Arizona School Funding Formulas Do Not Take Recessions Into Account

It is high time for school districts to wake up and smell the coffee

Back in March Governor Ducey signed a budget with the intention of bringing the General Fund into balance in three years. The path to balance is going to be paved with spending restraint and economic growth.

Overall, this was a good strategy, much in line with the general philosophy governing the state in the past few decades. It also works well in challenging economic times, when tax increases can derail moderate recoveries and deepen recessions.

The problem is that this general philosophy has not translated into an overarching model for funding and prioritizing state spending. A good example is the Cave Creek v. DeWit lawsuit over K-12 school funding.

In Arizona, like in most other states, K-12 appropriations are based on independent formulas. Those formulas are intended to “guarantee” a certain stability and quality in the education our kids get through the public school system. Some of those formulas come from Washington, attached to federal funds; others are constructed locally or by the state in order to “guarantee” funding stability.

The problem is that these formulas do not take into account the fact that there are both short-term and long-term trends in tax revenue, trends that are largely beyond control of the state government. Over the short term we have recessions, and in recessions tax revenue falls while the cost of government does not. This makes it practically impossible to maintain government spending, including but not limited to K-12 education.

You do not counter a recession and its tax revenue shortfall with higher taxes. It does not take a Keynesian economist to realize that higher taxes on an already depressed economy is like praying for a deeper, more serious recession.

Apparently, Arizona school funding formulas do not take recessions into account. They appear to be written on the premise that schools are elevated above macroeconomic reality.

This is, by the way, not just the case in Arizona. In March, seven school districts in Tennessee decided to sue for more money, again based on a preconceived notion of independent funding.

However, it is high time for school districts to wake up and smell the coffee. Arizona’s state government may have $13+ billion in tax revenue to toss around, but that does not mean the state can toss money around like a lottery winner. About 85 percent of that money comes directly or indirectly out of personal income, in other words the money that individuals and families in Arizona make every week. The direct part, of course, is personal income tax (26 percent of state tax revenue) while the indirect part is from sales and general receipts taxes (59 percent).

In recessions personal income drops, but it also recovers as the economy gets better. However, as mentioned earlier there is a long-term problem with the state’s tax base: its growth rate is slowly tapering off. Figure 1 has the story:

Figure 1

arizona-personal-income-growth

Source: Bureau of Economic Analysis. Current-price growth. The number for 2010s is based on 22 quarters through Q2 2015.

For the fourth decade in a row, now, the growth rate in total personal income in Arizona has been declining. Even though we are just a bit over halfway through the 2010s, we can already now see that it is entirely unrealistic to expect any rebound from the downward trend. On the contrary, it is more likely that the 2020s will see even weaker growth.

What does this mean? Plain and simple, the growth rate behind 85 cents of every tax dollar that the state takes in, will continue to weaken. In the meantime, school districts and others benefiting from government funding will continue to enforce appropriations formulas written without attention to macroeconomic reality.

As the Arizona Daily Independent reported on October 30, the state settled the Cave Creek v. DeWit lawsuit by promising a $2.2-billion increase in school funding over the next five years. That may have been what the lawyers advised them to do. But no lawyer in the country can litigate away the stagnating tax base of the real world.

It is time for Arizona’s legislators to start looking for long-term structural reforms to their entitlement programs. This includes K-12 funding. If not, lawsuits in the future are going to be even more desperate – and frankly comical. Just as you cannot give a bald man a haircut, you cannot give a school district money that does not exist.

About Sven Larson, Ph.D., Economist 15 Articles
Sven Larson, Ph.D., is an economist and Member of the Council of Scholars of Compact for America. He is the author of Industrial Poverty (Gower Publishing) about the debt crisis in Europe. Find his daily blog articles at America’s Fiscal Future.

6 Comments

  1. If there were Truth in Advertising and K-12 finances were held to the same accountability as every other industry, the Headline would be:

    Arizona k-12 school Funds Misappropriated! 50 Superintendents Indicted with more Indictments expected!!

    The Sub Headline would be: With the largest funding in history and a 40,000 decline in student population, giving these hirelings more money simply compounds waste, fraud and abuse.

