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Arizona's structural budget crisis is at the edge of a cliff, about to tip

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Posted: Friday, January 21, 2011 12:00 am

Arizona’s current $1.5 billion budget deficit is only the tip of the iceberg of a problem that cannot be fixed without making structural budget changes to assure its future stability.

That was the message delivered to 120 business and community leaders Wednesday (Jan. 19) at the Westin La Paloma Resort and Spa put on by the Southern Arizona Leadership Council. Titled the “State of OUR State,” it unveiled a report on Arizona’s budget crisis done by Brookings Mountain West at the University of Nevada Las Vegas and the Morrison Institute for Public Policy at Arizona State University.

The report, “Structurally Unbalanced: Cyclical and Structural Deficits in Arizona” came less than a week after Gov. Jan Brewer released her budget proposal on Jan. 14 and suggest her proposal fails to address the state’s deeper financial issues.

Brewer’s proposal calls for borrowing nearly $600 million to get the state through this fiscal year, more than half, $330 million, of which would be borrowed from next fiscal year’s budget on June 30, the last day of this fiscal year. The loan would come from the First Things First early childhood program and repaid the next day, under Brewer’s proposal.

Her proposal also includes delaying payments to school districts to put them into next fiscal year.

“These kinds of 24-hour gimmicks are admission that there is a structural problem with the state’s money,” said Grady Gammage, a senior fellow at the Morrison Institute, who delivered the report. “A structural deficit is a political problem. On the left, we want to add services without caring how they will be paid for and on the right, we want to cut taxes without asking from where they money will be replaced.”

A cyclical deficit has to do with economic downturns when reduced economic activity diminishes revenue performance. Structural deficits have to do with the imbalances between revenues and expenditures and expenditure obligations. 

“There are three factors that contribute to structural deficits,” Gammage said. “They include: the current fiscal structure, which defines expenditure obligations and the means of financing them through the tax system; the economy and demographics – where sales tax revenue decreases as a population uses more services than purchases goods; and political decision making.”

At the start of this fiscal year, on July 1, 2010, Arizona was looking at a deficit of about $3.4 billion. The cyclical deficit was around $1.2 billion and the structural deficit was $2.1 billion. As a percentage of the budget, Arizona has a 33 percent deficit with 12 percent of that cyclical and 21 percent of it structural.

A companion report compared Arizona’s budget issues with the cyclical and structural deficits of California, Nevada and Colorado.

As of the start of the fiscal year last July, California’s deficit was 21 percent with 12 percent cyclical and 9 percent structural; Colorado had a 7 percent deficit with a 2 percent cyclical surplus and a 9 percent structural deficit; and Nevada had an 18 percent deficit with 17 percent cyclical and 1 percent structural.

“Arizona is the worst state in the west for structural deficits,” Gammage said. “And it would surprise me if there was a state worse than Arizona in the country.”

Gammage said structural deficits need an increase in taxes or a decrease in government services to get revenues and expenditures back in line.

The structural deficit in Arizona predates the recession and is largely the result of policy-induced revenue reductions, according to the report. Dating back to 2007, Arizona had an 18 percent structural deficit. But that same year, Arizona had a 17 percent cyclical surplus for a total budget deficit of 1 percent.

After Gammage delivered the report, there was a panel of economists featuring George Cunningham, who was deputy chief of staff for finance and budget for former Gov. Janet Napolitano, and Dennis Hoffman, director of the Seidman Research Institute and a professor of economics at ASU.

“We don’t need massive tax increases to fix our problem,” said Hoffman. “But people need to be asked to take on more responsibility for the services they are demanding from government. Why would 5 percent be too much to ask?”

He later said a lesser amount, around 4 percent, or $40 per $1,000 of income would solve the deficit.

Other fixes they offered include expanding the tax base to include services, an extraction tax on mining operations and increasing property owner taxes.

Ron Shoopman, president of SALC, said it is extremely important to get these facts in the hands of business owners all around the state.

“We have another cliff facing us in 2014 when the one-cent sales tax goes away,” Shoopman said. “We need to solve this deficit problem now and we need businesses all on the same page. The public and private sector need to work together openly to get this problem solved.”

Contact reporter Joe Pangburn at jpangburn@azbiz.com or (520) 295-4259.

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