Proposed ballot referral targets K-12 rollovers

A GOP lawmakers wants voters to ban the state from using an accounting trick that has helped alleviate education budget cuts during fiscal downturns, but has left the state sitting on nearly a billion dollars in unpaid bills.

Rep. Warren Petersen, R-Gilbert, has sponsored House Concurrent Resolution 2008, which would amend the Arizona Constitution to prohibit the legislature from deferring a payment to a school district “that is scheduled by law to be made in one fiscal year to the next fiscal year.” The practice is known as a rollover.

If lawmakers approve Petersen’s proposal, it would go before voters in the November election.

The rollover is essentially an accounting trick. The state defers payments that are due to school districts in one fiscal year by a few days so that it technically comes out of the next year’s budget. Arizona has traditionally used rollovers during budget shortfalls and relied heavily on them during the 2009-10 fiscal crisis caused by the Great Recession.

As a result, Arizona is currently rolling over $930 million in K-12 education payments, according to the Joint Legislative Budget Committee.

“Arizona has taken some excellent decisions like paying off debt and amassing a billion-dollar rainy day fund. Now it’s time to eliminate the K-12 rollover and prevent future utilization,” Petersen said in a press statement. “A statutory change would be too easy to go around. That’s why I have introduced a constitutional amendment to prohibit the deferment of K-12 payments from one budget year to the next.”

But school districts say prohibiting rollovers would deprive them of a valuable tool when it comes to coping with budget crises. 

Chris Kotterman, a lobbyist for the Arizona School Boards Association, said his organization wouldn’t necessarily oppose eliminating the rollover as a fiscal tool, Kotterman said. But if lawmakers want to get rid of it, they need to fully fund the K-12 system.

“It strikes me as a bit problematic to take away a fiscal management tool that we’ve used in the past to avoid cutting K-12 education if you’re not also willing to talk about how we ensure there’s enough revenue available for K-12 education,” Kotterman said.

Chuck Essigs, a lobbyist for the Arizona Association of School Business Officials, emphasized that if the state isn’t able to roll over K-12 payments during lean years, then the legislature will simply have to make more cuts, either to schools or elsewhere in the budget. If the state had prioritized paying off the rollover in recent years, Essigs questioned whether lawmakers would’ve had the money for other things like increased teacher salaries or the restoration of district additional assistance, the money that school districts use for “soft capital” expenses like equipment and supplies.

Asked whether eliminating the rollover would require lawmakers to make deeper K-12 cuts during future budget shortfalls, Petersen said, “It will require better preparation and more sound budgeting practices. They still have plenty of other options that require more accountability.” Petersen didn’t elaborate on what other options he was referring to.

Essigs acknowledged that rollovers aren’t sound fiscal policy, and Kotterman said the state likely couldn’t add more to the outstanding balance without suffering any fiscal consequences. The $930 million represents about three months’ worth of state payments to school districts.

 “That’s about as much as you can do before the banks start getting nervous,” Kotterman said.

The massive size of Arizona’s outstanding rollover is a product of the Great Recession-induced budget crisis of nearly a decade ago. Going into 2009, when the state faced an unprecedented budget shortfall, Arizona has already been deferring nearly $273 million in K-12 payments. That more than doubled to $603 million in fiscal year 2009, and ballooned further to about $953 million the following year. 

Arizona hasn’t added to the rollover by deferring additional payments since the 2012 fiscal year. But it hasn’t paid off any of it since fiscal year 2013, when lawmakers slightly trimmed the balance to $930 million.

That could leave K-12 schools in a tough spot the next time there’s an economic downturn.

“If you don’t pay it off you won’t have that tool to use during the next recession,” Essigs said.

Essigs said he’s never seen the state go so long without paying off an outstanding rollover. But he’s also never seen a balance as big as the one the state has been carrying for the past eight years.

Even if lawmakers refer Petersen’s proposal to the November ballot and voters approve it, finding the money to pay off the existing rollover would likely be difficult. That dilemma was apparent during the 2019 legislative session, when the yearly rollover became a topic of debate during the contentious budget negotiations between Republican lawmakers and Gov. Doug Ducey.

Ducey sought more than a half billion dollars to bolster the state’s rainy day fund, another bulwark against budget cuts during economic downturns. Legislative leaders preferred to use the state’s excess cash to pay down part of the rollover. In the end, Ducey won and the rainy day fund swelled to $1 billion. The budget deal earmarked only $30 million to pay off a sliver of the rollover. And that money won’t even be available until fiscal year 2022.