Ducey takes on budget risk to fund teacher pay hike

Gov. Doug Ducey announces a plan to give teachers a 20 percent raise over the next three fiscal years. (Photo by Katie Campbell/Arizona Capitol Times)

As Arizona clawed its way out of the Great Recession, Gov. Doug Ducey sought to ease the state’s reliance on borrowing and gimmicks to balance the budget.

It worked. In 2016, after signing a $9.6 billion spending plan, the governor boasted that the state’s budget was structurally balanced for the first time in years. That means Arizona’s recurring revenues exceed their recurring expenses.

Ducey accomplished this through conservative budgets that cut spending, including millions of dollars in funds for K-12 schools and universities in 2015, and relied on cautious revenue projections in a state wary of repeating the mistakes of the 2000s, when lawmakers relied on doubt-digit revenue growth that rapidly declined when the recession hit.

Now the governor is taking on some risk.

It’s Ducey’s latest response to a grassroots protest effort by Arizona teachers, who spent years complaining about a dearth of new funding for education. Per pupil spending in Arizona still hasn’t reached the levels of funding the state provided before the Great Recession. Arizona teacher pay ranks among the lowest in the nation.

As public opinion has shifted in favor of the teachers’ plight, so too has Ducey’s approach to budgeting.

The governor’s budget analysts now project more than $1.5 billion in new revenues over the next five years — a timely announcement given that a week ago, Ducey responded to threats of a teacher strike with a promise to boost teachers’ salaries by 20 percent in the next three years.

Economist Jim Rounds said the governor’s revenue projections are “within the range of being reasonable,” but a change from the Governor’s Office’s typical conservative budgeting practices, he said.

The projections the Governor’s Office are now touting are more in line with what Rounds called a “best-guess forecast,” an attempt to predict as closely as possible what new revenues the state will collect in the years to come. That’s their prerogative given the political climate, Rounds said.

“It’s the level of risk they’re willing to accept,” he said. “They’re not starting with an optimistic forecast. It’s about middle-of-the-road. But they’re not going to have as much flexibility down the road if things slow down,” he said.

Economic upswing

There’s nothing suspicious about the governor’s grand announcement of a 20 percent raise for teachers and the subsequent release of rosy revenue projections, according to Ducey’s budget team.

There have been signs that Arizona’s economy has grown, and will grow, at a rate that exceeds the more traditional forecasts Ducey and the Legislature have used when crafting budgets the past three years.

“The economy was indeed doing better than what was thought before,” Dennis Hoffman, an economist at Arizona State University, said April 17.

The revisions to revenue projections that Ducey’s staff made this week are in line with what Hoffman said he had projected months ago. Hoffman, an independent consultant to the governor’s budget team, dismissed the suggestion that the governor’s staff had simply projected revenues that would allow for Ducey’s ambitious proposal for a teacher pay raise.

“I think the notion that I’ve somehow come forward in the last few days and said, ‘Hey, here’s all this money’ really misrepresents the facts,” Hoffman said, adding that the revisions made by Ducey’s staff line up with projections he modeled in November.

Matt Gress, the director of the Governor’s Office of Strategic Planning and Budgeting, cited revenue estimates made by the Finance Advisory Committee, a team of economists that advise the Legislature on the state’s financial health. The committee’s analysts recently projected that state revenues for fiscal years 2018 and 2019 would exceed estimates by $245 million — enough to fund the $240 million Ducey needs to accomplish a 9-percent teacher raise this fall.

Those same analysts also cautioned that of those dollars, only $46 million may be recurring revenue.

That’s where Ducey’s budget analysts disagree. The committee’s revenue projections are far too conservative, they say. The governor’s staff projects ongoing revenues of $100 million, at minimum.

And new federal employment data has Ducey’s staff convinced that there will be more tax-paying Arizonans to boost the state’s General Fund in the years to come.

“It all feeds back into the state of Arizona’s economy right now,” Gress said. “It’s strong. It’s growing.”

The Joint Legislative Budget Committee predicts the state will face a $265 million cash shortfall in fiscal year 2020 and
$302 million in fiscal year 2021 under the governor’s plan. Legislative Democrats victoriously pointed to the committee analysis to further their point that Ducey’s teacher-pay plan is unsustainable.

