Revenues for the current year may be up, but the Joint Legislative Budget Committee is still predicting a shortfall of nearly half a billion dollars for next year’s budget, largely because of cost increases to education and health care.

JLBC presented its fiscal 2006 budget overview to the three legislative appropriations committees last week. Fiscal 2006 begins July 1, 2005.

“After the governor’s [State of the State] speech…I thought the picture was going to be much rosier,” Rep. David Smith, R-7, said. “I’m disappointed.”

JLBC Director Richard Stavneak explained to the committees that the state will face a shortfall of $477 million if it only funds statutory appropriations determined by formula and new school construction and makes an optional deposit of $189 million into the budget stabilization, or rainy day, fund.

The shortfall does not include funding for several high profile issues, including business property tax cuts; full-day kindergarten expansion and state employee pay raises. Mr. Stavneak said those three additional programs alone could cost the state an additional $150 million.

Revenues Were Up In 1st Half of FY 2005

For the first half of the current fiscal year — July 1 through Dec. 31, 2004 — Mr. Stavneak said revenues were an estimated $270 million higher than expected; because of triggers placed in the budget, half of that surplus will be deposited into the rainy day fund. Forecasts through the end of the fiscal year show revenues will be up $370 million, or 11.1 per cent. The total net new available revenues for fiscal 2006, Mr. Stavneak said, will be $494 million.

However, he said the additional revenue is quickly offset by cost increases to several programs. JLBC estimated the net new spending for fiscal 2006 to be $971 million, $477 million more than the estimated new available revenues.

K-12 education costs will rise by $136 million next year, JLBC said, primarily because of a 3.2 per cent enrollment increase, though an 8 per cent property growth rate did ease the total cost increase.

AHCCCS Faces Shortfall

State subsidized health care under AHCCCS, the state’s Medicaid program, is facing an $80 million shortfall this year and will cost an additional $200 million in fiscal 2006, assuming a 2.5 per cent growth rate, Mr. Stavneak said.

“That will bring the AHCCCS budget above $1 billion for the first time,” he said.

Mr. Stavneak said a return of the redermination time period to 12 months from six months to ease a paperwork backlog at the Department of Health Services likely contributed to an 11.8 per cent enrollment increase since May 2004 as the backlogged paperwork was filed. However, he said JLBC is unsure if that is the only cause for the increase in enrollment.

“Our concern at this point is the underlying population growth of AHCCCS seems to be increasing faster than that,” he said, adding that if true, cost estimates may actually be low.

One reason for the possible increase in the base population is likely a decrease in the number of private companies offering health insurance for employees. From 2003 to 2004, Mr. Stavneak said, the percentage of private Arizona companies offering insurance dropped to 55 per cent from 59 per cent.

More Funds Needed For Prisons

An additional $43 million will have to be spent on Arizona’s prison system to provide new beds for a growing prison population, though Mr. Stavneak said the state will still have a 2,700-bed shortfall at the end of the next fiscal year — June 30, 2006.

Retirements Costs To Go Up

A rise in retirement costs for state employees will cost the state a total of $30 million in 2006. The retirement system rate hike will cause state employees to see a decrease of 2.5 per cent in take home pay, Mr. Stavneak said.

In the 2006 budget proposal, which was not available by press time Jan. 13, Mr. Stavneak said JLBC will recommend the state return to a pay-as-you-go system for new school construction. In 2002, he said the Legislature opted to borrow because of a lack of available funds. If Arizona continues to finance the cost of building new schools through borrowing, he said debt payments will absorb 3- to 4 per cent of long-term general fund expenditures.

However, he said if the state returns to cash payments for new school construction, the cost will be $300 million in the 2006 fiscal year, but will save the state money in the long run.

Mr. Stavneak said the Legislature will also have the option of paying $189 million into the rainy day fund, though there is no statutory requirement to add any money to the fund. He said if the full amount were deposited, the fund balance would be $360 million.

Pearce: Government Has Grown Too Much

Rep. Russell Pearce, chairman of House Appropriations P Committee, said budget decisions by past legislatures put the state in the predicament it is in today.

“There is a lot of waste in this government,” the District 18 Republican said. “We’ve grown government beyond what is reasonable.”

He said the one thing the Legislature can’t do this session is “put the taxpayer in jeopardy of a tax increase.”

Democrats were also concerned with the picture painted by JLBC, but said the situation was not impossible.

“We can come up with a balanced budget,” House Minority Whip Pete Rios, D-23, said. “The issue is just how.” —