Arizona’s bet on universal school choice is already paying off. At the same time that enrollment in the state’s Empowerment Scholarship Account (ESA) program is surging, the state’s revenue surplus has gone through the roof.
In the first four months of 2023 alone, enrollment in Arizona’s ESA program has soared by 7,000 students, bringing the total number of children served to over 51,000. And now, new data released this past week by the nonpartisan Joint Legislative Budget Committee (JLBC) show that over a similar period, the state’s estimated revenue surplus has surged by an extra $750 million, putting the total state budget surplus this year at $2.5 billion.
Before Arizona’s historic universal ESA expansion took effect, just 12,000 students were participating in the program. This means that during the first school year where every family in the state can use their child’s public education dollars to customize that student’s schooling, nearly 40,000 new students have received ESA support for private or at-home learning opportunities. And all this is happening as state coffers have overflown with over $1 billion dollars more in revenue than originally forecast.
Sources: Arizona Joint Legislative Budget Committee (JLBC) FY 2023 Appropriations Report: $1,077,036,700 projected FY 2023 ending balance based on enacted budget. Arizona JLBC Finance Advisory Committee April 2023 Briefing Materials: $2,530,157,100 projected FY 2023 ending balance (revised). Arizona Department of Education ESA Program 2022 Quarter 4 Report: 12,127 ESA students. Arizona Department of Education ESA Program Homepage as of April 17, 2023: 51,849 ESA students.
Indeed, this extraordinary economic momentum comes in the wake of Arizona enacting the nation’s first fully universal ESA program. Sponsored by state Representative Ben Toma and signed into law by former Governor Doug Ducey last summer, the new legislation took effect in September 2022.
Since then, leftwing activist organizations such as Save Our Schools (SOS) Arizona have attempted to portray the program as financially ruinous. Yet this same organization—whose leaders were forced to admit that they had miscounted the number of signatures they collected in opposition to the program last fall by more than 50,000—has again opted for partisan wish-fulfillment rather than numerical reality.
With a typical ESA scholarship award around $7,000 per student—that is, about half of the roughly $14,000 spent on average per student in a public district school—the ESA program now serves roughly two kids for the cost of each one in a traditional public school district.
Unsurprisingly, when compared to the roughly $15 billion now spent each year on Arizona public schools, the ESA program makes up only a sliver of total K-12 spending. Scholarship awards for students who’ve joined the program under the universal ESA expansion amount to roughly 2% of the total spending on public school students. In fact, despite claims by SOS and other opponents of school choice that ESAs have drained public schools of funding, state lawmakers increased ongoing public school funding by more than $600 million in the same year that the universal ESA expansion took effect.
In short, the ESA program makes up only a small share of the state’s spending on education, but with over 50,000 participants and growing, it will continue to provide a lifeline for all students in need. It’s already done just that for students with special needs and other vulnerable populations ever since Goldwater created the nation’s first ESA program in Arizona more than a decade ago—delivering life-changing results at lower costs than public school offerings.
Despite such real-world impacts on families, critics have doubled down to suggest that the program’s success is a sign of failure and financial unsustainability. Indeed, teachers union-aligned groups have suggested that because more students have opted into the ESA program than originally estimated, it must be too expensive. (Note the sharp contrast to their usual take on education spending, which is only ever portrayed as an investment, rather than a cost.)
It is true that demand for ESAs has already beaten initial estimates, and it is true that the expansion, which passed in the final days of last year’s legislative session, was enacted separately from the state budget—meaning ESA awards were not incorporated into the projected costs of the original budget. But ESA award amounts have already been factored into the state’s updated budget projections released this January for the current and upcoming fiscal year. In fact, it’s the very same state budget analysts who assume that the program will grow even further to 57,000 students by the end of this school year who also report the state is now sitting on a $2.5 billion cash surplus for next year. (Of note, that surplus is in addition to the state’s $1.4 billion rainy day fund, which former Governor Ducey and conservative lawmakers also accumulated to cushion the state from any future economic turbulence.)
The state budget analysts were characteristically cautious in their recommendations to spread out the massive war chest. They suggested that if all $2.5 billion were spent this year, the state budget would simply break even next year, before the balance increases again to an estimated $600 million surplus by 2026. But in any case, their projections make clear that the same Arizona lawmakers who unleashed universal school choice have helped steward robust economic vitality and have created a situation where Arizona lawmakers are again weighing how best to spend or return excess tax revenues. Indeed, as the JLBC analysts reported in January—even before the latest upward revisions—the state has enjoyed “an increase of $1.06 billion over the original revenue estimate included in the FY 2023 budget enacted in June 2022” due to “significantly stronger revenue growth than originally projected.”
