Arizona will likely face a $1.1 billion budget shortfall because of the coronavirus pandemic, and it will take months to learn just how grim the state’s economic forecast looks, legislative budget analysts said on a call with economists. 

But the extent of the economic impact remains highly speculative, and that deficit could range from roughly $600 million to $1.6 billion by the end of fiscal year 2021. Uncertainty surrounding the rates of coronavirus, how hard the disease will hit and how long it will take to find a cure complicates economic forecasts, Joint Legislative Budget Committee Director Richard Stavneak said. 

“The challenge is that those virus forecasts are extremely speculative and changing weekly, if not daily,” Stavneak said. “The whole potential for a second wave suggests we need to be cautious with a 2021 forecast.”

For now, JLBC predicts that general fund revenue will drop by nearly 25% during the last few months of fiscal year 2020, leading to a $638 million deficit in 2020 and another $482 million shortfall in 2021. With a deadline for state and federal income taxes extended from April 15 to July 15, more taxpayers who owe taxes on 2019 income are expected to file in the next fiscal year, while many who will receive tax refunds have already filed. 

Lawmakers, who passed a $11.8 billion “skinny” budget in March before recessing, initially hoped to return to the Capitol with funding available for spending priorities or tax cuts. Instead, they’ll likely have to discuss spending cuts or raiding the state’s $973 million rainy day fund. 

Budget analysts are not recommending that lawmakers return and try to address the shortfall right now, Stavneak said. It will take until early June to know just how severely Gov. Doug Ducey’s late March stay-at-home order, or the physical distancing recommendations many businesses followed before the order, affected sales tax revenue.

Retailers, bars and restaurants have a month to remit the sales tax they collect, so budget analysts won’t begin seeing full data from March until early May. And because restrictions were only in place for part of March, the April collection figures, available in early June, will paint a fuller picture. 

So far, about 247,000 people — roughly 7% of Arizona’s workforce — have submitted unemployment claims in the past three weeks. Phoenix’s hotel occupancy rates fell by 71% in the last week of March, and multiple restaurant chains reported a 70% decrease in sales despite increased rates of takeout. 

“It’s very challenging to craft a solution when the magnitude of the problem is so uncertain at this date,” Stavneak said. “Legislators may well want to start holding discussions about the shortfalls. You can have those discussions. I just wouldn’t target a specific dollar amount.”

While the state Constitution requires a balanced budget, lawmakers can roll a deficit from 2020 over to 2021 and address it in the following year. The Legislature used that tactic in fiscal year 2009. 

It also could use money from the rainy day fund to cover the shortfall, as it did in 2008. And JLBC recommended waiting on any budget cuts for state agencies or fund transfers until fiscal year 2021, because they’re difficult to implement at the end of a fiscal year.  

Federal funding could aid the state in its recovery efforts, though those dollars come with many strings attached. Budget analysts believe Ducey will be able to use some of the $1.68 billion provided in the recently-passed Coronavirus Aid, Relief, and Economic Security (CARES) Act to reimburse a $50 million appropriation from the state’s general fund to mitigate the economic impact of coronavirus. 

Another $277 million provided for K-12 education could replace a portion of the state’s spending on K-12 education, freeing up some general fund dollars for use elsewhere. 

The recession Arizona and the world faces now is unprecedented, said economist Elliott Pollack. Pollack recommended ignoring economic data. 

“It’s far worse than the Great Depression in terms of the severity of the decline and the timing of the decline,” Pollack said. “But it can be mitigated quickly if the economy reopens this summer and cash flow gets to those who need it.” 

George Hammond, an economist and professor at the University of Arizona’s Eller College of Management, agreed. Normal economic indicators of and normal responses to spur economic rebounds don’t function the same way in the current environment. 

“This is a downturn that is very unusual, essentially a sudden stop of the economy,” Hammond  said.