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Cash war: State’s projected surplus will bring new budget skirmishes

For a state that has been grappling with a multibillion-dollar deficit for four years, news of a potential revenue surplus is like a few drops of rain after a long drought.

For the first time since the recession began, revenues in the last fiscal year came in higher than the budget forecast. If the trend holds, the state is potentially looking at about $300 million in “extra” money by the start of the next fiscal year.

Assuming that surplus materializes, it would bring a dilemma: What to do with the extra cash?

As any Capitol observer will confirm, while it is far more painful to downsize programs, it is also difficult to decide which of those programs should be restored — or to resist that temptation altogether.

As revenues grow, that pressure will mount, and potentially, that’s where the next budget showdown will be, those who are familiar with the budget process say.

“The fact is, it is really pleasant to hand money over to people,” said Byron Schlomach, an economist with the conservative Goldwater Institute, who noted that many lawmakers have only experienced cutting.

“And they’ve dealt with all the unpleasantness of that, and I’m sure there is going to be some level of desire to be a nice guy and say ‘yes’ for a change,” he said, noting that lawmakers should not cave to the pressure.

But while many share that sentiment, there is no shortage of suggestions about what to do with the potential revenue surplus. And already, groups that were at the receiving end of the drastic budget reductions have begun lining up to call for some restoration.

The next regular session is still about five months away, but a budget battle is already taking shape.

• • •

Groups that were greatly impacted by the budget cuts have offered compelling reasons to back their spending recommendations.

Told that Republican leaders are hesitant to restore some of the cuts, they lament that lawmakers have been eager to give away tax cuts for years, and that, they say, has led to declining revenues and depletion of resources for priorities like education and health care.

Some like Sen. Kyrsten Sinema, D-Phoenix, have been saying every extra dollar should go straight to education, arguing it’s a no-brainer that a sound public education system is the key to a vibrant economy.

This group points out that the education community has been “gouged,” suffering one of the largest cuts in the years following the recession.

Putting some money back into schools, they add, would go a long way toward helping stimulate the local economy.

The health care community offered similar reasons.

“Healthcare sustained the lion’s share of the FY 2012 budget cuts and we sincerely hope that lawmakers will revisit these reductions,” the Arizona Hospital and Healthcare Association wrote in an email to the Arizona Capitol Times. The hospital group is pushing for a “bed tax” as an alternative to the cuts that it says threaten people’s access to care.

“The health care sector remains one of the only industries that consistently grew during the recession, and it is important for lawmakers to recognize the role of this job-creating industry in Arizona’s economic recovery,” the group said.

Others call for restoring programs whose funds were significantly slashed or completely wiped out.

Among them is Bruce Liggett, executive director of the Arizona Child Care Association.

“Many elected people are saying even though there were cuts to education and health care, it could have been worse, right?” Liggett said. “Well, the fact is it could not have been worse for child care. All general fund money was taken from child care (in the FY12 budget).”

What’s even more disheartening for Liggett is that the 1-cent sales tax hike, which his group enthusiastically supported, specified that revenues were supposed to also go to health and human services — not just to education and public safety.

He offered his economic rationale for funding child care: It helps create the conditions so parents can find and keep work.

• • •

But many Republicans recoil from the thought of increasing spending or restoring some of the cuts with surplus revenues that might turn out to be unsustainable.

They’re wary of finding the state in the same boat it has been struggling to keep afloat in the last four years, and they’re particularly cognizant that revenues from the 1-cent sales tax, which is propping the state’s dwindled resources, won’t be available in two years.

Freshmen legislators like Sen. Don Shooter, R-Yuma, said he doesn’t want to cut any more so he’d like to keep the current spending level rather than face the possibility of having to downsize programs again later.

“I’m taking the ‘Joseph of the Bible attitude’ and that is we better rebuild the rainy day fund because I see some big storm clouds coming,” he said, referring to the Biblical hero who saved his family during seven years of famine by stockpiling grain.

Shooter’s sentiment resonates with his GOP colleagues.

“Save it,” Sen. Michele Reagan,

R-Scottsdale, said of any budget surplus.

“If we have extra revenue and we don’t stock it away in preparation so we never have to go through this again, we’re very foolish,” she said.

Actually, Senate President Russell Pearce has been advocating putting any extra cash in a “lock box” —  to be opened when revenues from the 1-cent sales tax vanish.

Meanwhile, Republican leaders like Sen. Steve Pierce, the majority whip, want to use any additional revenue for debt reduction, arguing the surplus is money that has already been spent and the loans the state incurred need to be paid back.

Matthew Benson, the governor’s spokesman, said the possibility of a surplus is great news, but he emphasized that it’s a projection.

