Can an Arizona school district that earns money from leasing its land use the proceeds for day-to-day expenses like teacher salaries, or is it limited to capital projects?
Plain-English summary
Arizona's Kyrene School District signed a 77-year ground lease in 2021 with a private developer to build on district-owned land near Chandler Boulevard and the I-10 freeway. The district wanted to use the rental income for day-to-day expenses (maintenance and operations) like teacher salaries, utilities, and supplies. Its lawyer wrote an internal opinion saying that was fine. Under A.R.S. § 15-253(B), AG review of district legal opinions is mandatory.
AG Kris Mayes mostly agreed with the district lawyer but added an important clarification. The statute (A.R.S. § 15-1102) treats lease proceeds differently based on how much bond debt the district carries:
- For common school districts and high school districts at or below 7% bonded indebtedness (and unified districts at or below 14%), the district can use lease proceeds for maintenance and operations, capped at 15% of its revenue control limit.
- For districts above those thresholds, only sale proceeds (not lease proceeds) can go to maintenance and operations. Lease proceeds at higher debt levels can only fund capital outlay.
The original district opinion read like it was saying any district could use lease proceeds for M&O. The AG corrected that. The bonded-indebtedness threshold matters.
The AG also affirmed the district lawyer's analysis on when the district's bonded-indebtedness percentage gets calculated for purposes of these rules.
What this means for you
If you administer or sit on the board of an Arizona school district
Look up your current bonded-indebtedness ratio before deciding how to spend ground lease income. If your common or high school district is at or below 7% (or your unified district is at or below 14%), you can put lease income into the M&O fund up to 15% of your revenue control limit. If you are above that threshold, lease proceeds must go to capital outlay (buildings, vehicles, equipment, technology), not to teacher salaries or other operating costs.
Check this ratio annually. As you issue new bonds or pay down old ones, your status under § 15-1102 can change. A district that crosses the threshold midway through a multi-year lease will need to redirect proceeds going forward.
If you serve as legal counsel for an Arizona school district
This opinion is the AG's formal correction of an internal district legal opinion under A.R.S. § 15-253(B). Use it as a template for how to draft future § 15-253 opinions: lay out the statute, explain how each subsection applies to the district's bonded-indebtedness level, and avoid implications that one rule applies regardless of debt level. The AG specifically pushed back on language in the district counsel's opinion that "could be read to suggest" the same rule applied to all districts.
If you are a school district finance officer
Build the bonded-indebtedness check into your annual budgeting cycle. When you receive lease income, code it correctly: M&O if you are under the threshold (and within the 15% revenue control limit cap); capital outlay otherwise. If your auditor flags a ground lease, the AG opinion is on point and explains the framework.
If you serve as a state auditor or oversight officer
The opinion provides a clean, citable interpretation when you review district expenditures of lease income. The dividing line is the bonded-indebtedness ratio at the relevant date. If a district at 8% bonded indebtedness has used ground lease proceeds for teacher salaries, that is now expressly impermissible under the AG's interpretation of § 15-1102(C)(1).
If you are a parent or community member following district finances
Districts have different rules for spending depending on their debt load. A wealthier or less-indebted district has more flexibility to use lease income for classroom-side needs. A more-indebted district has to put lease income into buildings or equipment. That is a structural feature of state law, not a choice the local school board makes freely.
Common questions
Q: What is "bonded indebtedness"?
A: The total amount the district owes on bonds it has issued, expressed as a percentage of either its assessed valuation (for common and high school districts) or another statutory measure for unified districts. Higher percentages signal more debt relative to the district's tax base.
Q: What is the difference between "lease proceeds" and "sale proceeds"?
A: Lease proceeds are payments the district receives for letting someone else use district property (like rent). Sale proceeds are the money the district gets when it actually sells property. Under § 15-1102(C), districts above the bonded-indebtedness threshold can use sale proceeds for M&O but cannot use lease proceeds for M&O.
Q: What is "maintenance and operations" versus "capital outlay"?
A: Maintenance and operations covers ongoing costs like teacher salaries, utilities, supplies, and routine repairs. Capital outlay covers larger one-time expenses like buying buildings, vehicles, equipment, technology, and major construction. Arizona school finance treats these as different funds with different funding sources and uses.
Q: Why does Arizona limit how districts spend their own lease income?
A: Arizona's school finance system uses statewide formulas to equalize funding across districts. If a district could freely spend property-related income on M&O, it would have more operating revenue than other districts and break the equalization scheme. The bonded-indebtedness threshold is one of several mechanisms that constrain that.
Q: Does this apply to charter schools?
A: A.R.S. § 15-1102 governs school districts, not charter schools. Charter schools have a different statutory framework for property management and finances.
Background and statutory framework
A.R.S. § 15-1102 governs how Arizona school districts may use proceeds from selling or leasing district-owned property. The statute creates two regimes based on bonded indebtedness:
Lower-debt districts (common school or high school district at or below 7% bonded indebtedness, or unified district at or below 14%) operate under § 15-1102(B). Subsection (B)(1)(a) allows lease and sale proceeds to be expended for M&O, capped at 15% of the revenue control limit for that year. The remainder must go elsewhere within the statutory framework.
