inflation lawsuit

What is the lawsuit Cave Creek v. DeWit about? The lawsuit is about the state’s failure to adjust all components of the K-12 Base Level for inflation pursuant to A.R.S. §15-901.01, which was enacted in Proposition 301. The lawsuit, filed in October of 2010, did not address the other cuts to education. The lawsuit did not, nor did it have the potential to address, whether Arizona’s funding of K-12 schools is adequate, equitable or overall sufficient.


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The term “Base Level” in A.R.S. § 15-901.01 refers to the base per-pupil funding amount used in the K-12 school funding formula. The Base Level is then multiplied by factors to generate additional funding based on student grade level, special education designations and teacher experience, among others. What is the Base Level (pre-settlement) for this current school year? The Arizona Legislature set the 2015-16 (FY16) Base Level at $3426.74.
A.R.S. § 15-901.01, approved by voters in 2000, requires the legislature to increase the Base Level and other components of the funding formula either 2% or the actual change in the GDP price deflator, whichever is less. Additionally, the provision also prohibits the Base Level from ever being reduced below the fiscal year 2001-2002 amount, ($2,687 per pupil). This inflation funding requirement is separate from the increased sales tax revenue, also approved in Prop. 301, for the Classroom Site fund and does not expire in 2021 as the sales tax does.
The parties include Plaintiffs, Defendants, and Interveners. The Arizona Education Association (“AEA”), the Arizona School Boards Association (“ASBA”), the Arizona Association of School Business Officials (“AASBO”), and several districts and taxpayers are the Plaintiffs who brought this lawsuit. The Defendants were originally the State Treasurer in the Treasurer’s official capacity (originally Doug Ducey, but now Jeff DeWit the current Treasurer) and the State of Arizona. In early 2014, the Senate President and Speaker of the House intervened and became parties to the litigation. In late 2014, the Arizona Charter Schools Association intervened in the back pay claim
After the plaintiffs filed the lawsuit in October 2010, the Arizona Supreme Court ruled on September 26, 2013, that in Proposition 301, the voters constitutionally directed the Legislature to annually adjust all components of the Base Level for K-12 public school funding for inflation. Thus, the Legislature’s failure to adjust the Base Level funding for inflation violated the Voter Protection Act. The decision emphasized that the Voter Protection Act limits the legislature’s power to modify voter initiatives and referenda. Then the Supreme Court remanded the case to the Superior Court for a judgment implementing its decision. On remand, on July 11, 2014, Superior Court Judge Cooper ordered the Base Level for 2013-14 to be reset at $3,559.62. When inflation is applied to that court ordered Base Level pursuant to A.R.S. § 15-901.01, the correct Base Level for 2015-16 is $3666.84. The Superior Court also held an evidentiary hearing on back pay, but there has not yet been a decision on that issue. The state appealed the reset order to the Court of Appeals, arguing that it should get credit for years when it adjusted the Base Level in excess of inflation. It was estimated that a final decision on this appeal on the reset would not be for at least two more years, and it would be even longer for the back pay issue.
Yes. The Supreme Court decision settled the issue as to whether inflation funding is voter protected. Moving forward, the Legislature must fund inflation on the Base Level and all components to the school funding formula. The decision did not address the issues of Base Level reset or back pay, which is why the parties were still litigating after the Supreme Court decision.
If voter approved, this settlement in Proposition 123 gets over $530 million new dollars to schools in the next two school years. Schools will receive about $298 million dollars in Base Level reset and Additional Funds this school year in June 2016. Then, schools will receive another $300 million new dollars for FY17, which begins July 1, 2016. These dollars are flexible for schools to use as they need. Also, the settlement preserves inflation funding in perpetuity. Our school Base Level funding will again be adjusted for inflation as the voters wanted. It is worth noting that the plaintiffs previously offered to settle the case if the state fully reset the Base Level at $3666.14, in exchange for dropping all claims for back pay. The Plaintiffs were open to an up to a three year phase-in of the full required reset. However, this settlement gets schools to the full reset figure in YEAR TWO of the settlement (FY17), plus provides almost 50% of the back pay.
Litigation was going to take at least 2 to 3 more years, and in that time, schools would have no additional funding. Also, even if the Plaintiffs were to ultimately prevail, the Legislature must still appropriate any additional funding, so it was possible that Arizona schools would be then facing further delay while the state litigated whether the courts could force appropriations. In addition, were the schools to prevail, ultimate resolution of the case would likely come with negotiation – very likely with an outcome similar to the settlement just achieved. Finally, any litigation has risks, so the Plaintiffs chose to settle for money in schools this fiscal year over a possible, but not guaranteed, victory that might not ever translate into money in schools.
    1. A total of $3.5 billion dollars to K-12 education in just the first ten years.
      1. This includes a reset of the 2015-16 Base Level to $3600 in per pupil funding from $3,426.74. This represents a $248 million funding increase for the 15-16 school year. Over the first ten years, this reset represents an increase of over $2.8 billion dollars to base funding over ten years, and the Base Level inflation unding requirement continues in perpetuity.
      2. Payment of $625 million dollars over ten years in Additional Funds. These Additional Funds will be paid in $50 million payments for five years starting this current fiscal year (15-16 FY16). Then, the state will pay $75 million for the next five years. These Additional Funds equal about half of the potential back pay.
    2. Resumed annual inflation adjustment to the Base Level in perpetuity pursuant to A.R.S. § 15-901.01.
    3. An increased Trust Land revenue distribution from 2.5% to 6.9% for 10 years, with the increased contributions directed to go to K-12 funding.
      1. The Trust is protected in that if the current 5 year average balance is decreased, then the trust distribution will be decreased from 6.9% to a value that will not damage the trust.

