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The Arizona comeback? Temporary success yields to more financial turmoil

CIt’s looking less like a great comeback and more like an arduous climb out of Dante’s purgatory.

While Gov. Jan Brewer often talks about Arizona’s “success story” and how the state is now among the best places in the nation to do business, the truth is that Arizona is once more in deep fiscal trouble.

Analysts from the Joint Legislative Budget Committee said Arizona faces a $520 million deficit this year, $1 billion in fiscal 2016, $928 million in the year after, and $787 million in 2018.

That means the next governor will have to plug a roughly $3.2 billion budget hole during his first term. That doesn’t even count other obligations that may also be forced on policymakers. If the court orders the state to pay back the schools for the years it withheld full inflationary funding, that would add a $1.3 billion headache within the next five years.

Unless revenue trends are quickly reversed, it would be as if lawmakers woke up from the nightmare of the Great Recession — when they were forced to temporarily raise taxes, mortgage state assets, move funds from one pot to another, freeze programs or eliminate others, and cut deep into agencies’ bones — only to find themselves in the same situation.

This time, however, their options are greatly limited, as previous gimmicks and maneuvers have already been exhausted. Policymakers already borrowed against the state’s Lottery revenues and mortgaged state properties. Their attempts to balance the budget by withholding voter-mandated obligations or sweeping publicly-approved revenue streams have already been declared unconstitutional.

Senate President Andy Biggs told the Arizona Capitol Times that the choices are stark. Either raise taxes — an option he opposes — or slash budgets, which conservatives appear to have already settled on.

Biggs also noted various voter-mandated spending, which further constrains lawmakers as they try to resolve the looming deficit.

He said if the economy doesn’t pick up and it’s nearly impossible for the Legislature to raise taxes, “Where do you go? You’re going to have to find some way within the current pot of money that you have.”

A mirage in the desert
But what happened to the Arizona “comeback” story?

Depending on who is asked, either that narrative has been a mirage in the desert or it is still unfolding, albeit in frustratingly slow motion.

In any case, what’s clear is that Brewer faced a sizeable deficit when she became governor and her successor will face another deficit when she leaves office.

The contours of the downturn in the middle of the last decade are now familiar to all. The subprime mortgage crisis exploded, catching states and the national government flat-footed. But some states suffered more than most, and Arizona suffered especially hard.

Consider this: Arizona lost roughly 313,000 jobs during the recession, but it has only regained about 62 percent of them, lagging behind the U.S. and many of its competitor states in the Southwest region.

“We’re just not seeing the kinds of growth in the state in terms of goods-producing jobs and manufacturing jobs and things that can help sustain us,” lamented Professor Dennis Hoffman of Arizona State University’s W.P. Carey School of Business. “We’re just not seeing it at all. The puzzle is Colorado, Utah, California, Washington — they’re all doing better.”

He said part of the reason might be the fact that Arizona’s base industries — aerospace, defense, electronic manufacturing — are struggling.

“I’m not saying those (aerospace and defense) industries are dead, but they’re just not growing. They’re not in a position that can give us any growth,” he said, attributing the struggle to federal cuts, such as the sequestration that hit Arizona particularly hard.

Georganna Meyer, a former chief economist with the Arizona Department of Revenue, theorized that Arizona’s economy is so defined by construction that “when the construction rug was pulled out from under us, we fell hard.” Construction is a big component of the U.S. economic engine, but it has long been the backbone of Arizona’s economy.

At a recent meeting of finance advisers, economists and lawmakers, state economist Aruna Murtha perplexedly recounted how she poured over the statistics to find any one industry that is poised to take off and help catapult the state past its less-than-cheery job landscape.

Alas, she could find none, although health care, financial services and hospitality and leisure are doing OK, she said.

More worrisome, she said, it now looks like this year’s growth employment rate would fall below 2.1 percent, the growth rate in the past three years.

“Although a lot of the sectors are growing, the heavy loss in construction jobs during the recession has not been compensated by substantial gains in other sectors post-recession,” she recently told the Capitol Times. “Arizona lost 11.6 percent of jobs, far deeper than the U.S. at 6.3 percent. Hence, it’s taking that much longer for Arizona to recover.”

Sweeping tax cuts
The economy is so large that aside from setting the conditions to ensure that the private sector could grow, the government cannot, by itself, completely shift the economy’s direction.

But that hasn’t stopped politicians from claiming they can enact the right measures to create an oasis in the desert and lure the caravans of companies that are supposedly fleeing high-tax states like California.

So when the recession hit, the ruling Republican Party jumped on the opportunity to enact some of the most sweeping tax cuts in the state’s history.

Starting in 2011, Brewer and her allies were busy wielding their tax-cutting blade. Within two years, the Legislature had enacted and the governor had approved what was initially estimated to be $2.5 billion worth of tax cuts to take effect between fiscal years 2012 and 2019. More tax cuts were approved in 2013 and 2014.

