The state of Arizona stands on the brink of financial collapse
Thanks to the collapse of the building industry, a tanking economy and plummeting tax collections, the state is on track to spend $1.5 billion more than it is expected to collect in the fiscal year that ends in less than six months.
The bad news doesn't end there: Economic forecasters predict a $3.5 billion shortfall for the fiscal year that begins on July 1 because the state will have exhausted nearly all the stimulus money it has received from the federal government and spent all of its reserves, while demand for education programs and health-care coverage continues to increase.
Even worse: The state still has not hit bottom. Tax revenues on a year-to-year basis have dropped by double digits for 16 straight months.
Arizona has been forced to borrow nearly a billion dollars in short-term debt just to keep the lights on. Last month, both Moody's and Standard & Poor's downgraded the state's credit rating, with Moody's noting that Arizona faced "considerable challenges to a return to fiscal stability."
Just last week, the state sold the Capitol's House and Senate buildings and other state property (including the Kartchner Caverns visitors center) to raise $735 million. That maneuver should give Arizona enough money to avoid handing out IOUs to state employees in the place of paychecks, but the state will have to pay more than $1.1 billion to buy that property back over the next two decades.
As the first week of the legislative session came to an end last Friday, Jan. 15, Gov. Jan Brewer revealed her plan to fix the state's finances—and the picture isn't pretty.
Brewer billed the release of her budget plan "the most significant day of state budget reform and restructuring in Arizona's 98-year history."
If the budget gets passed, that's no understatement. Brewer hopes to cut state support for all-day kindergarten; get rid of programs for gifted students, AIMS tutoring and GED classes; take away state-subsidized health insurance from more than 300,000 people under the federal poverty line; cut state workers' pay by 5 percent; and eliminate the Department of Juvenile Justice, forcing those costs onto the counties.
And these are just a few of the cuts that Brewer says will be necessary even if she can persuade lawmakers to approve a one-cent sales tax increase and a new tax on repair services—both of which would require a two-thirds majority in both chambers of the Legislature.
Without the $1.3 billion that those two new taxes would raise, the cuts will have to be even deeper.
Here are the highlights from Brewer's budget plan.
While lawmakers are limited in what they can cut in education because of federal stimulus requirements and voter mandates, Brewer does propose some significant cuts in school funding.
Brewer's budget would eliminate state support of all-day kindergarten, programs for gifted students, AIMS intervention tutoring, teacher training and block grants for early education programs and vocational ed.
Adult education and GED courses would be zeroed out. Charter schools would see funding cut by $10 million.
The state would also cut back funding for school repairs, although $5 million would remain available for critical projects.
Funding for universities and community colleges would be maintained at the same level it was at in 2006.
Ann-Eve Pederson, president of the board of the Arizona Education Network, says she's glad that Brewer has not called for a federal waiver to reduce the amount of money that the state is obligated to spend because it accepted stimulus dollars.
But the cuts "are cause for concern," says Pederson, especially considering that the state has already eliminated $267 million from education programs in early budget-cut rounds.
"I don't think our schools can sustain any more cuts," Pederson says. "You get out of a recession by keeping jobs and creating new jobs. When you have this level of cuts to education funding, I think you're putting out a 'Closed for Business' sign."
Health Care and Social Services
In last week's State of the State speech, Brewer called on voters to roll back the expansion of health-care coverage they approved as Proposition 204 in 2000.
Under that initiative, anyone earning up to 100 percent of the federal poverty level—$18,310 for a family of three in 2009—became eligible for health insurance through AHCCCS. And since voters approved it, lawmakers have been unable to tamper with the eligibility standards.
With Arizona's continuing employment problems, the number of people on AHCCCS has been steadily growing even as the state's tax collection wanes.
Brewer proposes cutting $744.7 million in general fund dollars from the program as of Jan. 1, 2011, and using only $173.3 million in tobacco money to support it. That will mean that an estimated 310,500 people will lose health-insurance coverage, including all childless adults, and the state will lose $737.6 million in federal matching funds that help support health-care coverage in the state.
Critics of the plan, ranging from Democratic lawmakers to Glenn Hamer of the Arizona Chamber of Commerce, warn that cutting health insurance for the poor will lead to big losses for hospitals, which will then raise their rates for insurance companies. That, in turn, will lead to higher premiums for private businesses and the public sector.
In addition, emergency rooms will become more crowded as the clinic of last resort, meaning that anyone with an emergency will face longer waits to see a doctor.
Brewer wants to eliminate KidsCare, which provides health insurance for 46,800 kids whose family incomes are below 200 percent of the federal poverty level. That would save the state $22.9 million, but Arizona would lose three times that amount in federal matching funds.
