Arizona's deficit forecast grows to $1.7 billion as Gov. Katie Hobbs proposes new budget

Arizona Gov. Katie Hobbs released a $16.2 billion budget proposal Friday that trims transportation and capital projects, cuts back water augmentation spending and banks on enacting longshot reforms to two programs that benefit private schools.

The governor’s proposal is unlikely to win enough support as-is to reach a balanced budget. It comes as nonpartisan financial forecasters at the Capitol increased the state’s expected shortfall from $850 million to at least $1.7 billion.

The Democratic governor’s second budget differs from the latest numbers from nonpartisan budget forecasters and expects a deficit just shy of $1.4 billion. Hobbs proposed to remedy that with a combination of cuts and to move money from dedicated funds into the state’s general bank account, without dipping into the state’s rainy day fund.

But several of the measures on which the Hobbs administration bases its math — like curbing eligibility for private school vouchers — are unlikely to get majority support in the Republican-controlled Legislature. Hobbs administration officials acknowledged their budget was a starting point, but wouldn't detail their backup plans to fill the revenue gap.

“We’ll continue evaluating as we see actual numbers coming in, and of course always adjusting what is and isn’t funded as those numbers come in," Hobbs' spokesperson, Christian Slater, said. "Again, Arizonans across the state want accountability in (the voucher program). They want to see some of these really critical investments. I think we have a budget that brings those commonsense solutions to the table.”

It took only minutes for Republican leaders to reject her private school proposals, vowing to block any attempt to rein in the universal school voucher program and to eliminate the longstanding School Tuition Organization tax credit program.

They also charged Hobbs underestimated the current budget shortfall, complaining it was $372 million less than their figure. Republicans said her plan was "dead on arrival."

The rising deficit estimate surprised the Senate's appropriations chairman, Sen. John Kavanagh, R-Fountain Hills.

While previously he portrayed the moves needed to erase the deficit as minor cuts, he now sees a more serious situation.

“It goes from outpatient to a brief overnight stay,” he quipped.

The governor’s budget includes $488 million in new but mostly one-time spending initiatives to provide child care, start a mortgage assistance program, and combat the fentanyl crisis, among other things. It proposes ending the year with a $133 million balance.

"We are cutting out the wasteful taxpayer spending while making critical investments that will help middle-class families buy a home, expand access to childcare, make prescription drugs more affordable, and protect disabled Arizonans and seniors," Hobbs said in a statement. "This is what it looks like to invest in our communities and build a state that works for every Arizonan.”

The annual budget keeps state services operational, from highway patrols to welfare benefits and subsidized health care. Lawmakers must pass budget bills that win Hobbs’ signature by June 30.

Hobbs’ budget proposal is the starting point for what is typically months of negotiations with lawmakers about what those final bills ultimately include — or don’t.

With budget gurus talking for months about the state’s expected shortfall, what the governor wants to cut has taken on topmost importance as those negotiations begin.

What Hobbs wants to cut

Hobbs’ proposal cuts about 75 one-time projects that were funded in prior years but have not yet gotten underway or could be funded by other sources, according to administration officials. Those trims will impact 17 state agencies.

Those items include 24 transportation projects that were included in budgets over the last four years. Hobbs has kept in place money that will go to widen Interstate 10 between Chandler and Casa Grande and Interstate 17 north of Anthem.

Almost all of the transportation projects now on the chopping block were inked into the current budget by Republican lawmakers, Hobbs’ office confirmed. They were funded when lawmakers last year reached a deal with Hobbs to divvy up shares of the state’s then-$2 billion surplus, with each using their slice for priority projects.

The governor has also proposed taking $282 million from funds tied to state boards and agencies and moving that money into the state’s general fund, its main bank account largely funded by tax revenues, to help offset the shortfall.

She also wants to pull back about $300 million that her predecessor, Republican Gov. Doug Ducey, and GOP lawmakers dedicated to a fund that seeks to augment water resources within the Water Infrastructure Finance Authority. Hobbs’ budget shrinks that funding to about 10% of what was expected, just $33 million.

Hobbs volunteered her office, and the Legislature, should also take a hit, proposing a 1% cut in the upcoming year.

Why does state have deficit? Tax cut and school vouchers are not causing Arizona's budget shortfall, analysts say

Education battles to come

Two of the governor’s proposals to make up for the state’s revenue shortfalls are sure to meet resistance in the Republican legislature.

