Federal stimulus dollars intended to prop up government revenues and help states weather the economic storm have been spent, and the Grand Canyon State is facing deficits that could reach $3 billion in each of the next three years.
“I believe that the state is headed for insolvency,” said Kevin DeMenna. Now a lobbyist, DeMenna is a former Senate chief of staff and has been involved in legislative business in one form or another since the early 1980s.
It’s a dire prediction, but the challenges facing state lawmakers were unimaginable 18 months ago, while they were working on emergency legislation to patch a $1.2 billion deficit in the fiscal 2008 budget. That’s when the fiscal problems began.
Since then, a $2 billion hole for the 2009 fiscal year was filled, but revenues continued a precipitous decline and resulted in another roughly $2.1 billion deficit that had to be fixed mid-year. The fiscal 2010 budget on the table now is designed to address a $3.2 billion shortfall, but all expectations are that legislators will have to make mid-year repairs for the third year in a row.
Legislative budget analysts have predicted massive budget holes in the 2011, 2012 and 2013 fiscal years. If the temporary sales tax increase promoted by Gov. Jan Brewer isn’t adopted, lawmakers will begin work in January to solve a $1.9 billion deficit. If the tax increase takes effect – a proposal to let voters weigh in on the matter in a special election is stalled in the Legislature – Arizona still will have to cope with a $900 million shortfall.
In fiscal 2012, the deficit estimates range from a $2.2 billion to $3 billion. Then, in fiscal 2013, the gap could be as high as $3.1 billion. Those figures, though, are speculative and could change dramatically based on changes in the final 2010 budget and alterations to revenue and spending in the following years. For instance, they do not include a $1 billion sales tax increase, as proposed by the governor, among other changes being discussed by lawmakers.
“We have to figure out a way to pay for public services that the taxpayers presumably want,” said Dennis Hoffman, an Arizona State University economist. “What do you want to do? Do you want to just make the cuts now? The alternative is you’ve got to make all the cuts now or you’ve got to raise taxes to bridge the gap or you’ve got to gimmick the budget somehow.”
At this point, policymakers don’t have many arrows left in their quiver. All of the so-called “easy” ways to cope with deficits have been used: The last $130 million in the rainy day fund was allocated in January; virtually every dedicated fund the Legislature can legally sweep into the general fund has been swept; and government spending has been trimmed by nearly $1.9 billion since April 2008.
“It’s almost like playing poker and not playing with a full deck,” said Sen. John Nelson, a Litchfield Park Republican. “You don’t know how to play each hand, because all the cards aren’t there.”
Complicating things further is that Arizona’s share of the federal stimulus aid included in the American Recovery and Reinvestment Act, which was designed to help states cope with the loss of tax receipts until the economy recovered, have been exhausted.
The state received about $4.2 billion in stimulus funding that could be used through fiscal year 2011. Although Brewer and lawmakers had hoped to spread equally over the three years more than $1 billion of discretionary money, tax collections in fiscal 2009 were so bad that nearly two-thirds of that money was allocated that year. The rest of that money was used in the 2010 budget.
Arizona will still receive nearly $450 million in 2011 in federal stimulus aid, but that money can be used only to pay the state’s portion of Medicaid.
“The most immediate concern is 2011, because it’s not likely the economy will improve enough to make up for the lack of stimulus dollars,” said House Speaker Kirk Adams.
The remaining options are less than ideal. In its simplest form, the solutions boil down to either increasing revenue or decreasing spending even further.
Cutting spending has been a priority for Republican leaders this year and is a move they say is necessary to right the state’s financial ship. But some say cutting more than the $1.9 billion already pruned from state government since April 2008 will be devastating.
As a result, more than 1,500 state workers have been laid off – about 4 percent of the total workforce – according to the Arizona Department of Administration. Those figures don’t include layoffs in all state agencies, some of which don’t report to the Department of Administration. Among those not included are university employees, the Department of Commerce and seasonal or temporary employees.
The figure also doesn’t include elementary and high school teachers laid off by school districts that have had to adjust to lower funding levels.
More state employees are likely to lose their jobs this year, too, as the budget proposal currently being considered by the governor calls for a 5-percent reduction in salary expenses this year.
State services have suffered as well, according to critics of the cuts. They point to an inability for Child Protective Services workers to investigate every complaint the agency receives. Another casualty was the State Library, Archives and Public Records, which has slashed its hours of operation in order to absorb budget cuts. Funding for public education has been reduced, and state universities have laid off or furloughed thousands of employees.
“There’s no more to cut. We’ve already cut to the bone,” said House Assistant Minority Leader Kyrsten Sinema, a Phoenix Democrat.
Many Democrats and Republicans agree that the magnitude of cuts in recent budgets – $585 million in the fiscal 2009 fix and $630 million proposed for 2010 – won’t be feasible going forward, either practically or politically.