Brewer is calling on lawmakers to change the state law that requires Arizona to spend $37 million annually to care for mentally ill Arizonans, although she would maintain funding for medication, crisis intervention and housing support.
Pima County Administrator Chuck Huckelberry says that cutting funding for the mentally ill will cost the county's Regional Behavioral Health Authority-the Community Partnership of Southern Arizona-several million dollars. That, in turn, means that some seriously mentally ill individuals will no longer get treatment for their disease and will likely end up in trouble with the law.
"They aren't going to be getting counseling or any other treatment that they have been getting in outpatient settings," says Huckelberry. "So they will either crowd the jails for misdemeanor crimes or end up in civil commitment proceedings, which cost us about $1,200 a day. Or even worse, they end up committing serious crimes."
Brewer also wants to cut funding for childcare support, programs that help grandparents care for their grandchildren, and cut an estimated 10,000 families from state assistance by limiting their eligibility from five years to three years.
When you consider the proposed health-care rollbacks and other cuts to welfare programs and education, "the state is on the way to losing every step forward that children have made over the last 20 years," says Penelope Jacks of the Children's Action Alliance.
In a plan that she calls "bringing jobs home," Brewer proposes eliminating $86.5 million now paid to house prisoners in out-of-state private facilities.
In exchange, she wants to spend $40 million for 2,000 private in-state prison beds and $58.4 million for public in-state prison beds. The plan also calls for the state to backfill $50 million in stimulus funds that will no longer be available and $20 million in medical funds.
But she also estimates the prisoner population to grow by nearly 1,400 inmates per year, so by July 2011, the state will be short more than 5,000 prison beds.
Brewer's proposal would transfer responsibility for juvenile justice to counties, shifting $70 million in costs to local governments.
Pima County Administrator Chuck Huckelberry says the county probably has enough capacity in its facility to hold the young offenders, but his staff hasn't had enough time to work out the additional cost to local taxpayers of housing more inmates.
Brewer also proposed forcing counties to pick up the cost of housing at the state mental hospital sexually violent offenders who are too unsafe to release.
The county staff is still analyzing the cost, but Huckelberry estimates that it will run in the neighborhood of $2.5 million annually.
Brewer plans to hand out $20 million in public-safety grants with federal stimulus dollars, which she says will fund an additional 262 positions statewide.
Brewer also says she will eliminate photo-radar enforcement of speed limits on state highways, even though it will bring in an estimated $26 million this year. She says voters should decide whether to continue the system in November.
Brewer's budget proposes a transfer of millions of dollars from the Heritage Fund, a portion of lottery dollars that was diverted by voters in 1990.
Sandy Bahr, legislative lobbyist for the Grand Canyon chapter of the Sierra Club, says that means the Game and Fish Department and the State Parks Department would lose $20 million next year.
That's on top of the cuts that state parks have already taken this year, which have resulted in plans to close 13 parks. Four parks have already closed, so only nine parks will remain open, according to Bahr, who says those cuts were especially egregious because state parks are funded through user fees and other dedicated tax streams.
"They've been telling state parks for years to be self-sufficient," Bahr says. "The parks weren't using general fund money and were limping along with the Heritage Fund, the State Lake Improvement Fund, an enhancement fund and all these other dollars. And then they get swept and they can't operate the parks, anyway."
Bahr warns that cutting the Game and Fish dollars will also result in the loss of federal matching funds.
"If you don't have the dollars to come up with the match, then you lose them," Bahr says.
Bahr is also critical of Brewer's proposal to take $124 million set aside in the Land Conservation Fund created by voters in 1998 as part of a Growing Smarter package. The fund matches the contributions of local communities that want to buy land for conservation. (The fund recently helped Pima County purchase Tumamoc Hill from the State Land Department.)
Because it was created by voters, Brewer may not be able to tap the funds without a public vote, Bahr says.
Brewer also sweeps $23 million a year in lottery funds that now support public transit for local governments.
Last week, the state borrowed $735 million by selling and leasing back state properties, including the Senate and House buildings at the Capitol. That money should pay all of the state's February bills, which means the state should have enough money to get through the end of the fiscal year without issuing IOUs, according to state Treasurer Dean Martin.
This year, the state has also borrowed roughly a billion dollars in short-term debt to cover its expenses, says Martin.
Brewer's budget calls for the state to borrow an additional billion dollars in long-term debt over the next 18 months. She wants to borrow $450 million against future lottery revenues, put up another $300 million in state property in a sale-leaseback deal and refinance $60 million in school-construction debt.
