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Hobbs proposes $1 billion in cuts as Arizona revenue projections decline

Arizona Capitol building.
The Arizona State Capitol building in Phoenix, Arizona.

Democratic Gov. Katie Hobbs’ roughly $16 billion budget proposal includes around $1 billion in spending cuts, but that won’t be enough to resolve a massive deficit that legislative budget analysts estimate has grown to roughly $1.7 billion.

And some of the cuts in Hobbs’ budget have virtually no chance to pass the Republican-controlled legislature, anyway.

The governor’s proposed cuts are spread across dozens of state agencies and include at least one big ticket item — changes to the school voucher program, also known as Empowerment Scholarship Accounts — that Republican lawmakers have already said is a non-starter.

“These elements in her proposal are dead on arrival with the Republican Majority,” Senate Appropriations Chairman John Kavanagh (R-Fountain Hills) said of Hobbs in a statement following the budget’s release. “Her grandstanding of bipartisanship during her State of the State Address is a far cry from the reality of this budget proposal, as her funding cuts strictly target Republican priorities.”

School voucher changes

Hobbs released a list earlier this month that included a half dozen reforms she wants to see implemented to rein in the voucher program, including a provision that would require that a student attend a public school for at least 100 days before they are eligible to receive voucher money.

The reforms are less aggressive than the governor’s proposal last year to completely roll back the universal expansion of the voucher program.

That change would make over 40,000 ESA students ineligible for the program, at least until they first attend a public school, and save the state around $244 million every year, according to the governor’s budget analysts.

Officials with the governor’s office indicated it does not believe the costs to educate those students would simply shift onto public schools.

They believe the majority of those students attended private schools without vouchers before Republicans expanded the voucher program in 2022, citing data that shows from 2022 to 2023, the number of students in public schools declined by just 1,000 while the number of students in the voucher program increased by nearly 50,000.

Without the 100-day rule in place, the governor’s office projects enrollment will reach 83,000 students next year and cost $822 million.

Hobbs’ budget also calls to completely dismantle the Student Tuition Organization tax credits that parents and businesses can currently use to pay for a student’s private school tuition, the only meaningful change to Arizona’s tax law in the budget proposal. That would save a projected $185 million in 2026, the governor’s office said.

But, again, that program is supported by many legislative Republicans and Republican lawmakers accused Hobbs of trying to “raise taxes” in a press release responding to the budget proposal.

Those cuts are critical to the governor’s plan. The governor’s office projects that, under Hobbs’ budget, the state budget will see a $133.6 million surplus next year – thanks in part to rosier revenue projections than those made by legislative budget analysts. But if Republicans don’t get on board with the ESA reform, the governor’s budget will fall into a deficit.

The governor’s office acknowledged that reality and said it had other options to cut spending but declined to share those details.

“This is our budget; it reinstates some common-sense accountability measures. … We think that this is something that we’re going to put forward and we’re really hoping that this is something that we can get passed,” said Christian Slater, Hobbs’ spokesman.

Rolling back road projects

The governor’s largest proposed cut would roll back over $418 million that was allocated to various road projects over the past three years. That proposal aligns with previous comments by some Republican leaders, who said some funded road projects can’t break ground now anyway.

“There are many road projects that, even though we allocated money for them, they can’t be done right now, because we just can’t get workers to build those roads, and those projects can be pushed out a couple of years,” Kavanagh said in December.

Hobbs is also calling for the cancellation of an array of expenditures passed in last year’s budget that was packed with pet projects used to get Republican and Democratic lawmakers on board. That includes $121 million in one-time spending allocated to 11 state agencies that hasn’t been spent, and $201 million that was allocated to capital and IT projects over the past two years that are completed and have money left over, haven’t started yet or can secure alternative funding sources.

Hobbs is also calling for her office and both chambers at the state legislature to take a one-time, 1% cut to their budgets but it is unclear how much money that will save.

Here’s a look at the governor’s other spending priorities.

Housing

The budget proposal includes assistance for homeowners and homeless people, but not much in the way of building up the states’ housing supply.

Hobbs wants to create a mortgage assistance program, with $13 million dedicated to down payment assistance and mortgage interest rate relief.

There’s also a small amount earmarked for housing tax credits.

“This is something that can deliver some really immediate relief for Arizona families, and it's going to help them, middle class families, you know, buy a new home with some of that down payment and interest rate relief that's going to be really important to addressing our housing,” Slater said.

AHCCCS

The budget also shifts around existing funds to create a new program for assisting homeless people who are part of the state Medicaid program known as AHCCCS. If approved, it would be augmented with hundreds of millions of dollars in federal funds.

AHCCCS was defrauded out of hundreds of millions of dollars over the past several years by bad actors who claimed to run sober living homes, but didn’t actually provide those services.

Prisons

Hobbs’ budget includes over $270 million over the next two years to help the Department of Corrections come into compliance with an injunction U.S. District Court Judge Roslyn Silver signed last year. Silver found the agency was not providing sufficient health care to inmates in a case dating back to 2012.

Most of that money would be used to hire 84 additional staff members to help administer the department’s health care program and cover anticipated costs related to overtime, medication and health care contract increases.

The increase would also pay for infrastructure improvements, like showers, required by the court order.

U.S.-Mexico border policy, including fentanyl

Hobbs, who has criticized the Biden administration’s handling of border issues in recent months, emphasized her own border plan during her State of the State speech on Monday, and those priorities are reflected in the budget.

But governors and other state officials are limited in what they can do at the border, and Hobbs’ spending plan largely looks to mitigate the impact of the fentanyl epidemic.

Hobbs’ budget includes $15 million for her Stopping Arizona’s Fentanyl Epidemic, or SAFE, initiative. That includes $5 million in ongoing funding for the Department of Public Safety to provide grants for local police departments’ drug enforcement efforts.

The budget also includes money to fund a border coordination office within the state Department of Homeland Security to coordinate the response from state and local agencies to issues along the state’s southern border with Mexico. The state is using federal funds to launch the project, and Hobbs’ budget includes $1 million to fund the new office in 2026.

Water

Hobbs said in her State of the State address that Arizona’s water supply is a priority, but there’s very little funding for water.

The Water Infrastructure Finance Authority was awarded $1 billion to be doled out over the course of three years starting last year, but Hobbs’ administration has cut that funding down significantly.

Instead of the scheduled $333 million WIFA was expected to receive this year, the budget allocates $33 million of that to the department.

“We urge legislative leadership to reject the spending proposals outlined by the governor by appropriating more resources for conservation grants and fully funding the long-term augmentation fund,” WIFA said in a post on X.

Education

For K-12 education, Hobbs wants to maintain current funding levels and add $331.3 million to upgrade school buildings and to build new schools.

The governor’s office said that capital projects would only go forward this year if improvements are necessary for safety issues, but that doesn’t apply to school projects or certain prison projects where updating facilities is required by lawsuits against the state.

Arizona’s universities would also get $46 million in one-time funding for various initiatives like building and expanding medical schools. Some of the funding for that project will come from other sources.

The proposal also suggests increasing the universities’ bonding authority up to $1.13 billion, which is a $325 million increase.

Some of Hobbs’ other new proposed projects include $100 million for child care assistance, augmented by $91 million in federal funds, and roughly $500,000 to create a division to promote prescription drug affordability.

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Wayne Schutsky is a broadcast field correspondent covering Arizona politics on KJZZ. He has over a decade of experience as a journalist reporting on local communities in Arizona and the state Capitol.