Arizona’s debt has grown $4B since recession began

Arizona Capitol Times
October 29, 2010
Luige del Puerto

Most state lawmakers insist they had no other choice than to borrow billions of dollars to keep Arizona government running during the past few years. The reality, however, is that they had a couple of options – they just didn’t like them.

For Republicans, raising taxes during one of the most punishing recessions in U.S. history was the worst-possible scenario. Arizona residents, especially business owners, needed government to get out of the way and let the private sector pull the state back from the financial edge, GOP lawmakers argued.

For Democrats and some moderate Republicans, cutting state spending even further was unthinkable. Basic services such as public education and health care assistance for the poor had been reduced to the lowest levels that the federal government would allow. And Democrats argued that cutting government jobs would further destabilize the state’s economy.

Something had to be done, though, to rescue the state from financial catastrophe. The recession was decimating state revenues, and lawmakers were deadlocked against any sort of compromise that included enough tax increases and spending cuts to close annual budget deficits ranging from $2 billion to $3.5 billion.

So lawmakers borrowed money – a lot of it, and at a faster pace than ever before.

Arizona has racked up $3.9 billion in new debt just to pay its bills during the past four budget cycles. Total state debt now stands at about $9.7 billion and is expected to top $10 billion next year.

Lobbyist and former lawmaker Stan Barnes said wide disagreement on budget issues has resulted in borrowing because lawmakers see it as the safest, most politically palatable option. Raising taxes or cutting spending can be toxic for lawmakers seeking re-election, he said.

“It is the path of least resistance, politically speaking,” Barnes said. “Borrowing is out of sight and out of mind.”

But as state debt creeps higher, economists are becoming increasingly concerned about the state’s ability to balance future budgets. They argue that borrowing is not a safe alternative to raising taxes because it could hinder the state’s ability to pay for basic services in the future and siphon off revenue that could be given back to the public in terms of tax cuts.

“No matter how you look at it, borrowing today requires higher taxes later,” said Byron Schlomach, an economist with the Goldwater Institute, a libertarian think-tank.

Schlomach said the best way to balance the budget would be to cut spending for all programs not mandated by the federal government or Arizona voters, even if it means reductions in the core areas of government such as public safety, corrections and the court system.

Aside from cuts, Schlomach said he could make a case that adding to the state debt is actually worse for the economy than raising taxes.

“It sends the signal that you have a potentially unstable situation in your economy,” he said. “You’re basically saying to other businesses that might locate in the state: ‘You don’t know what your tax burden is going

to be here.’”

Kevin McCarthy, president of the Arizona Tax Research Association, said lawmakers realize that voters generally regard borrowing as poor fiscal policy and, therefore, try their best to avoid responsibility for it.

“A lot of times elected officials will go to great lengths to avoid that confrontation with voters and taxpayers to explain to them that they want to spend more money when they don’t have it,” McCarthy said.

FIRST SIGNS OF ADDICTION

Arizona has had some debt on the books for as long as anyone can remember, but the first signs that the state was developing a serious borrowing habit appeared while Democrat Janet Napolitano was governor between 2003 and 2009.

During Napolitano’s six years on the Ninth Floor, the state borrowed $3.2 billion to pay for things such as school construction, building repairs and the expansion of the Phoenix Convention Center. By the time she left office, the state’s total debt obligation topped $7.4 billion.

Napolitano, of course, couldn’t have done all that borrowing without Republicans, who controlled the Legislature while she was governor.

Despite her party’s disadvantage in the Legislature, Napolitano was notorious for her ability to wrangle just enough fiscally moderate Republicans to join Democratic lawmakers and advance her budget proposals.

Napolitano’s main fiscal 2009 budget bill, for example, passed with the minimum votes needed in both chambers of the Legislature. Eight Republicans crossed party lines to vote for it.

Every time one of Napolitano’s budgets passed, fiscal conservatives complained that she was setting up the state for financial disaster by spending too heavily and then issuing bonds for infrastructure projects and resorting to lease-purchase schemes when revenues came up short.

One of those Republicans was Sen. Bob Burns, who in 2008 said this about Napolitano’s budget proposal: “This bonding thing has become a battle in the war of solving the budget deficit, and even if the battle is won it does not solve the problem because we still end up in a tremendous deficit.”

In fact, Burns was on the front lines of the opposition to Napolitano’s fiscal policies. He called for spending cuts and used nearly every opportunity to remind his colleagues that racking up debt to solve budget problems is no different than a junkie looking for a quick fix.

Ironically, though, Burns would later succumb to the same addiction.

As Senate president during the 2009 and 2010 legislative sessions, Burns crafted budgets, along with fellow Republicans House Speaker Kirk Adams and Gov. Jan Brewer, that resulted in more borrowing than at any other time in state history.