She also wants to borrow $260 million from First Things First, a program created by voters to fund early childhood health and welfare programs through tobacco taxes. Lawmakers have been eyeing that fund as a way of finding money for current state programs, but they would need voter approval to tap it.
Brewer also hopes to put off paying $1.3 billion in bills from schools and universities until fiscal year 2011.
As grim as the above cuts appear, lawmakers will have to cut even deeper or find other ways to balance the budget if they don't go along with Brewer's demand for higher taxes.
Brewer proposes two tax hikes: A temporary one-cent increase in the sales tax and new sales tax on repair services.
The sales-tax hikes, if enacted soon enough for the state to begin collecting it by March, would raise an estimated $1.3 billion over the next 18 months.
But the political likelihood of getting it out of the Legislature appears slim because it requires the support of two-thirds of the lawmakers.
Rep. Steve Farley, a Democrat who represents midtown Tucson, says Democrats are willing to negotiate, but he doesn't believe Republicans can corral enough of their members to vote for a tax increase.
Rep. Frank Antenori, a Republican who represents Tucson's east side, says GOP lawmakers might be willing to support a sales-tax increase if it were linked to future tax cuts, but Democrats won't go along with that plan.
"Their strategy is to sit back and let the state implode and then blame it on Republicans," Antenori says.
But Farley counters that Democrats aren't willing to support a temporary sales-tax increase if the price is permanent future cuts to corporate and personal income taxes.
"If Republicans push forward with more tax cuts, and they're asking us to support a tax increase on the middle class and they shift that into tax giveaways instead of education and health care, then what's the point?" asks Farley. "Republicans are doing a pretty good job of destroying the state on their own. I'm not sure how much we could add in that regard."
House Speaker Kirk Adams has unveiled a package of tax cuts that would reduce business and income taxes by hundreds of millions of dollars between 2012 and 2016. The Arizona Economic and Job Recovery Bill, which also includes a plan to shift property-tax burdens from businesses to homeowners and spend more money on job training, is scheduled for a hearing in the House Ways and Means Committee this Thursday, Jan. 21.
The House plan was assembled with the help of consultant Elliot Pollack, but even Pollack has told the Arizona Republic that he believes lawmakers will have to find some new source of revenue to get out of the current fiscal mess.
UA economist Marshall Vest is skeptical of the Republican plan. He warns that "tax cuts do not pay for themselves. You cut a dollar out of taxes, you might get a nickel back."
Vest says the state needs to consider more potential tax hikes because state spending can help the economy recover.
"It's not as if those tax dollars are going to disappear," Vest says. "Those dollars are going to go back into the economy."
Vest notes that if you add up all the tax cuts that the state has made since the 1990s, the annual cost is in the neighborhood of $2.8 billion. Increasing income taxes on upper earners, for example, would "absolutely not" be a job-killer.
"In fact, our tax burden is not high," Vest says. "The state doesn't ask very much of its taxpayers. ... We're not going to ruin the economy by raising taxes here."
But given the current political make-up of the Legislature, Vest says the problem appears to be "insolvable."
Unless lawmakers can find a way to bring in more revenues, Vest warns that the state will suffer tremendous damage to its economy and reputation.
"Unfortunately, we're going to have to do a lot of damage to the economy," Vest says. "It will take years for us to repair the damage that has been done and is about to be done to the public sector."
Key Points in Gov. Jan Brewer's Budget
• Increase the state sales tax by 1 cent
• Expand the sales tax to cover repair services
• Cut $218 million for all-day kindergarten
• Eliminate programs for gifted students
• Eliminate AIMS intervention programs
• Eliminate early-education block grants
• Eliminate vocational education block grants
• Eliminate support for teacher training
• Eliminate funding for school repairs
• Eliminate additional assistance for charter schools
• Reduce support for universities to 2006 level
• Reduce support for community colleges to 2006 level
• Eliminate KidsCare, which provides health-care insurance for 46,800 children
• Eliminate health-care insurance through AHCCCS for an estimated 310,500 Arizonans
• Eliminate the Arizona Department of Juvenile Corrections and transfer responsibility to the counties
• Cut state employees' pay by 5 percent
• Cut support for the mentally ill
• Eliminate support for grandparents caring for their grandkids
• Sweep $23 million of lottery funds that now support public transit for local governments
• Sweep $20 million of lottery funds from the Heritage Fund, which now supports state parks and the Game and Fish Department
• Sweep $124 million in the Growing Smarter fund dedicated to conservation
• Borrow $450 million against future lottery proceeds
• Borrow $260 million from the First Things First fund
• Sell and lease back $300 million in state property
• Eliminate photo-radar speed enforcement on state highways