The obligation to fund the Base Level continues, even if this occurs.

    1. The general fund will continue to fund inflation when the Land Trust distribution returns to 2.5% after FY 2025.
  1. Contingencies have been put in place to account for a severe economic downturn in the state economy, while still protecting the Base Level reset.
More than half of the inflation mandate after the settlement – for ten years — is paid for from increased distributions from the permanent endowment fund, which is a fund made up of the proceeds of previous state land sales and the investment proceeds when the permanent endowment fund is reinvested in securities and bonds in the market. The permanent endowment fund is currently valued at $5.1 Billion, growing from $1 Billion in 1999. Important: while these funds are earmarked for education, schools do not have discretion to spend, invest or otherwise manage the fund; it is therefore debatable whether the fund is truly the “schools’ money” in the way most of us would understand that term. In addition, as late as 2000, the schools did not receive ANY tangible benefit from the fund – the Legislature used the meager proceeds from the fund to offset their basic state aid obligations. The plaintiffs believe the increased distribution from the permanent endowment fund is sustainable for the future – particularly when looking at the recent exponential growth in the fund even during the Great Recession. However, if this proves not to be true, the distribution formula is to sunset in ten years and adjustments could be made at that time. Finally, it is worth noting, the defendants in this case made it clear they would not support a tax increase or even a tax increase referral to the voters during these settlement discussions. It thus became necessary to seek additional revenue sources to provide both the quantity of resources needed and sustainability of those resources in future years; this is why increased distributions from the permanent endowment fund was on the table in negotiations and became part of the settlement.
Once approved by voters on May 17, 2016, the terms of the settlement have constitutional protection, either by inclusion in the Arizona Constitution amendments or through the Amendment’s reference to the corresponding Senate Bill appropriating the funding.
In January of 2015, the parties were asked by Judge Cooper in Superior Court to participate in a mediation process overseen by three Court of Appeals judges. All of the parties agreed to participate in the mediation, which involved the Plaintiffs meeting with the judges and then the Defendants meeting with the judges. The parties were bound by a confidentiality order, and the parties never met with each other, leading to several misunderstandings throughout the process. Eventually the parties declared impasse in August 2015 and resumed litigation. In mid to late September of 2015, the Governor’s Office approached both sides about again resuming settlement discussions. The parties agreed, and this time the parties were in the same room. While there were many disagreements on how to resolve this lawsuit, all the parties were committed to discussing many different possibilities for settlement. Finally, when an agreement acceptable to the parties was reached, the Governor called a Special Session on October 28, 2015.
The Plaintiffs had the primary goal of resetting the Base Level as high as possible because the Base Level funding reset represents permanent increases to education funding. Plaintiffs also wanted to get money into schools as soon as realistically possible, and the Plaintiffs did not want policy strings attached to the money. The overall value of the settlement was also a consideration as well as maintaining the inflation mandate as passed by the voters in Prop. 301.
After many attempts to craft an agreement acceptable to the parties, a tentative agreement developed in late October. The Governor’s office felt strongly if the Special Session was not called on October 28, 2015, then they could not guarantee it would pass. The Plaintiff’s attempted to delay the Special Session, due to concerns over the possible negative impact on pending bond and override elections, but were unable to get agreement.
The contingencies are known as triggers and in certain economic conditions will protect the general fund or the trust. However, in the event of any trust or economic trigger, the Base Level amount will be reset to account for inflation.

