Arizona Fiscal Cliff

By Tonia Day · Originally published March 2, 2026 at schooltrustlands.org

Sunset of Prop 123

In February 2026, the warnings that Advocates for School Trust Lands issued a decade earlier, which nearly resulted in the defeat of a dark-money-funded campaign, came to fruition. As Proposition 123 ends, Arizona's K-12 system is staring down a $285 million annual funding gap.

While some call this an "unforeseen crisis," our analysis shows it was an inevitable mathematical certainty when the state chose a 6.9% distribution rate, a rate that essentially "borrowed" from the future, and prioritized short-term budget relief over the fiduciary health of the Permanent State School Fund.

Using the fund's actual performance data through 2025, we can now see the "opportunity cost" of the Prop 123 era. When we compare the actual 6.9% "raid" against a responsible 4.5% distribution rate, the numbers tell a clear story:

• Had Arizona adopted a 4.5% rate in 2016, the fund would be $1.4 billion larger today.
• Because the corpus would be significantly healthier, the "payout gap" schools are currently facing would be roughly $85 million, a manageable figure, rather than the staggering $285 million shortfall created by the lower $6.2 billion balance.

ASTL advocates for a "Sustainable Payout Model" that caps distributions at 5% to ensure the fund grows in line with Arizona's student population. We cannot allow another decade of raiding the principal to cover for the legislature's failure to establish permanent, tax-based revenue for our schools.

Zoning, land, and the law: HB 2721

Beyond the distribution formula, we are closely monitoring legislative efforts in Arizona to solve the state's housing crisis using trust lands. While HB 2721 focuses on municipal "middle housing" zoning, there is increasing pressure to apply similar mandates to State Trust Lands. We must remain vigilant: The Arizona Constitution and the federal Enabling Act are clear. State Trust Lands are not a general-purpose land bank.

Any attempt to mandate "affordable housing" on trust lands without ensuring the schools receive full market value would be a direct violation of the state's duty to the beneficiaries, public schools. As the U.S. Supreme Court confirmed in 1967 in Lassen v. Arizona, the state cannot use trust land for public projects (highways, housing, or parks) at a discount.

© Tonia Day / Advocates for School Trust Lands. Reproduced for the library by permission of the parent organization. Original at schooltrustlands.org.