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Deficit politics in the COVID era is tricky as ever

Julia Shumway and Arren Kimbel-Sannit//April 24, 2020//[read_meter]

Deficit politics in the COVID era is tricky as ever

Julia Shumway and Arren Kimbel-Sannit//April 24, 2020//[read_meter]

lesson-learned

The next two months present an unprecedented challenge for Arizona’s lawmakers.

Ask just about anyone, and they’ll say the same — for fighting off an epidemic, there’s no playbook, not much in the way of history to examine, and nobody at ground control to ease the state into a smooth landing. Sometimes, there are only wrong answers.

But while the novel coronavirus has politicians casting about in the dark for solutions, one of its second-order effects may feel familiar – a massive hit to state revenues that threatens to burden the government with a $1 billion cash shortfall, potentially evaporating Arizona’s savings.

And though this deficit is the result of a deadly and elusive virus, not a mortgage bubble, lawmakers will be left to confront the new fiscal reality with some — though not all — of the same tools that their predecessors used to help right the ship during the 2008 financial crisis, which hit Arizona harder than most.

Some of the policymakers who made those decisions are still around, and some, in fact, are still in office. And they remember the cuts, the fund sweeps, the accounting gimmicks and the sell-offs that characterized Arizona’s response more than a decade ago, leaving the state with one of the most picked-over budgets of any in the country. They know that while the state is in some ways better equipped to handle a cash shortfall now than in 2008, the politics of cutting costs are just as fraught as ever.

“Some of the people that are in there now were there when I was there,” said former State Sen. Ken Cheuvront, a Democrat from Phoenix who served in the Senate from 2003 to 2011.

“I don’t know if there’s a right way to do this.”

Predictably, Republicans and Democrats have contradictory perceptions of the state’s readiness to confront the looming crisis.

Lawmakers had many more options for clawing back revenue during what became known as the Great Recession than they do today, said Sen. Rebecca Rios, D-Phoenix. Rios, who has served off and on in the House and Senate since 1995, was the Senate assistant minority leader from 2008 to 2010.

In 2008, lawmakers tried every budget gimmick available, from sweeping other state funds to selling and leasing back the Capitol complex and other state buildings. Fund sweeps led to lawsuits and taught state boards to avoid hoarding appropriations, Rios said.

Another option lawmakers pursued during the recession was freezing enrollment by childless adults in the state’s Medicaid program, the Arizona Health Care Cost Containment System. In 2010, the state also froze enrollment in KidsCare, the state’s version of the federal Children’s Health Insurance Program. It didn’t fully restore funding to KidsCare until last year.

“Back in 2008 we could just cap the program,” Rios said. “That’s not an option now.”

Recession-era cuts to many areas, including K-12 education, have yet to be fully restored.

Between the 2008 and 2012 fiscal years, lawmakers signed off on more than $1.9 billion in fund transfers, according to the Joint Legislative Budget Committee — at the time, a sizeable chunk of a deficit that some years exceeded $3 billion. In the same period, they reduced agency budgets by a staggering $3.3 billion, including $187 million as part of a moratorium on investing into the School Facilities board.

A decade of lean budgeting and foregone revenue has left few areas to cut, Rios said.

“Because there were so many cuts made a decade ago, that padding, that fat, is not in the budget,” she said. “It’s a very lean budget by Republican design, so it leaves little to no room for us to cut.”

But what lawmakers do have this time around is a massive rainy day fund — nearly a billion dollars in its own right, and an important buffer against what might otherwise be a devastating shortfall.

“If we hadn’t done that, this would be a bloodbath again,” said Rep. John Kavanagh, R-Fountain Hills, who from 2007 until 2013 represented what was then Legislative District 8. “The biggest lesson is to have a robust rainy day fund. A lot of people — and by that, I mean Democrats — owe [Gov. Doug] Ducey and the Republicans an apology.”

This is one reason why he predicts cuts and sweeps won’t be as severe this time around. Additionally, as Rios suggested, Kavanagh said that those discretionary funds haven’t grown to pre-recession levels, and their “keepers” have gotten wiser with the money.

Former Gov. Jan Brewer, who presided over the recession-era cuts, shares the sentiment, and then some.

“We were in a fiscal crisis, the worst imaginable kind,” she said. “Compared to what they’re going through right now to what we went through is like a walk in the park.”

Arizona took harder economic hits and took longer to recover than the rest of the nation. A booming pre-recession state economy and a better-than-average 4.4% unemployment rate became an unemployment peak of 11.2%, and it took until December 2015 for the state to recover the nearly 300,000 jobs it lost.

In Brewer’s mind, the deficit she faced justified what even she acknowledges were the largest budget cuts in the state’s history. It even justified a temporary sales tax increase that she shepherded to the ballot in 2010, despite her own reticence and resistance from legislative Republicans.

That 1-cent increase, Proposition 100, was about the only thing Republicans did right during the recession, said David Lujan, the head of the Arizona Center for Economic Progress. He was House minority leader from 2009 to 2011.

“The sales tax initiative was something that helped get us through that period,” he said.

And he wishes that the current stock of Republicans would be open to such an idea again.

So does Senate Minority Leader David Bradley.

Because the recession hit during the tail end of Democratic Gov. Janet Napolitano’s tenure, and because her Republican successor needed Democratic support to pursue budget policies loathed by conservative legislators, the minority was more involved than it usually is in budget negotiations, Bradley said.

But while Bradley thinks such a sales tax hike should be considered again — he’s also interested in an increased gas tax, given that he has seen gas selling for $1.80 a gallon in some places near his Tucson home. He said it’s unlikely Gov. Doug Ducey will agree.

“I remember it being so controversial when then-Governor Brewer promoted the 1-cent sales tax and some of our Republican colleagues said this would be the collapse of civilization,” Bradley said. “The notion that you can’t tax during a recession, I think folks on the other side would still say that that isn’t an option.”

Indeed, House and Senate Republicans have all but ruled out a tax increase, though they’ve said the same for further broad-based tax cuts, which have been a hallmark of their fiscal policy since the state began emerging from the
recession.

Some of these lawmakers, such as Sen. Sylvia Allen, a Snowflake Republican who first came to the Legislature in June 2008, think the rainy day fund may render tax increases and sweeping budget cuts unnecessary. Allen said she has supported increases in the state’s rainy day fund to avoid ever again having to make the kinds of cuts lawmakers made during the Great Recession.

As daunting as the state’s finances seem right now, they’re nowhere near as bad as the $3 billion deficit lawmakers dealt with in 2009, she said.

“We were in session many times that year, had special sessions one right after the other to deal with the crisis,” Allen said. “The priorities were to try to not damage too severely some of the social programs that the most vulnerable populations were depending on.”

But cut they did. During the recession, cutting spending — particularly when it came to K-12 education — was “devastating,” she said.

“Education was very hard,” Allen said. “There’s no way when you have a $3 billion deficit that you don’t cut from the area that’s 50 percent of the budget, but it was just very difficult. I truly hope we don’t have it that severe again.”

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