State Treasurer Jeff DeWit is charged with managing the state’s finances and part of what he manages is a state trust land fund for education. DeWit has criticized the governor’s plan to fund education with money from the fund, and will discuss his concerns.
TED SIMONS: Coming up next on "Arizona Horizon" -- hear why the state treasurer opposes the governor's idea to increase the use of land trust funds for education.
And we'll visit with the author of a new book on the history of flowers. Those stories next on airs "Horizonte." on "Arizona Horizon."
TED SIMONS: Good evening, welcome to "Arizona Horizon." I'm Ted Simons. The Arizona coyotes and the city of Glendale have reached a deal to keep the hockey team in Glendale for at least the next two years. The agreement cuts the management fee to the city will pay the team from $15 million a year down to $6.5 million in exchange the coyotes will no longer share revenue from ticket surcharges, parking and arena naming rights. The deal follows a city's move to terminate its lease agreement with the coyotes followed by the team getting a temporary restraining order to reinstate the agreement. Glendale City council will vote on the new deal tomorrow.
TED SIMONS: State treasurer Jeff Dewit charged with managing the state's finances and part of the of what he manages is a state trust land fund for education. Dewit has criticized the governor's plan to provide money for education with cash from the reserve. Here is state treasurer Jeff Dewit. Good to see you again.
JEFF DEWIT: good to see you.
TED SIMONS: let's define terms here. What is the state land trust?
JEFF DEWIT: The state land trust was established when Arizona became a state and so it's over 100-year-old trust. What happened is through the enabling act when we became a state land was designated for education. So this money is meant to benefit education in perpetuity. The trust was set up that as we sell parcels of land that money would then move into this trust which we would then grow through prudenter management and basically expend some of the interest to go and benefit the education of our children.
TED SIMONS: That's the operative phrase, using the interest to benefit education.
JEFF DEWIT: Correct. That's the most important thing is I fully support the concept of getting more money into education and I fully support that we can do more from this trust. We can expend more than the 2.5% but there's a limit to how much we can do that's not only reasonable and prudent but that's legal. That's where this plan runs into the trouble is that it's going to 10% is too much for what we can do in essence legally.
TED SIMONS: Let's talk about the legality in a second. First, just the idea of dipping into the principal of a trust, a lot of folks have a general problem with that. Are you against the dipping into it or the numbers that are being dipped?
JEFF DEWIT: Well, my job is the guardian of the trust. It's one of the terms they use for the treasurer. I'm charged with protecting this trust. The most important thing to remember is it's not a savings account. It's not an investment account. It's not just a bank act that we can use whenever we want. Most importantly it's not an emergency fund for when we just need more money. This is meant to be a study and even distribution that schools get forever and so it's in a trust. The most important thing on that is we cannot spent principle, which is called Corpus. We can only expend the interest.
TED SIMONS: So the governor's plan is 10% for five years. Then cutting it back to 5% for the next five years. Then cutting it off completely.
JEFF DEWIT: correct.
TED SIMONS: So right now it's a 2.5%. He wants to jump it up to 10 for five, down to 5 for five, then I imagine 2.5%. Who knows what happens. Are you against the current 2.5 annual rate?
JEFF DEWIT: Like I said, we can take that up by about 50% and everybody would be on board. We can go to 3.75%. Still keeps us within legal parameters, keeps it prudent and reasonable and gets 50% more money into our schools. Don't forget this isn't the main funding source for schools. I think a lot of people are confusing thinking this is where education comes from. The main funding source is from the legislature as the constitution describes through, taxation. This is just a supplement. It will provide an extra 3% a year for schools for five years. It's not a big number. What we would do, how much of the principal we would destroy to do this would be a short-term gain with a lot of long term pain associated after this plan runs out.
TED SIMONS: Are you sure that 10% for five years, then down 5%, are you sure principal will be touched?
JEFF DEWIT: By any math we run principal is touched. Even by the governor's numbers principal is touched. The argument they are using is saying well in ten years you'll have more money than you have right now. But that doesn't mean principal isn't touched. They are just saying you'll have a higher number. If I go to you and say, Ted, you have a hundred bucks in your pocket. Give me 40 of those dollars. Here's the great news. You won't need these $40 because with the 60 you have left it if you invest wisely you'll have 102 left so more money then in ten years than you have now. You'll never miss this $40 I am going to take from you.
TED SIMONS: What you're saying is the trust is charged with taking the full $100 and getting the 100, X, Y, Z, as opposed to 102.
JEFF DEWIT: Exactly, if you leave all 100 in you'll have 145. This 2.2 costs us 3.7 billion when you add the interest to that time and again, with a trust in perpetuity you have to look in the long term. Over the next 100 years this costs us $87 billion, is what it's going to cost our schools.
TED SIMONS: We have graphics regarding what's going to happen in 40 or 50 years. It shows that obviously if you dip enough into that principal in 40 or 50 years things go to the bottom of the ledger.