Higher-debt districts (above those thresholds) operate under § 15-1102(C). Subsection (C)(1)(a) allows only "sales proceeds" to be expended for M&O. Subsection (C)(1)(b) allows "[t]he sale or lease proceeds" to be expended for capital outlay in any amount. The textual difference matters: the first paragraph says "sales," the second says "sale or lease." Lease proceeds are intentionally excluded from the M&O permission for higher-debt districts.
A.R.S. § 15-253(B) requires the Arizona Attorney General to review school-district legal counsel's formal opinions before they take final effect. This is one of those reviews. The AG reads district counsel's analysis and either affirms, modifies, or revises it. Here, the AG affirmed in part (the district could use lease proceeds for M&O within the cap, given its current debt status) and revised in part (added the clarification that the same conclusion does not apply at higher debt levels).
The opinion also notes that A.R.S. §§ 15-1102(B)(2) and (C)(2) do not apply to lease proceeds, only to sale proceeds. Both subsections track this same lease/sale distinction.
Citations and references
Statutes:
- A.R.S. § 15-1102 (use of lease and sale proceeds)
- A.R.S. § 15-1102(B) (lower-debt district rules)
- A.R.S. § 15-1102(C) (higher-debt district rules)
- A.R.S. § 15-253(B) (AG review of school-counsel opinions)
Source
- Landing page: https://www.azag.gov/opinions/i24-010-r24-008
- Original PDF: https://www.azag.gov/sites/default/files/2025-06/I24-010.pdf
Original opinion text
To:
Jordan T. Ellel, Tempe Tri-District Legal Counsel, on behalf of Kyrene School District
Pursuant to A.R.S. § 15-253(B), this opinion affirms in part and revises in part the opinion that you prepared for the Kyrene School District (the "District") regarding the use of lease proceeds from ground leases pursuant to A.R.S. § 15-1102. That opinion is attached hereto as Appendix A.
Background
In February 2021, the District's Governing Board approved a 77-year ground lease with a private entity to develop District-owned property near Chandler Boulevard and the I-10 freeway. The District wishes "to utilize the proceeds from the lease in the most advantageous manner possible for the maintenance and operations of the District." App. A at 1.
A.R.S. § 15-1102 regulates how lease proceeds may be used by districts. The requirements for use of lease proceeds differ based on a district's level of bonded indebtedness. Compare A.R.S. § 15-1102(B) (applying to the sale and lease proceeds of a "common school district or high school district that has an outstanding bonded indebtedness of seven percent … or less" and to "a unified school district that has an outstanding bonded indebtedness of fourteen percent … or less") with § 15-1102(C) (applying to the sale and lease proceeds of a "common school district or a high school district that has an outstanding bonded indebtedness of greater than seven percent" and "a unified school district that has an outstanding bonded indebtedness of greater than fourteen percent").
Analysis
Use of lease proceeds
The first question presented in your opinion asks how the District's lease proceeds should "be classified under A.R.S. § 15-1102(B) and (C)?"
This Office agrees with your conclusion that, under A.R.S. § 15-1102(B)(1)(a), a common school district or high school district "that has an outstanding bonded indebtedness of seven percent … or less" may expend lease proceeds "for maintenance and operations in an amount that does not exceed fifteen percent of the revenue control limit for that year." This Office also agrees with your conclusion that A.R.S. §§ 15-1102(B)(2) and (C)(2) do not apply to lease proceeds.
Although your opinion focuses on the District's particular circumstances, it could be read to suggest that any district, regardless of its level of bonded indebtedness, may use lease proceeds for maintenance and operations. That is not accurate. This Office therefore revises your opinion to clarify that common school districts and high school districts with bonded indebtedness that is greater than seven percent and unified districts with bonded indebtedness greater than 14% may not use lease proceeds for maintenance and operations. Compare A.R.S. § 15-1102(B)(1)(a) (for school districts at or below the bonded indebtedness threshold, "the total sum of the proceeds [from certain sales of school property or] from the lease of school property … [m]ay be expended for maintenance and operations") with A.R.S. § 15-1102(C)(1)(a) (for school districts above the bonded indebtedness threshold, allowing only "sales proceeds" to "be expended for maintenance and operation") (emphases added); see also § 15-1102(C)(1)(b) ("The sale or lease proceeds may be expended for capital outlay in any amount.") (emphasis added).
Calculation of Bonded Indebtedness
The second question addressed in your opinion asks when "the District's bonded indebtedness [is] calculated for purposes of determining the District's level of indebtedness to determine restrictions on use of lease proceeds?"
This Office agrees with your opinion's analysis on this issue, and therefore affirms it.
Conclusion
We agree with your opinion as to its interpretation of A.R.S. § 15-1102(B)(1)(a) and its conclusion that A.R.S. § 15-1102(B)(2) and (C)(2) do not apply to lease proceeds. We revise your opinion to clarify that common districts and high school districts with greater than seven percent bonded indebtedness and unified districts with greater than 14% bonded indebtedness may not use lease proceeds for maintenance and operations. A.R.S. § 15-1102(C)(1)(a)-(b). We affirm the portion of your opinion addressing the calculation of a district's bonded indebtedness.
Kris Mayes
Attorney General