Hobbs says the state could make up $245 million by reviving a requirement that students attend public schools before they are eligible for Empowerment Scholarship Accounts, Arizona’s private school voucher program. That requirement was eliminated in 2022 when lawmakers and then Gov. Doug Ducey expanded the voucher program to be eligible to all students.

Hobbs wants to return to a slightly different version of the old eligibility rules, requiring students be enrolled in public schools for at least 100 days before they can receive a voucher.

That pitch will meet a roadblock in the Legislature. House Speaker Ben Toma, a Glendale Republican who sponsored the bill that expanded eligibility, has already declared any limitation on vouchers a nonstarter.

The governor has also proposed repealing the state’s school tuition organization program, which allows taxpayers to claim a credit each year for money donated to provide scholarships to private schools. Because of how tax credits are processed, that wouldn’t mean a budget savings until a year later, when Hobbs’ budget staff predicted a savings of $185 million.

Axing the STO program would amount to a tax increase, GOP leaders said in a news release. The state Constitution requires a two-thirds vote to raise taxes, an insurmountable goal in the closely divided Legislature.

If those proposals do not get legislative approval, the governor’s budget plan falls back into the red.

What Hobbs wants to add

The governor, who surprised some by prioritizing border issues in her State of the State speech on Monday, has called for more funding to support law enforcement and humanitarian groups that work at the state’s southern border.

She wants $5 million in ongoing funding and $10 million in one-time money, as well as $1 million to continue a border coordination office she launched last year.

The governor’s proposed mortgage assistance program, dubbed Arizona is Home, needs a $13 million infusion to get off the ground. The program will be a collaboration of the Arizona Department of Housing and the Arizona Industrial Development Authority and aims to help more low- and middle-income residents make down payments and mortgages.

The governor's budget includes a slew of proposals to better root out and protect against abuse within long-term care facilities and the state’s Medicaid program, the Arizona Health Care Cost Containment System. Proposed funding would allow the state to hire three new long-term care ombudsmen, boost staff at several boards that license health care professionals, and fund 202 jobs within the Medicaid program to target fraud.

Democrats said the budget plan acknowledges the needs of average Arizonans. Those priorities span the age spectrum, said Sen. Mitzi Epstein, D-Tempe. They range from increased money for child care costs to a continuation of free school lunches for all students to an intent to lower certain prescription drug prices, such as insulin.

Rep. Lupe Contreras, the House Democratic leader, said the budget protects public education, housing and child care.

“We have our starting point," he said in a statement, "and it's time for the adults in the room to get to work on some tough decisions."

Other budget asks include:

• $540,000 to establish a Prescription Drug Affordability Division that will study ways to cap prescription drug prices

• $100 million in combined one-time and ongoing spending for Child Care Development Fund, to curb the cost of childcare fees and prevent a waitlist for services, which could help over 31,000 children in a year

• $13.7 million to provide support to family members who care for children removed from their parents’ care due to neglect or abuse

• $78 million to pay for construction of seven new schools, three of them in rapidly growing Queen Creek

• $70 million in one-time money to 15 schools, to cover the costs of repairs, land purchases and other building needs

• $46 million to the state’s public universities to pay for medical schools and programs to boost Arizona’s access to affordable health care

• $20 million as a one-time addition to the Arizona Promise program, which provides scholarships to qualified low-income students at Arizona’s three public universities. The one-time addition would double the program’s budget next year.

• $203 million to add 84 employees at the state Department of Corrections

The governor’s budget pitch preserves the state’s rainy day fund, which stands at $1.5 billion. Hobbs’ budget documents say that the state’s deficit is not due to an “economic downturn,” therefore there was no reason to dip into the fund.

The last time the state faced a deficit, in 2015, Ducey and lawmakers offset an about $1.5 billion shortfall with cuts and a withdrawal from the rainy day fund. At that time nine years ago, the state's annual spending was just over $9 billion, and they ultimately finished the budget early in March.

Arizona State of the State: Takeaways from Gov. Katie Hobbs’ policy outline

Reach reporter Stacey Barchenger at stacey.barchenger@arizonarepublic.com or 480-416-5669. Reach the reporter at maryjo.pitzl@arizonarepublic.com or at 602-228-7566 and follow her on Threads as well as on X, the platform formerly known as Twitter @maryjpitzl.

This article originally appeared on Arizona Republic: Huge Arizona deficit looms as Gov. Katie Hobbs proposes new budget