Koch-backed ASU study endorses Ducey's Arizona school-funding plan

Arizona hoards too much money in its permanent land-trust endowment fund and should pull more dollars out of it to support education, as Gov. Doug Ducey has proposed, an Arizona State University study concludes.

The study from the Center for Economic Liberty, which is funded in part by the Charles Koch Foundation, gives credence to Ducey's plan to draw $2 billion out of the fund over the next decade for K-12 education -- a proposition which critics dispute.

Study author Scott Beaulier said Ducey's plan would provide more money to the schoolchildren who need it most: those in Arizona schools today. And while it would maintain the trust fund's ability to provide money for children in the future, they won't have as great a need because economic growth means they will be better off, he argues in a paper released this week.

Beaulier's study relies on a sunny forecast of economic growth, as well as a belief that future generations will be wealthier than today's schoolchildren. Therefore, the state would be wise to increase the payout from the trust fund now, rather than "hoarding" the money for future generations who won't have as great a need, Beaulier argues.

"(A)lmost every economic forecast predicts better living standards and higher incomes in the future, which means more dollars should be allocated to the (relatively) poorest generations (i.e., the most current generations)," he wrote in the report, titled "Should the Permanent Fund Sit on Its Assets?"

As the study's title suggests, Beaulier said it makes little sense to not use some of the $5.2 billion fund's untapped value.

Ducey in June proposed the state increase the annual distribution of 2.5 percent of the endowment's net value to 10 percent for five years, then drop back to 5 percent for the following five years. The distributions would zero out in 2026, leaving the issue of continued payouts to future policy makers.

Ducey has attended the Koch brothers' annual political summits at least the last two years and has said in the past that he has donated to their efforts. Charles and David Koch operate a vast network of nonprofits that support conservative causes using funds from anonymous donors.

His plan has energized the debate about increased school funding, but Ducey has not yet been able to marshall enough votes in the Legislature to send the proposal to voters in a March special-election ballot.

Negotiations are continuing at the state Capitol between the Republican governor and GOP leaders, who prefer to first settle a long-running lawsuit over K-12 funding. Ducey has said the estimated $2 billion in his plan should be new money for schools and not used to pay the deficit from previous years.

Beaulier argues the trust fund can afford a more aggressive withdrawal rate, at least for the next 10 years. And it would avoid the need for tax increases, he said, echoing Ducey's point that he has found a way to funnel more money to schools without raising taxes.

"Going with 10 percent is OK as long as you come back down," Beaulier said. "I'd be thrilled if we could just go from 2.5 percent to 4 percent," he said, adding he analyzed Ducey's higher withdrawal rate because that's the proposal at the center of the current debate.

Beaulier said he did not communicate with Ducey's office as he worked on the study.

State Treasurer Jeff DeWit, who has criticized Ducey's plan as harmful to the trust's long-term viability, said he agrees with Beaulier's point that the fund might be "hoarding" money. DeWit has proposed a 3.75 percent distribution rate.

"I wish that was the argument that this study was making," said DeWit. "I can agree with a higher payout."

But DeWit said Beaulier's contention that the state doesn't need to save money to benefit future generations of schoolchildren is flawed. The land-trust fund was not created to be the primary source of education funding; in fact, it only provides a fraction of the amount. And the trust was not designed to replace the taxes that underpin Arizona's school finance, he said.

Beaulier's study anticipates an annual growth rate of 6 percent, which he said should sustain the higher distribution Ducey wants as well as protect the principal of the fund. But he doesn't make allowances for inflation, which could cut into that growth rate.

The study adds to the debate about what is a prudent amount of money to withdraw from the land trust. The trust draws its money from sales of land Congress gave to Arizona at statehood, as well as the earnings on the money those sales generated. By state law, 60 percent of the money is invested in equities; 40 percent is in bonds.

Tim Hogan of the Arizona Center for Law in the Public Interest said, ultimately, the decision on how much to withdraw is up to Arizona voters and, probably, Congress. Hogan, who has litigated over various trust-land issues, said congressional OK is likely needed because the land in the trust was granted to Arizona by the federal government.

Andrew Morrill, president of the Arizona Education Association, a teachers union, said the state needs to move cautiously on tapping the land trust because it is designed to benefit schools in perpetuity. He doesn't reject the idea of a higher distribution rate, but said he did find one of Beaulier's assumptions "curious."

The conclusion that the quality of life will be better in the future, and, thus, not as much money will be needed for education doesn't make sense, he said. "The middle class is losing earning power right now, they’re losing their savings, the recession cost a lot of the middle class their homes, they’re racking up debt and higher education is harder and harder to afford," he said.

Armando Carbonell of the Lincoln Institute of Land Policy said the question is what is "prudent." To manage assets in perpetuity, as Arizona's trust requires, means one needs to be "pretty careful," he said.

He pointed to a standard adopted by Arizona and almost every other state that suggests withdrawals above 7 percent would be excessive. That standard is outlined in the Uniform Prudent Management of Institutional Funds Act.

Carbonell said that while he focuses more on the use of trust lands, rather than the proceeds, a 10 percent withdrawal rate could imperil the fund's viability.

"I think that would be shockingly high for an institution and not consistent with a strategy for maintaining value," said Carbonell, the chair of the Cambridge, Mass.-based institute's Department of Planning and Urban Form.

Investment advisers surveyed by The Arizona Republic last summer agreed that a 10 percent withdrawal rate would be risky, especially if the market drops.

Reach the reporter at maryjo.pitzl@arizonarepublic.com and follow her on Twitter @maryjpitzl

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