    According to the Auditor General, school boards and superintendents divert over $500 MILLION dollars away from the classroom annually. This malfeasance is the primary cause that teacher salaries have not been increased and also causes the increase in class sizes.

    It is a fact that Billions of revenue are received by the school districts IN ADDITION TO THE $10.041 BILLION THEY RECEIVE IN TAX REVENUES. The schools have never had so much money yet only a third of our students were able to pass the Beta Test for AZMERITS. That sorry record should be laid directly at the feet of the school bureaucrats.

    VOTE NO on Proposition 123. It will only enable larger and more egregious waste, fraud and abuse of confiscated tax dollars.

  2. Do you want some FACTS about school funding and spending? email us. We can come speak to your group with detailed information taken directly from the schools’ own reports. email us

    Do you want some FACTS about Prop 123, funding schools with State Trust Land? email us

    http://WWW.AZRA2016.COM FACEBOOK: ARIZONA REPUBLICAN ASSEMBLY

  3. It doesn’t take a Phd to understand there has been a long term decline in income countered with the skyrocketing wealth of a few hundred families in the United States. It’s called greed. No longer are workers rewarded for their hard work. Instead they are “rewarded” with stagnant to declining wages. Only the chosen few are rewarded for someone else’s hard work. Now, folks like you want to kill public education by starving it of funding (48th in the nation isn’t something to be proud of) and further widen the gap between the haves and have nots. I was once poor. Hard work coupled with education was what took me from being a young, poor man striving to get out of poverty and provide for his family to an upper-middle class man reaping the rewards of my labors. My generation still had the opportunity to move up the ladder. That has allowed me the ability to pay for my children’s college. All of them went to public schools. Others deserve the same opportunity to move up the ladder that I had. You want to pull the rug out from under the next generation.

  4. New taxes don’t guarantee a dime in the classroom Richard. We have fallen for that before. Not again.

    Never forget the 2015 Bond Election.

  5. The only specific federal requirement on school funding is that the effort school districts make (“effort” can be translated as “spending”) to educate handicapped students will not be reduced. When I taught in Alaska during the 1980s the huge drop in oil prices resulted in a huge cut to school spending. The district where i worked tried to cut special education funding by the same percentage it cut other school funding. The district was told that all federal spending for the district would be cut if they went ahead and did this.

    In fact, the entire arena of special education has been the epitome of a federal underfunded mandate. When the federal government passed the first Individuals with Disabilities Education Act, PL 94-142, back in the mid 1970s, they said the feds would contribute up to 50% of the increased costs of providing those services. In fact, for most of the time since then the federal contribution never exceed 15% of increased costs, and for a significant part of those years, was only in the single digits.

    Generally speaking, it does no good to “throw money” at any problem. There is a world of difference between a district saying it wants additional funding to increase spending in the classroom and a district looking for a budget override and not spelling out what it wants to do with the extra funding. The very first thing a district ought to be doing …even before suggesting an override…is to pinpoint how it wants to spend the money and commit to using additional funding only in the ways it is proposing.

    The state legislature has not really done enough to make sure that the money they allocate for schools is spent in ways that actually enhance student learning. They have yet to establish minimums for the percentage of district funding that must go into classrooms and maximums that can be spent on central bureaucracy. Regardless of how much or how little is spent on public schools the legislature has a responsibility to make sure it is spent in ways that help students learn.

  6. Schools need addition funding. Historically School Boards grossly misspend funds. I am like many others in support more funding to school, but have zero confidence in how it will be used.

    The formula our new Governor is using is not about kids. His only motivation is he said he would not have any new taxes. That why this plan is before us the Voters.

    I do not like new taxes. But I would support idea ONLY if it comes with clear and specific instructions and how it maybe spent. No more grossly high paid salaries for Administration.

    I plan to Vote no on this plan. The Legislature needs to reevaluate where, how they fund school. They need realise this crisis was brought on by Republican Governor & Leadership at State Legislature. The group chose to balance state budget on the back of our kids education.

    I encourage a no vote, let’s go back and find another solution to giving money yo school that was Illegally and wrongfully taken by short sightness of Legislature.

    Don’t dump it on us the Voters when you created this problem. Yes to more funds for public education. No to this method of attaining that goal.

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