AZ Treasurer: Surpluses in education trust

| May 16 2012

Download the Q2 2012 version of Inside the Vault.

With the Legislative session now over, I wanted to take this opportunity to share with you details on a reform that simplifies government by helping better fund education withNO new taxes, and NO new General Fund spending.

BACKGROUND

Through an Act of Congress in 1863 that established the Territory of Arizona and the State Enabling Act of 1910, the Federal Government granted about 8.4 million acres of land to public education. Today, about 8.1 million acres (shaded in light blue) remain in the Arizona State Trust for K-12 education.

Revenues derived from the sale of State Trust land are deposited in the Permanent Land Endowment Trust Fund and invested by the Treasurer’s Office in stocks, bonds, and interest-bearing securities. There are 13 beneficiaries of the fund, K-12 education being the largest receiving approximately 93% of the distributions. Today the market value of the fund is at an all-time record high of $3.57 billion.

Earlier this year the Treasurer’s Office completed the first-ever asset allocation study for the fund. The most glaring take-away from the study was that the current formula used to distribute proceeds to education is flawed and has resulted in uneven and unpredictable distributions. This formula was never market tested and in 2010 resulted in $0 going to support education.  

OPPORTUNITY

After nine years in use, these unpredictable distributions using the current formula have the budgeting process extremely difficult for educators. The asset allocation study revealed that if left unchanged, this formula could result in several additional years over the next two decades in $0distributions.

Now armed with critical knowledge, the Board of Investment and I worked with Representative Steve Court and Senator Don Shooter to introduce a new, simplified formula that would make certain Arizona’s children and teachers have a consistent and reliable distribution every single year. If adopted in 2004 when the current, complicated formula (orange line) was put in place, the new, simplified formula (blue line) would have resulted $21 million more in funding for K-12 education while avoiding years with $0 distributions.

House Concurrent Resolution (HCR) 2056 simplifies the distribution formula to be 2.5 percent of the average 5-year market value of the fund. Currently, the distribution is based on the 5-year average of annual returns after adjusting for inflation. It has bi-partisan support passing unanimously by the Arizona Senate with a vote of 28-0, and by the Arizona House of Representatives with a vote of 45-15.

HCR 2056 will now be placed on the ballot in November to give voters the chance to smooth out distributions while protecting the principal of the fund from inflation for the next 10 years. At the conclusion of the 10-year period the distributions will revert back to the current distribution formula being used today, unless further action is taken by a future Treasurer and Legislature.

Having a “sunset” provision is one way to keep government accountable.

It is my hope that a future study be conducted on the fund to examine the performance of the formula, and with the hope of uncovering another better way to maximize distributions for public education. Supporters of HCR 2056 cross party lines and include both the education and business communities. If approved by voters, next year’s distribution will be $62.4 million for K-12 education.

This is a winner.

A winner for the budget.

A winner for sound finances.

And a winner for business thinking in government.

I hope you will support this measure in November, and help spread the word to your friends and family on why this simplified formula is a good reform.

If you would like to know the daily cash balance of the state or want more frequent updates and commentary you can go to www.aztreasury.gov or follow me on Facebook at www.facebook.com/dougducey or on Twitter @dougducey

Thank you for your ongoing support.

Sincerely,
Doug Ducey

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