Committee predicts Arizona heading into another financial hole

PHOENIX -- The state is headed into another financial hole, the combination of already approved tax cuts and required annual spending increases.

Members of the state's Finance Advisory Committee predicted Friday that revenues will grow 3.5 percent this current fiscal year over what they were last year. And the following year there will be another 5.3 percent increase.

But Richard Stavneak, staff director of the Joint Legislative Budget Committee, said none of that is keeping pace with already built-in requirements for annual spending. In fact, even the budget for the current year is $330 million above what's coming in the door.

Stavneak said the state can survive for the next two fiscal years because of sharp spending cuts in prior years, coupled with leftover cash from the now-expired 1-cent surcharge on the state sales tax.

But Staveneak said that will be gone by the 2016 budget year, with the state ending up $202 million in the red. And if that deficit is not cured and spending proceeds apace, he figures the red ink could hit $505 million by the 2017 budget year.

Even that may be optimistic.

Rep. John Kavanagh, R-Fountain Hills, said he foresees pressure by colleagues to increase spending above the normal increases by about $150 million a year. Kavanagh said at that rate, the 2017 deficit would be close to $1.4 billion in a $9.7 billion budget.

But Kavanagh, who chairs the House Appropriations Committee, said there is no political will among the Republicans who control the Legislature to either increase taxes or rescind some of the already approved tax breaks to bring the budget into balance.

At the same time, Sen. Don Shooter, R-Yuma, who chairs the parallel Senate panel, said that trimming expenses in areas where the state isn't obligated to spend more probably also is not an option.

"We've cut to the bone on everything,' he said, referring to the budgets enacted during the recession.

Andrew Wilder, press aide to Gov. Jan Brewer, said his boss is monitoring the situation. But he questioned whether there is a need for concern, saying the Finance Advisory Committee has a history of "a very conservative projection of things.'

But what happens down the road may not be Brewer's problem: Her term is up at the end of 2014. A constitutional provision likely legally bars her from running again, though she disputes that.

At least part of the problem are those built-in spending increases.

JLBC staff figures the number of students in public schools will grow more than 1 percent. And Arizona courts have said lawmakers cannot ignore a 2000 voter-approved mandate to boost state aid to account for inflation.

Those two factors alone add $181 million to state spending next year, with another $204 million on top of that the following year and $251 million more in the 2017 budget year.

On top of that are anticipated increased enrollments in the state's Medicaid program as well as the Department of Economic Security having more cases of child abuse to investigate.

On the other side of the equation are the tax cuts lawmakers already have approved which are starting to kick in.

For example, legislators agreed to cut the corporate income tax rate, now close to 7 percent, to just 4.9 percent. Another change will allow some multi-state corporations to escape most, if not all, of Arizona's corporate income taxes altogether if they meet certain requirements. And a third reduces the state's capital gains tax by 25 percent.

Those changes alone will result in the loss of $139 million in revenues next fiscal year alone, with another $114 million drop in the 2016 budget year and yet another $95 million decrease in 2017.

Kavanagh, however, said budget staffers who prepared those estimates are ignoring what he believes will be the "dynamic' impacts of the tax cuts.

"The theory is the tax cuts will stimulate greater revenue,' he said.

"We're hoping that when you give more money to people in business, they spend more,' Kavanagh said. "There's more entrepreneurial spirit.'

And if those new taxes don't materialize?

"If revenues aren't taking off, we have to slow down even further,' he said.

And that, he said, means spending cuts. Kavanagh said as far as he is concerned, reversing those tax cuts or boosting taxes elsewhere is not on the table.

Some of that is political reality: It takes a two-thirds vote of both the House and Senate to enact new taxes or rescind a previously approved tax cut.

"We are in a 'no tax increase' mode,' Kavanagh said. "As long as the residents of Arizona are struggling with unemployment or with historically low incomes, we are not going to increase the tax burden upon them.'

Shooter said he does not have a specific plan for bringing the budget into balance. He is counting on the current surplus to buy some time.

"We have a little bit of breathing room, but not much,' he said. "These are tough decisions we're going to have to make.'

That prediction of a $202 million deficit in 2016 and $505 million red ink the following year could be the best case scenario. Part of that is Kavanagh's fear there will be political pressure to boost funding beyond what's mandated.

Arizona borrowed $1.4 billion during the height of the recession just to balance its budget. Much of that came in the form of selling off key state buildings -- including the state House and Senate.

then arranging a lease-purchase plan to acquire them back over 20 years.

Stavneak said the $80 million annual scheduled payment is already built into the budget.

But he pointed out that these are tax-exempt bonds. And federal regulations say if the state has a certain amount of extra cash -- which it likely will this year because of the leftover dollars from the sales tax hike -- then it is required to use those funds to pay off some of that borrowing.

He said if the state ends up having to spend another $150 million this year in debt repayment, that means less cash in the bank to carry forward to future years, and deeper red ink down the road.


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