PHOENIX - A ballot measure injecting $3.5 billion into Arizona's K-12 education passed by a razor thin margin, a major victory for Gov. Doug Ducey that S&P Global Ratings said could be a short-term positive for state and school district credits, with a much less certain long-term impact.
Arizona voters approved Proposition 123 May 17 by 50.9% to about 49.1% according to the Arizona Secretary of State's office, a margin of fewer than 20,000 votes out of more than 1 million cast. The measure involves diverting revenue from a land trust owned by the state to K-12 funding, and also would add $625 million from the state general fund. The vote was so close that it took days of counting before Ducey, a Republican, declared victory for the measure, which he backed despite the opposition of Republican Treasurer Jeff DeWit.
"Thanks to the voters, schools will soon see a cash infusion, with billions of new dollars flowing in the years ahead," Ducey said in a statement. "This will make the difference in the lives of kids and teachers all across this state, and that can't be understated. These are the resources educators have been telling us they need, and by coming together and working together, we were able to make it happen."
The governor said the result justified the gamble of putting the measure on the ballot in May instead of waiting until November.
"Special election turnout presents unique challenges, and this is certainly the most difficult political environment anyone can recall," he said. "However, the schools needed money now, so we took the harder path because it was the right thing to do. I'm gratified that it paid off, with a majority saying yes, and now schools will see funds as early as next month."
S&P analysts saw the passage of the measure as a bit of a mixed bag.
"We believe passage of the referendum would not lead to an immediate credit impact to the state. It would provide general fund expenditure flexibility, which we would view as positive from the perspective of the state's credit," the rating agency said. "Additionally, passage would improve the near-term revenue position of school districts."
The economic and spending triggers included in Proposition 123 benefit state credit, S&P determined, by identifying economic circumstances in which the inflation adjustments otherwise required by law could or must be suspended. While this gives the state more flexibility, S&P said, it could create a pinch for school districts if one of these triggers leads to an unexpected cut in state funding.
There are long-term risks, the agency said, if the state can't find a new funding source at the end of Prop 123's 10-year authorization.
"Based on current statute, the state will have to fund the inflationary adjustments from another source following the 10-year infusion from the state trust land permanent fund," S&P said. "Furthermore, we understand that many school districts expect to use this additional money for salary increases and operations. To the extent any Proposition 123 funds are used for ongoing expenses such as salaries and benefits, there is the potential to build in an unsustainable salary/operational base that risks future structural imbalance if a future funding source is not identified when the increased permanent fund distributions end. If Proposition 123 funds are spent on capital for which the state has already cut funding in prior years, we believe there would be less structural risk in the future."
The same night as the close Prop. 123 vote, Arizona voters easily approved Prop 124 as part of a reform to the Public Safety Personnel Retirement System that serves police and firefighters. Ducey signed that pension reform package into law in February, but voters had to approve an amendment to the Arizona Constitution to cap cost of living adjustments as part of the plan. Prop 124 passed with more than 70% of the vote.