If the surplus were realized, Benson said Brewer’s priorities are to take care of the debt incurred in the last few years and to manage other drastic fiscal measures the state resorted to during the crisis.

“She’d like to buy back some of the state buildings that were sold to bring in extra revenue during the downturn, especially the state Capitol buildings. That is really a top priority of hers,” Benson said, adding the governor would also like to deal with the rollovers, which include deferred school payments.

But Benson said the governor also supports the idea of putting some money aside for the budget storms ahead.

• • •

Many hope the past fiscal crisis has taught everybody a lesson. Actually, there are strong signs it has compelled people to engage in introspection and to think ahead.

Fiscal hawks tell the Capitol Times they recognize some programs were hit especially hard, and some mending is good investment.

Meanwhile, even groups that are seeking spending restorations are cognizant of the fiscal hurdles ahead and of the probability that extra revenues won’t materialize.

Setting aside money for the expected revenue downturn is wise, too, said House Assistant Minority Leader Steve Farley.

“We shouldn’t just spend it all away, and that’s why I have some common ground with some of my colleagues on the other side of the aisle,” he said.

But what Farley really wants to see is long-term planning — not budgeting based on “short term booms and busts.”

Dana Naimark, of the Children’s Action Alliance, also pointed out that cuts to the Arizona Health Care Cost Containment System are under a legal challenge, and if the courts ultimately ruled against the state, that would throw the budget back in the red.

A trial court on Aug. 11 upheld the cuts to state Medicaid, but the case is expected to be appealed.

It would make sense to see how it all plays out before making any commitments, Naimark said.

“We’re a lobby for healthy children, for educated children, for safe children. We know to accomplish those goals you do need to look beyond a one-year horizon,” she said. “Having said that… we’re really in a precarious situation right now where far too many children are at risk of growing up without health care, without quality education, without the safety and security they need — and we’re all going to suffer for that.”

Revenue spike produces an unexpected $300M

Many greeted the unexpected growth in revenue with a sigh of relief, but it is a measured one and nobody is celebrating yet.

Actually, the good news came with plenty of caveats.

In its latest report, the Legislature’s budget research arm said revenues, buoyed by gains in individual income taxes, jumped by 11.6 percent in fiscal 2011, which more than doubled the budget forecast.

As a result, budget analysts are anticipating that $300 million of the $332 million shortfall last year would be erased.

And since the current FY12 budget set aside money for that deficit, this means if the gains held, lawmakers might be looking at about $300 million they could use for something else next year.

Budget analysts and economists, however, cautioned that the revenue spike in FY11 may be one time, noting that the job market remains lethargic, the housing industry is fragile, and it’s easier to post higher gains against such a dismal performance in FY10.

Senate Majority Leader Andy Biggs noted that the growth in individual income taxes likely came from higher capital gains and fewer households taking advantage of mortgage interest deductions.

Like many others, Biggs is cautious about assuming that those gains would necessarily translate into a surplus at the end of the current fiscal year.

Add to that the possibility of some federal programs going away — which would have significant implications for states like Arizona — coupled with the temporary sales tax hike expiring in two years, and the question becomes: “Is it prudent to spend everything you get?” Biggs asked. “The answer, of course, is ‘no.’

“The future is so hard to predict and I’m thinking back to predictions that I heard in 2008 indicating that we would be out of this by now, and it hasn’t happened,” he added.

Economists: Resist spending urges

Regardless of how lawmakers deal with any unexpected revenue surplus, economists are urging plenty of caution.

“This is a surprise that we got more money than what we thought,” said Marshall Vest, the director of the Economic and Business Research Center at the University of Arizona’s Eller College of Management.

But as budget analysts have noted, Vest said the extra money appears to be the result of one-time factors.

The best strategy, Vest said, would be to resist the urge to “spend that money right now.”

Policymakers shouldn’t get carried away by the bit of good news, he said, noting that the expected $300 million surplus is the equivalent of a “rounding error” given the size of the budget.

Vest said policymakers should keep in mind what’s also happening to the national economy, which could have an impact on Arizona’s plodding recovery.

“Limping along is, I think, a nice characterization,” he said. “The recovery is very fragile and in the very early stages here in Arizona, and if we were to see the national economy fall back in recession, it would certainly derail any recovery that we have going on here.”

Meanwhile, Tom Rex, a professor at the W. P. Carey School of Business at Arizona State University, said legislators should also keep in mind the fiscal hurdles ahead, notably the loss of revenue from the temporary 1-cent hike in the sales tax.

“Any permanent use of the money, you’ve got some factors that are advising against that,” he said. “By permanent I mean if you would try to bump up spending on some of the programs that were cut. Or, hopefully, no one will consider doing a tax cut based on those excess revenues.”

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