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Return of the deficit: a budget nightmare on Washington Street

cIf Freddy Krueger were visiting Arizona’s treasury instead of terrorizing teenagers’ dreams, he would be clawing, burning and plunging it into another nightmare of billion-dollar proportions.

Merely four years after policymakers struggled to bridge a multi-billion budget gap, Arizona could be scrambling to plug a deficit that has the potential to quickly get out of hand.

If that shortfall isn’t resolved and things turned for the worse, Arizona might be starting at a $1.2 billion deficit in fiscal 2016, which the new governor and the next set of legislative leaders will have to solve next year.

The new estimates came from the Joint Budget Legislative Committee, which poured over the state’s revenue collections in fiscal 2014 and found them discouraging.

“June results were disappointing, further increasing the year-to-date revenue shortfall,” JLBC declared in its monthly fiscal report.

That’s just the tip of the iceberg.

All told, revenues for fiscal 2014 grew by only 2.8 percent, the lowest growth rate since fiscal 2010. The state collected $8.45 billion, which was supplemented by roughly $895 million in carry-forward balances.

For June, revenues were $56 million below forecast, which JLBC attributed to weak corporate income and sales tax collections.

For the entire fiscal 2014, revenues dipped by $113 million compared to the budget forecast.

The smaller ending balance and an expenditure savings of $47 million could put last fiscal year’s ending balance at $530 million instead of $596 million.

This has significant repercussions for the current budget, which was built around a cash balance of $596 million. Because of a weakness in collections, this year’s ending balance is now expected to dip to $64 million instead of $130 million.

And worse, even if the targeted growth rate – 5.3 percent – for this year is reached, the lower revenue base could translate to a shortfall and turn the expected $64 million in positive cash balance into a $49 million deficit.

That does not year factor in the K-12 inflation funding lawsuit, which is threatening to become a $2.9 billion headache.

If the court orders Arizona to immediately reset the K-12 base level funding and pay the schools roughly $317 million in the current fiscal year, lawmakers would be looking at a $366 million deficit. To avoid that scenario, revenues need to grow at an improbable clip of 9.4 percent, the JLBC said.

The implications will reverberate beyond this year.

Projections could leave the state with a shortfall of $480 million in FY16, and if the state is also compelled to pay back $320 million to schools, that deficit grows to $800 million.

That’s not even the worse scenario.

“These FY 2016 results would occur assuming any FY 2015 shortfall was resolved. If a FY 2015 shortfall of $366 million was not resolved, the cumulative effect would be a deficit of approximately $1.2 billion in FY 2016,” the JLBC said.

The Legislature’s budget research unit didn’t project what the deficit will be in FY17, but the original budget already put that shortfall at $489 million.

There’s a glimmer of hope in JLBC’s gloomy estimates. Its numbers are based on anticipated revenue growth rates, which means, in theory at least, that Arizona could avoid the worst if its economy rebounds much faster and the collections rate are accelerated.

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