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By Anonymous Mike, pseudonymously.

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Thursday, March 13, 2008
Budget Follies, Energy in the Executive

"We cannot congratulate ourselves and think we have made progress by piecemeal attempts like House Bill 2857. We fool no one," Napolitano wrote in a letter explaining her veto. "Arizonans deserve a comprehensive fiscal plan that resolves the expected budget deficits of fiscal year 2008 and 2009."

A basic principal of government is that it is far easier for the chief executive to lead than a legislature. Pick the reason you want; a tendency toward decisive action versus deliberation, the need to get a working majority through compromise within a legislature... whatever.

To top it off this Governor has been lionized by the media for her leadership. Whether it was boosting state spending, by double digits every year, preparing Arizona for the challenges of the knowledge economy through all-day kindergarten, or solving that intractable Squaw Peak naming controversy. So you would expect her to be in the forefront of tackling the sticky budget problems through the rest of this fiscal year (FY2008) and in the next (FY 2009)

A quick recap of the budget problems.

FY2008, which has a little more than 3 months to run, is a projected $1.2 billion in the red. If nothing is done the state will run out of money by mid-May or so. Keep in mind that the projected deficit has been growing larger, not smaller as time has progressed and since it doesn't look like the economy has actually improved over the last month or two, it's a good bet that the deficit will increase by the time the Suns get knocked out of the playoffs.

The projected deficit for FY2009 is $1.9 billion. Two critical parts to that statement. The first is "projected"; that is if nothing is done to change the projected levels spending and levels of revenue collection. The spending part is critical because the budget will increase by more than $700 million from FY2008 to FY2009 without any legislative intervention; that spending increase means base revenue needs to keep growing at an annual rate of about 8%. The gap between spending and revenue growth is the structural deficit.

The second critical part is that $1.9 billion figure; notice it's about $700 million higher than the FY2008 figure, thanks in part to the structural deficit. The JLBC wonks are not forecasting the closing of that structural deficit until about 2011 so between now and then something needs to be done to balance revenue and spending; or else the deficits will keep piling up.

One last thing, unlike other states and especially the feds, in Arizona you cannot borrow to cover a budget shortfall. You have to make ends meet every year.

Last December when both the Legislature and Governor saw the FY2008 as something below $1 billion, there were two strategies. While both the Legislature's Republican leadership and the Governor would rely on some one-time accounting tricks and tapping cash reserves in the form of special accounts sweeps and the rainy day fund, the Legislature's proposal would have deeper spending cuts than the Governor with the latter making up the difference by relying on "financing" instead of cash to build K-12 schools.

Fast forward 3 months. The projected deficit is larger and the amount of time in the fiscal year is shorter; by any stretch the situation is even more dire. Spending cuts are less effective because most of the money in the FY2008 is already spent.

Now I'm sure the budget geeks at the Capitol and 9th Floor have better numbers than I do, but it seems if the worst scenario happens and the budget goes bust in mid-May we can still get through the rest of the fiscal year on that accounting gimmericky and cash reserves. Maybe I'm wrong, but let's assume I'm right, then what for FY2009?

The deficit for FY2009 will be even higher and most if not all of the one-time budget fixes will be used up. Rather than using the FY2008 budget as a stepping stone to surmount the FY2009 budget by reducing spending (spending cuts in FY2008 will help reduce spending in FY2009), we will be back at square one in trying to tackle that $1.9 billion deficit.

That's what makes the Governor's veto of the Legislature's spending freeze so frustrating. The Republican leadership in the Legislature has been meeting with the Governor's staff in order to try solving the FY2008 but no agreement has been reached and time is running out. Soon there wouldn't be any spending cuts because the agencies would have spent all of their money. To freeze spending is to at least leave spending cuts as an option for FY2008, but the Governor vetoes and the deficit band plays on.

I find all of this breathtaking, yes I find the state budget breathtaking, because what we have is a Governor playing chicken with the State of Arizona's fiscal health in order to preserve both her legacy and her future political options.

Back in January, when the deficits for both FY2008 and 2009 were much smaller, Governor Napolitano's priority was clearly the maintenance of spending. Not only through minimizing any spending cuts but also by converting school construction to financing (making it much more expensive in the long run) but also by overestimating revenue. As the deficits have worsened, her public projections have remained unchanged as if she can defy economic and fiscal reality.

Slowly things are turning her way. Opposition to the financing of school construction is crumbling in the Legislature, mostly it seems due to the fact that even the die hards are beginning to realize the depth of the problem. Napolitano, despite the fact of showing little to no public leadership on the budget deficits, has been able to claim that she vetoed the spending freeze because the initiative was not comprehensive or bipartisan. So more than likely she will end FY2008 with both construction financing and minimal spending cuts...

...and then comes the hard work of climbing Mountain FY2009.

Tackling budget deficits has been the death knell of many politician, after all the two options of tax increases or spending cuts are both unpopular with the electorate. I used to joke that Napolitano's long term fiscal strategy was to avoid either unpopular decision until she could take her seat in President Obama's cabinet and leave the problems to Governor Brewer, but I'm not sure that's funny any more.

Somebody, besides her enablers in the media and the other side of the aisle in the Legislature, needs to ask when she's going to start doing her job as the top elected official in the state and help figure out how to bridge a $3 billion shortfall over the next 15 months... because none of her effort to date shows how that problem gets solved.

Prove me wrong.