JEFF DEWIT: Here's the extra money. You're going to get that now. Now look what happens when that runs out. You get less and less and less money forever because you took this little amount up front. Basically again it's as we said it's a short-term Band-aid that leaves a long-term scar on our education.
TED SIMONS: You went to 100 years as well. Even a bigger drop, obviously, because of the principal being removed.
JEFF DEWIT yea, That plays in with the law of compounding interest which Albert Einstein says is the 8th wonder of the world. Those who understand it earn it, those whom don't pay it.
TED SIMONS: Yes, You mentioned the legality. I still want to get to that. You also mentioned a fiscal cliff. We have a graphic on that as well. What is the fiscal cliff that you are so concerned about?
JEFF DEWIT: What this does, if this were adopted, you add this to the 0.6% sales tax and they both would cut off at the same time. So what we're doing is setting ourselves up for in seven years an almost billion dollar hole in the budget of our schools. One of the reasons I ran for office, I'm not from the political world. I have never run for officer before. I'm 23 years in finance. One thing that frustrated me was when our politicians would make short term decisions based around, say, when they were in office and later we're left holding the bag. I want to see us make sustainable, long term decisions. We have so many smart people down there. Let's make something that works forever and fix the problem.
TED SIMONS: Is it fair to criticize this idea when the fiscal cliff that you're concerned about involves a tax that would go away that has nothing to do with this idea?
JEFF DEWIT: Well, the funny thing about that is the reason the current formula actually has a sunset date in it, it matches the 6.6%, is because the schools intended on purpose for these both to be addressed at the same time. The schools said when we made the 2012 change that the only way they are going to allow another change is if we readdress what's going to happen with this. I don't think we can get around the fact, that's why I'm pointing it out. When this gets to the legislature the schools, the teachers will want this addressed. We may as well make it part of the conversation now because it's going to have to be.
TED SIMONS: This entire conversation could be secondary to the fact that what you're saying is because this is a trust, enabled by the enabling act, it's not even legal to do what the governor wants to do.
JEFF DEWIT: Right. You can't touch principal. It's completely a nonprudent thing to do. That's why it's trustee, my job is to put the word out saying look we have to reevaluate the numbers. I'm not arguing with the governor just opposing a plan that what I'm trying to say is we need to get some math people in the room because the math doesn't add up. We have to adjust the numbers. This won't fly based on current math.
TED SIMONS: But you're also saying based on current courts. You're saying that -- legislature refers it to the voters. Voters say we love this idea, pass it overwhelmingly, you're saying it doesn't matter?
JEFF DEWIT: Right. The reason we have $5 billion, this wasn't the first time that a politician, someone at the capitol, has seen a big pot of money and said, I'm going to go get that. That's what politicians do. They see money, hey, I can spend. That that's the plan. So this has not been the first time. But this is why it's in a trust and why it's in a protected fashion is to keep governors and legislatures or elected officials from spending this money so it's not gone. If you look at our neighbor to the east, New Mexico, they have over $15 billion in their trust fund. This is meant to get much bigger and they spend over $500 million a year for the benefit of their school system. That's what we're going to get to and were going to have to keep doing what we're doing.
TED SIMONS: The bottom line is schools would get more money, they have certainty for ten years according to the governor, these are his talking points, certainty for ten years, they get more money. He's not going to support a tax increase. The folks at the legislature aren't going to support a tax increase. Which means this additional money with emphasis on the word additional. If you say no to it, then you say no to all that money going to education.
JEFF DEWIT: Well, again, it's really not a large amount. You're talking about $300 per student for the next five years. So it's not even an amount that's going to solve what many say are the amounts needed. That's why you've seen a lot of opposition has been even to the governor saying this is a drop in the bucket. Why would you blow up the trust for a drop in the bucket when we have to do more structural, long term fix to get to the bottom of it.
TED SIMONS: Last point considering the need, this is a prudent trustee action, you say --
JEF DEWIT: No, it's not prudent at all. I say show me one other, any other trust in the country that is paying out 10%. Try to find one. Clearly we have been unable to find anything close to it. Part of being prudent is being equitable to all beneficiaries. We have to examine the beneficiaries aren't just the students of the next five years. They are the students of the five after that and the five after that and after that. Why would we say that the next five years students are more important than any other and if your kid is entering kindergarten or even in elementary school right now they are not going to benefit from this. Only the kids leaving high school will benefit. And what they are going to see the ones in elementary school now the will see a $1 billion hole before they leave school.
TED SIMONS: And quickly you used the phrase blow up the trust. You mean impacting it. It's not going to blow it up.
JEFF DEWIT: No, but it could depending on market conditions. Wee could see the valve the trust cut in half then where are we? Forever distribute half as much to schools as it otherwise would. It's just not a prudent thing to do. I want to reexamine the numbers. If we rework the numbers we can get to something that works over the long time.
TED SIMONS: state treasurer Ted Dewit. Thanks for joining us.
JEFF DEWIT: Good to be here, Ted.
Jeff DeWit: State Treasurer