July 2015
POLICY
BRIEF
Arizona’s State Land Trust
Arizona’s State Land Trust
Beneficiary Funds
Common Schools (K-12)
University Land Code
University of Arizona
School of Mines
Agricultural & Mechanical
Colleges
School for the Deaf & Blind
Normal Schools
Military Institutes
State Charitable, Penal,
& Reformatory
Miners’ Hospital
Penitentiaries
State Hospital
Legislative, Executive,
& Judicial Buildings
A statewide conversation has begun regarding
beneficiaries’ access to billions of dollars held in
trust for their benefit. Here are the most important
things to know about Arizona’s state land trust, and
the current policy conversation.
The Enabling Act and Arizona’s
Trust Land Background
As part of the 1910 Congressional Enabling Act
allowing Arizona and New Mexico’s statehood,
Arizona was granted 10.9 million acres of land
that are held in trust for 13 beneficiaries. The
beneficiaries each have designated land parcels
across Arizona and the revenue from the sale, lease,
or other value derived from those assets are for the
financial support of the beneficiaries.
Beneficiaries cannot directly spend the
dollars earned from sale of the assets that
are deposited into their permanent fund,
but instead are provided distributions
from interest and other earnings from
investments at a percentage defined by
Arizona’s Constitution.
funds to the beneficiaries at a percentage
that is set by the Arizona Constitution
and in a manner defined by law. Certain
other earnings, such as earnings from land
leases for grazing, are distributed monthly
as expendable receipts – meaning the
full amount earned is distributed and not
deposited into the permanent fund.
Permanent Fund Endowment Value
Annual Receipt from Sale of Land
Revenues earned from the trust are
classified as either permanent or
expendable receipts. Revenues derived
from the sale of state trust land and natural
products on those lands are referred to
as permanent receipts and are deposited
into each beneficiary’s permanent fund.
Those dollars are then invested in stocks,
bonds, and interest-bearing securities.
The Treasurer distributes money from the
More than 9 million of the original 10.9 million
acres granted to Arizona are still held in trust.
Arizona Chamber Foundation • 3200 North Central Avenue, Suite 1125 • Phoenix, Arizona 85012 • 602-248-9172 • www.azchamberfoundation.org
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POLICY
BRIEF
Arizona’s State
Land Trust
In 1998, Arizona voters approved an important
modernization to the funds’ financial management
by allowing a portion of the funds to be invested
in stocks. This change could not be enacted
without congressional approval. In 1999, with
the leadership of then-Congressman Bob Stump,
Congress approved the state’s new investment
strategy. Additionally, Congress allowed Arizona to
set its own path as it relates to setting distribution
percentages from the funds with the following
language:
Because more than 85% of the 46 million
acres held in trusts across the country are
in the West, and 38% in the Intermountain
West, a strong conservation movement
exists in these states.
(Source: Lincoln Institute of Land Policy)
Trust Management
In the early years of land grants to states,
the requirements of the land trusts were
few and scandals frequent. As a result,
by the time Arizona sought statehood,
Congress provided a much more rigid
structure for land trusts to ensure
land sold was sold and utilized for its
highest and best value and to preserve
the longevity of the assets for future
generations.
The Enabling Act outlines many of the
mandates that trust and fund managers
must follow to this day. The Enabling Act
cannot be amended without congressional
approval.
Enabling Act amendments are very rare. In
addition to convincing Congress to adopt
changes, New Mexico shares Arizona’s
Statehood Enabling Act and, therefore,
must be consulted regarding any attempts
to modify the terms of our state trusts as
described in our joint Statehood Enabling
Act.
Distributions from the trust funds shall
be made as provided in Article 10,
Section 7 of the Constitution of the
State of Arizona.
The Enabling Act does allow state
discretion on a handful of matters.
Most of these discretionary powers are
deployed via our state Constitution and
amendments are subject to voter approval.
The assets of the trust are managed by the
State of Arizona.
The Arizona State Land Department, under
the direction of the Land Commissioner,
manages the land assets and prepares
them for lease or sale. The Governor
appoints the Land Commissioner.
The Arizona State Treasurer’s Office, under
the direction of the Board of Investment,
manages investments for the beneficiaries’
permanent funds. The five-member
Board of Investment consists of the State
Treasurer, the Banking Superintendent,
the Director of the Department of
Administration and two other individuals
appointed by the Treasurer who meet
certain criteria. The State Treasurer is a
statewide elected office.
Arizona Chamber Foundation • 3200 North Central Avenue, Suite 1125 • Phoenix, Arizona 85012 • 602-248-9172 • www.azchamberfoundation.org
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POLICY
BRIEF
Arizona’s State
Land Trust
Fiduciary Responsibility
A 2012 voter amendment to the Arizona
Constitution, Article 10, Section 7, states:
“…the annual distribution from the
permanent funds for fiscal years 20122013 through 2020-2021 shall be two
and one-half per cent of the average
monthly market values of the fund for
the immediately preceding five calendar
years.”
The policy-making construct for how earnings are
distributed is driven by a current and historical
desire to grow the funds and to preserve the
ongoing benefit of the trust for future generations.
More specifically, fiduciaries are governed by
industry standards and practices as well as public
expectations. In general, fiduciaries prescribe to the
Prudent Investor Rule. The Arizona State Treasurer’s
website contains the following definition:
“Prudent Person Rule:
The standard adopted by some states to
guide those fiduciaries with responsibility for
investing money of others. Such fiduciaries
must act as a prudent man would be expected
to act, with discretion and intelligence, to seek
reasonable income, preserve capital, and, in
general, avoid speculative investment.”
