Arizona lawmakers approved their new state budget with just days to spare before the start of the new fiscal year. Just a few days later, President Trump signed the so-called ‘Big Beautiful Bill,’ which includes many of his policy priorities.
To pay for them, the federal measure also includes spending cuts to programs like Medicaid and SNAP, or the Supplemental Nutrition Assistance Program. Those two federal programs send money to the states, so cuts to them will mean less money coming to Arizona.
Glenn Farley, director of policy and research with the Common Sense Institute in Arizona, joined The Show to talk about what that might mean, especially in light of the spending plan approved by state lawmakers and the governor.
Full conversation
MARK BRODIE: Let’s start with the 30,000 foot takeaway from the Arizona budget. When you look at both policy and money changes, what comes to mind for you?
GLENN FARLEY: Yeah, I, the first thing I guess I'll say is, what a roller coaster ride to get to a conclusion that that in many ways, if you've been following the state budget for the past couple of years, is a status quo budget. There isn't much different from prior budgets, but that's not to say it doesn't do a lot. It spends about $2 billion.
Historically, we have not spent that much, but that has been the status quo of the past couple of cycles. We spent $2 billion two cycles ago then we couldn't spend, we actually had to make some reductions because there was no money left, and then we spent $2 billion again this year. So that's what I mean when I say status quo.
The other interesting thing about this budget from my perspective is for that $2 billion, it's hard for me, or I think probably anyone else, the governor or the Legislature or anyone else, to articulate what exactly we bought for that $2 billion.
BRODIE: How much of that though was sort of increases that were mandated by formulas? I mean some of that, you know, there's more maybe more people on AHCCCS, more people, more kids in schools, things like that that you have to pay for.
FARLEY: Yeah, no, that's a fair question and a fair point. And the short answer to that is about half. It's split roughly between $900 million to $1 billion in so-called baseline issues. That's what, what you're sort of describing these would be K-12 formula increases, Medicaid formula increases, etc. And then $1 billion in sort of new initiatives, that's for the budget parlance for new policy changes.
But don't ignore too much that $1 billion and baseline increases. Those were all simply prior year policy changes. For example, a significant chunk of the increase in the K-12 space is general fund money to backfill the expiration of Proposition 123.
We've been talking about the imminent expiration of Proposition 123 for years. It was effectively a policy decision by the Legislature and the governor's office to punt on or allow Proposition 123 to expire, necessitating those funding increases. They needed not to have done that.
BRODIE: So when you look at what is in the budget, does it seem as though lawmakers and the governor left themselves wiggle room to deal with some of the uncertainty that at that time they weren't quite sure about what was coming from the federal government. Now we have maybe a little more certainty, but not total certainty.
Do you think that there's enough wiggle room that lawmakers and the governor aren't going to have to come back and mess with this too much?
FARLEY: That too is an interesting question. You know, I've, I've worked on the state budget for many, many years previously in the governor's budget office and more recently externally. And in my experience, there's never enough capacity left behind to really handle any significant movement in the state budget, but two years ago, legislators and the governor signed a budget that left effectively $0 in the general fund.
Now, that necessitated a painful correction, the immediately following fiscal year. I do think policymakers learned from that. So while this budget repeats the recent cycle of large spending increase, it does leave more money in cash in the general fund. I think the number is about $200 million at the end of the year.
Again, going back to, to the last two years, we had a $1 billion roughly cash deficit, unexpected cash deficit, $200 million could not weather that, but that's atypical.
BRODIE: I want to ask you about the so-called “Big Beautiful Bill” which President Trump signed on July 4. So, I mean, it's a huge massive bill. It's gonna take a long time to really understand what the implications are of it and, and what will change, but some of the, the big ticket items, changes to Medicaid, changes to the SNAP program, essentially what are often called food stamps, things like that.
When you look at what might be coming down, trickling down to Arizona in terms of less federal money, maybe more, more people without health insurance, more people without coverage to help them buy food and groceries, things like that, what might that do to the state of Arizona's budget?
FARLEY: Yeah, great question, and as you alluded to, the bill is large and brand new, so I won't claim to be an expert, but I did just this morning actually start looking at some of the provisions. You know, as you know, there's been a lot of speculation about the implications of federal changes for the state budget going on for many, many months.
There's really three parts, you talked about two of them, but three parts of these federal proposed changes that potentially could impact the state budget and state policy.
There's Medicaid, there's food stamps, and there's also tax codes. So there's a kind of the, the big three and the big beautiful bill touches all three of those things. So it's natural to assume it will have implications to ask what.
So I'll start with the easy one. On the tax changes side, a lot of what it does is codifying continuing the Tax Cuts and Jobs Act from 2017. The state largely already conforms to that, so that becomes baseline at that point.
A lot of the new policy changes are below the line. That's just a technical term, but for your listeners, all they need to know is that means: by default, the state won't have a conformity issue or a significant conformity issue, in my opinion, due to Big Beautiful Bill. So that's the tax changes.
Look at Medicaid and food stamps, for sure, there are reforms here, and the, the federal policymakers and the federal budget scorecard assumed those reforms with lower federal costs by reducing the number of folks using in the amount of services those folks were using on Medicaid and SNAP.
That trickle-down likely means if it's true that there will be fewer folks enrolled in the state's Medicaid program and fewer folks enrolled in the state's food stamp program over the next 10 years compared to the baseline that produces some much smaller state general fund savings, but also reduces the flow of federal dollars into the state. But contextually, what we're talking about are relatively small reductions over 10 years, and compared to a baseline that assumes growth.
BRODIE: Is there a danger, I mean, we've heard a lot about, for example, rural hospitals who are required by law to treat anybody who comes in, and just because somebody is no longer on Medicaid doesn't mean they're not gonna get sick and need care.
Might the state be in a position where, you know, a hospital in a rural part of the state is, which is already running on very tight margins, might be danger of shutting down and the state has to step in and do something to prevent that from happening?
FARLEY: No, I think that is a fair point. You know, in general, the hospitals are more reliant than the overall average health American health care system on Medicaid dollars in the rural hospitals likely disproportionately even more so. So it could have implications for the state's rural hospital system.
I think some of the proposed more substantive reforms that were talked about months ago this was potentially a larger issue. Again, these in the grand scheme of things of the size of Medicaid and the amount of future expected growth are likely to be relatively small. So I think there will be dramatic implications for the state's rural hospital system as a whole, probably not.
Might there be independent isolated hospitals that are already sort of operating on the margins where this could push them or tip them one way or the other? Absolutely, that's always sort of a risk.
BRODIE: Would you anticipate that state lawmakers will be looking at this federal bill and maybe taking things from it to incorporate, you know, policy-wise and try to incorporate in the state maybe next legislative session?
FARLEY: Absolutely. That I think is a much more realistic interpretation. So again, circling back to the baseline implications for the state budget over the next 10 years, likely de minimis, I'm sure, will be provisions that will have baseline costs but likely de minimis. But will there be policy debates and policy implications of these federal reforms? Absolutely.
I wouldn't be surprised in the slightest if you saw some state lawmakers and legislators wanting to piggyback off of some of the federal tax reforms like overtime, tips, car loan, interest deductions, and proposing to incorporate those into the state tax code.
Those would have revenue implications, of course, and then correspondingly, this has been an ongoing debate since Arizona adopted Medicaid expansion. I suspect it will continue to be an ongoing debate is how does the state fund its Medicaid and its food stamp populations and how does it do so, especially now, given how much larger and more expensive those programs are than they were before the pandemic.
