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How the AZ budget went from a $2.5 billion surplus to a large deficit

Arizona is facing budget shortfalls for the rest of this fiscal year, as well as the new one that’ll start on July 1. That’s after starting last year with a roughly $2.5 billion surplus. Legislative budget analysts say revenues through November were $331 million lower than the estimate made for the current budget.

Gov. Katie Hobbs will present her budget proposal a week from Friday, and many lawmakers are no doubt already thinking about their priorities, as well.

To get a sense of what 2024 may hold for the state’s finances, The Show spoke with Robert Robb, who writes about politics and public policy on Substack, and the conversation started with what Robb sees as the main culprits for going from surplus to deficit.

ROBERT ROBB: I think there was one proximate cause and that was the decision by the Republican legislative leadership to spend all of a $2.5 billion surplus, which was inherited for the budget year that we're currently in and they did so, in my judgment, a fiscally irresponsible fashion rather than going through the kind of difficult debates and deliberations and appropriations, what's the priority, how much money does each program get? The decision was made to let every legislators spend tens of millions of dollars on whatever he or she wants.

MARK BRODIE: A particular pet projects kind of thing.

ROBB: Yeah, I, well, in pure pork, well, unexpected things happen and you can look at those unexpected things and blame them income tax. Revenues are below expectations, so you can blame the tax cut. The voucher program is costing more than budgeted so you can blame the voucher program, and people are doing that. But in reality, there was ample resources going in if prudently managed to have survived those surprises and not be facing a deficit. 

BRODIE: So what you're basically saying is had state legislators and the governor decided to, instead of give all the legislators who voted for the budget X millions of dollars to say, OK, we think maybe the ESA program, the voucher program is going to cost more unexpected things could happen, which a lot of forecasters expect unexpected things to happen even if they don't know what exactly they're going to be. If they had done those things instead of what they did, we wouldn't be in the position that we're in now.

ROBB: Correct. The deficit is $400 million. The anticipated income tax revenues are running $250 million less than budgeted. The voucher program is running $350 million more. So you take a $2.5 billion surplus, you absorb those two things and you still have about $1.8 billion to spend.

BRODIE: So, when you look ahead then to January and beyond, are you thinking that we're gonna be looking at mid year cuts to try to make up that $400 million deficit? And even regardless of what you think about that, do you think it's safe to say that going forward because there's a shortfall looming for the next fiscal year starting on on July 1 of 2024, are you anticipating spending cuts going into that budget as well?

ROBB: I think certainly the budget challenge for the fiscal 2025 year, which is what they will be appropriating next session is extremely challenging and it's deeper than is currently being projected. It's currently being projected at $450 million. The legislative budget staff who made that projection are gems of state government. They're not responsible for what I'm about to say. But the Legislature has decided to denominate certain expenditures that are recurring as one time and those are excluded from that legislative budget staff estimate. There's probably at least $250 to $300 million in that category. And so the deficit is even deeper. So I anticipate that Gov. Hobbs will try to cobble together a budget that tries to minimize the cuts, trying to predict what the Legislature is going to do is virtually impossible because they opted not to go through an appropriations process and instead paste it all together with giving these grants to every single Legislature.

BRODIE: Well, and it's really interesting because earlier this year when everybody was saying, well, the budget's never gonna get done. The Republicans and the governor, the democratic governor never gonna be able to get together. It got done really early in large part because of what you're saying, where everybody got some amount of money to spend on what they wanted. Given that that's off the table, and also, I guess maybe to an extent, given the fact that this is an election year, at least for the legislators, how like, how might that process look like? Is it gonna be a worse version of what we had expected we were gonna see in 2023.

ROBB: It has the potential to be a much worse than what we had anticipated in 2023. The process begins with Gov. Hobbs. She will offer the first, shot at the budget and it will be interesting and important as to whether she presents a governing document, something that kind of recognizes the politics and at least provides a framework with when within which you can have that bipartisan discussion. Or she presents a political budget, which is full of unrealistic solutions to the problems, the physical problems that the state now faces. Even if she presents a governing document based upon the track record, there wouldn't be a lot of hope that the Republican legislative leadership would respond in kind. It is impossible to accomplish what needs to be accomplished without it being bipartisan. 

BRODIE: There's an old conventional wisdom at the state Capitol that it's easier to do a budget when there's no money, right? Like when you have to, you can basically say no to everybody as opposed to saying yes to some and no to others. Although, as we saw in 2023 is basically yes to pretty everybody in the Legislature. Do you think that that holds true, given the current climate with Republicans holding a narrow majority in the legislature, a democratic governor, all the legislators are up for election, some running for other offices.

ROBB: It depends upon the attitude of the governor and the legislators. When Janet Napolitano was governor and Republicans were in control of the Legislature, there were successful budgets negotiated on a bipartisan basis both in times of shortage and times of plenty. But because she was willing to accept Republican priorities, And because Republican leadership understood the need to create a bipartisan budget if someone in the other party happens to have to sign it in order for it to become law. I don't see the same leadership attitude, either from the governor's office but even more, not from Republicans in the Legislature, to create that kind of an environment in which there's a recognition that we ain't gonna get our own way about this. It's gonna be something that we're gonna negotiate.

BRODIE: All right. That is Bob Rob. Bob, thanks for coming in. I appreciate it.

ROBB:  Always enjoy it.

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Mark Brodie is a co-host of The Show, KJZZ’s locally produced news magazine. Since starting at KJZZ in 2002, Brodie has been a host, reporter and producer, including several years covering the Arizona Legislature, based at the Capitol.