STILL HOOKED

When Brewer replaced Napolitano as Arizona’s chief executive in January 2009, the state was in the depths of a recession and economists were predicting that multi-billion-dollar budget deficits would continue for several years.

At that time, fiscally conservative lawmakers were hopeful that Brewer would go along with their plans to bring spending in line with revenue and, along the way, dismantle many of the programs that Napolitano had protected and strengthened such as state-funded all-day kindergarten.

Instead, Brewer demanded a tax increase only a few months after taking office, touching off a battle between legislative leaders and the Governor’s Office that caused deep rifts within the Republican majority and complicated nearly every budget decision since then.

During the next two fiscal years, Republican lawmakers and the governor agreed to spending reductions of about $2.2 billion, while voters approved a three-year sales tax increase that was projected to raise $1 billion in annual revenue.

But when Republican leaders failed to agree on ways to close what was left of the deficits, they fell back, grudgingly, on the same methods that they had criticized Napolitano for using.

Brewer and Republican lawmakers have added about $2 billion to the state’s debt by passing budgets that relied heavily on borrowing, such as the sale and leaseback of state buildings and loans backed by future state lottery revenue.

The state has racked up debt faster under Brewer than Napolitano, but the reasons for taking on new debt were much different for the two governors. Napolitano borrowed money for infrastructure projects, while Brewer borrowed to pay basic operational costs such as employee salaries.

“Napolitano borrowed in order to basically have the Cadillac, and Brewer has borrowed basically to keep the bus pass,” said former Sen. Jonathan Paton, a Republican from Tucson. “It was a completely different situation.”

The federal stimulus act also complicated matters for Brewer and Republicans. By accepting billions of dollars to temporarily prop up state programs, they were restricted from reducing spending for public education, Medicaid services or welfare programs such as unemployment benefits.

Lawmakers cut spending for those programs to near the minimum levels allowed by the federal government, but it still wasn’t enough.

Stuck with the options of reducing spending for public safety programs, eliminating dozens of small government agencies or raising taxes, Republicans resorted to borrowing.

THE DEVIL MADE ME DO IT

Even fiscal hawks such as Burns and Sen. Ron Gould, a Republican from Lake Havasu City, voted for bills that included new debt obligations after failing to round up enough votes for deeper spending cuts. Raising taxes was never an option that they considered viable.

“I argued with a lot of people a number of times, and I had to go with the flow of the group,” Burns said.

Gould, who is among the Legislature’s most vocal supporters of smaller government, said he would have rather cut spending than borrow. But he voted for a budget bill that added more than $1 billion to the state’s debt last year after his fellow senators rejected deeper cuts.

“You can’t get 16 votes to cut anything because people want to protect their own pet projects,” he said. “I’m beyond frustrated.”

Sen. Sylvia Allen, a Republican from Snowflake who voted for more borrowing last year, blamed Democrats for blocking spending cuts.

“They certainly didn’t cooperate with anything,” Allen said. “Not one of them came forward and said, ‘Hey, I want to help try to figure out how to solve this problem here.’”

Democrats, such as Senate Assistant Minority Leader Rebecca Rios, blamed Republicans for locking them out of the budget negotiations and for ignoring proposals to increase state revenue by suspending individual and corporate income tax credits.

“They’re not willing to even consider reining in any tax loopholes, even suspending tax credits,” Rios said. “And I think it’s because, politically, it’s easier to take the heat for borrowing than it is for reining in loopholes because it will be spun as raising taxes.”

Meanwhile, it’s getting harder to hide the state’s massive debt load. Debt servicing in fiscal 2011 stands at $232 million and now accounts for the state’s sixth-highest annual expense, after public education, health care, universities, state prisons and compensation for state employees, excluding educators and correctional workers.

Burns said he felt hamstrung as he watched, and at times helped, the state’s debt pile up over the years. He said it was impossible get a majority of state senators to agree to any other solution by the time the recession kicked in because many of them had already grown accustomed to borrowing.

“I think if you matched up the years that Napolitano was governor (you can) see what the debt increases were at that point. Then at the time she left the economy was going in the tank,” he said. “The bad habit had been created — taking on debt — and so it became an out.”

In one of the final maneuvers of his 20-year legislative career, Burns attached a strike-everything amendment to a bill that was aimed at breaking Arizona’s cycle of addiction. Burn’s ballot measure would have put a cap on the state’s ability to take on new debt and require a funding source other than the general fund to pay for it and the interest.

Burns even used his power as Senate president to advance the measure through his chamber in the final weeks of the 2010 legislative session, which will be his last before retirement.

The bill died in the House without receiving a hearing.

“I tried to get something going. I hope that effort will continue without me. And I think it possibly will,” Burns said. “So, you know, it might not be a complete failure — at least we got to sow the seeds.”