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Debt reduction is next fiscal hurdle

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After policymakers borrowed heavily to keep government afloat amid a festering fiscal crisis that blew holes in the state’s budget for four years, a former Senate president tried to put into place a mechanism to rein in politicians’ appetite for debt-financing.

He came up with a complex proposal to tie allowable debt to a percentage of the value of assessed property in the state and to require a funding source other than the general fund to pay for new borrowing and debt servicing.

But with Bob Burns’ retirement in 2010, the issue appears to have taken a back seat and there are no longer any debt-reduction champions in the Arizona Legislature.

“He really had provided most of the leadership on that issue,” said Kevin McCarthy, president of the Arizona Tax Research Association.

McCarthy said debt-reducing proposals in the last session indicated that policymakers recognize the need to pay down the $3.7 billion in debt tied to the state’s general fund.

But with Burns gone and lawmakers’ attention centered more on slashing government spending and cutting corporate taxes in an effort to spur economic growth, McCarthy said “there wasn’t the focus that there was in the previous year” on the debt problem.

In essence, the debate shifted from reforming the way the state acquires debt to avoiding taking on any more debt.

One explanation why is obvious.

Spurred on by sweeping Republican victories in November that saw the GOP caucus in each legislative chamber swell to supermajority status, fiscally conservative lawmakers were able to muster the votes needed to make sweeping budget cuts that hadn’t been possible in recent years.

“First of all, to tackle the debt, we (have to) develop a culture of living within our means. That means (you) don’t put yourself in a position where you are going to borrow a whole bunch of more money or that you’ll need to,” Senate Majority Leader Andy Biggs said.

Led by fiscal hawks, the Legislature pushed for more cuts and successfully negotiated a budget that shunned borrowing and accounting gimmicks.

But by not striking now, policymakers run the risk of missing out on the opportunity to tackle the debt problem while the topic is fresh.

Not only is the subject often dull and wonkish, but there are other crises looming on the horizon that could overshadow any focus on tackling the state’s debt load.

One of them is already threatening the state’s fiscal stability.

The state faces a dramatic decline in revenue when the temporary sales tax voters approved in 2010 ends in 2013. The tax increase was estimated to bring in about $1 billion a year.

Already, Republican leaders say they want to set any aside cash between now and then to help bridge that gap.

And if the economy manages to recover quickly enough to produce the kind of revenue needed to fill the hole that the expiration of the one-cent sales tax will leave, lawmakers will likely face tremendous pressure to restore cuts to programs.

Many policymakers and economists recognize the downside of massive borrowing, which legislators had increasingly resorted to as they wrestled with a historic budget shortfall.

Already, debt servicing in fiscal year 2012 stands at nearly $300 million. That’s roughly equivalent to the cuts made to community colleges, the Department of Economic Security and K-12 schools combined.

A budget provision two years ago that saw the state securitize dozens of government buildings — a maneuver known as sale-leaseback — provided the state with more than $700 million to fill budget gaps, but it will also cost the state nearly $450 million in interest over 20 years.

And the $450 million lawmakers borrowed against state Lottery revenues last year will cost the state $254 million in interest over 20 years.

Some lawmakers want to trim those expenses by paying that debt down more quickly.

House Majority Whip Debbie Lesko pushed legislation this year to limit state spending to the growth in inflation and population. A provision in the bill, HB2707, would have automatically appropriated excess revenue to, among others, debt repayment.

Lesko said she and the Governor’s Office failed to reach a deal in the regular session. Subsequently, Gov. Jan Brewer vetoed the bill, arguing that the spending limitation was too restrictive.

Lesko said she’ll hunker down and resume talks with the governor’s staff for another try next year.

“She has said to me personally — and so has her staff — that they want to tackle some type of spending limit and paying off the state debt,” Lesko said.

Senate President Russell Pearce also promised to get “very aggressive” in whittling down the state’s debt load.

“We’re going to have an excess in revenue this next year. It won’t be spent on expanding government,” Pearce said. “If anything, some of that money can be spent on debt reduction.”

Sen. Steve Yarbrough, chairman of the Senate Finance Committee, said that’s where the next “great tension” will be.

“If revenue improves, there will surely be that sort of a struggle between those who would prefer to reinstate or at least increase or refund programs that have been cut, and there will be others who believe dealing with the debt issue is a paramount concern,” Yarbrough said.

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