When Revolution Meets Reality

When congressional Republicans explain their ambitious plan for reforming the federal government--the Contract With America--they often use state governments as examples of the change to come. In fact, the notion that many federal programs would be more effective if they were moved--or devolved--to the state level is inherent to the Contract.

House Speaker Newt Gingrich and other congressional leaders regularly point to particular states andparticular programs as models for 21st-century governance in America. Education reform and Michigan Governor John Engler are synonymous for many Contract conservatives. When tax cuts are mentioned, the name off New Jersey Governor Christine Todd Whitman often comes up.

And when the overall ethos of the Republican Revolution is being explained, the state of Arizona is invoked, as is its reform-minded governor, J. Fife Symington III. Clearly, Republican leadership sees Arizona as a proving ground for the Contract's major principles: a balanced budget, tax cuts that spur economic growth and reform that reduces the size and cost of government.

One leading conservative journal, the National Review, has praised Symington for his unabashed embracement of the Contract's central tenets. "Fife Symington of Arizona has turned out to be one of the country's best governors," the magazine said.

It is also clear that Governor Symington and his allies in the state Legislature see themselves as advance scouts for the revolution described by the Contract With America. During his nearly five years in office, Symington has increasingly pushed programs that reflect the national priorities of the Contract--especially its emphasis on returning power to the states.

As Symington said last year: "Let the little potentates of the Potomac be warned; we are growing weary of your ways, so kindly get out of ours."

As he has pursued his conservative policies, Symington has repeatedly been criticized on ethical grounds. His personal estate is in the hands of a bankruptcy court, and a federal grand jury continues to investigate both his own finances and some of his actions in office. Symington's response to that criticism has been consistent; he claims political opponents are exaggerating his personal problems and ignoring his cutting-edge accomplishments in reforming state government.

Indeed, there has been little in-depth analysis of the Arizona programs that have been referenced as experiments in the type of reform Republican revolutionaries want to spread through the nation.

More than three months of research by a team of New Times staff writers and editors, however, strongly suggests that leaders of both political parties should exercise caution before adopting Arizona-style reform as their own. That research included examination of thousands of pages of state and federal budgets, audits, financial reports and other documents, along with dozens of supporting interviews across political and ideological lines.

The public record clearly shows that many of the state programs touted as examples of reform are--in cold, hardfact--underfunded paragons of mismanagement and ineffectiveness.

The record also indicates that state government is headed for a budgetary disaster that reasonably can be expected to hamper important state programs for years to come.

During five years of Republican revolution in Fife Symington's Arizona, rhetoric has consistently misrepresented reality.

The Symington administration says it wants to cut the bureaucracy and the cost of environmental regulation, even as the environment is protected. Yet Arizona's Department of Environmental Quality has been managed in a way that frustrates business and allows even basic environmental laws to go largely unenforced. (See "Quit Polluting Our Aquifers," page 9.)

Congressional Republicans plan to move welfare programs to state control, and, with federal approval, Arizona has already embarked on a welfare reform program. But the state's welfare agency, the Department of Economic Security, remains nothing less than a monument to governmental incompetence--in the eyes of observers in both major political parties. (See "Welfare That Doesn't Work," page 14.)

Symington has touted a variety of market-based reforms as solutions to Arizona's problems in primary education. But policies enacted by Symington and his legislative allies have pushed the public school system to the verge of financial crisis, forcing school districts to raise taxes and take on massive debt. (See "The High Cost of Education Reform," page 6.)

And the state's indigent health-care program, often cited as a model for Medicaid reform across the country, is plagued by severe management problems. The program--the Arizona Health Care Cost Containment System--is now under investigation by three federal agencies. (See "The Health-Care Mirage," page 12.)

To be sure, the Symington administration has had its victories. Some efficiencies have been implemented. Some budgeting processes have been placed on a more businesslike footing. Overall, however, the public record demonstrates that performance has been less important to the Symington reform agenda than appearance.

