Key Points:

• Arizona has less than 40 days to complete a state budget before a government shutdown

• One reason for budget delay is uncertainty over state tax revenue

• Despite habitual partisan disagreement, lawmakers they are on the same page

With a hard deadline of just over a month before the Arizona government shuts down without a new state budget, Republican lawmakers and Democratic Gov. Katie Hobbs — or at least her staff — are finally talking. 

The long delay has put pressure on both sides to hammer out a deal quickly.

At the heart of the delay, and the start of negotiations, has been the extension of Proposition 123.

The 2016 voter-approved ballot referral was designed to raise teachers’ salaries by tapping about $300 million more a year from the state land trust. It expires this year, but GOP lawmakers decided last week to wait until 2026 to send any Prop. 123 extension to the voters.

That decision came because Republicans hoped to attach a constitutional protection to the state’s universal school voucher program to any extension of Prop. 123. The Legislature doesn’t need Hobbs’ approval for a ballot referral, and Hobbs has stated she’s opposed to universal vouchers in general.

Yet another more important reason for budget delays has been uncertainty about state tax revenue. 

After starting the calendar year with an expected $612 million in new revenue, the Legislature’s budget analysts and a group of outside economists lowered that figure to $277 million in mid-April. 

The change was prompted by concern that new federal tariffs would affect consumer spending and related tax collections and probable federal spending cuts by the Trump administration. Fears of a potential recession also contributed to the lower revenue estimate.

Those changes resulted in a predicted 2% surplus in the expected $17.6 billion budget for the coming year. Since then, concerns about tariffs have moderated slightly.

Then April’s tax collections numbers came in much higher than expected — $207 million higher, mainly due to a big increase in individual income tax payments. 

That news, released last week, provides some unexpected breathing room, although the Legislature’s budget analysts cautioned that budget negotiators should not rely on it as ongoing revenue. That’s because much of the higher income tax revenue was driven by a surge in capital gains as people locked in stock profits late last year before Trump took office. 

“I think everybody understands where the economy is, the fragile nature of the economy, and then also the potential impacts from federal administration decisions,” House Speaker Steve Montenegro said Tuesday.

“So I think we all understand that the numbers are flat here in Arizona,” said the Goodyear Republican. “We all see that there isn’t a lot of room here.”

On May 23, Sen. John Kavanagh, R-Fountain Hills, said that formal budget talks could begin this week, although as of May 27, none have been scheduled. 

Hobbs is also looking at the looming deadline.

“We have started informal conversations this week,” she said last on May 22. “So I’m hopeful we can meet the 40-day deadline that’s in front of us.”

Hobbs rolled out her proposed spending plan for the budget in January, but GOP lawmakers have not presented any outline of their priorities — other than rejecting, for the third year, her proposal to roll back the state’s universal school voucher program. 

“The governor has been calling on the Legislature to put out their plan for months and months and months,” Slater said. “Now we’re down to the wire and now we have to get something done.”

She released an updated version of that budget in early March which asked for nearly $50 million in supplemental funding to cover the ballooning cost of the voucher program for the balance of this fiscal year that ends June 30. The program adopted in 2022 is now on track to cost $1 billion in the upcoming budget year, even as the governor has unsuccessfully pushed to reduce its scope.

She said last week that she’s working toward a bipartisan budget deal.

“We’re still looking at what priorities we can include that will get the votes we need to get a bipartisan budget,” Hobbs said.

Kavanagh said GOP lawmakers are eyeing just over $250 million in new spending to split between the governor’s office and Republican members of the House and the Senate, setting the revenue bar lower than many expected. 

Splitting the new revenue between GOP and Democratic wish-lists is a new tack that emerged for the first time after Hobbs took office in 2023 as the first non-Republican chief executive since Janet Napolitano left office in 2009. 

Kavanagh said Senate Republicans will collectively receive about $90 million to spend, with an identical amount allocated among House Republicans.

Under that plan Hobbs will also get $90 million, but minority Democrats in the House and Senate aren’t included in Kavanagh’s spending math.

The House, however, isn’t on board with the Senate plan, according to Rep. Matt Gress, R-Phoenix, who sits on the House Appropriations Committee.

“One of the challenges with the 90-90-90 plan is that there are several items in the executive budget that are the basic functioning of government,” Gress said, like replacing air conditioning at prisons, repairing school buildings or buying new state police vehicles.

“There are these basic things that you’ve got to do as government that cost a lot of money,” Gress said. “So when do the 90-90-90, it basically gives the executive $90 million to use on things that I think are the responsibility of all of us — the House, the Senate and the governor.”

And that, he said, is wrong.

“The governor also has other executive initiatives,” he said, things on her wish list, just like the House and Senate Republicans. So she’ll blow through her $90 million in two seconds just on covering the basic costs of government — the things that Gress, who was budget director under former Gov. Doug Ducey, should be the responsibility of the entire government.

And Hobbs does have things she wants.

Her January budget proposal included new spending that far exceeds what Kavanagh said GOP lawmakers have earmarked, including $112 million in new general fund spending to provide child care subsidies for an additional 25,000 children. Subsidies help low-income Arizonans afford child care, enabling parents to work.

She also wants nearly $50 million in new spending for college scholarships for potential nurses, teachers and other groups, more money for the Housing Trust Fund that helps fund low-income homes and apartments, and money for a first-time homebuyer program, among other spending proposals. She also wants raises for prison guards and state police and money to combat fentanyl smuggling and for border enforcement. 

Kavanagh didn’t specify any potential uses for the money, saying Republican lawmakers want to use it outside of normal spending increases, including in the budget “baseline,” and depositing money into a state employee health care fund and one for school building repairs.

“We want to take care of the baseline and divvy up $280 million three ways between the governor, the House and the Senate,” he said.

The governor also wants to allocate $30 million for raises for state troopers and corrections officers, something Gress said is also backed by House Republicans.

Another concern is the state’s Medicaid program, which provides medical care for about a quarter of Arizona residents. Although the Arizona Health Care Cost Containment System, known as AHCCCS, has seen an 8% decrease in enrollment in the past year, those still on the program are sicker and cost more money.

That means higher per-person costs that the state has to pay. Add into that a boost in use for a relatively new program that pays parents to care for their seriously disabled children at home and Medicaid spending.

“So the Medicaid programs are a significant chunk of this new spending for the governor – and again, those have to be shared by all of us,” Gress said. 

All of those needs and wants, along with many more, go into a budget plan, and neither side will get everything they hope for out of a state budget, especially when money is fairly tight. 

But Gress said with time running short, it’s time for serious talk. 

“Our lines of communications are open with the Senate and the executive,” Gress said.

“We need to get this budget passed, and you do it by assembling the votes,” he said. “And you’ve seen two bipartisan budgets passed, in fiscal years ’24 and 25, and I would expect the same to be the case in 2026.”

Montenegro said the House is focused on public safety, ensuring the economy is sound, and individual rights. And he downplayed the differences in the budget plans being pushed by the Senate and the House, saying they will come together.

“Ultimately … we will be on the same page,” Montenegro said.

Kavanagh said he doesn’t know when a budget will come together but knows it must be within the remaining 34 days – or less, since Gress has a personal commitment that will mean he’s not available after June 22. 

“Things could go quick or slow. It’s fairly unpredictable,” Kavanagh said.