(The Center Square) – Former Gov. Doug Ducey’s chief economist and policy adviser told The Center Square that the ongoing budget negotiations between Arizona Republicans and Democratic Gov. Katie Hobbs are “unusual.”
Last week, budget talks between Republican legislative leaders and Hobbs abruptly ended.
Senate President Warren Petersen, R-Gilbert, and House Speaker Steve Montenegro, R-Surprise, issued a joint statement saying Hobbs walked away from the negotiations on Thursday.
“At the center of this dispute is her proposal to dramatically increase withdrawals from Arizona’s Public Land Trust, a voter-protected fund designed to support K-12 education for generations. This is not a solution. It is a long-term raid on a critical resource,” they said.
Petersen talked to The Center Square Friday about the stalled budget talks.
“What happened was she wanted us to raid the education trust fund to the tune of 10% withdrawals every year. It would have bankrupted the education trust fund. She wanted to use that as a way to balance the budget,” Petersen said during a phone interview. “And to complicate it even more, the voters would have to vote on it.”
Petersen told The Center Square that “there’s no way” voters would have approved draining the education trust fund.
He said Republican legislative leaders told Hobbs that they didn’t want to rely on “something so speculative” and, “We want to deal with real money, not fake money.”
That’s when Hobbs walked out of the budget talks, Petersen said.
The Center Square contacted Hobbs’ office, but did not hear back before publication.
According to the Arizona Joint Legislative Budget Committee, the state land trust fund “supports K-12 schools, universities, and other public agencies in Arizona by generating revenues via the sale and use of lands and the investment of proceeds associated with acreage granted to the state.”
The Republican state leaders cited legislative budget analysts who project Hobbs’ proposal “would cut the trust nearly in half over the next 20 years, dropping it from roughly $9.7 billion to $4.7 billion.”
“Her latest plan calls for a 10.9 percent distribution for the next 20 years, far above the previous 6.9 percent over ten years,” they said. “That approach would bankrupt the trust and rob future education funding from our children just to please unions today.”
On the other side, Hobbs said she would not continue negotiations until the Arizona Republicans publicly released their budget plan.
“Legislative leaders have refused to engage in serious negotiations, failing to show the Governor’s Office a responsible way to pay for their proposed tax cuts for billionaires and special interests and refusing to discuss a Prop 123 proposal, a once-in-a-decade opportunity to invest in our public schools without raising taxes,” Hobbs said, according to the Arizona Mirror.
Petersen was critical of Hobbs during Friday’s phone interview.
“We have a real vacuum of leadership on the ninth floor,” Petersen said, referring to Hobbs and her office. “It’s time for a real leader, a real governor.
“2027 cannot come soon enough,” Petersen said, referring to the 2026 gubernatorial race and the start of a new term after it. The winner of the July 21 Republican primary will run against Hobbs in the Nov. 3 general election.
Petersen, meanwhile, is running for Arizona attorney general. The winner of the Republican primary is expected to go up against Democratic incumbent Kris Mayes on Nov. 3.
Glenn Farley, who currently works as Common Sense Institute Arizona’s policy and research director, told The Center Square that in mid-March, budget negotiations are usually in their early stages.
It would not be until May that budget documents would be made public, noted Farley, who served eight years in Arizona Gov. Doug Ducey’s administration. Ducey, a Republican, was governor from 2015 to 2023 and is a former CEO of the ice cream parlor chain Cold Stone Creamery.
Farley said Hobbs’ request to have budget documents made public stood out to him.
He described the budget documents as being “live,” “changing sometimes several times a day.”
“ They’re in flux, and the things that are changing, there are hundreds of lines of items on the spreadsheets. The things that are changing can be politically sensitive. So it would be very uncommon for documents that are in that state of flux to be released publicly,” Farley noted.
These documents would not usually be released until late April or early May, when they would be “vetted publicly,” Farley explained.
Despite the ongoing budget negotiations being “unusual,” Farley said it was a positive sign that they were already underway.
However, he said the downside to the budget negotiations is Hobbs stopping until certain “public demands are met by her legislative counterparts.”
“I don’t recall that ever happening in the Ducey administration,” Farley noted.
Regarding Proposition 123, Arizona voters approved it in 2016. The proposition increased the annual distribution of the state’s land trust fund made to education funding from 2.5% to 6.9% for the next 10 fiscal years.
Proposition 123 had a “specific purpose, Farley said, adding that it was at the time when the Ducey administration “was settling an ongoing lawsuit with school districts related to conduct the state did during the Great Recession.”
As part of the settlement in Cave Creek Unified School District v. Arizona, Farley said Arizona needed to “make a large one-time cash payment and an ongoing increase in basic state aid” to education.
The proposition expired in June 2025. Farley stated if the state Legislature and governor don’t act on it, then it “will remain expired forever.”
He added that Arizona’s general fund is picking up the costs. Common Sense Institute Arizona projected that in 2024, the general fund in fiscal year 2026 will need to increase its spending by nearly $300 million to cover the last K-12 formula funding.
Farley said the governor and the Legislature disagree on whether the state will put new money into K-12 education and, if so, how to pay for it.
Based on Hobbs’ budget proposal, she wants to move the distribution rate up from 6.9% to 10.9%.
Farley said in a typical year, the state land trust fund would earn between 7% and 8%. He added that the distribution rate of 6.9% is “probably sustainable.”
However, he said the 10.9% distribution rate is “aggressive.” If the distribution rate was increased to this percentage, Farley noted it would “likely result in decreases in trust value.”
Farley told The Center Square this means that Arizona “would be distributing more money than the trust is earning every year.”
Besides education spending, Farley noted another issue the governor and Legislature are discussing is conformity measures to the One Big Beautiful Bill Act. He said the Legislature wants full conformity, whereas Hobbs has proposed partial conformity to the federal changes.
The two sides are “disagreeing” over an estimated $100 million, Farley said, adding that $350 million of the $450 million in conformity costs are in Hobb’s proposals.
The items they are disagreeing over are “depreciation and capital investment incentives,” he stated.
The longer the conformity issues remain unsolved, the more they become an issue, according to Farley. He noted tax filing season started in January.
The research director said Arizona will be at the end of income tax season soon and the one-year mark of Proposition 123’s sunset.
In the environment Arizona is operating in, Farley said it assumes the state’s revenues have “already absorbed the conformity costs,” and the general fund is paying for the costs of Proposition 123.
“ The governor wants to deviate from that environment, and the Legislature wants to maintain the current operating environment, which is simpler and more efficient for taxpayers,” he explained.
Center Square Southwest Regional Editor Dave Mason contributed to the reporting for this story.