Nowhere have appearances been more misleading than in the financial arena. For the Symington administration, tax cuts have been a raison d'etre, financial responsibility a cause celebre.  

Yet Symington budgetary policy has set the state on course for a financial train wreck. No one is even bothering to plan how to treat the survivors.

The Symington strategy for reducing the size of state government is simply summarized: Cut taxes first. Worry about damage later.

The tax cuts have been large. The damage may well be long-lasting.
To understand the full scope of Symington's version of Republican revolution, it is necessary to delve into the arcana of the state budget. As sleep-inducing as the subject often can be, state budget policy determines what the government will, and will not, do. Purse strings are power.

And Symington's budgetary policies will powerfully affect agencies, programs and people across the state.

This year, the Legislature has appropriated about $4.6billion in state funds for the myriad agencies that provide services across the state. On top of those state appropriations comes $3.4 billion in federal funding for a wide variety of programs that Congress has deemed to be, in some way, national priorities.

As a central feature of the Symington reform program, the Arizona government has embarked on a series of tax cuts that have significantly reduced the amount of money Arizona citizens and businesses pay each year in state taxes.

The Symington administration has argued that the cuts will spur economic activity that will, in the end, bring the state more tax revenue than it was collecting before the cuts were made. This theory, known as supply-side economics, is far from universally held; Symington and his legislative allies, however, consider it gospel.

The tax cuts have come in a variety of forms. If the Legislature makes good on its pledge to make a $200 million property-tax cut early next year, the Symington-era tax reductions will have reduced state tax revenue by about $1.6 billion during a five-year period.

Another way of looking at it: The state is projected to take in about 15 percent less revenue in fiscal 1997 than it would have received if the Symington-era tax cuts had not been made.

The tax cuts have earned Symington wide praise from the right side of the political spectrum. Steven Moore, an economist at the Cato Institute, a conservative, Washington, D.C.-based think tank, has given the governor an "A" for his tax policies.

Yet that same institute has denounced Governor Symington for another aspect of his fiscal policy. Despite his rhetorical emphasis on fiscal responsibility, Symington has seen state spending steadily grow on his gubernatorial watch.

State budget documents show that expenditures have increased at a 5.9 percent clip between fiscal year 1992 and fiscal year 1996. State revenue, meanwhile, has grown at only a 4.9 percent rate.

If the state government continues to pursue these policies, sooner or later, growing expenditures will collide with slower-growing revenue.

"We are certainly setting up for a fiscal train wreck," says former legislative budget analyst Dana Naimark, who now works as Arizona program manager for the Children's Action Alliance, a national advocacy group.

Spending is increasing faster than revenue because neither Symington nor the Legislature has linked tax cuts to specific reductions in spending. Despite rhetoric to the contrary, even conservative legislators dislike the nasty constituent battles that erupt when state programs face funding cuts.

Symington took office in 1991 during the trough of the last business cycle; employment was lagging, retail sales were stagnant and welfare rolls were growing.

But since then, the Arizona economy has surged. Powered by healthy increases in retail sales and job growth, tax collections created a series of large state budget surpluses.

So far, those surpluses have disguised the underlying, structural reality of Arizona's "conservative" budget policies: Spending is outpacing tax collection, even during a boom economy. Also, the full impact of the tax cuts has not yet kicked in, because many of them are phased in over time.

"Most of them [the tax cuts] were backloaded, so the impact of most of them wouldn't kick in until '96-97," says Democratic state Senator Chris Cummiskey, a member of the Senate Finance Committee.

Down the road--probably when the U.S. economy next slips into recession and Arizona follows--state income and spending will collide. It is a prospect eerily reminiscent of the federal budgetary deficits of the late 1980s: The Reagan administration had cut taxes, but Congress had not offset the cuts with spending reductions.

