Former Sen Jon Kyl: Let’s Debunk The Myth That Prop. 123 Will Hurt Us

[pullquote align=”right” cite=”” link=”” color=”” class=”” size=””]Former senator: I’m baffled by claims that Proposition 123 will do irreparable harm to Arizona’s permanent fund.[/pullquote]

I strongly support Prop. 123 and am baffled by opposition to it, most of which seems to claim it will do irreparable harm to the state’s permanent fund.

Jon KylThis simply isn’t true.

To help Arizona transition from a frontier territory to the 48th state, the federal government turned over to the new state about 11 million acres of land, to be held in trust for the support of public needs, the first and foremost of which was K-12 education.

The state accomplishes that role by selling and leasing state trust lands to produce revenue. The revenue from the sale of state trust lands are deposited into Arizona’s permanent fund. The money in the permanent fund is then invested by the state in stocks, bonds and other investments and produce additional returns.

We’re dipping into interest, not the fund

Arizona’s permanent fund is currently worth about $5 billion, and the trust earns money each year, with an average rate of return over 6.9 percent for the past 10 years.

Right now, 2.5 percent of the value of the permanent trust fund is distributed on an annual basis to beneficiaries like K-12 public schools. Voting “yes” on Prop. 123 would increase the distribution amount to 6.9 percent (roughly $342 million per year) from 2.5 percent (roughly $125 million per year) for a period of 10 years.

Given that the permanent fund has averaged a rate of return in excess of this proposed 6.9 percent distribution for the past 10 years, which includes the depths of this past recession, we should view Prop. 123 as an agreement to distribute the anticipated interest from the permanent fund to the trust beneficiaries – and not as an agreement to dip into the $5.1 billion corpus of the permanent fund.

Trust also includes $70 billion in land

We also shouldn’t lose sight of the fact that the trust is composed not only of the $5.1 billion in the permanent fund, but also of the value of the remaining state trust lands, which have a current estimated value of some $70 billion.

As urban growth has reached formerly outlying areas of state trust land, it stands to reason that this value will very likely increase in future years as expanding infrastructure and growth drive values to those lands.

Using $3.5 billion of that combined $75 billion of value over the next 10 years to help educate our K-12 kids is hardly a wasteful dissipation of the trust assets. Indeed, the combined values of the state trust lands and permanent trust fund should very well be even greater in 10 years based on current and expected trends. In any event, the myth of destruction of the trust needs to be exposed.

Why not put this cash to better use?

Prop. 123 does not mandate the sale of any part of the land being held in trust for K-12. That asset will continue to be managed in the best manner possible to provide for this generation of students as well as future generations.

Prop. 123 does put appropriate pressure on the state to ensure it performs its role in producing a quality revenue stream to support the intended beneficiaries of the trust, including our K-12 system.

Here is my question. From what do we get greater value: sitting on the assets in the trust (earning a bit), or investing $3.5 billion to better educate millions of Arizona kids today?

An educated citizenry is the best guarantee of economic growth and societal health. In other words, this human capital will be much more valuable for the state than keeping the assets in the trust, which is supposed to exist to help educate our youth.

In addition, this funding will also satisfy a legal obligation resulting from court decisions holding that the state government had not devoted sufficient appropriations to K-12 education in the past. Without Prop. 123, it is likely a tax increase would be necessary to meet this legal obligation.

Let us keep in mind that the trust was intended from the beginning to provide support for our K-12 system. Rather than allowing the trust to continue to underfund our current students, we should support Prop. 123 and put those funds to work in our classrooms now.

Former U.S. Sen. Jon Kyl is senior counsel at Covington and Burling in Washington, D.C. 


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