There is no doubt that global financial uncertainty, the risk of fiscal and monetary mismanagement from Washington D.C., and warnings of mild or severe recessions should perennially weigh on the minds of state legislators. But when it comes to ESAs and the state’s financial solvency, one thing is clear: universal school choice and successful economic stewardship easily go hand in hand.
Arizona has just proven it.
Matt Beienburg is the Director of Education Policy at the Goldwater Institute. He also serves as director of the institute’s Van Sittert Center for Constitutional Advocacy.
Who wouldn’t want more money in their pocket? As Bidenflation continues to crush the American people—and in particular the people of Arizona—our elected leaders should be looking for every way possible to provide relief.
Just look at the anti-tax mood among Arizona voters this past November. They rejected Prop 310, which would have increased the statewide sales tax by 0.1% to fund fire districts throughout Arizona. They voted down ill-conceived transportation taxes in Pinal County and Kingman. And they passed Prop 132 to protect against future tax increases. That should be proof enough that Arizonans want to ensure that their hard-earned dollars stay in their wallets.
Now, a new bill recently passed by the Arizona Senate would do just that…
While the City of Bisbee is hoping $24 million in municipal bonds will resolve fiscal problems associated with its unfunded liability to the Public Safety Personnel Retirement System (PSPRS), the governor recently signed legislation addressing the opposite problem – several public safety employers who have overly funded accounts or accounts with no future liabilities.
Gov. Doug Ducey signed Senate Bill 1085 earlier this month to provide government employers of public safety workers more options in calculating contribution rates paid to PSPRS. The legislation, sponsored by Sen. David Livingston (R-Peoria), also addressed the fiscal burden on public safety employers when even when the group is properly funded or has an excess of employee contributions.
Before the governor signed the bill, certain members of PSPRS hired after July 20, 2011 and before July 1, 2017 generally pay an employee contribution rate of 11.65 percent. However, employee contributions above 7.65 percent are not directly accounted for in the valuation process, so they do not serve to reduce an employer’s contribution rate.
SB 1085 modifies how the “excess” of employee contributions are treated once an employer reaches 100 percent funded status. As a result, any employee contribution above 7.65 percent can be factored into the valuation process in an effort to reduce any required employer contribution.
The Joint Legislative Budget Committee has identified 12 local government PSPRS employer groups which appear to meet the 100 percent funding threshold: Apache County Detention, Coconino County Deputies, Flagstaff Police, Gila County Dispatchers, Graham County Dispatchers, Groom Creek Fire, Hayden Police, Pima Police, Pinal County Dispatchers, Tombstone Marshals. Wickenburg Dispatchers, and Winslow Fire.
Another key feature of SB105 is a provision which removes language in state law dating back to FY 2007 that required the employer contribution rate to not be less than 8 percent of employee compensation (5 percent for some employers) regardless of funding status. In some circumstances, the PSPRS Board of Trustees would have authority to suspend additional employer contributions subject to certain fiduciary restrictions.
SB1085 also provides a procedure for an employer to request the PSPRS board transfer excess assets of an employer’s account which has no liabilities or beneficiaries to another PSPRS group under the same employer. The JLBC reports this would currently impact only three employer groups: Greenlee County Attorney Investigators, La Paz County Attorney Investigators, and Tonopah Valley Fire District.
PSPRS was established in 1968 to provide a uniform statewide retirement program for public safety personnel. It is a defined benefit pension plan organized into local boards for different employing agencies.
However, overly optimistic investment projections, a rash of baby boomer retirements, and a kick-the-can attitude by many city and town councils the last two decades has left several PSPRS employer groups underwater and accruing interest.
Last year Ducey signed legislation which appropriated $500 million of the state’s budget surplus to the underfunded Arizona Department of Public Safety (DPS) account with PSPRS. Despite the move, the DPS group’s unfunded PSPRS liability remains at nearly $431 million, and grows at about 7.3 percent annually.
Another $502 million in supplemental payments -to the DPS and the Arizona Game & Fish Department PSPRS group accounts- has been proposed this year by the governor’s office as budget discussions continue with the Legislature. Another Livingston-sponsored bill SB1087, would have also appropriated $550 million toward underfunded pension liabilities in the Corrections Officer Retirement Plan (CORP) which is administered by PSPRS.