But Arizona's financial system is different from the federal government's.
When federal spending outpaces its income--as it did during the Reagan years--the federal government can borrow, piling up running deficits. But the Arizona Constitution prohibits state government from incurring an operating deficit. During periods of slow economic growth, the state must either raise taxes or cut spending to ensure a balanced budget.  

And, because of a 1992 citizens initiative, the Arizona Legislature must pass any tax hike by a two-thirds majority--a virtual impossibility, given the conservative bent of the state and most of its legislators.

So a combination of three forces--Symington's tax cuts, the balanced-budget requirement and the inability to raise taxes--will leave Symington and the Legislature with only one option the next time the economy stalls. They will have to cut state spending--drastically.

And there will be a recession sometime. Arizona's economy has historically followed an extremely cyclical, boom-or-bust course. National experts have suggested Arizona is at or past the peak of its current economic expansion.

"When we have the next recessionary period, with a supermajority vote needed for a tax increase, you have no choice but to cut expenditures," says Rob Melnick, director of the Morrison Institute for Public Affairs at Arizona State University.

Another factor will make the impact of state spending cuts especially severe: As Arizona approaches the budgetary crossroads, in all likelihood, it will also be absorbing huge cuts in federal funding.

Even the most generous plans for balancing the federal budget now under consideration would significantly cut Washington's contribution to Arizona government programs. As yet, neither the Legislature nor the governor has prepared any public analyses of the possible impacts of impending federal cuts on the state budget.

Federal budget reductions are expected to range anywhere from 5 percent to 15 percent next year. And 5 percent of a $3.4 billion federal contribution would make a cut in the $170 million range--most of which would be absorbed by health and welfare agencies. Some legislators say the state can absorb the reductions--and cuts in the state's own budget--by implementing more efficient programs.

Some economies are certainly possible. But research into the state's welfare, health-care, education and environmental programs shows they are already severely underfunded. It seems unlikely that elimination of waste and fraud can compensate for the scale of budget cuts on the horizon.

Services will be reduced. Some will be severely slashed.
And many Republican revolutionaries in Arizona are openly delighted at that prospect.

"Not until you see people in really tough economic times can you start to make the cuts that need to be done," says House Ways and Means Committee Chairwoman Lori Daniels, a Republican from Chandler.

"We have let people slide."
In fact, despite warning signs of a budgetary crisis, the governor and the Legislature have committed to another $200 million tax cut next year.

And, in what would probably be the most audacious experiment ever in supply-side fiscal policy, the governor continues to support a plan to eventually eliminate state income taxes altogether.

Even if he cannot eliminate the income tax--many committed legislative conservatives question such a move--Symington has his reputation made as a tax-cutting conservative. Whether the tax cuts have been--or will be--healthy for Arizona depends on the reliability of a theory that is not, by any means, universally accepted: supply-side economics.

Symington has based his tax-cutting strategy quite explicitly on the supply-side theory developed by controversial SanDiego economist Arthur Laffer.

The basic concept of supply-side theory is not complicated: The less the government taxes its citizens, down to a certain minimum level, the more overall tax revenue government will receive.

Government revenue will increase even in the wake of tax cuts, according to the theory, because individuals and businesses have more money to invest and spend. They will use that money to create new businesses with new employees--and those businesses and employees will pay enough in taxes to make up for cuts in the general tax rate.

Over the past several years, Symington, his legislative supporters and major Arizona news outlets have so regularly and offhandedly mentioned supply-side economics that the public might be excused for believing the theory to be noncontroversial, a given.

As Symington says: "My faith in tax cuts rests on sound economic theory."
Actually, though, the governor's faith rests on a largely untested theory that is well outside the mainstream of American economic thought.

While supply-side economics has attracted supporters--mostly in business circles and the conservative wing of the Republican party--the vast majority of economists are yet to be convinced that the theory works.

On any level.
"There are major questions regarding the whole theory," says Tom Rex, research manager at the Center for Business Research at ASU's College of Business. "Even if it does work, it would be in a situation where taxes are truly high."

