PHOENIX - Arizona schools will be getting their first Prop 123 dollars on Thursday. But we're getting a lesson right now from the Brexit stock market turmoil about the perils of pulling more education dollars out of a state investment fund that was designed to last forever.
The State Investment Board has had to generate cash for a $290-million lump-sum payment this week as the market tanks -- the worst time to sell, investment advisers say.
"It's a reality check," said Erick Newton, of CopperWynd Financial. "You don't want to be selling when you have to. You only want to be selling when you want to."
Under Prop 123, the Arizona Permanent Land Endowment Trust Fund will pay out $2 billion over the next 10 years.
"The good news is we sold 75 percent of what we had to sell before the Brexit vote, instead of waiting until the last minute," said State Treasurer Jeff DeWit, who chairs the State Investment Board.
Before voters approved Prop 123 in May, the land trust fund had been paying out returns of 2.5 percent to Arizona schools. The new payout is 6.9 percent, which investment advisers had warned was too high.
"Not only are we selling at the wrong time, we're definitely not able to meet that 6.9-percent return," Newton said.
One state investment manager said the fund had never had to sell stock to make an education payment in the past. While no one is saying the sales will drain the fund, independent investment advisers have expressed concern that eating into the fund will deplete the principal over the long term.
The stock sales will likely continue -- in good times and bad -- as the fund funnels $24 million a month to schools under Prop 123.
"We have very good people in place to manage the tough hand we were dealt with Proposition 123," said DeWit, who opposed Prop 123.
Investment board records show the state land trust fund has outperformed the average university endowment.
The State Investment Board meets Tuesday to formally approve the Prop 123 payments.