This measure shows the percentage of intended capital funding Intended capital funding is the sum of the district additional assistance funding formula amount and any voter-approved capital override. While these funding sources are intended for capital needs, State law allows districts to allocate their district additional assistance and revenue control limit, the main components of equalization formula funding, between the Maintenance and Operation (M&O) Fund for operational spending and the Unrestricted Capital Outlay (UCO) Fund for capital spending. districts have redirected to operational spending Operational spending consists of a district’s day-to-day expenditures such as salaries and benefits, supplies, facility maintenance and repairs, utilities, and more. Most of these operational expenditures are made from a district’s M&O Fund, while some are paid from other more restricted funds, such as federal or State grant funds. Operational expenditures are not allowed in the UCO Fund. rather than capital spending Capital spending includes expenditures for the acquisition of assets such as land, buildings, equipment, furniture, and vehicles, and other supplies required by State law to be paid from the Unrestricted Capital Outlay Fund such as textbooks, library books, and instructional aids. For most districts, capital expenditures are primarily made from the UCO Fund, but some capital costs are paid from other more restricted funds, such as federal or State grant funds. Capital expenditures are not allowed in the M&O Fund. in the current year and on average over the last 5 years. Districts that direct a substantial portion of their intended capital funding to operational spending may be at higher financial risk if they are putting off necessary operational spending cuts or when large capital spending needs arise, especially if they have lower-than-average capital reserves.

Arizona school districts receive revenues from local, State, and federal sources. In general, districts receive local and State revenues based on an equalization formula set by State law. This “equalization formula funding” provides the base funding for districts through locally levied property taxes and State-appropriated monies. That formula includes 2 main components: the revenue control limit A district's RCL is generally calculated as the sum of its base support and transportation support levels. The base support level is fundamentally determined by multiplying a district’s weighted student count by a statutorily set base level amount and increasing the result by a teacher-experience index for districts with average teacher experience greater than the State average years of experience. The transportation support level is primarily calculated by multiplying route miles by a statutorily set per mile support level based on approved student transportation route miles and eligible riders. For elementary schools that pay tuition to separate high school districts, tuition costs are also included in the RCL. (RCL), intended to fund districts’ operational needs, and district additional assistance A district's DAA is based on its prior year unweighted student count multiplied by a statutorily prescribed per student amount. A growth factor increase is applied for districts with more than 5 percent student count growth from the prior year. An additional support level amount for high school textbooks is added based on the prior year grades 9-12 unweighted student count. (DAA), intended to fund districts’ capital needs. Districts can choose how to allocate each of these components annually between the Maintenance and Operation (M&O) and Unrestricted Capital Outlay (UCO) Funds based on their anticipated needs.

Districts with voter-approved operating or capital overrides A.R.S. §§15-481 and 15-482 allow districts to ask local voters to approve additional spending capacity through a budget override. Overrides are typically funded through a secondary property tax levy and are in place for 5 to 7 years. Operating overrides phase out in the final 2 years if a new override is not approved. have additional resources available to meet their needs. Often, districts with overrides allocate their RCL and DAA resources differently based in part on their ability to use override monies for only the limited voter-approved operating or capital purposes. Accordingly, our analysis includes districts’ capital overrides in total intended capital funding when looking at the percentage of that funding that was redirected to operational spending.

All districts that directed DAA funding of more than 25 percent of their total DAA and capital override amount to their M&O Fund in either the current year or on average over the last 5 years could be considered at higher risk for this measure. However, to recognize such redirection represents less risk for districts with larger capital reserves, we limited the districts considered high risk for this measure to those with a fiscal year 2022 per pupil capital budget limit reserve less than that year’s State-wide average of $1,099* per pupil.

*Calculated the per pupil reserve amount for each district and then averaged, excluding districts with extreme values that would skew the average.

The 5-year average was calculated by adding the percent of capital monies redirected to operations for each year and dividing by 5.

DAA and capital override amounts were obtained from the Arizona Department of Education as of December 19, 2022, as follows:

• Fiscal year 2023: BUDG25 report for each district, which includes the intended allocations for the current year based on each district’s most recent adopted or revised expenditure budget.
• Fiscal years 2019 through 2022: BUDG75 reports for each district, which includes the final district allocations for each year.