Supply-side supporters frequently point to President Reagan's round of tax cuts in the early 1980s, and a subsequent, seven-year economic expansion, as an example of the successful application of Laffer's theory.  

Other economists say the situation is far from clear-cut. The Reagan tax cuts coincided with his administration's sharp increases in government spending, much of it in the defense sector. ASU economist Tracy Clark says there is no way to tell whether it was tax reductions or increased defense spending--fueled with borrowed money--that spurred the economy.

"The Reagan supply-side experiment really wasn't much of a supply-side experiment," he says.

Even if it could be conclusively proved that supply-side policies work at the national level--and no such proof exists--there are serious doubts that tax cuts can significantly increase business activity in a small state economy embedded in the multibillion-dollar capital flows of national and international economic life.

Laffer claims his theory is applicable to the state level; he points as proof to improved stock-market performance of companies located in states that have enacted tax cuts.

But Clark and other economists say state tax cuts represent such a small amount of money that it is hard to conclude they could have serious impacts on the economy. For example, Arizona's recent personal income tax cut will put about $100 back into the pocket of the average taxpayer this year.

Are people actually likely to use their tax-cut C-notes to form new, taxpaying businesses?

"It is a very difficult area to look at, because usually the changes you're talking about in the state tax law are small enough that, even if there is an impact, it might get lost in the general noise of other economic impacts in the general economy," says Clark.

Finally, even if one assumes that Laffer is correct--that supply-side tax cuts can markedly improve the performance of a state economy--economists point out another obstacle to his theory's use in Arizona.

Under Laffer's theory, tax cuts significantly increase tax collections only if the relative tax burden of a state is above the average. In fact, if the overall tax burden is below average, Laffer's theory acknowledges that tax cuts will reduce state income.

According to numerous studies, Arizona was, at most, a moderately taxed state before Symington implemented his tax reductions. This medium-tax status raises further questions about the governor's reliance on supply-side theory.

Despite the uncertainties surrounding supply-side economics, Arizona Republican leaders present the theory as absolute truth.

Besides Symington, the key budget and appropriations leaders in the Legislature--House Appropriations Chairman Bob Burns, Senate Appropriations Chairwoman Carol Springer, Senate Finance Chairman Marc Spitzer and House Ways and Means Chairwoman Daniels--all embrace supply-side dicta.

"It simply makes sense to me that when government takes more of your money, you as an individual will not tend to spend as much, therefore, that money is not doing as much good as it was before," says Springer, a real estate agent from Prescott.

So far, the tax cuts advanced by Symington and the Republican Legislature have not resulted in an overall surge in tax collections as would be expected under Laffer's theory. While the total amount of tax revenue has increased each year during the recent economic expansion, it is doing so at a much lower rate than supply-side theory would predict.

There is one exception. Corporate income tax collections have increased sharply and are projected to rise to $432 million in fiscal 1996--up from $239 million in 1993.

But the strong surge in corporate income taxes has not been able to overshadow a drop in personal income tax collections--a decline caused by Symington-sponsored tax cuts.

And most economists attribute the surge in the Arizona economy not to some supply-side effect, but to a continuing national economic expansion that has carried Arizona with it.

All economic theorizing aside, there is a bottom line here: Total state tax revenue for the 1997 budget year is projected to be almost $64 million less than fiscal 1996 tax collections.

The budget trains are about to collide.

Whether the carnage from the upcoming budget derailment will be light or heavy depends on the severity of the next recession. But there is little doubt that a crash will occur.

"The Legislature and governor are either going to have to cut a lot of state services or things are going to have to get bad enough that the Legislature will get a two-thirds vote to raise taxes," says Timothy Hogan, an economist and director of the Center for Business Research at Arizona State University.

For Symington and his legislative allies, taxes are anathema. Yet they don't appear to have developed a plan for dealing with the injured after the budget train leaves the tracks.

The Symington administration has made some attempts to identify inefficient areas in government and implement cost-cutting moves.  

