Arizona has made national news in the recent years for its controversial legislation and immense cuts to necessary state funded programs. Governor Doug Ducey notoriously campaigned on his promise to get the budget in check and he did just that. He also managed a surplus. This could mean a great thing for many programs that are desperately underfunded.
Arizona has money in its pocket as the governor and Legislature prepare to return to work, and everyone has a hand out.
Budget experts estimate the state will begin the next fiscal year in the black, with $550 million in the bank and $200 million in unspent annual revenue.
Last year at this time, newly elected Gov. Doug Ducey and the state Legislature faced a $1 billion fiscal cliff.
“I made an unwavering pledge to get our budget in balance,” Ducey said at a recent tax conference. “We’ve proven not only can we balance the budget, we can do it without raising taxes.”
Keeping that balance will require restraint from the governor and lawmakers in the face of demands to increase funding for everything from schools and child welfare to prisons. Ducey during his campaign also promised to cut taxes every year he’s in office, and he is widely believed to be working on a proposal to trim income taxes.
The question now: With money in the bank, should the state continue to shrink government and cut taxes, or is it time to look at restoring some cuts made since the Great Recession?
Answers are expected to come soon. The legislative session begins Jan. 11. And Ducey must introduce his budget proposal by Jan. 15.
Robbing Peter to pay Paul
Economists say the state’s rosier financial picture is not due to any great economic boom, but extremely conservative revenue projections stemming from a few unexpectedly rough months in 2014.
“A year ago, we had just come off the spring of 2014, where the revenue numbers were abysmal,” said economist Dennis Hoffman, with Arizona State University’s L. William Seidman Research Institute. “Things started to turn in January and February (2015). Now there is reason to believe we’re on solid financial footing, at least for the next couple of fiscal years.”
The Legislature based its decisions on those conservative forecasts, despite criticism from Democratic lawmakers that the budget was intentionally rushed through before the better, later revenue numbers were publicized.
“I think some folks in charge of our state preferred to cut things, and there’s always more pressure to cut things when you’re in a deficit situation,” said Sen. Steve Farley, D-Tucson.
The result was one of the smallest Arizona budgets in recent history and significant one-time and ongoing cuts to state programs, including $99 million from universities.
“Balancing the budget was some tough decisions,” Ducey said. “So much of that was about how do we put the state in the proper financial shape. We knew if we make these difficult decisions, tighten our budgets now, we’ll be in much better shape a year from now.”
Those decisions included shifting to the general fund $220 million intended for other purposes, such as paying employee health-care costs, assisting victims of mortgage fraud and encouraging economic development. State leaders often resort to this funding gimmick during lean years. This year’s sweeps were larger than any since the Great Recession, when in 2009 more than $675 million was diverted to the general fund.
Here are examples of where the swept money was originally designated to go:
- $21.4 million this fiscal year and $15 million retroactive to last fiscal year from settlements of national lawsuits on behalf of consumers, primarily the national mortgage settlement and Standard and Poor’s Investment Services.
- $75 million from income taxes and lottery sales intended for grants to attract and grow businesses in Arizona.
- $25 million from wage taxes intended to provide job training.
- $4.6 million from gas taxes for highway projects that would help retain or attract jobs.
Ryan Anderson, communications director for Attorney General Mark Brnovich, said cuts to the lawsuit settlement funds have hurt programs that benefit the public.
“Our office was forced to greatly reduce funding and eliminate programming designed to assist veterans, seniors and those most harmed by the financial crisis,” he said. “The statewide network of programs had served over 20,000 Arizonans to date at the time of the cuts, and was anticipated to serve another 19,000 in future years had funding continued.”
Ducey and the Legislature also agreed to sweep $100 million from the Health Insurance Trust Fund. Payments into the fund exceeded the cost of health-care coverage, meaning some of what state and university employees pay for health care will be redirected to everything from public schools to prisons.
University officials have been critical of this approach. The universities, as the employers, pay 85-90 percent of their employees’ health-care costs into this fund.
“The state systematically overcharges the whole system so the rates are too high for what the claims are,” said John Arnold, Arizona Board of Regents vice president for business management and financial affairs and the former budget director under former Gov. Jan Brewer. “They are taking tuition dollars that we’re paying into this fund and they’re sweeping them into the general fund. So these are really student dollars that end up in the state’s general fund.”
Under Brewer, $192 million was swept from the fund.
