Arizona's Adventures with School Capital Finance

By Judy Richardson

Arizona state policymakers are currently preparing for their third attempt to enact a system of school capital finance that will satisfy the Arizona Supreme Court as meeting the constitutional requirement for a "general and uniform" public school system. 

The initial ruling that the Arizona school finance system was unconstitutional came in July 1994, with subsequent rulings in January 1996 and October 1997 after new legislation was reviewed by the court. Each subsequent ruling found that the legislation enacted was not sufficient to make the system general and uniform.  

The primary reason for the court finding the school capital finance system unconstitutional was that it relied too heavily on the issuance of general obligation bonds supported by the property tax base of the school district. The court found that disparities in property wealth per pupil meant that the system itself caused inequities in school facilities. Although the case itself dealt only with the issue of capital funding, the court found the entire school finance system unconstitutional, and it is not clear to what extent, if any, the system for funding maintenance and operations must be changed. 

To date, all legislative solutions have focused on capital funding. The original opinion was a plurality opinion; two justices agreed on the plurality opinion, one justice concurred in the ruling but wrote a separate opinion, and two justices wrote a dissenting opinion. 

Previous Legislative Action 

Both legislative attempts to address the problem were intended to build on the current system of local bonding to meet school district capital needs. The first attempt established the School Capital Equity Fund and the State Board for School Capital Facilities. The board distributes fund monies as a supplement to bonding for school districts with low property wealth. The second legislative attempt created an additional program, called Assistance to Build Classrooms, or ABC, which provided formulaic assistance to low-wealth districts that was inversely proportional to their bonding capacity and was intended to offset their lack of property wealth. The School Capital Equity Fund was continued to act as a supplement to both bonding and the ABC formula monies. 

Debate over Constitutional Requirements 

At the time of this writing, the opinion from the most recent ruling has not yet been received, and policymakers are hoping that it clarifies the court's interpretation of what is required for a general and uniform system. The plaintiffs are quite certain that they know what is required: either eliminate all disparities in revenue or ensure that all school buildings in the state meet state standards, and eliminate obstacles like voter approval. Many policymakers, on the other hand, do not believe that the constitutional requirements are that strict and are frustrated by conflicting statements in the original and subsequent court rulings.  

The rulings to date and the oral arguments indicate that the justices themselves do not agree on the goal of a general and uniform school finance system; of the original majority that found the system unconstitutional, two approach the problem from the standpoint of eliminating (or reducing) disparities and one is more concerned about adequacy. And regardless of approach, it is not clear whether these concepts of adequacy or disparity are to be applied to resources or the actual facilities themselves. If the state is to be responsible for the adequacy of, or the disparity in, actual facilities, then much local decision-making will have to be moved to the state level so that local districts cannot make unwise spending decisions that result in inadequate facilities.  

Current Proposals  

If the new opinion is as unclear and contradictory as the earlier ones, policymakers will continue to debate solutions based upon their own perceptions of what is required. Currently, the proposed solutions fall into two main groups: those that would make major changes to capital finance system, and those that would supplement the existing system.  

Of all the redesign proposals, the one that has been given the most serious consideration is the proposal of Superintendent of Public Instruction Lisa Graham Keegan, which would fund capital on a per pupil formula basis, funded by a sales tax. Districts would be prohibited from bonding or using property taxes to meet their capital needs.

Judy Richardson has been executive director of the Arizona State Board for School Capital Facilities since 1996. She also has served as director of school finance and associate superintendent for support services for the Arizona Department of Education, and has been a research analyst for the Arizona State Senate Education Committee. Dr. Richardson holds a B.A. in English and an M.A. in Secondary Education from Stanford University, and a Ph.D. in Higher Education from the University of Washington.

Despite arguments that formulas cannot be devised to address all of the complex factors that cause districts to need varying amounts for capital, Superintendent Keegan has persisted in her proposal because she sees it as a necessary step toward her ideal market-based system. In her ideal system, all schools (regular public, charter, and private) would receive a simple per pupil state allocation that follows the student to the school. She has not fully addressed the practical problems associated with this concept (particularly how new schools are built in anticipation of enrollment growth or the tax consequences of simultaneously paying off current debt and raising enough revenue to fund the new system) and believes that the details could be worked out later after the program is established. This proposal is designed primarily to eliminate disparities in capital revenues and has considerable popular support because it is simple and seems fair.  

Several supplemental programs have been proposed, but most contain the basic features of the legislation most recently rejected by the court: a formulaic program supplemented by a pool of discretionary money to address unusual circumstances. Some of these proposals also include the use of standards, usually as a guideline for funding and a measurement of system performance, rather than as a basis for a state guarantee. These proposals are primarily designed to provide a minimum guaranteed level of funding in order to assure that all capital facilities are adequate. The supplemental proposals are more popular with most school districts than the redesign proposals because they do not disrupt the existing system that works adequately for the majority of school districts. 

Primary challenges for the supplementary proposals are: (1) determining the level of funding provided as the minimum guarantee (what is "adequate?") and (2) the fine-tuning of the formula so that it gets as much money as possible to the districts that really need it without spending too much on those that have already have adequate facilities under the current system. The primary problems with supplementary proposals are their complexity and uncertainties whether they will satisfy the court.  

Conclusion 

Although it is too early to forecast the outcome of the next legislative attempt to modify Arizona's school capital finance system, it is fairly certain that it will be completed in the next few months. The state is facing an injunction issued by Superior Court Judge Rebecca Albrecht that prohibits the distribution of funds to Arizona schools by the Superintendent of Public Instruction and the State Board of Education if the constitutional deficiencies are not corrected by June 30, 1998.