How to fix Arizona's budget hole — without decimating services
There’s been a lot of attention given to Arizona’s current budget shortfall.
But today’s deficit is much different than what lawmakers wrestled with during the Great Recession, both in its root cause and potential solutions.
For starters, our current dilemma is not the result of a global recession or rapidly declining revenue. We’ve rebuilt our manufacturing base and are emerging as a leader in the semiconductor industry.
Our economy is more diverse and more resilient than it was 10 years ago.
What's driving Arizona's shortfall?
Consider that Arizona recovered from the COVID-19 economic downturn faster than almost any other state. Even with the implementation of the lowest flat tax in the nation, our state revenues are still an impressive $4 billion higher than they were just three years ago.
Secondly, there are two key components of the budget: One-time spending and ongoing spending.
Ongoing spending is similar to things in your own household that are fixed, ongoing costs — your car payment, mortgage or grocery bills. For the state, these are things like school budgets, health care, prisons and social safety net programs.
Blame the budget deficit: On tax cuts for the rich
One-time spending would be more akin to items in your personal budget, such as replacing your air-conditioning unit, getting a new roof or going on a family vacation. Some of this is necessary spending — some is discretionary.
Arizona’s current deficit is entirely a product of one-time spending. The projected deficit is around $835 million this year and $879 million next year.
Compare this to the Great Recession, when the state faced a staggering $3 billion ongoing deficit on a total $9 billion budget.
How to fix the budget with little pain
Simply put, Arizona’s spending has recently grown faster than our economy.
A new report by the Common Sense Institute provides a path for lawmakers to address this in a responsible way. Here are the highlights:
Continue Proposition 123 distributions: Passed by voters in 2016 to provide more money to K-12 education from the state’s Land Trust, Proposition 123 is set to expire. This will shift roughly $300 million in K-12 spending annually to the taxpayers. Extending it — cleanly, without new commitments — would continue to protect the Land Trust, the General Fund and K-12 spending.
Identify surplus “other” funds that lie with state agencies. Every year, policymakers commit billions of dollars of spending in “other” funds outside of the state General Fund. In 2016 — the last time the state was facing a shortfall — policymakers swept $220 million from these funds into the General Fund. Realistically, policymakers can probably find at least $250 million of savings in this category.
Delay or eliminate one-time spending commitments made in the current budget, but not yet spent. By identifying just half of the unspent one-time commitments that can be either rolled back or delayed, policymakers can resolve the remaining shortfall. For example, some funding for new roads only sped up existing construction plans; those can be returned to their original schedules.
Restore fiscal discipline in the annual budget process. Over the past two years, spending growth has averaged a nearly 18% increase per year, even as nearly all new spending has been categorized as “one-time” in nature. Policymakers should strive to tie total annual spending growth to reasonable anchors, like the sum of population growth and the inflation rate (or about 4%-5% per year).
Avoid reductions in essential services: Since the current deficit is primarily a one-time issue, policymakers should focus on one-time solutions and maintain funding for vital state programs and avoid tax increases. Much has been said about the cost of the state’s expanded Empowerment Scholarship Account program, or recent efforts to reduce taxes. These are both ongoing revenue and expenditures. That means that the current budget accounts for them and still has $300 million left.
As you can see, cash solutions coupled with a return to fiscal discipline can resolve the current storm without making any ongoing cuts to education, social safety net programs, public safety and other essential services.
If we adhere to these steps, we can anticipate a resolution to this challenge, positioning Arizona for a stable and prosperous future.
Katie Ratlief is executive director of the Common Sense Institute Arizona, a nonpartisan research think tank. Reach her at Katie@csinstituteaz.org.
This article originally appeared on Arizona Republic: Arizona budget shortfall is surprisingly easy to fix