SB1087 cleared the Senate but not the House. As a result, any appropriations for state pension liabilities will likely be addressed in budget bills in the next few weeks.
The State may be flush with cash, but the same cannot be said for communities like Bisbee which has a $24 million PSPRS unfunded liability. Voters there will be asked in November to approve a city council plan to continue a one-cent sales tax, half of which will be used toward payments on a recently adopted resolution for the issuance of municipal bonds to pay off the city’s entire underfunded PSPRS liability.
Doing so, city officials announced earlier this month, will result in a bond interest debt that is less than the amount accruing each month from interest on its unpaid $24 million PSPRS debt.
Republicans in the Arizona legislature are on the cusp of passing significant tax relief for hardworking families and small business. With historic levels of surplus cash sitting in the state coffers (over $4 billion for FY 2022 alone), returning this money to taxpayers makes sense. In fact, it would have already happened if not for two lone holdouts within the Republican caucus, claiming the $1.9B tax cut is just “too big.”
Are they right? Should the size of the tax package be reduced to avoid a funding cliff in the future?
For an answer to this criticism, it makes sense to examine current revenue projections being provided by the Joint Legislative Budget Committee (JLBC). For years JLBC has been relied upon as an independent source for revenue and budget projections by the state legislature. JLBC has never been accused of partisanship or of “cooking the books” to produce rosy budget scenarios. If anything, they have historically been too conservative in their figures, often because they don’t use dynamic modeling for their growth projections.
With this in mind, JLBC is projecting that by FY2024, baseline revenue for the state will be over $14.5 billion, a figure that has been growing with each month. For perspective, legislators were budgeting just shy of $11.1 billion in ongoing revenue prior to the pandemic—meaning that Arizona is expected to see a 31% increase in state revenue in four years.
Where is all this new revenue coming from? While a portion of this surplus is expected from economic growth, that is not the only source. Much of this new revenue is from a series of tax increases that continued to be ignored by opponents of the budget.
Remember the “monumental” new gaming compact Ducey signed in April—the one allowing for sports and fantasy sports betting? That is projected to rake in $300 million of new revenue annually by FY2024.
The Arizona state coffers are running over with cash. The state is set to receive $12B in federal recovery funds, more than the entire annual state budget. On top of that, forecasting by the Joint Legislative Budget Committee projects by 2024 the state will have a $6.4B cash balance with $1.5B in ongoing revenues. Republicans in the Legislature and Governor Ducey are looking to return the record high, multi-billion-dollar state surplus to taxpayers by passing major tax cuts.
On the front lines to defeat these efforts—the cities—that are claiming major income tax reductions will significantly impact their bottom line. But it isn’t just the state sitting comfortably on a mountain of cash, the cities are too.
In opposing the proposed tax cuts, cities are arguing that the package will result in a $225 million decrease in their shared revenue from income tax collections. Despite this estimate being seriously flawed, their projections are in reality insignificant.
Based on research from the Arizona Tax Research Association, we’ll look at 4 cities—urban, rural, small, and large—comparing their estimated “cut” from the tax package to their cash balances and scored against additional revenues generated from the 2019 Wayfair legislation, which permanently expanded the cities’ tax base.
Chandler
The city of Chandler has a budget of just under $317 million in general fund expenditures for FY2021, leaving nearly $135 million in the general fund.
So far in FY2021, the city has collected close to $3.6 million in new, local TPT revenue and $1.2 million in state shared TPT collections by remote sellers. Taking the average from the 8 months of collections so far in FY2021, this would result in just over $7 million annually.
The estimate of Chandler’s decrease in shared revenue? Just over $10 million.
With a cash balance of $135 million, $7 million in new revenue from Wayfair, Prop 207 revenue, and nearly $36 million in Covid cash from the latest package, residents of Chandler need not worry about their city providing a high level of service.
Their estimated “cut” represents a 0.67% decrease in Chandler’s general fund when scored against new ongoing tax revenues.
Flagstaff
The city of Flagstaff budgeted $81.7 million in general fund expenditures for FY2021, leaving the city with a cash balance of over $33 million.
From Wayfair, Flagstaff has already collected $1.3 million from remote sellers and their estimated state share is $340,000. Averaged out this is just under $2.5 million in new annual revenue. Flagstaff has also received $15.2 million in new Covid cash.
The estimated “cut” from income tax reductions? $2.9 million. This represents a mere 0.36% decrease in the general fund when scored against new ongoing tax revenues…
