Economist Elliott Pollack tells House and Senate lawmakers that Arizona’s bleak economic outlook means trouble for the state budget.

If revenue collections during first three months of the 2009 fiscal year are any indication, the state budget is likely to take another pounding — or perhaps several of them. 
During a special briefing at the Capitol on Oct. 1, legislative budget analysts and an economist pegged this year’s budget deficit as high as $1 billion. But even that figure depends on a slight improvement in the Arizona economy.
A significant economic turnaround isn’t likely as the national economy continues to falter and there is no end in sight to the housing crisis, said private economist Elliott Pollack.
“Good is not in the equation in 2009, in terms of the economics,” he said.
In July and August, tax collections came in 8.6 percent lower than a year ago, and preliminary numbers for September show collections again were down 8.6 percent.
Yet the worst-case scenario presented by analysts considers a 5-percent decline in annual revenue.
If revenues continue to fall at the rate they are now, a legislative budget analyst told a panel of lawmakers on Oct. 2, the deficit will be closer to $1.4 billion.
Population growth has been one of Arizona’s key economic engines. But as long as people in other states can’t sell their homes because of the national slump in the real estate market, Pollack said, they won’t be able to move here, limiting the number of new residents. He said the state’s population might even shrink by 1-2 percent next year.
And Arizona’s struggling construction industry, which drove much of the windfall in revenues in recent years, won’t be making a quick turnaround, Pollack said.
Greater Phoenix has anywhere from 55,000 to 75,000 houses on the resale market, about double the historical average. Pollack said the decreased population growth, coupled with tighter lending restrictions, means it may take several years before the excess supply is absorbed by the market.
The bottom of the housing market may be reached in 2009, he said, but a full recovery will almost certainly take years. During that time, he expects cities will see far fewer new home permit applications.
Richard Stavneak, director of the Joint Legislative Budget Committee, said Arizona joins states like Florida and Nevada as those with the most severe housing downturns.
“We have one of the most significant problems of any other state,” he said. “Arizona is one of the worst states.”
The state’s bottom line has already suffered because of it. Earlier this year, legislators were forced to amend last year’s budget to address a nearly $1.4 billion shortfall. The 2009 budget was designed to bridge what was expected to be a nearly $2 billion deficit, but revenue numbers have fallen well short of expectations.
July and August, the first two months of the fiscal year, each posted $90 million less than anticipated. Preliminary numbers for September, Stavneak said, show the shortfall could be increased by an additional $130 million, bringing the total deficit through the first quarter of the year to about $300 million.
The crux of the state’s budget problems, Stavneak said, is that the state has $10.7 billion of ongoing spending commitments, but is only expecting to take in $8.2 billion in ongoing revenue, or tax collections that can be counted on every year. Right now, the budget also includes about $700 million of anticipated one-time revenue.
That makes the picture for the upcoming fiscal year, a budget for which lawmakers will craft in the upcoming legislative session, even gloomier. Stavneak said the deficit for fiscal year 2010, which starts next July 1, likely will be between $1.5 billion and $2.6 billion.
Solutions for bridging the budget gap this year are few and far between. When lawmakers fixed last year’s budget and created this year’s, they did everything they could to avoid deep cuts to state agency spending. They nearly drained the state’s rainy day fund, raided dozens of specialized accounts designed to fund specific programs, delayed paying some bills and borrowed to cover the construction costs for new schools.
“There’s not a lot of options left,” said Senate Majority Leader Thayer Verschoor. “One is to reduce spending and the other is to increase revenues.”
When House Speaker Jim Weiers presented those options to more than 30 Republicans who gathered after the Oct. 1 budget briefing, several voiced their objection to raising taxes.
“If taxation going up is not really an option,” Weiers said, “then I guess you go with (cuts). It’s going to be really hard.”
But Gov. Janet Napolitano said there are other options available to address the deficit. On Oct. 1, she said state agencies have been directed to tighten their belts, but she also said the state may have to examine more unorthodox way of raising revenues, such as securitizing Arizona’s portion of a settlement with tobacco companies or privatizing the state Lottery.
But Weiers was skeptical about any moves to have what he termed “a fire sale” of the state’s assets.
“That only gives you short-term (help),” he said. “If you start having fire sales, you might be selling yourself short.”
The governor released an outline of her budget management plan Oct. 1, outlining how she intends to address a shortfall she pegs at $450 million, but could rise as high as $800 million. Napolitano is proposing using the rest of the rainy day fund, raiding some more dedicated funds, and reducing spending among state agencies to bridge the anticipated budget gap.