Gov. Janet Napolitano has released long-awaited details to a plan she initially proposed in September to rectify a mounting deficit that some predict will reach $1 billion, proposing a combination of budget cuts, borrowing for capital projects and using a state savings account to balance the budget.
“This is a temporary dip in our economy, and we will work our way through it, just as we have before,” Napolitano stated in a press release.
But the state’s economic picture isn’t set in stone and still could get worse, State Treasurer Dean Martin said. He attributed most of the slumping economy to the decline in the housing market and the crisis in the sub-prime lending industry.
“It’s kind of like somebody who has a hangover after partying: The harder they party, the bigger the hangover the next day,” he said. “And Arizona was one of the biggest partiers on the block when it came to the whole mortgage arena, so we’re going to get hit a lot harder as a result.”
Martin said the deflation of the housing bubble in Arizona result in a state budget deficit that’s even larger than economists now predict.
“You should have to count on saving at least that much,” he said of the estimates, which range from $870 million to $970 million. “Don’t be surprised if it gets bigger.”
Legislative reaction to Napolitano’s plan was mixed, as Republican leaders said they were glad to have a starting point to begin negotiating an agreement with the governor, but were displeased to see her plan relies heavily on borrowing.
“I stand ready to look deeper into the budget to reduce spending even more, and that includes reducing the Legislature’s spending,” House Speaker Jim Weiers said.
Appropriations committees for both the House and Senate are scheduled to begin meeting to consider options for addressing the shortfall on Jan. 8, nearly a week before the Legislature convenes in 2007.
Napolitano’s plan proposes $214 million in state agency spending reductions, $393 million in borrowing for construction of new schools and a $263 million withdrawal from the Budget Stabilization Fund. Although the Legislature’s budget staff estimated the deficit at $970 million, the governor’s budget advisors peg the shortfall at only $870 million.
When Napolitano originally unveiled the tenets of her plan — though not details about the proposed spending cuts — she proposed $100 million in cuts, $300 million in borrowing and $200 million in cash from the Rainy Day fund to meet what was estimated at the time to be a $600-million shortfall.
Among the state agency cuts Napolitano has proposed are: $19.4 million in the Department of Corrections; $6.5 million for the Department of Economic Security; and $5.2 million for the Department of Health Services.
The largest individual cuts would be achieved by reducing by 630 the number of Arizona inmates housed in Indiana prisons ($14.8 million), financing a design for the downtown Biomedical Campus next year instead of paying cash this year ($10.5 million) and reducing the number of postsecondary education grants given to students attending private colleges ($5 million).
Also included in the state agency budget savings category are various fund sweeps totaling $128 million, including $24 million from the Clean Elections fund and $15 million from the State Aviation Fund.
Economist Elliott Pollack said it would be unwise to dip into the Budget Stabilization or Rainy Day funds quite yet.
“It’s too early to use the Rainy Day fund,” he said. “The Rainy Day fund was meant for periods of recession. I’m not sure we’re in one yet. I don’t think we’ll know until the employment numbers are revised in February.”
Another reason lawmakers should hold off on dipping into the Rainy Day fund, Pollack said, is that the economic picture is likely to be poor for several years and there will not be a quick recovery like the state saw the last time the economy dipped in 2001.
He also said the state’s recovery could be negatively impacted by the employer sanctions law, which took effect at the beginning of the year. Among the possible unintended consequences, Pollack said, could be businesses choosing not to move or expand to Arizona.
“We won’t know the true effect [of employer sanctions] for three or four years,” he said.