Projected Arizona midyear budget shortfall grows, spurring talk of new spending cuts

Budget analysts: Arizona midyear shortfall growing

PHOENIX — Current economic conditions point to less revenue for the state than previously projected, legislative budget analysts said Wednesday, putting more pressure on lawmakers to consider new cuts to services such as education and health care.

Staff from the Joint Legislative Budget Committee predict Arizona’s $8.5 billion budget will face a midyear shortfall of up to $825 million. Most of the increase from the previous forecast for a shortfall of up to $700 million is due to the still-ailing economy producing less tax revenue than expected.

Lawmakers heard the new forecast as Finance Advisory Committee economists said the state’s economy is starting to recover but the rebound will be slow and gradual.

“Definitely, the worst has passed. There are signs the economy is growing again (but) we should not budget or plan for any sharp acceleration any time soon,” said Brian Cary of Salt River Project.

A revenue forecast based on economic modeling and the views of the Legislature’s own budget staff and of outside economists has state revenue growing at 2.4 percent this fiscal year.

That’s a lackluster growth rate compared with boom years but much better than the last several years’ declines. The biggest drop was 18.2 percent in the 2008-09 fiscal year, followed by a 10.3 percent drop last year.

Both the old and new budget forecasts assume the rejection of two Nov. 2 ballot propositions to sweep about $470 million from special-purpose funds for early childhood programs and land conservation into the general fund.

If voters reject the propositions, it could prompt a lame-duck special session of the Legislature later this year, or the midyear budget gap will confront lawmakers when they report in January for their 2011 session.

After the advisory committee’s meeting, Senate President Bob Burns said lawmakers may resort to spending cuts that would have been implemented had Arizona voters rejected a temporary sales tax increase from 5.6 percent to 6.6 percent.

The sales tax increase passed in a May 18 special election, averting the cuts. However, “the contingency plan is still the contingency plan,” said Burns, R-Peoria.

The contingency plan had $862 million of budget cuts, mostly aimed at education but also hitting nearly all state programs.

School officials said the reductions would have increased class sizes, forced teacher layoffs and chopped some specialized instruction.

Other planned reductions included layoffs of Highway Patrol officers, transfers of up to 5,000 state prisoners to county jails, further reductions in Medicaid payments to hospitals and other care providers and sliced services for developmentally disabled adults and disabled children.

One complication is that the contingency plan’s cuts were based on a full fiscal year of savings. However, the fiscal year will be half-over by January, so any program cuts made then would have to be deeper to achieve the same dollar savings.

With the fiscal year well under way, “it’s a challenge to try to do the permanent changes,” said Richard Stavneak, the Legislature’s budget director.

Besides spending cuts, other options include more borrowing, raids on special-purpose funds and delaying expenditures such as school aid payments into the following fiscal year, Stavneak said.

Arizona has already used those tactics extensively to help balance recent budgets.

Senate Appropriations Committee Chairman Russell Pearce, R-Mesa, initially said “everybody has to got to pony up this time,” but he then backed away when asked whether that would include the Department of Corrections.

“I’m pretty much saying it’s off limits as far as I’m concerned,” said Pearce, a former sheriff’s deputy who is among many lawmakers reluctant to cut funding for public safety functions. That function and education are priorities for the state, Pearce said.

Limitations on what lawmakers can do include federal stimulus program restrictions that require education funding to be kept at roughly current levels. Pearce said the state should consider defying that mandate.

Small signs of improvement in the state’s economy include its slight rebound to 42nd so far this year among the states in job growth. That’s up from 49th in 2009 but far below Arizona’s second-place ranking in 2006. Also, sales tax revenue is stabilizing, through consumer confidence still appears weak, economists said.

Marshall Vest, a University of Arizona economist, said the state’s recovery is in a “difficult stage of convalescence.”

“It will be uncomfortable for a while,” he said.