But some lawmakers see shrinking government as the most effective way to get out of the budgetary mess.
“The revenue will be improving, but the spending right now looks like it will still be growing faster than the revenues, which is why the budget problem gets worse,” said state Treasurer Dean Martin, who earlier this year said the state should cut its spending to fiscal 2006 levels.
To that end, Republican legislators attempted to cap state spending at $10.2 billion for the next three years. They also worked to temporarily suspend a constitutional provision that protects spending approved by voters, but ultimately were unsuccessful. Much of the spending on public healthcare and education – which together constitute more than half of the state’s budget – is voter-protected.
If left up to Rep. Sam Crump, a Republican from Anthem, he would bridge all of the future budget gaps by enacting further spending reductions.
“We need to make some serious spending cuts. We never do it,” he said. “Let’s stop making new revenues the first item of discussion every time.”
However, Crump and his allies almost certainly won’t see a budget that solves the problems with cuts alone. The political will to do so didn’t exist this year, despite a concerted push by the governor to raise the sales tax, and it’s unlikely that next year – an election year – will see lawmakers clamoring to slash state services by billions of dollars.
“If we don’t (increase) the revenue in some way…you just end up having public services – especially health and human services – get cut,” said Tim Schmaltz, CEO of the Protecting Arizona’s Family Coalition.
But any revenue increase that involves a tax increase will be a hard sell in the Republican-controlled Legislature, which has rejected several times the possibility of a special election to let voters decide if a sales tax increase is appropriate. Nelson said the anti-tax pledges many of his colleagues have signed make that option almost dead on arrival.
“Grover (Norquist, founder of Americans for Tax Reform) is not going to allow that to happen. Everyone who signed that no-tax pledge is going to be told (to vote) no,” Nelson said.
Democrats have proposed stabilizing state sales tax collections, which account for roughly half of state revenues, by expanding the base to include services like attorney fees and haircuts. At the same time, their proposal would lower the tax rate to 3.6 percent from 5 percent, which would keep the plan revenue-neutral.
In addition, lawmakers have considered raising money in the short-term by securitizing the state’s future lottery revenue. In June, Brewer’s office estimated that borrowing money, which would be repaid in the future using state cash from the lottery, would result in a one-time boost of $450 million next year. Adams said the maneuver was not used this year in order to save it for fiscal 2011.
Other options include privatizing state prisons and selling the rights to create toll lanes on existing highways. The state is planning to raise $735 million in fiscal 2010 by selling state properties, including the House and Senate buildings, and leasing them back over a 20-year period. Adams said more properties could be targeted for similar lease-purchase agreements in future budget years.
There also is a movement to expand slot-machine gambling to Arizona racetracks, tax the profits at a 45-percent rate, and then borrow against that revenue stream for additional income. But the plan faces opposition from various groups, including those who oppose expanding gambling for moral reasons and the Native American tribes who operate full-scale casinos under a gaming compact with the state.
Adams, though, believes the most effective way to get the state’s finances in order is to spur economic growth.
“I think we have to proactively jump-start the economy,” he said.
To that end, Republicans have pushed for repealing a statewide property tax that generates $250 million annually and reducing corporate and individual income taxes by $400 million.
Sinema, though, said that is a recipe for disaster and isn’t motivated by economic development.
“We’ve been cutting taxes for years in Arizona, and it’s not resulted in the kind of economic activity (supporters) talk about,” she said. “They’re much more interested in dismantling government.”
Rep. Vic Williams, a Republican from Tucson, said the problem facing the state right now “transcends” the traditional methods of increasing revenue or cutting spending.
“We’re facing deficits that we know we can’t cut our way out of or tax our way out of,” he said.
The tax code needs to be overhauled to make the state competitive in attracting businesses, Williams said, but the spending obligations also need to be re-evaluated. One way to do that, he said, would be to tackle two budget years at a time.
“Right now, it’s single points on a map. If you put two points together, you start to plot a direction,” he said.
Nelson agreed there hasn’t been enough planning for future years. He wants lawmakers to plan for the next five years, the way cities do, to ensure decisions for the upcoming year aren’t made absent the discussion of what the impact will be in future years.
Nelson also wants the governor to take the lead in planning for the impending crises by involving community stakeholders in the discussions about the state’s immediate future. That, Nelson said, would relieve some of the pressure from state agencies and special interest groups that advocate tax policies that are created from the extreme wings of political parties instead of from the middle.
“Unless there’s a magic money fairy out there somewhere, we really have to sit down with the major entities involved – health care, education and public safety – and start talking about where we go,” he said. “We can’t have the continued political infighting between the groups.”
But the numbers make it clear that, no matter what kind of planning is done, significant problems will remain. How the caretakers of state government react to the crisis will determine how much harm is done, said lobbyist DeMenna.
“There will be a train wreck. It’s a matter of the scale and what we do with the damage,” he said.