Budget Bonanza or Bust?

Discord between GOP lawmakers and the governor is just one reason the budget battle might get ugly.

Gasp! The state budget for fiscal 2000, which begins July 1, 1999, is projected to be $282 million in the red.

That is the dire warning sent to the Legislature in November by numbers crunchers at the Joint Legislative Budget Committee (JLBC).

This would appear to be stunning news. After all, the state has had money pouring in so fast the past couple of years that legislators were hard-pressed to spend it all. When the dust settled on fiscal 1998, which ended June 30, there was $523 million available to be carried over to fiscal 1999.

But now, on the eve of Governor Jane Hull's first legislative session as an elected governor, suddenly there's a major budget crisis looming for next year.

It seems more than a little strange--especially in light of the fact that Hull and legislative leaders are still talking about a $50 million to $100 million tax cut.

So what gives?
How can the state really be facing a massive budget shortfall at the same time key policymakers are prepared to add to the string of tax cuts ushered in by former governor J. Fife Symington III?

As with most things legislative, the answer is complex.
First, the projected $282 million deficit is a worst-case scenario prepared by a JLBC forecasting team that has vastly underestimated the recent vigor of the Arizona economy.

Private economists and key legislators say the deficit projection will narrow considerably as state revenue--especially from personal income tax and sales tax receipts--continues to increase at a brisk pace. The JLBC will issue an updated forecast on the nearly $6 billion budget next week when the Legislature convenes.

A waning deficit is not necessarily good news to the Republicans who control both the state House and Senate. Many Republican legislators welcome projections of a hefty deficit because it abets their mission of slashing the size of state government.

"I'm glad to see that there is going to be a shortfall that is going to force us to prioritize our spending," says Senate Finance Committee chairman Scott Bundgaard. "At some point this session we will come up with a budget that better reflects our priorities."

A tax cut proposal makes it all the more likely some legislators will push to eliminate certain state agencies (particularly the Department of Commerce), slash welfare spending and tighten the screws on university budgets.

Hull doesn't seem eager for a cutting frenzy, and instead is expected to present a budget proposal next week that calls for a tax cut, but little in the way of significant spending reductions.

There are two essential elements to the Republican governor's budget, and both revolve around spending for new-school construction.

First, Hull wants to roll over $110 million in unspent school-construction funds from this year's budget into fiscal 2000.

Second, the governor wants to sell up to $200 million in revenue bonds in fiscal 2000 to pay for school construction and repairs, rather than taking the money out of the state's general fund. Instead of a $200 million hit to the general fund, state payments on the revenue bonds would only be about $30 million next year.

Implementing the two proposals would free up about $300 million in fiscal 2000, allowing the governor to cut taxes, fund school construction and expand other programs she strongly supports.

Key Republican legislators are dead set against Hull's carry-forward and revenue bonding proposals. Ironically, some of the Republicans who fought the school-funding measure passed last spring now insist that the measure be financed fully out of general funds rather than using revenue bonds.

The looming battle over how to pay for school construction could evolve into a round of nasty GOP infighting.

The school-finance issue was foisted on the Legislature by the state Supreme Court, which ruled that relying on property taxes to fund such capital expenditures as construction and repair of public schools is unconstitutional because wealthy districts could fund capital outlays more readily than poorer neighborhoods. Poorer districts had sued the state, seeking equity. After years of contentious debate, legislative foot dragging and two legislative fixes that were rejected by the court, lawmakers last year passed a bill that requires the state to spend up to $200 million a year to fund construction of new schools.

The new spending obligation for school construction is squeezing the state budget. Conservative Republicans see the spending obligation as an opportunity to support public education while exerting pressure to trim spending in other areas.

Further complicating matters is the fact that for the first time, lawmakers this session will prepare budgets for the next two fiscal years. They hope that passing budgets for two years will allow them to more closely study individual state agencies next year.

The complex agenda almost guarantees a lengthy and fractious budget debate. Such a scenario will force Hull to crack her leadership whip--a practice she has eschewed since ascending to the executive office in September 1997, upon Symington's resignation.

rojecting budget surpluses and deficits is always tricky business. No one knows for sure how the nation's economy will perform over the next two years. The fortunes of state and national economies are inextricably linked.

The U.S. economy has continued to surprise forecasters with its robust strength, even in the face of international economic shocks in Asia, Russia and South America. The U.S. economy looks recession-free through at least 1999--and Arizona stands to benefit.

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