  1. Economic triggers: When both TPT growth (sales tax) and non-farm employment growth are less than 2% but greater than 1%, based on the prior 12-month calendar year, then the legislature may not fund inflation adjustment for the next year, but when the trigger is lifted the Base Level is adjusted to account for inflation. When both TPT growth (sales tax) and non-farm employment growth are less than 1%, based on the prior 12-month calendar year , then the legislature cannot fund inflation for the next year, but when the trigger is lifted the Base Level is adjusted to account for inflation.
    1. The trigger only impacts inflation in the year the condition is met, and once the trigger is lifted, the Base Level gets adjusted to account for the inflation in year or years not funded and going forward.
  2. Aggregate trigger: This is unlikely to ever occur as since 1992, general fund expenditures have never exceeded 43%, including when Arizona funded all day kindergarten. (It also is NOT effective until 2025-26.)
  3. For this trigger to be utilized, there needs to be a decreased share of the budget in all other areas of general fund expenditure.
  4. If total “general fund” K-12 appropriations, not including Trust Land funds, sales tax revenue, federal funding, equals 49% of the total general fund appropriations, then the Legislature may suspend inflation and reduce K-12 funding by the equivalent of the prior year inflationary adjustment.
  5. Aggregate trigger: If total “general fund” K-12 appropriations, equals 50% of the total general fund appropriations, then the legislature may reduce K-12 funding by the equivalent of twice the prior year inflationary adjustment.
It means that the critical compounding effect of inflation funding is preserved for future years. As an example, let’s say both triggers are in play and the state does not have to pay for inflation that year, saving the state $70 million. The next year, the economy has improved and the triggers are not in play. In that year, the state would not owe schools $70 million but rather $140 as the base gets adjusted each year. This was a critical reason the plaintiffs supported the deal: it offers an orderly way in and an orderly way out of economic downturns and avoids future litigation and the accompanying funding delay that goes with it.
No. The legislature can increase K-12 funding. The other areas of the budget, AHCCCS, Department of Child Safety (DCS), DPS, etc. would have to decrease in proportion so that all other areas of the budget are less than 50%. Remember even when the state funded all day kindergarten, the K-12 general fund percentage did not exceed 43% of the total general fund expenditures. In addition, this restriction is only for general fund appropriations to K-12 and funding from a different identified revenue source would not be covered under this restriction. (Again, also remember that the 50% trigger only has legal effect in 2025-26 and beyond.)
No. There are no policy strings or specific requirements placed on the money. The plaintiffs were unanimous that the use of this funding must be decided at the local level.
In June of this school year! If the voters approve it in the May 17, 2016 election, schools will get an adjustment for this current year in June of 2016.
Then there is no additional funding, and the lawsuit resumes with a 2-3 year delay on a final resolution, with all of the attendant risks and constitutional separation of powers issues in enforcement.
Absolutely not! Even after the settlement, Arizona still will be near the bottom of states in terms of funding. Recent cuts in Career and Technical Education and the change to current year funding must be addressed this legislative session. Funding for school facilities must be addressed to once again comply with the provisions of Roosevelt v. Bishop – by either the Legislature or through the courts. Finally, Prop. 301’s sales tax expires in 2021 and must be renewed – and hopefully expanded – in either the 2018 or 2020 general election. The settlement of the inflation lawsuit is a good first step; but it is only a first step.