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Arizona schools face a funding cliff again. A 40-year-old tax battle is to blame
Lawmakers in 1980 fended off a drastic anti-tax measure inspired by a California law, but created a spending limit that now threatens public schools.
If you’re wondering why Arizona keeps bumping into a school spending limit each year, you can blame California.
Well, not just California, but the whole debacle started there, back in 1978.
The school spending cap was part of a set of measures Arizona lawmakers sent to the ballot in 1980 to limit government spending. The package was designed to head off a citizen’s initiative that would have copied a California property tax measure that political leaders in both parties here thought would be disastrous.
Forty-plus years later, Arizona’s school spending limit has proven to be a disaster of its own.
This year, Arizona schools once again face a funding cliff on March 1 because of the four-decades-old limit. If lawmakers don’t lift the cap, public K-12 districts will collectively need to cut about $1.3 billion from their current year budgets. Those cuts would likely mean furloughs for teachers, school closures and huge headaches for parents.
If this sounds familiar, it’s because lawmakers had to do the same thing last year — they voted to increase the limit in late February 2022, just before the annual deadline. In recent history, they’ve also had to lift the cap in 2007 and 2008.
But the limit on school spending was never intended to be in place for more than a few years, the man who helped write it said.
“I'm shocked that it is still largely intact 40 years later,” Alan Maguire, the Senate economist at the time who helped write the set of measures, said. “Much of it we thought would last for, like most legislation, five, six, 10 years. It really is amazing that it has survived this long.”
Dubbed the aggregate expenditure limit, the wonky term functionally means overall school spending for the state is capped at a certain level based on inflation and student growth, with some funds excluded from the calculation. Charter schools, which are public, aren’t included in the limit because they didn’t exist in Arizona when it was adopted.
These days, the limit is consistently lower than the amount lawmakers allocate to schools. If the limit isn’t raised in time, schools won’t be able to spend the money lawmakers gave them that they’ve already included in their local budgets.
“We will be talking about massive layoffs of teachers,” Superintendent of Public Instruction Tom Horne told a legislative subcommittee tasked with examining the issue this week. “If the expenditure limit is not waived this year, and two-thirds of the teachers are laid off, parents of all ideologies are going to go crazy. They are really going to resent it.”
Schools are exceeding the limit this year for a few reasons: Lawmakers added more money to education in recent years, a funding stream that used to be excluded from the calculation is now added in, and schools simply operate much differently than they did 40 years ago.
School superintendents have repeatedly lobbied the Legislature to fix the issue. Last year, they sought a special session after former Gov. Doug Ducey promised during budget negotiations to call one. Ducey failed to follow through.
While lawmakers last year finally agreed to increase school spending beyond the limit, they used the threat of a fiscal cliff to negotiate on other issues, like school vouchers.
“It's now become sort of a political football,” Maguire said. “It's a little bit like the Arizona version of the debt limit at the federal level. It’s an opportunity to negotiate for both sides.”
Still, lawmakers can only increase it year by year, and they need a two-thirds vote to do it. For a permanent fix, voters would need to approve a change to the Arizona Constitution.
Several bills filed this year would attempt to resolve the problem, including through a temporary increase and by sending the question to voters. None of the bills have received a committee hearing yet.
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What happened in California
To understand why the limit exists in the first place, it’s important to recognize the economic dynamics of the 1970s and early 1980s. High inflation, resulting in property valuations going up and then spiking property tax increases, rankled taxpayers during a period known for its economic volatility. “The Great Inflation,” as it was called, led to taxpayer revolts, one of which started in California.
In 1978, California voters approved a measure called Proposition 13, which severely capped property tax rates. The measure is still in place, is constantly the subject of additional changes and enjoys high approval ratings from voters — politicians in both parties often don’t want to touch it, despite the headaches it has caused.
At the time, Arizona lawmakers in both parties saw the California revolt sweeping across state lines.
“It was a time where people were trying to control taxes, and property taxes were a big thing,” said Chuck Essigs, director of governmental relations for the Arizona Association of School Business Officials, who was working with legislative staff during the 1980 special session. “There were a lot of other states that looked at that and said, that's a pretty good model, let’s see if we can get that passed in our state, or something very similar to it.”