Essentially, investors, while working to grow these
assets, should not pursue investments that carry a
high level of risk even in exchange for the potential
for substantial returns. The practice of these
standards is subjective and, until recently, had
evolved little over a series of decades.
Guidance documents and institutional managers
from around the country argue that prudence for
more mature endowments is a different standard
than for very new and small endowments. They
note that low rates of distribution can deprive
beneficiaries of dollars trust donors wanted
them to have. The needs of beneficiaries,
like endowments, vary and the individual
characteristics and needs of beneficiaries should
be weighed alongside the prudence standard.
With the modernization of fund
management to include stock investments,
many funds have grown exponentially,
thus evolving the ongoing challenge to
ensure beneficiaries have access to this
revenue while still protecting the longterm viability of the funds.
Modern standards advise fund managers
to consider not just the historical
treatment of their charge but the current
conditions of both the fund and the
beneficiaries. As described by a recent
publication of the Public Treasury Institute,
managers often balance both what is
legal with what is “suitable” in the context
of preserving the trust while ensuring
revenue for the beneficiaries.
Because Arizona’s earnings distribution
formula was left to the state’s discretion
and is housed in the state Constitution,
as distribution needs ebb and flow, voters
must approve changes. For public funds
with statutory requirements, public
officials and fund managers can dictate
a minimum and maximum distribution,
specify exact distributions, or create other
mechanisms to maximize income while
back-stopping losses.
K-12 Beneficiary
With approximately 87% of the land
holdings, the largest trust beneficiary
is K-12 education. In March of 2015, the
Arizona State Treasurer’s office valued
the full trust endowment at $5.1 billion.
The majority of these dollars are held in
trust for K-12. For decades, the earnings
were simply used to offset the state’s
General Fund contribution to the state
funding formula. However, with the
passage of Proposition 301 in 2000, all
new earnings over the $72 million that
currently subsidize the Legislature’s
payment to the state funding formula
go to the Classroom Site Fund and are
Arizona Chamber Foundation • 3200 North Central Avenue, Suite 1125 • Phoenix, Arizona 85012 • 602-248-9172 • www.azchamberfoundation.org
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POLICY
BRIEF
Arizona’s State
Land Trust
Use of K-12s Permanent Fund
revenue distributions (Classroom
Site Fund)
Teacher Compensation
40%
Maintenance and
Operations:
•
•
•
•
•
•
Class size reduction
Teacher
compensation
increases
State test
intervention
programs
Teacher
development
Dropout prevention
programs
Teacher liability
insurance premiums
Teacher Base Salary
Increases and
Employment Related
Expenses
distributed to district and charter schools
on a per-pupil basis. As required by
law, the majority of Classroom Site Fund
dollars are used for teacher pay including
base salaries, performance-based bonuses,
and instructional time for intervention and
tutoring.
have been accounted for in both timing and
funding. In 2010, when the Legislature referred
a temporary one-cent sales tax to the ballot,
elections officers were provided 90 days and $8
million to run a statewide election in May of that
year. The election does not have to be held on a
previously scheduled statewide election date.
Current Public Policy
Conversations Related to State
Lands
Unless otherwise noted, successful
ballot measures are effective following a
proclamation from the Governor that the
state has certified the results from the
election and that they have been deemed
valid.
Two state constitutional amendments are either
ready for the 2016 ballot or being debated for a
ballot.
40%
20%
First, Governor Doug Ducey has proposed a
statewide ballot referral to amend the Arizona
Constitution to allow more of the funds’ value
to be annually distributed to the beneficiaries.
Depending on the funds’ growth from land sales,
investments, and interest, Governor Ducey projects
schools could annually receive as much as $300
million or more per year from their fund. The State
Land Department noted fund distributions in Fiscal
Year 2014 as $67 million. The Governor’s Office
expects that the fund will not diminish below its
current level and more than likely will modestly
grow with a projected average growth rate of
7.2%. The Joint Legislative Budget Office estimates
slightly less growth and in their analysis of the
Governor’s proposal for the period in question
projects a distribution increase in the first five
years of $1.72 billion rather than $1.78. The Arizona
State Treasurer’s Office has strongly disputed the
Governor’s growth rates.
In order for the voters to consider Governor
Ducey’s plan, it must appear on the ballot either
as a citizens’ initiative or the Legislature must
refer it to the ballot. Should the former occur,
more than 225,000 valid petition signatures
would be necessary. If the Legislature takes it
under advisement and refers it to the ballot, the
Legislature can call an election for constitutional
amendments on any date they can agree to, given
that the needs of the election offices and officers
Second, in the 2015 legislative session, a measure
was referred to the ballot to allow up to 10%
of permanent receipts to be diverted for the
management and administration of the trust.
However, this act was met by a court challenge
from the Arizona Center for Law in the Public
Interest based on its view that the measure violates
the Enabling Act requirement that all earnings be
forwarded only to beneficiaries. A long-standing
view by some in the trust community is that more
consistent funding of trust management would
lead to greater earnings later by affording them
the resources to sell more land, etc. Regardless of
the intent, the likelihood of this measure being
implemented if passed by the voters is unclear.
For more information as the conversation
continues, please visit:
Governor’s description of his plan and projections
for the growth of the Fund
azgovernor.gov/governor/news/governor-ducey’splan-put-2-billion-our-schools
JLBC analysis of Governor’s Proposal
azleg.gov/jlbc/Land%20Trust%20Proposal%20
Projections.pdf
Arizona Chamber Foundation • 3200 North Central Avenue, Suite 1125 • Phoenix, Arizona 85012 • 602-248-9172 • www.azchamberfoundation.org
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