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"The challenges for state lawmakers now are to refrain from cutting taxes further and boosting spending as surpluses return.  In short – do no harm.  Any surplus should be used to adequately fund the decimated Budget Stabilization Fund.  A balance of six months of spending would not be too much."

 

 

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Arizona’s State Government Closes Budget Gap (For Now)

By Marshal J. Vest, Director
Economic and Business Research Center
June 16, 2011

Heading into the 2011 legislative session (which began in early January) the state faced a $543 million shortfall for the fiscal year ending June 30, and a $1.2 billion deficit for fiscal year 2011-12.  (These targets excluded over $1 billion in formula spending that was suspended when the economic downturn began.)

Prior to the 2011 session, the state had implemented some $12.8 billion of budget “solutions,” dating back to FY2008 (Exhibit 1).  Most of these “temporary” solutions came from federal assistance, debt (sale/leaseback of government buildings), fund transfers (aka sweeps), delaying payments until after the end of the fiscal year (referred to as “roll overs”), the temporary one-cent increase in sales taxes, and emptying of the Budget Stabilization (Rainy-Day) fund.  Permanent spending cuts totaled $2.2 billion while permanent revenue enhancements (primarily increases in fees) added $400 million.

Exhibit 1: Budget “solutions” ($12.8 billion FY ’08 – ‘11)

ex1

Faced with impending expiration of federal stimulus money of roughly $1 billion per year, and having rejected the possibility of raising taxes, the state was forced to enact massive spending cuts in the FY2011-12 budget.  There weren’t a lot of choices of where to cut.  Only three areas account for 87% of general fund spending: Medicaid, education, and corrections (Exhibit 2). 

Exhibit 2: AZ General Fund Spending FY ‘11, total= $9,524.3 milex2

As expected, the cuts came largely from healthcare (Medicaid $511 million and $97 million from Dept. of Health Services) and education (K-12 at $163 million and universities at $198 million), see Exhibit 3

Exhibit 3: Budget Spending Reductions, FY 11-12

 ex3

With these cuts, the state eliminated its structural deficit – at least for now.  The following chart shows the structural deficit beginning FY 2007 with projections through FY 2014.  Spending peaked in FY08 at $10.4 billion. The FY12 budget is set at $8.2 billion, a 22% drop in four years. 
Ongoing revenues fell from $9.5 billion in FY07 to only $6.2 billion in FY10.  The increase in FY11 largely reflects collections from the temporary one-cent sales tax approved by voters. 

The “solutions” mentioned above allowed expenditures to remain fairly steady.  If expenditures had been cut to match revenues, Arizona’s recession would have been even deeper.  State leaders deserve credit for maintaining spending as best they could.

With the $1.1 billion in spending cuts, the state’s budget is balanced in FY12 and the following year.  But in FY14, the budget deficit returns to the tune of $600 million as the one cent sales tax expires (Exhibit 4).

Exhibt 4: AZ General Fund Revenues and Expenditures ($billions)

ex4

Not shown in the above chart are the effects of the recently passed tax cuts contained in the “jobs bill” (HB 2001).  Cuts to individual and corporate income taxes and to property taxes will cost $538 million annually when they are fully implemented in FY18.  (The cost is only $38.2 million in FY12; Most of the cost will appear as measures are phased in over the FY15 through FY18 period).

The challenges for state lawmakers now are to refrain from cutting taxes further and boosting spending as surpluses return.  In short – do no harm.  Any surplus should be used to adequately fund the decimated Budget Stabilization Fund.  A balance of six months of spending would not be too much.

Notes:

All figures cited in this article may be found in reports available on the Arizona Legislature's Joint Legislative Budget Committee's (JLBC) webpage at: http://www.azleg.gov/jlbc.htm

For additional information, please contact us.

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