Ducey proposes cuts, one-time sweeps to balance budget

Gov. Doug Ducey proposed a combination of one-time solutions and hundreds of millions of dollars in budget cuts, including big hits to universities and Medicaid providers, while Arizona waits for the economy recover enough for its budget to be structurally balanced by fiscal year 2017.

But that plan comes with a massive asterisk: It assumes that the state wins its appeal in lawsuit over K-12 funding. If the state loses, it could be on the hook for more than $300 million each year, throwing a precariously balanced budget back into disarray.

“We’ll cross the bridge when it gets there. I’m trying to close a $533 million shortfall,” gubernatorial budget chief John Arnold said during a budget briefing on Friday, referring to the presumed budget deficit the state will have for fiscal year 2016.

For now, Arizona faces shortfalls of nearly $160 million for the remainder of fiscal year 2015 and more than $533 million in FY16, presuming a ruling in the K-12 funding case doesn’t add to it.

In FY15, the state will plug the deficit primarily using more than $125 million of the $454 million in the rainy day fund, and makes several smaller cuts to eliminate the deficit. That will leave the state with a structural deficit of nearly $769 million for FY15.

For FY16, things get a bit more complicated. Ducey is proposing $348 million in cuts, $304 million in sweeps and other one-time solutions, along with $62 million from “maximizing revenues,” which include reducing a rebate the state provides homeowners for property taxes and increasing collection of outstanding sales taxes.

The governor also proposed about $44 million in new spending, including 3,000 new prison beds for the Department of Corrections.

Ducey proposed a $9.09 billion budget for FY16, with an ending balance of about $184 million. The plan is for the state budget to be structurally balanced by fiscal year 2017.

“We want to set this up so (in) fiscal (year) ’17, when we start that year we’re balanced. We’re more than balanced,” Arnold said.

By FY17, Ducey’s budget presumes that general fund revenues will have increased to $9.3 billion, up from a projected $8.9 billion in FY16 and $8.5 billion in the current year.

Ducey’s budget proposes $74.4 million in additional inflation funding to the K-12 system, rather than the $317 million a Maricopa County judge said the state owes. The state has appealed that ruling and contends it only should increase funding by about $75 million a year.

Arnold, director of the Office of Strategic Planning and Budgeting, said the state’s figure is the one based in current state law, and is therefore the assumption he can use for the time being. He said he didn’t know where the state will find the extra money if the courts ultimately uphold the trial court judge’s ruling.

Arnold said the Ducey administration will attempt to have school districts verify that administrative spending cuts don’t end up coming out of classroom spending. But when asked whether that was legally enforceable, Arnold quipped, “Define ‘legally.’”

“I think the harder question is, is it enforceable with 220 some odd school districts?” he said.

All told, Ducey proposed an increase of $134 million in K-12 spending, which the governor said would all go to the classroom. But he offset that with nearly $124 million in cuts to non-classroom spending, leaving the K-12 system with a total of only $11 million in new funding – or about $10 per student.

The biggest ongoing cut in Ducey’s budget proposal is a $75 million reduction in university funding. The lion’s share of that comes from Arizona State University, which will lose $40 million, while the University of Arizona will lose nearly $22 million and Northern Arizona University loses $13 million.

During a Friday morning press conference with House Speaker David Gowan and Senate President Andy Biggs, Ducey indicated that university cuts would be coming.

“We believe the universities are investments for state. And we think they’re also an investment for individuals at the universities. But we’re asking everyone to share in this sacrifice while we’re protecting these classrooms,” he said.

Community colleges will take a hit, too, with Ducey calling for an $8.8 million cut for Maricopa, Pima and Pinal counties, representing about half of the funding they receive from the state. Arnold emphasized that community colleges get most of their funding from tuition and local property taxes, and noted that each of the three counties’ community college systems would lose less than 2 percent of their total revenue under Ducey’s proposal.

Another major cut will come from the Arizona Health Care Cost Containment System. Ducey proposed cutting health care provider reimbursement by $40 million.

Arnold noted that the state will have to demonstrate to the U.S. Centers for Medicare and Medicaid Services that the cuts won’t reduce Medicaid coverage in Arizona.

“It is not very easy, but we’ve been through it a number of times now,” he said.

In FY16, Ducey called for more than $300 million in fund sweeps. The Arizona Commerce Authority stands to lose $100 million – $75 million from the Arizona Competes Fund, also known as the agency’s “deal-closing fund,” and another $25 million from its Work Force Recruitment and Job Training Fund. The Special Employee Health Fund at the Arizona Department of Administration, which Arnold said was overfunded, will lose $90 million. And the Arizona Department of Transportation will lose $35 million from its highway expansion and aviation funds.

Under Ducey’s plan, Arizona will shift some spending burdens onto local governments.  Arnold said that because about 17.5 percent of the tax money collected by the Arizona Department of Revenue goes to local governments will have to pay for an equal percentage of the agency’s budget. Ducey also plans to shift additional costs from the Arizona Department of Juvenile Corrections over to counties.