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New budget solution: Deal with it next year

House speaker Kirk Adams says lawmakers will have to push the limits when dealing with the state’s budget deficit, including perhaps rolling over some debt to fiscal 2011.

House speaker Kirk Adams says lawmakers will have to push the limits when dealing with the state’s budget deficit, including perhaps rolling over some debt to fiscal 2011.

This year’s budget problems might just become next year’s nightmare.

Lawmakers hacked $650 million from the state’s deficit during the final two months of 2009, but the shortfall still tops $1.4 billion.

And with little time and few options remaining, lawmakers might opt to stack this year’s problems onto next year’s.

House Speaker Kirk Adams said lawmakers may have to forestall the inevitable until next year, even though that means compounding the projected fiscal 2011 deficit of $3.3 billion.

“We are entering a stage in this budget-balancing process where we will be required to push the limits in every area,” Adams said.

There are several ways to prolong the tough budget decisions, such as delaying payments to schools and state agencies as well as other accounting gimmicks. In fact, those maneuvers have been used frequently; about $450 million of this year’s deficit was held over from fiscal 2009.

But each time state payments were rolled over into the next fiscal year, the Legislature had started the year with a balanced budget, approved by lawmakers and signed by the governor. Revenue came in short due to economic swings and did not keep pace with projections.

This year, though, that’s not the case. Lawmakers passed a budget on July 1 that was balanced on paper, if not in reality. But parts of it were later vetoed by the governor, which put it out of balance by any measure.

If lawmakers end this fiscal year without a balanced budget signed by the governor, it would be entirely new territory. And it may put the state crosswise with a constitutional provision that requires a balanced budget.

Nick Dranias, an attorney with the Goldwater Institute, said entering the next fiscal year without bringing spending in line with revenue would violate the spirit and the purpose of the state Constitution’s debt clause.

“If they actually are going to do it that way, we may (file a lawsuit),” he said.

Whether such rollovers are permitted under the Arizona Constitution is open for debate. The state Constitution says the state shall provide taxes or other annual revenues sufficient to defray the cost of state expenses. Many people interpret that clause as a requirement for a balanced budget. The Constitution also does not allow the state to borrow more than $350,000 between fiscal years.

Economist Alan Maguire, whose firm The Maguire Company provides economic data for the state, said he believes pushing a deficit off to the next fiscal year is constitutional. But that doesn’t mean it’s a good idea, he said.

“It only has validity from a narrow accounting perspective,” Maguire said. “Think about your household budget. If your credit card is due on June 30, and you decide to pay it on July 1, you haven’t changed the amount of the bill. You haven’t changed the amount of your obligation. All you’ve done is change it from one month to the next.”

Since January of 2009, about $985 million has been carved from state spending. Additional spending reductions are problematic for practical reasons. With only six months left in this fiscal year, implementing additional cuts becomes increasingly unlikely.

“There’s probably not much left to cut in fiscal 2010,” said Victor Riches, Adams’ chief of staff. He speculated there was only $200 million or so that could be cut this year.

Borrowing in some form will be a large part of the solution, Adams said.

The state may be able to come up with additional money by selling more state property, though doing so in less than six months presents a challenge. The state already has authorized the sale-leaseback of a package of buildings that is expected to generate $735 million, but the process has not been finalized.

A temporary sales tax increase, which Gov. Jan Brewer has called for since March, would provide little direct revenue during this fiscal year. After several failed attempts to send the temporary tax hike to the ballot for voters to weigh in, Brewer’s office has set its sights on a May special election.

Even though tax collections wouldn’t be much of a benefit for fiscal 2010 – assuming the sales tax measure ever makes it to the ballot and is approved by voters – gubernatorial spokesman Paul Senseman said the state could borrow against the final year of the revenue stream and spend the money right away.

Republican lawmakers also want to ask voters to temporarily suspend a constitutional voter-protection provision. Under the language developed by House Appropriations Committee Chairman John Kavanagh, the Legislature would be able to divert up to half of any taxes created by voter approval to help solve the deficit. Lawmakers also would be able to raid voter-created funds and sweep up to half of the available balance into the state’s general fund.

In contrast, there are more solutions possible for the fiscal 2011 deficit. Larger cuts will be easier for state agencies to implement and lawmakers will have more borrowing options at their disposal. For instance, they could borrow against the Arizona Lottery or revenue from the state’s tobacco lawsuit settlement.

Any sales tax increase approved in May also would increase revenues by upwards of $1 billion, according to estimates from the Governor’s Office.

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