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ARIZONA STATE SENATE
Fifty-Seventh Legislature, Second Regular Session
education funding; teacher compensation program
Purpose
Subject to voter approval, constitutionally prohibits the state or a state officer from reducing the Permanent State School Fund's annual distribution rate below the level on the effective date or 6.9 percent of the average monthly market valuation for the previous five calendar years until FY 2036, except as outlined. Requires, until FY 2037, any increase in expendable earnings from the Permanent State School Fund annual distribution to be appropriated for a statewide classroom teacher compensation program (program) to increase the base salary and salary schedule of all eligible teachers. Directs the Legislature to enact legislation for the program as outlined.
Background
State Trust Land
Arizona State Trust Land supports Arizona public schools, universities and other agencies by generating revenues via the sale and use of lands and the investment of proceeds associated with acreage granted to the state. Each beneficiary has a separate permanent fund comprised of expendable and permanent monies. Only expendable monies are distributed as outlined to beneficiaries and include investment earnings from the State Treasurer, proceeds from the lease of state trust lands and interest paid by buyers who purchase state trust land on an installment basis. The Permanent State School Fund is established as the permanent fund for Arizona common and high schools (Ariz. Const. art. 10 § 7; Ariz. Const. art. 11 § 8; JLBC).
Proposition 123 Distribution Increase
In 2015, Arizona voters approved Proposition 123 to increase, for FYs 2016 through 2025, State Trust Land permanent fund distributions from 2.5 percent to 6.9 percent of the average monthly market valuation of each permanent fund for the previous five calendar years. Proposition 123 requires, for FYs 2016 through 2025, Permanent State School Fund expendable earnings that would otherwise go to the Classroom Site Fund to be appropriated to Basic State Aid, including statutorily required inflation adjustments, if those earnings are a result of an increase to the 2.5 percent permanent fund distribution. Beginning in FY 2026, each permanent fund's annual distribution rate reverts to 2.5 percent.
Proposition 123 Triggers
The Directors of
the Office of Strategic Planning and Budgeting (OSPB) and the Joint Legislative
Budget Committee (JLBC), by February 1, must jointly notify the Governor, the
President of the Senate and the Speaker of the House of Representatives that a
permanent fund distribution reduction is necessary to preserve the capital of
the permanent fund, if the average monthly market values of the permanent fund
for the immediately preceding five years have decreased compared to the average
monthly market values of the permanent fund for the
five-calendar-year period that immediately precedes the preceding five calendar
years. The Legislature may, on receipt of the notification and with the
Governor's approval, reduce the permanent fund distribution rate for the next
fiscal year to between 2.5 percent and 6.9 percent of the value of the
permanent fund.
The Directors of the OSPB and JLBC must provide notification if, by February 1, the transaction privilege tax (TPT) growth rate and the total nonfarm employment growth rate are each: 1) at least one percent but less than two percent; or 2) less than one percent. If the TPT and total nonfarm employment growth rates are between one and two percent, the Legislature may suspend inflation adjustments to the school finance formula. If the TPT and total nonfarm employment growth rates are each less than one percent, the Legislature must suspend inflation adjustments to the school finance formula.
Beginning in FY 2025, the Directors of OSPB and JLBC must provide notification if, by February 1, the total amount of state General Fund (GF) appropriations for the Arizona Department of Education is between 49 and 50 percent of the total state GF appropriation for the current fiscal year, or at least 50 percent of the total state GF appropriation for the current fiscal year. If state GF expenditures are between 49 and 50 percent, the Legislature may suspend inflation adjustments to the school finance formula and reduce the base level amount for the next fiscal year by the amount of inflation adjustments made for the current fiscal year. If state GF expenditures are more than 50 percent, the Legislature may suspend inflation adjustments to the school finance formula and reduce the base level amount for the next fiscal year by two times the amount of the inflation adjustments made for the current fiscal year.
There is no anticipated fiscal impact to the state GF associated with this legislation.
Provisions
a) the level on the effective date;
b) 6.9 percent of the average monthly market valuation of the Permanent State School Fund for the previous five calendar years until FY 2036, except as specified; or
c) 2.5 percent of the average monthly market valuation of the Permanent State School Fund for the previous five calendar years.
2. Specifies that the Permanent State School Fund's annual distribution rate may be reduced below 6.9 percent of the average monthly market valuation of the Permanent State School Fund before FY 2036 if:
a) the average monthly market values of the Permanent State School Fund for the preceding five calendar years have decreased compared to the average monthly market values of the Permanent State School Fund for the five-calendar-year period that immediately precedes the preceding five calendar years;
b) the Directors of OSPB and JLBC jointly notify the Governor, Senate President and Speaker of the House of Representatives by February 1 that a reduction to the distribution is necessary to preserve the safety of the capital in the Permanent State School Fund; and
c) the Legislature enacts legislation, with the approval of the Governor, that reduces the distribution rate for the next fiscal year to between 2.5 percent and 6.9 percent of the average monthly market valuation of the Permanent State School Fund for the previous five calendar years.
3. Requires, until FY 2037, any increase in expendable earnings from the Permanent State School Fund that results from a distribution rate of more than 2.5 percent of the average monthly market valuation for the previous five calendar years to be appropriated for a program to increase the base salary and salary schedule of all eligible teachers.
4. Directs the Legislature to enact legislation for the program that:
a) ensures that the program distinguishes between performing and underperforming teachers;
b) establishes reporting and auditing requirements for the program;
c) requires schools to update teacher salary schedules;
d) requires each school that receives monies for the program to allocate an equal amount per teacher to all eligible teachers employed by the school;
e)
allocates appropriated monies to a classroom teacher only if the teacher
is a
full-time teacher, spends a majority of the teacher's time on
non-administrative activities that provide classroom instruction to students
and meets or exceeds performance requirements; and
f) requires monies appropriated to supplement, and not supplant, teacher compensation monies from any other sources.
5. Requires the Secretary of State to submit the proposition to the voters at the next general election.
6. Becomes effective if approved by the voters and on proclamation of the Governor.
Prepared by Senate Research
February 13, 2026
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