Symington initiated the cost-cutting program known as Project SLIM within months of his election in February 1991. The program, which later became enmeshed in bid-rigging scandal, was designed to review the operations of all major state agencies and teach state employees better management techniques.

The results of the $6 million-plus effort to imbue state workers with "total quality management" concepts have been mixed. Overall state spending and the number of employees continue to increase, even if some agencies--the Department of Transportation, for example--have managed to keep their employment levels relatively stable.

It seems clear, however, that SLIM will not be able to slim state government nearly enough to accommodate the large state and federal funding cuts that will almost certainly occur during the next two to three years.

So far, state leaders have not released any public plan for dealing with the looming budget crisis.

But there are suggestions as to what programs might bear the brunt of the Symington drive toward limited government.

Some of the first areas likely to face large funding cuts will be secondary education and the state's welfare agency, the Department of Economic Security.

The reason involves simple mathematics: Large cuts will have to be made in the agencies with the largest budgets.

"In the bigger agencies--higher education and funding for DES--[that] is where the Legislature has some discretion," says the Morrison Institute's Rob Melnick.

Although it is one of the state's most mismanaged agencies, DES is also significantly underfunded, New Times research shows. Deep cuts in state DES funding, combined with projected cutbacks in federal welfare funds, could produce devastating results.

"I think we will see more people falling through the cracks and ending up in a total crisis situation," says Dana Naimark of the Children's Action Alliance.

The state's largest expenditure is for primary education--kindergarten through high school. A New Times investigation has revealed that current state budget policies have already put some school districts into financial crisis.

But when the train wreck hits, knowledgeable observers say even this area is vulnerable.

House Appropriations Chairman Bob Burns, for one, appears willing to reduce the state's role in public education.

"If there is any significant cutting that takes place, you almost have to bring education into the mix," Burns says.

In fact, restrictions in funding reasonably can be expected to hit almost every state agency, with the exception of one--the Department of Corrections.

Spending money on public safety, particularly prison construction, is sacrosanct in Symington's world.

"The one moral obligation of state government is to protect innocent people against criminals," Symington says.

State spending on corrections has leaped upward. In 1992, the state spent $255 million on adult corrections. This year, the corrections budget is $367 million, a 44 percent increase in four years. And the corrections budget leaps to $438 million next year.

The massive spending cuts expected to be produced by Symington's budgetary policies will come in programs that already are minimally funded in comparison to other states.

Arizona ranks below average in per capita spending on education, health and welfare, according to state reports. But it ranks very high in social dysfunction.

Arizona ranks third among the 50 states in the percentage of teenagers who are high school dropouts. Arizona has the dubious distinction of ranking first in the nation for the number of births to unmarried females. Arizona is 36th in the country in regard to the percentage of children living in poverty. The state has the third-highest crime rate in the country, after Florida and Texas.

These types of statistics, however, are not of primary concern to many of the Republican revolutionaries involved in Arizona's budgeting process.

For example, Senate Appropriations Chairwoman Springer says the state Constitution is her guidepost in making budget decisions.

And, Springer says, the Constitution's top priority is for government to protect the citizens. For Springer, that means ensuring adequate police protection, a fair court system and secure prisons.

"That is our role," she says.
After providing for public safety, the state has a secondary duty to provide public education, Springer says. This role, she says, should be limited, particularly in regard to universities and community colleges.

Beyond those two areas, Springer says, there are few other constitutionally mandated duties for state government.

And in Springer's world, spending on social, health and welfare programs is most certainly not a state obligation.

"There is no place in the Constitution that says the statehas to provide health care or food stamps or any ofthatkind of stuff," she says.

With strong support from the Legislature, Arizona Governor J. Fife Symington III has nearly accomplished his goal. He has cut taxes and set the state on a course that closely parallels the limited government foreseen by the Contract With America.  

As Symington said in his budget message to the state in January 1994, "Steadily and without fanfare, we have turned the state around."

The question is: In what direction?

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