The Governor’s Office “strongly disputes JLBC’s revenue estimates,” Ducey spokesman Daniel Scarpinato said. The committee’s projections are based on a single faulty analysis that underestimates state revenue growth, estimates that historically, have been shown to be lower than actual collections.

Strong revenues

Arizona lawmakers have taken advantage of substantial growth in the past, and relied so heavily on that growth continuing in ways they would later regret.

Arizona’s history of promising new spending without identifying new sources of revenue to sustain spending should give pause to legislators who want to vote for Ducey’s plan, said David Lujan, vice president of the Arizona Center of Economic Progress.

When former Gov. Jane Hull signed the Students FIRST bill in 1998, it created a promise, in law, to invest state dollars in school construction and facility maintenance. The bill eliminated a local property tax that had previously been used to fund school construction, but no new tax was created to supply state dollars needed for Students’ FIRST.

When the economy dipped, the Legislature went years without allocating funding for new school construction and spent millions of dollars less on building renewal, causing school districts to sue the state in 2017 for failing to meet the Students FIRST funding commitment.

Former Gov. Janet Napolitano instituted a full-day kindergarten program prior to the Great Recession, with funding reliant on state revenues that grew by roughly 7 percent a year at the time.

When the economy tanked, full-day kindergarten was one of the cuts made to balance the budget.

Lujan is optimistic about the ability to give teachers the immediate 9-percent raise Ducey proposed. It’s what happens after 2018 that worries him.

“I think they should be applauded for that because that revenue for this year would be there, but for future years, I think it’s relying on gimmicks and some very optimistic revenue projections that past history has shown us often do not come through,” he said.

In a radio interview this week, former Gov. Jan Brewer had similar thoughts.

She said Ducey’s office can really only ensure the pay bump for next year because the way the state’s annual budgeting process makes it hard to require future Legislatures to boost teacher pay.

Brewer was also skeptical of how Ducey plans to fund the pay raises.

“This is a difficult situation and to come up with this kind of money over a three-year period is going to be very, very difficult in my mind without a guaranteed revenue source,” she said.

Scarpinato said the governor’s past budget choices have made a less conservative outlook possible. The budget is structurally balanced and the state has a rainy day fund in the event revenues don’t deliver as the governor’s budget team anticipates, he said.

“We aren’t going to promise more than we can deliver. We aren’t going to make false promises,” Scarpinato said. “Those were made in the prior decade. I think people remember those. They don’t want to see that happen again.”

Reasonable

The governor’s plan – and the revenue projections used to finance it – don’t come without risk. The stakes are higher for policymakers at the state level than they are for most economists, Rounds said.

Rounds presented a hypothetical situation in which a person is betting on a basketball game. Say you guess the final score will be 89-75. There are no ramifications if the predication is off, he said. But the situation is completely different if someone tells you to predict the final score of the basketball game, but you have to pay $10,000 if you go over, he said. Your guess is going to be significantly lower in that case, Rounds said.

That’s how the state has traditionally budgeted under Ducey — lower projections are a safer bet.

The fight over revenue projections is always the first step toward a Republican budget agreement each year. The Legislature relies on its own budget analysts, who historically project revenues in a more conservative fashion than the governor’s staff.

Even by those standards, Ducey’s staff has erred on the side of caution. In January, the governor’s budget proposal predicted $90 million more in revenues than analysts with the Joint Legislative Budget Committee projected. That’s the closest the respective budget gurus have been in years.

With his latest projections, Ducey already has the tentative buy-in of legislative Republicans. Rounds said neither branch of government is out of line in ditching the cautious approach.

“They’re not being irresponsible, they’re just not being as conservative as we’ve seen in the past when it comes to that kind of public policy,” he said.

In response to Ducey’s proposal, Democratic lawmakers have argued it’s irresponsible to commit large sums of money to teacher-pay raises without new, sustainable revenue. Rounds concedes that the concern is valid. However, Ducey’s plan is feasible, Rounds said.

“This isn’t one of those scenarios where you have a forecast and people are saying, ‘It’s too high,’” Rounds said. “When things are more in the middle, it’s kind of hard to describe it as being either really good or really bad. I get it. It’s reasonable.

“Is it good policy? I guess we’ll have to see,” he said.