after more than 100 years, and nearly 8.1 million of those acres remain public school designated lands,” Palmer said.

How is revenue generated from state trust lands?

The state land department commissioner serves as the trustee and the state land department manages state trust lands. A board of investment is the trustee of the endowment.  The state treasurer’s office manages the endowment’s investments.

Revenues from trust lands are generated by grazing, mineral rights and commercial leases and go directly to schools, while proceeds from trust land sales go into the state land permanent endowment trust.

State trust lands benefit all public school children, not just those where the lands are.

“If lands are auctioned off in northern Scottsdale, they’re helping you out in Kofa,” Palmer said. “If they’re being leased for grazing rights in eastern Arizona, those monies are actually getting distributed to every school district across the state.”

In many other states, mineral rights yield most of state trust lands’ returns, but in Arizona real estate sales do, Palmer said.

Trust lands: Arizona's biggest little-known K-12 funding source (+ Infographic) ArizonaStateLandTrustHP3

Arizona State Trust Land within Cave Creek town limits.

The state land department sells only about 1,600- to 3,000-acres a year at true value to the highest bidder at public auction, Palmer said.

During the economic downturn, state trust land was still being sold to counties and cities for conservation, which helped provide additional revenue, Palmer said.

Neither of the current proposals that would draw additional revenues off the endowment for schools include plans to sell off lands at higher rates to do so.

Some state trust land sales were defaulted on during the economic boom, Palmer said. Those assets returned to the trust, payments made were treated like lease payments and became a direct distribution to the schools.

Since statehood, earnings from the trust have been used to help support basic state aid. The first $72.3 million of earnings on the state trust land endowment fund go into basic state aid for schools. All earnings above that amount go into the Classroom Site Fund to supplement, not supplant, money generated by Prop. 301’s six-tenths of a cent sales tax, which was approved by voters as part of Education 2000, Palmer said. This provision was voter protected in 2002.

What is the Classroom Site Fund used for?

All Classroom Site Fund money is considered dollars spent in the classroom. Sixty percent of Classroom Site Fund money is mandated to be used for teacher salaries. Of that amount, 20 percent is used for base level teacher salaries and 40 percent is used for performance pay for teachers.

The remaining 40 percent of the Classroom Site Fund is mandated to be used for several items including dropout prevention programs, services or items for students, class size reduction, and a portion of this amount may also be used for teacher salaries.

“The better we do on our endowment fund, the more money that we get to teachers,” Palmer said.

In fiscal 2003, trust lands produced an additional $20 more per student, and in 2016, it is estimated they will add $65 more per student, Palmer said.

How the state trust land endowment fund is invested

The state trust land endowment fund could only be put into fixed income investments until 1998, when a constitutional amendment allowed up to 60 percent of the fund to be invested in equities and provided for a four-year transition period to get there, Palmer said.

“Right now, we’re at 60 percent equities and 40 percent fixed income – that’s why our permanent endowment fund has really skyrocketed,” Palmer said.

With the Arizona Legislature’s Senate and House Republican leaders meeting with Republican legislators this week to update them on the ongoing discussions to increase funding for public schools, Democrats unveiling their proposal to increase education funding on Tuesday and the  possibility of a special legislative session on school funding in the future, projections for the state trust land endowment fund and other sources of funding will remain a key focus.