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ASU study: Arizona deficit more than triple GOP's claim

'Arizona suffers not only from a massive cyclical deficit but also a gargantuan structural deficit'

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Arizona's true state budget deficit is $2.1 billion, more than triple the $825 million cited by Gov. Jan Brewer and Republicans in the Legislature, a new study estimates.

Tax cuts and spending decisions made in good times have deep implications when the economy heads south, says the report. Short-term fixes that papered over budget deficits have only made the state's fiscal situation worse, "Structurally Unbalanced: Cyclical and Structural Deficits in Arizona" says.

The study, by the Morrison Institute for Public Policy at Arizona State University and Brookings Mountain West, was released Wednesday.

The report drew its deficit number by calculating the potential revenue "lost" due to tax cuts over the past decade and a half.

The state's "serious cyclical budget shortfall" is the result of not just the "temporary collapse of revenue due to the recession" but also "the chronic, longer-term, and massive structural imbalances that have developed largely due to policy choices made in better times," the report says.

The report outlines steps to decrease Arizona's structural deficit, including broadening and diversifying the tax base, increasing local spending flexibility, developing a strategic spending plan, adopting multi-year budgets and increasing transparency.

Arizona's Republican leadership opposes tax increases and has proposed further cuts in the state's spending.

Recent measures to reduce the state's budget include a 20 percent reduction in K-12 education funding, the elimination of all-day kindergarten, a 28 percent cut to state universities, limits on organ transplants for AHCCCS patients, and a sell-off of the state Capitol building.

"Budget cuts from this point forward could - if handled crudely - prove devastating and difficult to recover from," the report says.

But "the crisis might actually prompt innovation instead of just pain," the report says.

The report's authors said they want to spark a conversation on the budget:

(F)or all the painful moves Arizona has undertaken in the last two years to close its recent budget gaps, little has been done to address the longer-term structural pressures on revenues and expenditures. Instead, the state has relied disproportionately on temporary or one-time measures to fill its fiscal holes, rather than permanent repairs to the tax and expenditure system—despite the fact that many of the problems are long run in nature. For example, the temporary one-cent sales tax rate increase was implemented in 2010 with great controversy to help close a budget gap that was well over $1 billion. The state also garnered national attention for its asset sales, which included the state Capitol and Supreme Court building. Of the $12.5 billion in total budget adjustments since 2008, 80 percent of the balancing act has been realized by one-time measures.

Yet now that the “easier” options have been exhausted, starker choices are coming, both today as well as during the next economic downturn.

Speculation now abounds that the K-12 and university systems will bear the brunt of substantial new cuts—a potential disaster as Arizona tries to position itself to diversify its economic base and develop the sort of high-impact, good-paying industries that require a top-quality “job-ready workforce.”

What is more, Arizona’s budget situation—like that in other states—is likely to get worse before it gets better. In fact, the Government Accountability Office (GAO) projects a continued deterioration in the state’s budget outlook for decades to come absent fundamental policy changes that address core imbalances between revenues and spending.

According to the report, Arizona's "dire budget crisis is really two-fold, because at present Arizona suffers not only from a massive cyclical deficit but also a gargantuan structural deficit."

Cyclical deficits can spike in economic downturns when reduced economic activity diminishes revenue performance while lower incomes and higher unemployment rates put added pressures on spending. At the same time, though, a weak economy can also help expose longer-term structural (or chronic) imbalances between revenues and expenditures. In this circumstance revenues consistently fail to grow in tandem with expenditure obligations and the cost of government, often because past policy actions have thrown off the balance of incoming revenue and ongoing spending.

In this fashion, Arizona is now struggling with two related but distinct fiscal disasters. Recognized is the portion of the state's budget crisis that has resulted from the sudden collapse of annual revenues after the real estate crash and economic downturn. This crisis has hit hard but will ease as the economy recovers.

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Less understood is the depth of the state's massive structural imbalance, which has arisen thanks in large part to policy choices made during the go-go years of the state's recent past but which will not soon relent. During the growth years, legislative and executive leaders acted as if the state could maintain a basic level of service provision even as it implemented tax cuts that permanently reduced the state's revenue base.

Now, the illusion has been shattered and the state's yearly labors to close its fiscal year budget gaps are about to get harder. With one-time fixes, gimmicks, and fund sweeps exhausted, budget cuts from this point forward could—if handled crudely—prove devastating and difficult to recover from. Serious discussions among state leaders have included opting out of Medicaid, cutting a K-12 system often cited before the recession for receiving the lowest per-pupil funding in the nation, and significantly reducing funding for the state's university system. At the same time, if managed well (that is, with a balanced approach and a sense of strategy and rigor) the crisis might actually prompt innovation instead of just pain.

The 16-page report recommends:

First, the state needs to improve the quality of its fiscal policymaking by moving to broaden, balance, and diversify its revenue bases while looking to the long-haul balance of taxing and spending. Implicit in this push must be a recognition that action has to occur on both the revenue and reduction side of the equation. Spending cuts alone are not going to put Arizona on a stable fiscal path.

And second, the state needs to improve the information sharing and budgeting processes through which fiscal problems are identified, analyzed, and addressed. As part of this, the state needs to put in place the sort of strategic plan that furnishes a long-term vision of state success against which budgetary and other sorts of performance can be measured against clear goals and mileposts.

The Morrison Institute for Public Policy is a public policy think-tank headquartered at ASU. Brookings Mountain West is a think-tank partnership between the Brookings Institution and the University of Nevada, Las Vegas.

What's your take?

Should Arizona grow or cut it's way out of budget troubles? If cuts are to be made, what programs should have their funding reduced? If growth is the goal, what strategies will jump-start the state's economy?

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1 comment on this story

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40 comments
Jan 5, 2011, 10:53 am
-0 +2

“...cutting a K-12 system often cited before the recession for receiving the lowest per-pupil funding in the nation, and significantly reducing funding for the state’s university system.”  Yes…cut funding for the single most important path to a brighter future…education.  Arizona, like California, is poised to be a Third World State.

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“Arizona is at a critical point. The state has always relied on its next growth spurt to pull it out of any downturn and keep the revenues flowing. This time is different. This time the budgetary problems are deeply entrenched, the choices painful, and there is no quick fix in sight.”

— "Structurally Unbalanced: Cyclical and Structural Deficits in Arizona"

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Morrison Institue/Brookings Mountain West: Structurally Unbalanced: Cyclical and Structural Deficits in Arizona

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