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Hobbs releases plan to increase teacher, school staff pay with Prop. 123 renewal

Gov. Katie Hobbs is calling on Arizona lawmakers, particularly Republicans who control both the House and Senate, to adopt her plan to raise K-12 school funding.

Both Hobbs and legislative Republicans want to ask voters to extend Proposition 123, a ballot measure that passed in 2016 and increased the amount of money schools receive from the state’s land trust fund.

Prop. 123 boosted schools’ distribution from the fund to 6.9% over the past 10 years. While Republicans have proposed extending Prop. 123 at the same rate, the governor wants to increase that distribution again to 8.9% to cover raises for teachers and support staff along with safety improvements and general school costs.

The Governor’s Office estimated that over the course of 10 years her proposal would provide $257 million for general school funding; $347 million for teacher salaries; $118 million for school support staff; and $39 million for school capital and safety improvements.

“It does all of this without raising taxes by one cent,” Hobbs said. 

But Hobbs will need the Republican lawmakers who hold narrow control of the Legislature on her side to pass the plan. That’s because the Legislature — not Hobbs — has the power to send a Prop. 123 renewal before voters, who will then have the last say in deciding whether schools continue to receive an increased distribution from the fund.

If the Legislature fails to refer a proposal — or voters shoot it down — schools’ distribution from the land trust will drop back to 2.5%, which would siphon hundreds of millions of dollars away from Arizona’s public school system.

Republicans’ own plan to renew Prop. 123 at the current 6.9% rate, but they want the money to pay for teacher raises only.

“My No. 1 priority is to raise pay for classroom teachers," Rep. Matt Gress (R-Phoenix) said after Hobbs first announced her plan last week, saying the teacher shortage is the most acute staffing issue facing schools.

Hobbs did not say how she plans to bridge the gap between the two plans to win support from Republicans who control the Legislature.

“We’re starting at a point where I think there’s agreement that 123 should be extended, and so I think that’s a good starting point,” Hobbs said. 

The Republican plan doesn’t include the $257 million in general school funding included in Hobbs’ proposal. Prop. 123 currently injects over $420 million a year into K-12 funding. If the GOP plan to extend the diversion uses all that for higher teacher salaries, that will reduce available general education dollars.

But Gress said the state is able to cover those costs out of its regular tax revenues.

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."

Woman in blue blazer speaks into microphone
Arizona State Treasurer Kimberly Yee speaking with attendees at the 2024 Legislative Forecast Luncheon hosted by the Arizona Chamber of Commerce & Industry at Chase Field in Phoenix on Jan. 5, 2024.

Hobbs also faces opposition from Republican state Treasurer Kimberly Yee, whose office administers the trust fund. Yee seemingly took issue with both plans, saying forecasters predict returns of under 6% for portfolio’s like the Arizona’s land trust over the next decade.

“The governor's proposal to increase Prop. 123 distributions to a whopping 8.9% is dangerous and unsustainable. Now that she has released her study, it is apparent that she doesn't understand the simple math,” Yee said in a statement.

The Governor’s Office released its own numbers, prepared by economists from Arizona State University's W.P. Carey School of Business and investment bank Stifel, that Hobbs said proves her plan won’t put the fund’s health at risk.

That analysis assumed the state would deposit $200 million into the account annually and the land trust portfolio’s investments would yield an annual return of 7.24% while increasing schools’ distribution to 8.9%. In that scenario, the fund’s balance would actually grow from $7.9 billion in 2025 to $8.9 billion in 2035, according to the governor’s office’s analysis.

Annual deposits into the fund have averaged about $286 million since 2019, peaking at $521 million in 2022.

But Yee said Wall Street forecasters have projected much lower returns — 5.45% — for funds with a portfolio like the state land trust.

“By comparison, our office only hit that 10-year average return 60% of the time. Further, the governor's recommendation of an 8.9% payout is completely unrealistic as we have not reported a 10-year return above 8.9% in two years,” Yee said in the statement. 

She said she recommends a distribution of 4% to 5%, which is also lower than the proposal from Republican lawmakers.

Sen. Ken Bennett (R-Prescott), chairman of the Arizona Senate's Education Committee, said he doesn't support Hobbs' proposal to raise the distribution to 8.9%, but he also thinks Yee's recommendation is too conservative. He said he remembers when former Gov. Doug Ducey wanted to set the distribution rate at 10%, and former Treasurer Jeff DeWit preferred a rate closer to 5%.

Bennett said he recommended the 6.9% rate based on the fund's previous performance.

"I think that has proven to be a number that we could pay out of the fund without digging into the principal of the fund," Bennett said.

But Democratic lawmaker Christine Marsh said the fund is strong. She pointed out that it grew by more than $2 billion dollars over the past 10 years.

“Our choice is between letting that number sit in a bank account and get bigger or setting Arizona's children up for success and supporting our entire education system and all of its professionals,” said Marsh, a past Arizona teacher of the year. 

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Wayne Schutsky is a broadcast field correspondent covering Arizona politics on KJZZ. He has over a decade of experience as a journalist reporting on local communities in Arizona and the state Capitol.