Arizona Fiscal Update

By Marshall J. Vest
Forecasting Project Director

December 1, 2010

Arizona is one of 46 states facing a budget deficit in the current fiscal year that ends next June.  As a percentage of enacted budget, Arizona ranks 4th in severity with a 38% gap1.  Only Nevada, Illinois, and New Jersey are worse.  Latest estimates from the Arizona Joint Legislative Budget Committee show a current year shortfall of $825 million and a $1.4 billion gap in FY 2012.  This does not include some $1 billion in suspended funding formulas.  A “structural shortfall” gap in excess of $1 billion persists as far as the eye can see.

Since FY 2008, the state has enacted some $12.5 billion in “solutions” to budget shortfalls.  Most of these have been of a “temporary” nature such as borrowing, fund transfers, rollovers (delaying payments until the following year), a 1-cent temporary sales tax increase, and federal assistance (Graph 1).

Clearly, not nearly enough was available from the “Rainy Day” fund, better known as the Budget Stabilization fund.  This fund is capped at 7% of prior year spending, which represents less than one month’s spending.  The temporary 1-cent increase in sales taxes accounts for only 7% (or $900 million so far), and this source will expire in June 2013.  Federal assistance to Medicaid and education will expire in FY 2012 (along with attached maintenance of effort restrictions), which totals roughly $900 million annually.  Voters rejected two referendums in November that would have provided $469 million in additional transfers.
 
Very little money in “temporary solutions” remains.  Given rejection of augmenting revenues (raising taxes) by both voters and politicians, we can expect big cuts in spending in the months to come.  Where will the cuts fall?  Some still believe that there is a lot of “fat” in government spending that can be cut.  Facts show that over 87% of general fund spending now goes to education, healthcare, and prisons (Graph 2).
 
Clearly, the state could lay off all state workers but wouldn’t begin to balance the budget.  Look for big cuts to education and health programs going forward.  The state also could cut the amount of money it shares with cities and counties, thereby creating even larger dislocations for local governments than what they currently face.

These cuts will have devastating effects on contractors, employees, students, and those who depend on public support programs.  The cuts in spending will further weaken the fledging recovery and erode Arizonan’s future standard of living.  Unfortunately, there are no good choices left.

Graph 1		Graph 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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For additional information, please contact the Economic and Business Research Center.