State lawmakers and the governor have yet to approve a budget for the new fiscal year that starts July 1. And, looking at the calendar, they have less than six weeks to get that done. But there’s another deadline that may be even more pressing.
As of last month, the state was facing a $676 million deficit for the upcoming fiscal year. But Arizona also has a $650 million shortfall for the fiscal year that we’re currently in, the one that ends at the end of June. And that means there are only about six weeks to close that — a task that becomes more difficult the closer that date gets.
With The Show to talk about what that means and what kinds of options lawmakers and the governor may have is economist Alan Maguire, president of the Maguire Company, and a veteran of many state budgets.
Full conversation
MARK BRODIE: Good morning, Alan.
ALAN MAGUIRE: Good morning. How are you?
BRODIE: I'm doing all right. So how challenging is it six weeks out to close a $650 million shortfall for the current fiscal year?
MAGUIRE: Well, it's almost too late. Obviously, you have only moments before the budget year ends. And so really, your focus needs to be on how do we survive the current $600 million shortfall and then figure out what's going on for next year. Now, the good news is, is that we keep, just, we seem to keep making these same mistakes over and over and over again and we've survived them all. So we've built up sort of a list of things we can do to fix these problems. And so they're gonna have to do some very drastic, very quick things to solve the current year problem and then prepare for the coming year problem.
BRODIE: Well, so how much would you expect? And, you know, we don't know what's going on behind the closed doors of budget talks, assuming that they're happening. But how much would you imagine it at this point in, you know, on May 21, how much of it is cuts to state agencies and programs, which would have to be pretty dramatic as you alluded to because of the condensed time frame. How much is sort of tapering it over and kicking it to, to the next fiscal year than dealing with it then?
MAGUIRE: Well, we know that they spent a lot of money last year, last budget year on one-time expenditures. Now, some of them are projects like a transportation project. That project may have been designed but not bid so they can stop a lot of that spending right away. That will help them in, for the current year. They can defer those and say, well, we'll get you that money back in three years or five years. They can do a bunch of that stuff.
There are some operating increases that they could probably stop, but frankly, if I was sitting in the, the governor's office, God forbid, the first thing I would do is I would cancel or freeze all on, on all unexecuted contracts. If you haven't started, stop. Obviously a hiring freeze, they did that a couple of months, a couple of weeks ago, a promotion freeze, freeze any capital outlay spending immediately.
We'll take a look at that down the road a little bit but the, the real big dollar amounts to fix the current year problem are probably gonna come from maybe two big sources. The first one is, the state has something called the operating fund, which is kind of like cash on hand. And so that's a sum of all the, all the dollars in hundreds of individual accounts that are sitting in the state Treasurer's Office. Right now, there's over $10 billion there. Now, you could borrow that money from those special funds and use it to close your budget shortfall this year. You should, you should pay that back someday, but that would get you through the budget crisis immediately.
The second thing is you can do some, you can take some money out of the rainy day fund. Now, technically, the current economic situation doesn't qualify for a transfer, but that's a state law. The Legislature can change the law if the governor and the Legislature agree to that, that would be two places they could get ready cash to fix the current a budget, which a budget year which ends in about 45 days.
BRODIE: Is that, does that account for $650 million worth of money or they still have to do other stuff if they did all that?
MAGUIRE: There's more than enough between the operating balances and the rainy day fund.
BRODIE: OK. Do you expect them? I mean, in the past, you know, during the Great Recession, during other times of economic difficulties, they, for example, delayed payments to schools, you know, for a couple of weeks into the new fiscal years. How much of an option is that at this point?
MAGUIRE: Yeah, rollovers, which basically means paying your, your bills late, right. So, we all do that. We'd pay the water bill this month but then the phone bill next month and we kind of string it along. We can, they can do that. They still owe the K-12 system money. So there's some capacity there, not that much, but some. They, they, they did it to the universities in the past where they deferred payments to them. You can defer payments to providers who provide services to the state of Arizona. You can't do that very long because a lot of them are pretty small and they can't make the cash flow work. You could probably even defer grants and revenue sharing to local governments, fairly drastic action, probably get sued, probably lose. But that takes a while. And in the meantime, you, you've got the money but then you have to pay the legal fees on top of that, right.
BRODIE: Right.
MAGUIRE: But when, you know, when you're desperate, you, desperate times call for desperate measures.
BRODIE: Would you consider this a desperate time at this point?
MAGUIRE: When you're sitting in May and you're $600 million in the hole? That's pretty desperate.
BRODIE: So what do you think it is that's holding this up? Again, we're not, we're not in the room. But I mean, you just outline enough things that they could do that from the outside, at least, you know, taking money from the rainy day fund, stopping projects that haven't been started yet, maybe deferring transportation projects. A lot of those seem like not super controversial type things.
MAGUIRE: They're not, but, but a lot of it has to do has to do with attitude, right. You have to decide that when I'm trying to solve my budget problems, I'm not thinking about policy. So I'm not gonna pick the thing to cut that I know the other side really loves. That's just wasting time. So what you try to do is find things you can do that both sides can agree to something that, that I kind of like a little bit and you kind of like a little bit, but neither of us are gonna go, gonna die over. Find a bunch of those things to cut and, and reduce your spending that way until you get to that point where you go, we have to do this together. It's very, very hard to make progress.
BRODIE: And when they're making those choices for this year, how much are they also looking at the next fiscal year? Because for example, if they do a rollover or something that makes the deficit for next year, that much bigger that there.
MAGUIRE: There is the problem. They, they've got, they've got, they've got deficits projected for at least the next four years. So what they really need to do is, as they plan the spending for the budget year, next fiscal year, they need to figure out a way to ramp spending down. If, if I were sitting there, my, my advice to them would be, let's try to figure out a way to get the general fund budget back to the 2019 level. Let's target that level. And, and if we don't have to do that over the next three or four years, great. But at least we have a plan, get back to solvency and then we can regroup and move forward. And that means a lot of policy choices, new programmatic efforts just have to be delayed and deferred.
BRODIE: All right, lots to keep our eyes on over the next five and half weeks or so. Valley economist Alan Maguire with the Maguire Company. Alan, thanks as always for coming in.
MAGUIRE: Always a pleasure.
KJZZ's The Show transcripts are created on deadline. This text may not be in its final form. The authoritative record of KJZZ's programming is the audio record.
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