The start of the legislative session is usually an exciting period, but this year is exceptionally challenging.  My session started the week prior to January 14th as the Senate and House Appropriations Committees met in joint session to get a head start on resolving our 2008 budget deficit.  We heard presentations from the larger agencies or departments, almost all decrying any cuts to their budgets.  But the fact is that if significant changes are not made, the State will run out of money before the end of the fiscal year, June 30, 2008.  Even with an infusion of cash from the Budget Stabilization Fund (BSF or Rainy Day Fund), we will still be over $700 million dollars short.

The Governor has agreed to not ask for tax increases to cover the balance, but she does want to revert to financing to pay for school construction -- about a $400 million expense each year.   She likens this to putting a mortgage on a home, but there are few (if any) people who buy thirty homes each and every year without selling any of their prior purchases!  Our Joint Legislative Budget Council (JLBC) has provided information that shows that within a relatively short period of time, if we continue the practice of bonding for schools, the State will be paying out as much in interest every year as it would cost to build them for cash.  With all that going out in financing costs, funds won't be available to revert back to cash payment.

My position has been that we cannot allow this to happen, for philosophical as well as economic reasons.  However, in conversations with members of our leadership team it seems clear that we may have to agree to some sort of financing of schools.  One suggestion is to use short-term instruments, with the proviso that these must be paid off as soon as the economy rebounds and there are additional revenues coming into State coffers.  As always, these decisions really come down to what can be negotiated between the Speaker of the House, the Senate President and the Governor.

But when can we expect that rebound?  We had a joint caucus session with Senate and House Republicans and Democrats on January 15th.  Presentations were made by leading economists Elliott Pollack and Marshall Vest, on both the State and national forecasts, and the news was not good.  The consensus is that while we will not see declines as great as in the 2001-2002 period, our recovery will not be as fast nor as robust as we saw in 2004-2006.  The crux of Arizona's problem is, of course, the decline in the housing industry and related fields such as home finance.  Most of the other sectors continue to show modest growth.  But the impact of the construction slow-down more than offsets any gains elsewhere.  The effects of the sub-prime mortgage lending are contributing somewhat, but it was pointed out that even if foreclosures stabilized there would still be excess inventory of new and re-sale homes, an inventory that may take as long as three years to exhaust.  And so, the prediction is that we will not see significant improvement in the economy before the end of 2009 or even later.  Historically during times of decline, Arizona does worse than the nation as a whole; but the one ray of hope is that during expansion Arizona does better.

In the meantime, we are faced with expenditures that cannot be covered by revenues -- cuts will have to be made.  But one time cuts and budget "gimmicks" are not the answer either, because we will continue to have lower revenue growth for the foreseeable future.  Now is the time to bite the bullet, bring our expenses in line with our income, and rein in government growth. 

I will continue to keep you informed of our progress via these "Weekly Reports."
Please contact me with your comments or questions at (602) 926-5051 or nmclain@azleg.gov.

 

Until Next Week,
Nancy McLain