“It’s just inexcusable that we would be continuing to have these sweeps coming from the universities knowing the impact on tuition, particularly when we’re being criticized for tuition increases,” said Eileen Klein, president of the Arizona Board of Regents and former chief of staff to Brewer.
She said the fund should be charging employees and employers only the actual cost of health care instead of using the fund as “a supplemental tax opportunity for the state.”
Re-funding the cuts
Arizona’s general fund budget this fiscal year is $9.2 billion, compared with $9.5 billion in 2007.
Today, the Department of Education receives about $100 million less than it did in 2007. Universities get nearly $200 million less. The Department of Corrections gets nearly $200 million more.
Seeing extra money available for the upcoming fiscal year, every major agency is asking for more.
The Department of Child Safety wants an additional $105.8 million. Of that, $64.4 million would be for an increasing caseload, including funds for foster care and preventive programs to keep children in their homes. The other $41.4 million would be for administration, operations and a new computer system.
The universities want $24 million to make up for the $99 million cut in the current fiscal year, plus an additional $63 million for next fiscal year. Their goal is to gradually restore the amount the state pays toward the costs of in-state students to 50 percent. The state currently pays about 34 percent of those costs. It paid 88 percent of the cost of in-state students in 1998.
The Department of Education wants $10.5 million to continue to update its software program, nearly $1 million to overhaul the academic standards formerly known as Common Core and $4.6 million more to administer state assessment testing, among other things.
Education advocates and some lawmakers have said they’d like to see some or all of the surplus funds invested in K-12 education. Lawmakers have already introduced legislation to restore $30 million cut from middle and high school career- and technical-training programs.
“There are a lot of agencies that suffered dramatically over these past several years,” Farley said. “When the money comes back, we shouldn’t be making this the new normal.”
House Minority Leader Eric Meyer, D-Paradise Valley, said he will push for additional funds for programs to recruit and retain K-12 teachers, as well as repair aging school facilities. He said he’d like to see $40 million go toward decreasing class sizes and buying students new books and computers.
Meyer said the universities should get the full $24 million they are requesting. He said the state’s child welfare agency needs more money for preventative programs, and welfare services cut last year should be re-funded. He’s also proposing $30 million for highway construction and road improvements statewide.
Republican leadership is urging caution, at least for the short term.
In 2008 and 2013, spikes in revenue prompted spending increases, only to be followed by cuts the next year when the growth wasn’t sustained.
“Two years ago, I said we don’t have the surplus, we have a structural deficit. But we did a pretty big spending spree and again found ourselves in a tough situation,” said Senate President Andy Biggs. “We’ve got to manage what we have. That’s important as we consider the demands. We have got to be prudent.”
Agencies’ budget requests are enormous this year, Biggs said. “At some point I quit tallying it up. It was like, ‘Are you kidding me?'” Biggs said.
Biggs said it feels like 2008 and 2013 all over again.
“I would much prefer we be wise about this and keep the lid on those pent-up expectations and desires for another year,” he said.
Several lawmakers have said reaching structural balance – where the state has more ongoing money coming in than going out – will be their focus in the coming months.
Senate Appropriations Chairman Don Shooter, R-Yuma, said, “I don’t want to see any tax cuts. I don’t want to see any crazy increase in spending. Let’s sit still and let this thing level out. Then we can adjust one way or the other.”
Ducey said he and legislative leaders started discussions for next year’s budget in September. He has indicated there may be increased funding in next year’s budget for border security, K-12 public schools and universities. He said his border plan would require “tens of millions.”
He was less specific about the schools.
Ducey is focusing his attention on supporting Proposition 123, which goes to voters May 17. It would use a combination of general fund and Sate Land Trust funds to add about $3.5 billion to K-12 district and charter schools over the next decade and potentially settle a long-standing school-funding lawsuit.
But he has said more needs to be done and noted funding K-12 schools is a state responsibility.
Ducey also said he values higher education and would support increasing their funding as well. But he said details on how much he’ll propose will have to wait until the State of the State address and his budget proposal.
Experts warn that Arizona doesn’t currently have the tax revenue to return to the pre-recession spending levels of 2007 – even if lawmakers and the governor wanted to.
“Our state tax revenue as a percentage of the economy has been cut by a quarter since 1992,” said Dan Hunting, a senior policy analyst with Arizona State University’s Morrison Institute. “That’s not coming back.”
He predicted a fierce battle over every extra dime this session.
“Lots of people have been cut over the years, and they want that back,” he said.
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