Budget Bonanza or Bust?

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

"Although the [Arizona] economy will post slower growth in 1999, there is no recession in sight," states the Arizona Blue Chip Forecast published by Arizona State University's College of Business.

The state is expected to remain among the top five in growth, a position it has held for 70 consecutive months.

This should all be good news to JLBC analysts. The committee, however, is known for vastly underestimating the amount of revenue state government will collect each year. The conservative forecasts play a crucial role at the Legislature, where lawmakers decide how many tax dollars to collect and how they should be spent.

"There are legislative agendas that are advanced as a result of artificially deflating revenue," explains Senator George Cunningham, a Tucson Democrat. "You create the perception in the Legislature and the general public that there isn't any money and we need to tighten the belt and swallow hard."

Conservative Republicans have controlled the legislative agenda in recent years--a period in which the JLBC budget forecasts have been increasingly off the mark. In fiscal 1993, forecasters underestimated the state's year-end budget surplus by $75 million. The error increased to $227 million in 1994, $266 million in 1995, $397 million in 1996, $516 million in 1997 and $513 million in 1998.

Legislators say JLBC forecasters were directed by former Senate Appropriations Committee chair Carol Springer, a Prescott Republican, to issue very conservative revenue projections. Springer was elected state treasurer in November. Her successor as Senate Appropriations chair is Randall Gnant, who is taking a different approach to budget forecasting.

"I want the forecast to be accurate," Gnant says. "I don't want large swings up or down."

Gnant believes the revised JLBC budget forecast for fiscal 2000 that will be released next week will be far more accurate than it has been recently.

"The chances of there being a major change in revenue for this year (fiscal 2000) are considerably less than in previous years," Gnant says.

While politics certainly have influenced the JLBC forecasts, economic variables have played havoc with the numbers as well. Year after year, economists have been forced to revise upward their economic growth predictions as the Arizona economy continues to expand.

"Over the last few years, we all, not just JLBC, have been short of the mark in forecasting economic growth in Arizona," says Brian Cary, an economist with Arizona Public Service Company, the state's largest electric utility. "It's continued to defy economic expectations favorably."

LBC's dire predictions of a $282 million deficit for fiscal 2000, and $205 million for fiscal 2001, have not been accepted as gospel by the governor's office.

"We don't agree with the $282 [million] or the lesser amount of $205 [million] at the end of the second year," says Ted Ferris, the governor's deputy chief of staff and JLBC's former director.

Ferris says he expects state revenue will be fattened by strong personal income-tax collections, which have been driven up by last year's cut in the federal capital-gains tax and continued strength in the stock market.

Sales-tax collections also are running ahead of JLBC projections for this year, further evidence that revenue will be higher than anticipated for fiscal 1999, which means there should be a surplus that can be used in fiscal 2000.

The only major state revenue source showing a decline is corporate income-tax collections. But Ferris says that downturn "may not be as great as anticipated."

The governor wants to bolster fiscal 2000 revenue by carrying forward about $110 million in unspent school-construction funds from this year's budget. The Legislature appropriated $375 million in the current budget for K-12 capital expenses.

Of this, $200 million was for new school construction, $125 million for repairs to existing schools and $50 million intended for equipment such as computers. Ferris says it is impossible for school districts to spend the full $200 million during fiscal 1999 on new school construction.

The state School Facilities Board says it can spend only $75 million of the $200 million this year. Ferris says the governor wants to shift $110 million of the leftover $125 million into next year's budget.

By carrying forward the unspent money into fiscal 2000, the governor essentially increases state revenue next year by $110 million. The money would still be earmarked for new school construction, Ferris says.

The combination of greater than anticipated state tax collections plus the $110 million in unspent school-construction funds would go a long way toward eliminating the projected $282 million budget deficit, Ferris says.

Hull wants to wipe out the projected deficit--and create a surplus which can be used to finance a tax cut--by selling revenue bonds to fund the $200 million annual school-construction outlay for fiscal 2000.

Ferris says the state should take advantage of historically low interest rates to build schools. The bonds would be relatively short term--seven to 10 years--and would be repaid out of existing general revenue.

"There would be no need for a tax increase to pay for the bonds," Ferris says.

Revenue bonds would also shift the repayment burden to taxpayers whose kids will use the schools in the future rather than simply dumping the burden on today's taxpayers, he says.

But most important, the use of revenue bonds would allow the state to meet its legal obligation to build new schools while keeping funds available for other programs.

"From our standpoint," Ferris says, "it allows you to fully fund [school construction] and keep commitments on other fronts, whether that's K-12 education, universities, opening new prisons, increasing state-employee pay, and instituting some further modest tax cuts."

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