The Arizona $3 Billion Deficit

PHOENIX (Wire Services) March 29, 2009 — The deficit looming in the state budget is at least $3 billion.

That's a staggering figure, and difficult for state lawmakers to digest, much less the average citizen.

How big is $3 billion?

• If you cut out all general-fund money sent to the state university system, essentially shutting it down; eliminate the state prison system; close the state parks; stop state funding to the arts and welfare services; and get rid of the Commerce Department, you still wouldn't close the gap.

• To erase the deficit, every man, woman and child in the state would have to send the treasury $473.28.

• Or, given the state's current rate of spending - an average of $27 million a day - a budget $3 billion lighter than projected would mean government would have to shut down three and a half months before the year is up.

Arizona ranks second in the nation when it comes to the size of its deficit in comparison to its base budget: 28 percent, according to the National Conference of State Legislatures. Only Nevada, another fast-growth state hit hard by the mortgage meltdown, ranks higher.

"Arizona is, on a relative scale, one of the worst states in terms of shortfall numbers," said Scott Pattison, executive director of the National Association of State Budget Officers.

Arizona builds half of its budget on the sales tax, which has faltered as the economy has gone south. It's been followed by declines in the income tax, creating less money to cover the state's costs, which are projected to hit $11 billion for 2009-10.

This upside-down situation has triggered revisions of the last two state budgets, and is the reason for the growing deficit that lawmakers must balance, as the state constitution requires, before the new budget year starts July 1.

Gov. Jan Brewer, who took office just over two months ago, minces no words describing the deficit.

"We have a catastrophe here in Arizona," she said. "It's unbelievable. It gets worse each day."

How we got here

It was only three years ago that Arizona lawmakers and then-Gov. Janet Napolitano were quarrelling over how to spend a $1 billion surplus.

As long as the state's tax collections kept growing, the state could afford spending.

But collections started to slow in 2007, and the last two state budgets needed mid-course corrections to bring them back into balance. The work is not over on the current-year budget that ends June 30: It's about $500 million out of balance, even after a $1.6 billion "fix" was enacted in late January, cutting programs and services by nearly $600 million and adding in federal bailout money.

After plugging that growing hole, lawmakers need to tackle the deficit for next year.

Limits and options

Resolving a $3 billion deficit is made more difficult by the constraints lawmakers face.

About $7.3 billion of the budget is out of lawmakers' control, driven either by existing law or mandates created by voters. For the coming fiscal year, if budget cuts were the only option, that would mean $3 billion coming from the remaining $3.7 billion. But GOP legislative leaders long ago conceded they can't cut their way to a balanced budget, even though they see this budget crisis as an ideal time to downsize government.

They also have to contend with political pressure. Since the late-January budget cuts, the Capitol grounds have hosted regular protests, with everyone from child-care providers to the disabled to public-school advocates bringing their message of woe to lawmakers.

"You don't take from the poor box," said Cletus Thiebeau, president and CEO of the Valley of the Sun School, which provides services to the developmentally disabled.

While cuts remain a key component, lawmakers also are looking at other moves to close the deficit. They include delaying scheduled payments to schools and universities and borrowing against future lottery dollars or against Arizona's share of the federal tobacco settlement.

Senate leaders have talked about further privatizing the state's prisons or selling state holdings, such as Veterans Memorial Coliseum, as another way to tame the deficit. So far, it's unclear how much money that would save.

"This hole is so deep, this budget is so out of balance . . . everybody has to participate," said state Sen. Russell Pearce, R-Mesa, and chairman of the Senate Appropriations Committee.

Federal stimulus dollars are estimated to bring more than $4 billion to Arizona. Many of those dollars are intended for specific causes, such as education, transportation and Medicaid, but they would ease the state's obligation to those areas, if only for a year or so.

Brewer has agreed to accept stimulus dollars, and although some lawmakers have complained it could obligate the state to higher spending in the future, they have been willing to use the money to help balance the budget.

A new option

A few weeks after taking office, Brewer put another option on the table: a temporary tax increase. She said she concluded that tax cuts, budget maneuvers and even help from Washington won't be enough to get the state through what she argues will be three rough budget years.

It was a surprising announcement from a longtime fiscal conservative who won election to the Maricopa County Board of Supervisors by campaigning against a tax hike for the baseball stadium. And it sent shock waves through Republican circles, with stunned legislative leaders saying tax hikes aren't in their plans.

House Speaker Kirk Adams said the state must be "extremely careful" about further burdening taxpayers during the economic downturn.

"Not even Harry Reid or Nancy Pelosi attempted to raise taxes at this time in our economy," Adams, R-Mesa, said last month.

Adams, like many other Republican lawmakers, has signed a no-new-tax pledge and has vowed to eliminate a state property tax that brings in about $250 million a year.

Brewer is taking her show on the road, banking on her own fiscal reputation to convince business and community groups that the state can't dig out of its budget problems with cuts and budget maneuvers alone.

"I'm a fiscal conservative," she said. "Why would Jan Brewer come to the realization a tax increase is needed unless it was absolutely necessary?"

In addition to a tax hike, Brewer also has called for tax reform, an idea that's been raised repeatedly during times of budget duress, only to go nowhere.

Napolitano campaigned for office, in part, on closing tax loopholes. Once in office, she commissioned a study to propose changes to the state's tax structure, which is heavy on sales tax. Nothing resulted.

This year, tax reform is again in vogue. In addition to Brewer, lawmakers from both sides of the aisle are talking about it. But so far, the only specific bills are proposals that would cut a variety of business taxes. They are awaiting action by the House of Representatives.

What's ahead

On Monday, Democrats in the House will unveil their plan to balance the budget. Their strategy will rely heavily on federal stimulus dollars and will call for tax reforms, such as closing loopholes.

On Tuesday, the Legislature's Finance Advisory Committee will release its latest forecast of the state's economic condition. The Joint Legislative Budget Committee also is expected to revise its estimate of the state budget deficit upward; Senate leaders last week said it could go as high as $3.7 billion.

Lawmakers have turned to the public for ideas on how to save money. They say they've identified how to trim $3 billion from the budget through a mix of cuts and stimulus dollars, but they are trying to figure out how to wring another $500 million from the plan, anticipating a growing deficit.

House Appropriations Chairman John Kavanagh, R-Fountain Hills, has said it's possible a 2010 budget could be done by mid-April.

In the Senate, Burns has held off on other legislation until a budget is completed and on Brewer's desk. This tactic, unusual for the Legislature, is intended to focus lawmakers on the budget and force action sooner rather than later.

The ultimate deadline is July 1, when the 2009-10 fiscal year begins. By that date, the state must have a budget that balances - if only for a little while.

Brewer said she hopes to get the tax-hike question before voters in September, if not sooner. But doing that would either require a majority vote in the Legislature - something that's possible if Democrats band together with some Republicans - or a petition-gathering process that is tedious and time consuming.

Brewer has toyed with the idea of presenting voters with two scenarios: What Arizona would look like with a budget balanced with cuts and accounting maneuvers, and what the state would be able to do if a temporary tax increase, presumably in the sales tax, were in place.

But before that comparison can start, lawmakers have to figure out how they're going to tackle the deficit: Erase it with cuts and maneuvers or bridge it with temporary measures.

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