The Capitol Times’ estimate shows that between fiscal years 2015 and 2017, ongoing and one-time tax changes would result in roughly $830 million less being collected.

Indeed, the tax cuts, some of which were phased in until the middle of this decade, became the most profound legacy of Brewer’s term.

Actually, the current deficit shouldn’t come as a complete surprise. Previous estimates showed that unless the economy has rebounded by now, the expiration of the 1-cent sales tax, which produced roughly $1 billion annually, at the end of fiscal 2013 would put the budget in a deficit by the middle of this decade.

Based on the economic theory favored by the state’s policymakers, many of the conditions for economic vibrancy are now in place.

Optimism shining through
Brewer’s optimism shines through in her speeches.

“We’ve been able to attract such international icons as Apple, GM and Silicon Valley Bank. Industry has taken note of our pro-business climate. In fact, Forbes magazine rates Arizona as the number one state for expected job growth,” she said, adding that the Arizona Commerce Authority has brought about 32,000 jobs and more than $4.4 billion in capital investments.

And yet something appears to have hijacked Arizona’s plane on the way to recovery. House Minority Leader Chad Campbell is incredulous when he hears the phrase “Arizona comeback.”

“Hey, I’ve been telling you guys for years: There was never an Arizona comeback. It was all a myth,” he said. As governor, Brewer “did nothing” to move the state forward, he said, insisting that Brewer only resorted to “temporary stop-gap” measures.

But consultant Stan Barnes sought to distinguish the underlying mechanics behind the looming deficit and the one that Brewer and legislators tackled, concluding they’re two vastly different things.

“When (Janet) Napolitano left and Brewer came into office, the deficit was mainly driven by Governor Napolitano’s desire to spend as much money as was coming in back in days of budget plenty, and when Governor Brewer leaves office, the deficit is a lingering hangover from the historic budget crisis that has been a constant factor in her governorship,” Barnes said.

He said Arizona’s economy has been anemic, which in turn is suppressing revenue collections. It’s true that current elected officials share the responsibility for approving the budgets the state now lives under, but Barnes said most Capitol observers would agree that Brewer and legislators have done their best to approve conservative budgets, anticipating future difficulties.

“But it is an imperfect system and there was some wager by budget staff as well as elected officials that the economy would be yielding more tax revenues to the state of Arizona by now and that hasn’t materialized,” he said.

Chuck Coughlin, an adviser to Brewer, also defended the administration by noting the enormity of the challenge that she and legislators faced five years ago. He maintained that the state benefited from the decisions she and lawmakers had made.

Gubernatorial spokesman Andrew Wilder struck a similar tone.

“It’s hard to comprehend how deeply troubled Arizona’s finances were when Governor Brewer took office just a few years ago when there was a massive $3 billion deficit (the worst in the nation). Governor Brewer turned that situation around,” he said. “Through strong leadership and a willingness to make the difficult decisions necessary to right our fiscal ship, the governor is leaving the state in a far more financially secure position than she found it.”

Both Coughlin and Wilder acknowledged the budgetary challenges the new governor will face.

“We went from near bankruptcy to stability and the next governor and Legislature are going to be faced with a smaller but similar problem. Does the next solution come in the form of a Band-aid or does the next solution come in the form of a fix, as we did on Medicaid restoration?” Coughlin said.

Actually, revenues are still inching up and economists remain optimistic, noting that the state’s growth potential compared to others remains sound and consumer confidence is moving up.

“We will go back to prosperous times again. The hard part is figuring out when that’s going to be,” said economist Jim Rounds.

The problem is that collections are insufficient to erase the deficit and have fallen below forecast for six consecutive months.

Many economists, including Hoffman and Rounds, also believe that Brewer managed Arizona’s fiscal mess well.

“I think that the conditions could have been far worse in this state had we had a governor that did not embrace some really key moves,” Hoffman said, noting Brewer’s decision to push for Medicaid expansion and a temporary sales tax increase against the wishes of many in her party.

But others said the tax cuts have contributed to the deficit.

“Of course… you can’t reduce your state revenues like that — you can’t reduce your taxes — and expect not to feel some impact, especially when the revenues aren’t coming in very well,” said Meyer, the former Revenue Department chief economist.

As for the philosophical underpinnings behind the tax cuts — that is, they would not only pay for themselves but also bring in more revenues — Meyer had this to say: “You know, that’s a beautiful theory, but I have yet to see that happen.”

Still, Biggs bristled at the suggestion that the tax cuts have not stimulated the economy.

“When you say we’re going to ‘give away’ (money through) tax breaks, what you’re really saying is that you believe that the government is entitled to that money. And the reality is the government coercively takes this money,” Biggs said, adding that he can “safely” make the argument that, without the tax policies lawmakers have enacted, the state would be fiscally worse off.

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