The Arizona Republic
Dec. 24, 2006
The days of double-digit
increases in state spending appear to be
over, with economists forecasting a
significant slowdown in the Arizona economy
and some experts predicting the first state
budget deficit since 2004.
That news comes as Gov. Janet Napolitano
prepares her budget proposal for fiscal
2008, which begins July 1, 2007, and
lawmakers gird for the beginning of a
legislative session that figures to be a lot
less bountiful than in recent years. General
Fund revenue rose 20 percent last year and
19 percent in 2005 and is up more than 10
percent so far this year.
Contrast that with the Joint Legislative
Budget Committee's latest projection for
2008 revenue growth: 4.8 percent. The
governor's office may project less than that
when its numbers are released in January.
The robust economy of recent years allowed the state to invest in new programs such as all-day kindergarten, a raise for state employees and a half-billion dollars' worth of tax cuts. What can residents expect this time around, with growth in revenue even less than the state's 7 percent average?
Think turkey. Without the trimmings.
"It's going to be a tight budget, there's no question about that," said George Cunningham, Napolitano's budget adviser. "We're now down to much more modest revenue growth."
The 2008 budget must be completed by the end of the coming legislative session, which begins next month.
So state lawmakers and budget writers now are charged with setting a considerably less ambitious course for state spending while still paying for programs enacted in recent years and keeping up with the costs of being the nation's fastest-growing state. Neither the Legislature nor governor is talking about raising taxes.
"That's the challenge," said Marshall Vest, an economist at the University of Arizona. "You're going to have more children in school, you're going to have more inmates in prison, you're going to have more people on AHCCCS (state-subsidized health care). It takes a lot of money just to keep up."
Back to the future
The upcoming budget will be a shift for
Napolitano.
She inherited a state deficit that grew to
$1 billion soon after she took office in
2003, and she helped balance that budget and
lead the state to a surplus of more than $1
billion in the years to follow. The boast
was central to her campaign for re-election
earlier this year.
But now some experts are warning that the
state is sliding back toward the red for the
first time since 2004.
The Joint Legislative Budget Committee,
which has nonpartisan staffers who work for
the GOP-led Legislature, says the state's
ongoing expenses will eclipse its ongoing
revenue in 2008.
Lawmakers are constitutionally required to
balance the budget every year. But since a
one-time windfall can mask weak underlying
finances, some economists use the term
structural deficit to define when long-term
expenses exceed long-term revenue. In
essence, it means the state is living beyond
its means.
Although the budget committee's numbers
won't be out until next month, Assistant
Director Stefan Shepherd warned that the
state shortfall could be hundreds of
millions of dollars.
The governor's office disputed that, saying
the threat of a structural deficit is often
raised by lawmakers and groups hoping to
drive down spending. "Every year, there's
this specter raised of a 'structural
deficit,' " said Napolitano spokeswoman
Jeanine L'Ecuyer. "There isn't one. It
doesn't exist."
Experts differ on what lies ahead for
Arizona's economy.
In a recent forecast at the Arizona Blue
Chip Economic Outlook, 33 percent of the
panel said they expect recession in 2008 or
earlier.
The stock market remains perched near an
all-time high, and the Arizona economy
remains the envy of much of the nation as it
generates new jobs by the tens of thousands
every year. On Thursday came news from the
Census Bureau that Arizona was the
fastest-growing state in the nation last
year.
But . . .
Arizona's retail sales and real estate
market have cooled from their white-hot
levels of a year ago. Home builders are
reporting a steep drop-off in earnings, and
the number of people in the metro area
losing their homes to foreclosure or falling
behind on payments is near a two-year high.
"I think there's a good deal of uncertainty
out there," said Vest. "I don't think we'll
see recession. I just think we'll see slower
growth."
Valley economist Elliott Pollack also
doesn't expect recession in the near term.
If anything, the coming year represents a
return to normalcy from the recent past when
everything from the exploding housing market
to overflowing state coffers made a mockery
of projections. "It's not that things are
terrible," Pollack said, "it's that fiscal
2005 and 2006 were an aberration."
New money locked up
The problem for 2008 budget writers is this:
State revenue figures will grow at a
substantially slower rate in the coming
year. Since two-thirds of the budget is
essentially on autopilot because of mandated
spending increases, lawmakers won't have
much leeway.
Five percent revenue growth would mean
roughly half a billion dollars in additional
state funding for the 2008 budget. State
revenue has grown $3.3 billion since 2003,
which followed a string of years with
virtually no increase.
But the budget committee cautions that a
good portion of any new money would already
be spoken for. Among the bills coming due,
the state is slated to spend $80 million to
finish the rollout of the all-day
kindergarten program that was enacted last
session, and an additional $35 million is a
debt payment for university research
facilities.
Roughly two-thirds of the General Fund is
driven by formulas, voter-imposed or
otherwise, so lawmakers must meet funding
baselines when it comes to programs such as
K-12 education. For the current budget, $184
million was allocated to account for
additional students, and $163 million for
new recipients of AHCCCS.
Before long, in other words, the new revenue
is spent. And while the state figures to
carry over a few hundred million dollars
from this year to next, it seems there won't
be much wiggle room when it comes to
approving new spending initiatives or tax
cuts this session.
Kevin McCarthy says that's not necessarily a
bad thing.
"The silver lining when you don't have a lot
of money is lawmakers slow down a little bit
. . . and do look for ways to prioritize
spending," said the president of the Arizona
Tax Research Association. "I wouldn't look
for any new spending initiatives. The game
plan, you would think, would be to make sure
any revenue that is available is put into
those high-priority areas."
For the governor, that means continued
investment in schools, transportation and
other needs to maintain Arizona's
competitive edge.
"We have to keep moving Arizona forward,"
Cunningham said. "We're the fastest-growing
state in the nation, so we have an
obligation to our current residents and
those to come."