To head off the anti-tax offensive, Democratic Gov. Bruce Babbitt, at the request of legislative leaders, called a special session of the Republican-controlled Legislature to create an alternative set of measures both parties could sell to voters to counter a Prop 13 copycat. Enacting a similar law here was “viewed universally as a terrible idea,” Maguire said, because Arizona had a more sophisticated property tax system that was also a crucial funding source for local governments.
But the school spending limit, in particular, seemed unnecessary to Maguire when it was brought up late in the drafting process. The state had just approved a school funding formula, which is still largely intact today, that figured out how to assess school spending in a better way than a cap would, he said. The aggregate expenditure limit is a statewide school spending cap, not a cap on individual districts’ spending. It’s designed that way so as not to disrupt the funding formula, he said.
He and other staff who argued against the need for a schools limit ultimately lost out to lawmakers who insisted on it.
The special session resulted in 10 ballot measures about taxes, from caps on local governments to tax exemptions for widows to the aggregate cap on schools. Voters approved all 10 in a special election in June 1980 by wide margins. Lawmakers then were able to convince voters against the Prop 13-style measure on the November 1980 ballot, telling them better limits on taxation had already passed.
The California-style measure, 1980’s Prop 106, “went down in flames,” Essigs said.
The consequences of spending limits
While the package of bills to limit taxes passed with wide margins, they weren’t without concerns.
In the publicity pamphlet sent to voters for the 1980 special election, the arguments against the schools measure focused on local control: The elected school boards of each district should be in charge of setting their budgets.
“This proposal is vaguely worded and confusing and would require a sizable bureaucracy to administer its provisions,” the con arguments said. “It assumes that the complex problems of highly diverse school districts and community college districts can be covered by a precise mathematical formula imposed by state officials on local districts.”
Within a couple years, some of the cracks started to show.
A 1982 story in the Republic talked about a “new era” for schools, which faced declining enrollment and the new spending constraints at the same time. Schools said then that they agreed to the spending cap because the alternative — the Prop 13-style option — would’ve been worse, but that they were struggling with their new reality.
“Big spending is out; fiscal conservatism is in. Where do the public schools fit?” the story concluded. “So while the great race into space may long since be over, for these hopeful educators the race for future financial survival has just begun. In the long run, it may be infinitely more difficult to achieve.”
Schools first exceeded the limit in the 1986-87 school year. In response, voters approved a 10% increase in the limit. During the 2001-02 school year, following approval of a sales tax for education in 2000, the limit was again exceeded, though voters then exempted the sales tax increase from the aggregate limit going forward.
But when the sales tax for education, Prop 301, was extended in 2018, the exemption for it in the aggregate limit calculation wasn’t extended. That’s one reason schools are hitting the limit again and are likely to do so annually now.
The other reasons are broader: The Legislature has allocated more money in recent years to education, and schools today bear little resemblance to schools of 1980. Schools now use tons of technology that didn’t exist then, to name one example.
“Nobody thought that they would ever hit the limit” when it was approved in 1980, Essigs said. “Nobody thought about how different schools were going to be.”
Arizona Sen. Lela Alston, who also served in the Senate in 1980, said the proponents of the limit back then saw it as a “pretty generous” ceiling. They didn’t anticipate that schools would ever run into it.
Alston, who serves on the Phoenix Union school board as well, said the impending fiscal cliff creates a lot of anxiety for schools.
“Schools should be worried about educating students, not past bills gone bad,” she said.
Maguire still doesn’t think the aggregate expenditure limit for schools is necessary, and he thinks the school funding formula could use updating, too. It’s not just schools that have run into problems with the 1980 measures, either — counties and cities often have had issues with the spending limits imposed by a similar measure from the package that constrains their spending, Maguire said.
While the set of Arizona measures fended off the California influx that would’ve been more disastrous, it’s time to modernize them, he argued. He’d go back and fix them all if he could, but “nobody’s asking my opinion.”
Lawmakers tend to focus on new priorities and agendas, not on repairing or updating old laws to fit the current era, Maguire observed.
“Most people — whether they're a CEO or a governor or a county supervisor or a legislator — they're not so much interested in what their predecessor did. They care about what they can do,” he said. “That's an inherent part of governance in America. The strive for the new and different is always a challenge.”