Arizona's Prop 123: Competing plans about using state trust land for education

PHOENIX - We all know it's important to have a savings account for our future, such as an IRA or 401(k). The state of Arizona has its own savings account, and it's called the State Land Trust Fund. It contains billions of dollars and millions of acres of land.

When Arizona became a state in 1912, the federal government gave nearly 11 million acres as "state trust land," that's more than 17,000 square miles. It's a huge area, roughly the size of the entire states of Massachusetts and Maryland combined.

The agreement was that Arizona would sell that land over time, then invest the money conservatively, and withdraw some of the interest only, not the principal, to primarily fund education. But how much of that money do we want to withdraw every year? The question will likely be before voters in November.

There are two different plans being discussed. One from the governor and one from the legislature. And the woman ultimately in charge of our Arizona savings account is sounding the alarm on both.

The $8 billion in Arizona’s savings account is managed in a small room on the first floor of the capitol building – the state’s own small investment firm. Markets are watched, trades are executed, and money is made. The big debate now is how much should be withdrawn from the state land trust fund every year and still be able to make sure there’s money for future generations. 

In 2015, voters narrowly approved a plan to increase withdrawals from the account. From a very conservative 2.5% per year – and they've been that way for decades, to a much more aggressive 6.9%, with that extra money going to education.

The state’s money managers did a good job and the real estate and securities markets were strong, so the trust actually has more money in it now, than it did in 2015 when those bigger withdrawals began. Now those higher withdrawals are expiring and some of our leaders want to keep them going, or even increase them -- they need a public vote to do it.

Democratic Governor Katie Hobbs wants voters to raise withdrawals to 8.9% per year. Republicans in the legislature want to keep the withdrawals where they are at 6.9%. State Treasurer Kimberly Yee, whose job it is to manage the trust, doesn’t like either plan.

"Ask any other money manager out there across the globe. They will tell you that nobody on the planet would ever recommend an 8.9% distribution rate out of a long-term fund such as this. And even a 6.9% is just not normal. And so we really want to stay on point. 4% to 5% is the safe way to go," she said.

Members of the Arizona Senate are defending that 6.9% withdrawal number, saying the results of the past 10 years speak for themselves.

Republican State Senator J.D. Mesnard has proposed a bill to put the withdrawal of 6.9% from the trust fund back on the ballot this year, basically renewing what was done back in 2015.

How confident are you that we'll be okay money-wise, taking nearly 7% out of the fund?

"In the uncertain world that we live in, I would say I'm as confident as one can be. Knowing we have history on our side, knowing that we have a little bit of buffer with additional land sales that will occur to help the fund," he said.

Of the nearly 11 million acres the federal government gave Arizona, there are just over nine million left. Some of that state trust land is way out in rural Arizona, but a lot of it is here in the Valley and very valuable. So take the area near Interstate 17 and Carefree Highway – it's all state trust land and a stone's throw away from the brand new $40 billion Taiwan Semiconductor [TSMC] plant, and it will bring in a nice pile of money when the state decides to sell.

The state has made roughly $2 billion in land sales since 2015. That money was put into the trust fund, and is now earning more interest.

What if somebody argues we have more money in that account than we've ever had, and we've taken out almost 7% for the last eight years? What's the harm?

"First of all, you're talking about the last 10 years of performance. You can never predict future results based on the last 10 years. So you're taking a look at making sure you're providing a hedge against an inflationary environment as well as protecting the corpus or principal and that is our responsibility, and we're just letting people know where our returns have been and where we predict them to go, so they can start at a really strong range, and I believe that is 4% to 5%," said Yee.

Over the last 10 years, again thanks to our state's investment experts, and solid markets, the fund has averaged returns of 7.2% per year.

"So I feel pretty confident that we can do that again, and we have a little bit of wiggle room between the average performance and what we're proposing in this measure. And if something disastrous happens, we can always go back to the voters to change that, or we can put some safeguards in as the legislation moves through the process."

Right now, Arizona is withdrawing roughly $500,000,000 a year from the account – significant money. You can expect to see the issue on the ballot this November, or possibly in a special election in 2025.