Arizona schools wait on Prop 123 renewal plan for funding

By Stacy Mantle
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Arizona school districts are again waiting for a funding solution that would provide them more money from the state.

Proposition 123 was approved by voters in 2016 to settle a lawsuit alleging the state failed to account for inflation when funding schools between 2010 and 2013. The measure boosted the annual distribution from the State Land Trust Permanent Fund from 2.5% to 6.9%, generating roughly $300 million a year for K‑12 public schools without raising taxes.

“Prop 123 passed 10 years ago to settle a lawsuit,” said Sen. JD Mesnard, R‑Chandler. “At the end of 10 years, it allowed us to tap into the State Land Trust fund to a higher degree. It had grown very fast and we could afford to tap into it — put more toward education — and at the end of 10 years, the general fund would pick up the difference.”

The trust itself has continued to grow, topping $8 billion, fueled by land leases and mineral revenues. Voters authorized the state to draw an additional $3.5 billion over 10 years, helping schools stabilize budgets in the wake of the recession.

With the measure’s sunset clause taking effect June 30, distributions reverted to 2.5%. Lawmakers have not passed a replacement plan, so the general fund is temporarily covering the lost revenue — about $285 million to $300 million annually. 

“While it’s true that as of a month ago it expired, there was no fiscal cliff,” Mesnard said. “The general fund is making up the difference.”

However, fiscal analysts caution the backfill could strain other priorities, including health care, infrastructure and emergency reserves if revenue tightens. The lapse comes as Arizona schools face compounding pressures including a teacher shortage exceeding 3,000 vacancies and one of the nation’s worst student-counselor ratios.

“In the budget that Gov. Hobbs just signed, we made sure that public schools don’t see any negative funding impact from Prop 123 expiring,” said Liliana Soto, press secretary for Gov. Katie Hobbs. “Gov. Hobbs’ plan allocated 3% of the distribution toward teacher pay — about $216 million in (fiscal year) 26 — and 1.4% in flexible Base Level funding, about $101 million in (fiscal year) 26.”

The current debate

Now two competing renewal proposals frame the fight. 

Hobbs’ plan would keep the 6.9% draw for 10 years, then make 5.5% permanent. The governor has said it allows flexible use of funds for teacher pay, support staff and operational needs, aiming to address the teacher shortage and maintain local control.

Republican lawmakers’ plan also maintains the 6.9% draw but dedicates all funding exclusively to teacher salaries. Their proposal adds a push to enshrine Arizona’s Empowerment Scholarship Accounts — the nation’s first universal voucher program — into the state constitution.

ESAs, created in 2011 and expanded universally in 2022, allow parents to use public funds for private school tuition, homeschooling and other nontraditional education expenses. Costs for ESAs have surged to more than $1 billion annually, drawing scrutiny over their impact on public school budgets.

“Gov. Hobbs has continued to say that enshrining ESAs into the Constitution is a nonstarter,” Soto said. “This is a shamelessly partisan game that endangers our ability to increase pay raises for teachers.”

Mesnard noted the original funding lacked restrictions.

“The funds initially were for a revenue source that went into a bucket of education funding,” he said. “There was no specificity at all. Once they allocate money to the district, they can do what they want with it. Even the 20% pay raise for teachers — the school boards ultimately decided where it went. 

What’s at stake

Without renewal, money for school districts must now come from the general fund. This shift could crowd out other education priorities such as early childhood programs, career and technical education, college promise scholarships — as well as broader state needs such as health care and water infrastructure.

Proponents of an extension say without one,  teachers face uncertainty around pay raises and retention incentives. Hobbs' plan supporters say support staff, including bus drivers, aides and custodians, could be excluded from future funding, and students could see reduced services, larger class sizes and delayed facility improvements. 

“Gov. Hobbs’ plan allocated 3% of the distribution toward teacher pay — about $216 million in FY 26 — and 1.4% in flexible Base Level funding, about $101 million in FY 26,” Soto said.

What’s next

Voters could see a Prop 123 renewal proposal on the November 2026 ballot unless lawmakers move unexpectedly fast. Until then, the general fund backfill will continue.

“Legislative Republicans should stop politicizing public education and work across the aisle to deliver teacher pay raises and funding for Arizona’s public schools,” Soto said. “The governor is committed to working across the aisle to negotiate a bipartisan deal that does just that.”

Mesnard disagrees.

“Nothing on Prop 123 involves ESA or school choice. Republicans are interested in protecting the setup we have today as it relates to school choice broadly. Democrats are opposed to it in general, but Republicans feel it’s part of a comprehensive plan.”

Editor’s note: A grant from the Arizona Local News Foundation made this story possible. The foundation awarded 15 newsrooms to pay for solutions-focused education reporters for two years. Please submit comments at yourvalley.net/letters or email them to AzOpinions@iniusa.org. We are committed to publishing a wide variety of reader opinions, as long as they meet our Civility Guidelines.