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Scramble over rising revenues begins – save it or spend it

After four years of painful slashing, a steady uptick in state revenues could lead to a budget showdown the public hasn’t seen since the heydays of Arizona’s economy — what to do with “surplus” money.

The Governor’s Office estimates a $600 million surplus this fiscal year, and believes it might be as high $1.5 billion for fiscal 2013, which begins July 1.

In any case, what’s clear is lawmakers will not be dealing with a deficit this year, and there are high hopes the trend will hold or even get better.

What that means is an end to the sometimes heart-wrenching budget-balancing acts lawmakers resorted to in the last few years — decisions that included temporarily eliminating funding for certain transplant services, freezing Arizona residents out of the state’s health care system, and squeezing the child care subsidy. That’s not to mention major cuts to education and temporarily raising taxes, an action that once bitterly divided Republicans at the Capitol.

Instead, the big question that now preoccupies policymakers is what to do with revenues above what’s earmarked for the current spending plan.

In short, this session will undoubtedly be less painful for those who had been at the receiving end of the budget cuts, and for those who once made those decisions.

But it doesn’t mean crafting the budget will be any less contentious.

Sometimes, more money can mean more wrangling. Already, pressure is mounting about where to spend the “surplus” money — or whether to spend it at all.

• • •

Some sectors were hit especially hard by the budget cuts, and they offer sound arguments why their funding should be restored.

But many of today’s policymakers are grizzled veterans of budget battles and they are mindful that while more revenue is trickling in, Arizona — or the country — is not quite out of the woods yet.

The threat of another economic downturn or prolonged recovery is ever present, which cannot bode well for Arizona, a state that outperforms the country when things are doing well, but is worse off when things are going bad.

Additionally, a temporary sale tax hike that propped up the state during its direst hour will expire by the middle of 2013, and the governor, who fought hard for the increase, recently promised she’ll see that it ends as scheduled.

And so depending on how the economy performs, the state could be looking at another budget deficit by fiscal 2014.

• • •

What’s likely to happen is the revenue “surplus” will go to several pots, and maybe even include a little bit of additional spending.

The two big ones will likely be debt-reduction and setting aside money to prepare for the loss of revenue when the 1-cent sales tax increase goes away.

In fact, there are broad agreements between the governor and the Republican-led Legislature on the need to pay back some of the debt the state has incurred in the past few years.

More specifically, Gov. Jan Brewer has asked the Legislature to send her a bill before Statehood Day — Feb. 14 — to buy back the Capitol complex, where some of the buildings, including the very edifices where laws are being crafted, have been mortgaged.

Republican lawmakers appear amenable to buy back the state buildings that were sold in a sale/lease-back scheme to offset staggering deficits a few years ago.

The governor is asking the Legislature to appropriate $106 million for the buy-back scheme. The money will be placed in an escrow account and it will cover the interest and principal payments until the earliest time that the debt can be called — in 2019.

She’s also claiming the move will save the state $47.5 million in interest payments, which would have accrued over the debt’s original 20-year life span.

But Democrats aren’t sold on the idea. They said the state would save the same amount of interest if it waited until 2020 before paying off the debt.

Letting $106 million “sit” in an escrow account would do nothing to address the state’s other budget priorities — except get the title to the Capitol back, a “symbolic gimmick,” House Democrats said.

Legislative leaders also often mention the state’s unpaid obligations to school districts, which is about $1 billion. So portions of school rollovers —meaning deferred payments to districts — might actually get paid.

Another prevailing sentiment is to put a good chunk of any “extra” cash into a rainy-day fund, to be drawn once the temporary sales tax expires.

But beyond these two concepts, policymakers and interest groups diverge about where else to put the money — and there’s no shortage of ideas about what to do.

Senate Minority Leader David Schapira, for example, wants to set aside some money for school building renewal, arguing it would benefit students and spur jobs.

“I know this: Everybody is wanting programs restored and obviously, priorities are going to have to be set,” said Byron Schlomach, an economist with the Goldwater Institute.

But Schlomach advises caution. He said any funding increase, if there has to be one, has to be strategic: spend the money only if the public good is clearly defined and the benefits are absolutely necessary.

“I think the bottom line is we need to hold the line on current program spending and not create any new programs,” he said.

• • •

But holding the line on current spending isn’t music to some people’s ears.

Bruce Liggett, executive director of the Arizona Child Care Association, said his industry has been at the harshest end of lawmakers’ budget decisions. State subsidy for child care was completely eliminated in the last budget go-round.

Now that the state is getting some fiscal relief, Liggett is hoping to persuade the Legislature and the governor to restore funding for child care, saying it’s a wise investment.

For Liggett, it’s not just a safety net, it’s also a boon to the economy.

“We have a situation where revenues are up, and yet the number of low-income families trying to go to work being helped continues to go down,” Liggett said. “(But) there’s no better investment than child care. It keeps people off welfare as families work and support their children.”

Undoubtedly, many others will also be offering powerful arguments why certain spending is also good and necessary.

But they face a tough climb in the Legislature, where leaders have repeatedly said they want to hold the line on spending.

In fact, some, like Senate President Steve Pierce, have been saying there’s really no “surplus” revenue given the state’s debt load. Any extra money is “already spent,” he says.

But other Republicans, such as Rep. John Kavanagh, are open to funding population increases at schools, prisons, the state’s health care system, and a few specific items like boosting Child Protective Services and upgrading the state’s computer systems.

Kavanagh, chairman of the House Appropriations Committee, however, said he doesn’t see the “gates opening” for other types of spending.

The other route for interest groups is to convince Brewer to include their priorities in her budget plan since she appears more open to a little extra spending. For example, the governor said she plans to ask the Legislature for $7 million to promote tourism.

• • •

The governor is expected to lay out her spending plan Jan. 13.

She’ll have to sell her budget to legislators, who, for now, appear to be agreeable to granting some of the spending she has publicly talked about.

But as always, the fights will be over concepts as well as details.

Pierce’s reply when told about tourism money that Brewer is expected to ask for was this: “I have to look at it and see what she’s talking about.”

But House Speaker Andy Tobin was immediately supportive of the governor’s tourism plan.

“I always thought that tourism was something that had a place in the Competitiveness Package,” Tobin said, referring to last year’s “jobs” bill. “That’s a place where we can put money that will bring a return for the state.”

Meanwhile, Brewer unveiled her tax proposals a few days after the session began. Their fiscal impact could be big or small depending on when they take effect, but they will cost the state some money, regardless.

The bulk of her proposal provides tax breaks to businesses, such as bringing down the corporate income tax rate to 4.9 percent from nearly 7 percent beginning in 2014, reducing commercial, industrial and agricultural property taxes while increasing rebates for residential homes, and creating a new tax credit for “quality jobs.”

Democrats, on the other hand, said they will offer their own “jobs bill”

While they did not have specific details yet, it would likely include a package of tax incentives to help small businesses, which they argued have been neglected in favor of tax cuts for big companies.

The cuts would be funded by closing tax “loopholes” elsewhere, they said.

It’s not only Brewer and lawmakers who will have to reconcile potential differences.

Republican leaders will have also to manage different expectations by the rank-and-file, as well as deal, or not deal, with the wishes of the minority party.

Already, there’s potential friction within the majority between fiscal hardliners who want to continue cuts even as revenues are growing, and those who are wary about further reductions.

“I imagine that that will be an internal struggle inside of the Republican caucus,” said Sen. Ron Gould, a Lake Havasu City Republican who is arguing that policymakers need to make “preparatory” cuts now to cover the potential loss of revenue when the 1-cent sales tax expires.

— Caitlin Coakley Beckner contributed to this report

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