A balanced budget… for now: Threat of lawsuits could undo spending cuts

Arizona Capitol Times
April 8, 2011
Luige del Puerto

"Fiscally conservative Republicans won the argument when the governor agreed to forego borrowing and other budget gimmicks to help shore up the state’s sagging revenues, instead balancing the budget with deeper cuts to education, health care and social programs.

The budget-slashing proposal was also a vindication for legislators who saw themselves as lone voices in the wilderness, warning for many years that politicians’ appetite for spending would one day come back to haunt them.

“It’s much more reflective of my personal thoughts on what the budget should be than we had it before,” said Senate Majority Leader Andy Biggs, a fiscal hawk from Gilbert.

But a bigger, perhaps more critical fight looms.

Between now and fiscal year 2013, policymakers face the daunting task of preparing for another inevitable and dramatic decline in state revenue.

According to Gov. Jan Brewer’s plan, the approximately $1 billion from the 1-cent sales tax increase approved by voters last May won’t be available in fiscal year 2014.

If the economy hasn’t rebounded by then — and economists are saying it’s likely the state will still be in the midst of recovery at that point — then the governor and legislators face yet another budget wringer and would be forced to consider even deeper spending cuts, new ways to raise revenue, or a combination of the two options.

For some, that’s when the budget-cutting approach that dominated this year’s session faces its biggest test.

The next two years will give legislators a fairly good idea of the impact of the cuts to core government services, and Republicans are under no illusion that their budget has made anyone happy. Lawmakers are expected to encounter tremendous political pressure to restore funding in some areas.

Regardless of whether they restore any funding or keep state spending in line with revenues for the next two years, the state is clearly headed for a cliff when the temporary sales tax expires. One of the selling points in last May’s special election was that the sales tax would be “temporary” and automatically end after three years.

But Sen. Ron Gould, R-Lake Havasu City, said the question is: Will lawmakers let that tax expire?

“The upcoming battle for fiscal conservatives is whether the Legislature can hold the line on voting out a tax increase or sending one to the ballot when the Prop. 100 tax is ready to expire and we’re going to then fall off a $1 billion cliff,” he said.

End of the budget gimmicks?

Republican budget negotiators said the current spending plan puts the state in a better position to deal with the revenue cliff in fiscal year 2014, which will begin July 1, 2013.

This budget still won’t erase the deficit resulting from the expiration of sales tax increase, but Republicans said the shortfall would be about $500 million less than where it would have been if policymakers agreed to keep propping up the budget with maneuvers that put it in the black only on paper.

And since legislators have successfully weaned themselves — for this year, at least — from their tendency to gimmick their way out of one fiscal crisis after another, this budget should also place them on better footing to resist their old habits, backers said.

Biggs, who is also chairman of the Senate Appropriations Committee, said he’s optimistic the Republican-approved plan will provide “a framework” for passing budgets that won’t use accounting gimmicks, such as borrowing or delaying payments to agencies from one fiscal year to the next.

Of course, whether fiscally conservative legislators can hold the line depends on several factors, many of them unknown.

The economy could turn around quicker, for example, providing needed boosts in revenue. A surplus certainly could change legislators’ approach to budgeting.

Meanwhile, some veteran legislators are facing term limits in the 2012 election year, which means a new batch of lawmakers will craft the fiscal year 2014 budget.

And new legislators mean new leaders, who may or may not share the fiscal ideology that permeated the Capitol this session.

But what lawmakers do between now and fiscal year 2014 will help determine whether Arizona will find itself in the same spot it has been each year since late 2008 – sorely short on cash.

And while some economists agree that this year’s budget is the closest to being structurally balanced since the recession hit, they said preparations to solve the fiscal year 2014 deficit should begin right away.

Byron Schlomach, an economist with the libertarian-leaning Goldwater Institute, suggested what appears to be a straightforward approach: If the economy produces more revenue than what’s allotted in spending this year, policymakers ought to save the money.

“What they really need to do is bank their savings from now on, and bank that extra revenue for that day when the sales tax goes away,” he said. “The question, of course, is do they have the discipline to bank these savings… realizing that there is yet this future day of reckoning?”

Relief from ‘a whole host of bad decisions’

There was a lot of self-congratulating among Republican legislators for passing a structurally balanced budget.

Kevin McCarthy, president of the Arizona Tax Research Association, said the recently approved spending plan is a significant improvement from “a whole host of bad decisions” in the past.

But he also pointed out that some reductions, such as the suspension of soft capital funding for K-12 schools, are one-time cuts.

“The challenge when you do that is that those numbers appear right back on the balance sheets the next year, and you’ve got to deal with that,” McCarthy said.

Schlomach said it’s also a risky proposition to depend more on cuts to the Arizona Health Care Cost Containment System — reductions that almost certainly will be challenged in court as violating the voter-protection clause in the Arizona Constitution.

If the critics of the AHCCCS cuts prevail, this year’s budget will have a $510 million hole punched through it.

“That’s why this budget isn’t real,” said Sen. Kyrsten Sinema, D-Phoenix.

Democrats, who were shut out of the budget negotiations, harshly criticized the spending proposal as a shortsighted, job-losing plan.

“Last year, the Republicans hoped the voters would give them about $500 million. This year, they are hoping that the court will give them about $500 million. Apart from the body who they’re hoping will give them money that doesn’t belong to them, there’s no difference,” Sinema added, referring to Proposition 302 on last year’s ballot, which would have scrapped the early childhood development program known as First Things First by redirecting its budget money to the state’s general fund.

Voters overwhelmingly rejected the measure.

But Republicans believe any challenge to AHCCCS cuts has an uphill battle.

“The budget, unlike Prop. 302, was not built on a hope and a prayer that Prop. 302 would pass,” said Sen. Frank Antenori, R-Tucson. “This budget was built on, ‘We don’t have any money and this is the baseline, and we’re only going to spend what we take in.’”

Critics: Budget not balanced ‘ethically’

For the first time since the beginning of the economic downturn, the $8.3 billion budget that the governor signed late April 6 doesn’t rely on borrowing, deferring payments or other accounting maneuvers that allowed the state to limp through fiscal crises without really fixing the shortfalls.

At its core, this budget plan attempts to align spending with the cash that’s available.

Worst hit are K-12 schools, higher education and health care programs.

But some critics say the budget sets the state back, not forward.

For example, it reflects a failure to understand that funding education is an economic driver, said Andrew Morrill, president of the Arizona Education Association, the state’s largest teachers’ union.

“This budget isn’t balanced in the larger sense, because it doesn’t balance revenue needs for the state of Arizona and the programs that we need to be able to deliver,” Morrill said. “I understand that, financially, it’s balanced. Ethically, it is far out of balance.”

But groups like the Arizona Free Enterprise Club, a free-market advocacy group, lauded the proposal.

“The fact that they made real baseline cuts is a stark difference from the previous legislatures,” said Steve Voeller, the organization’s president.

“This Legislature should get a lot of credit from the (taxpayers) that they’re not kicking the can down the road and putting the problem off to some future legislature and future taxpayer,” he added.