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By Anonymous Mike, pseudonymously.

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Wednesday, June 25, 2008
Hey Ho, Let's Go!

It looks like the FY20o9 budget is going to get done and the broad outlines are already public, background is here. I do have some questions....

1) As the AZ Republic states, the Senate version of the budget (the one that seems most likely to pass) will close the budget gap with a 50-50 mix of spending cuts and borrowing. Keep in mind that the State, unlike the Feds, cannot explicitly float debt to pay for budget deficits. What it can do is use borrowing for the same purpose by off-loading capital programs like school construction from cash to lease-finance and using some accounting trickery to delay payments until the next fiscal year.

The problem with borrowing is well... it isn't free. Yeah you can move off the budget several hundred million in school construction in exchange for smaller annual payment, but school construction is a recurring need. Keep paying for school construction with borrowing year-after-year instead of cash and it won't be too many years before your annual financing charge equals what you would have paid if you stuck with cash in the first place. Also that accounting trickery has to show up sometime on the expenditure side and so...

How much is all of this kicking the fiscal can down the road going to cost us both in terms of finance charges and deferred expenditures? Give me a dollar figure.

2) When is the fiscal mess going to end? Short answer when the economy rebounds, but when will that happen? The deficit from FY2008 (the current one) is $1.2 billion. The deficit for FY2009 (which starts next week) is projected at $2.2 billion. See a trend? Want to bet a shiny quarter that we'll have a deficit of some size for FY2010? So what are the options for closing that inevitable deficit in FY2010?

I ask because the strategies you use to close a deficit one year have a direct impact on the ones you use to close the deficit the year after that and so on. If you switch from cash to finance to pay for school construction, you can get several hundred million off the books that first year but the next year those savings will start to be eaten up by the financing charges. You can tap cash reserves in various agency accounts and the Rainy Day Fund but after doing that for 2 budgets that option is pretty much gone.

The Senate budget plan, with its borrowing and fiscal can kicking, assumes the economy and therefore revenue will turn around sooner rather than later. If that approach is the correct one, they look like geniuses. If it isn't, then we may have developed a structural deficit that cannot be
closed without significant tax hikes.

3) What are they smoking down at the Capitol?

You have a budget that has the largest deficit of any state in the country (measured percentage-wise) so why in the name of all that is holy and sacred would you commit Arizona to backing bonds on whose success depend on people being stupid?

The Legislature seems likely to pass a bill that will allow a private developer to draw on $750 million in bond financing to construct a theme park in Eloy. The bonds would be paid off from tax revenue generated by the theme park so on the face of it... it doesn't cost taxpayers a cent. However what if the theme park isn't successful? Who pays the bonds? Oh you think this is a cannot miss proposition? All it depends on is having people willing to spend their summer vacation dollars in a place (Eloy) that's an hour drive from anywhere and daytime temperatures are north of 105 degrees. Since we the taxpayers are backing this thing, has anyone seen a business plan?

The Senate budget contains a provision for the issuance of $1 billion of bonds to pay for the construction and renovation of university buildings. The bonds will be paid for in part by... an expansion of revenue from the Arizona Lottery, in other words people willing to throw more of their money away on gambling. The number being thrown around is an extra $1.2 billion over the next ten years with about $519 million that dedicated to paying the bonds.

Let's leave aside the ethics of paying for universities (education) by having people act in a stupid manner (gambling.) Can the numbers even work or is this pie-in-the-sky type of thinking on par with the Governor's idea of closing the budget gap with photo radar? Right now the Arizona Lottery generates, after prizes and expenses, about $139 million (FY2007) with $52.9 million going to the general fund; that's about $1.4 billion over a ten year period. To make the projected numbers, the Lottery will have to double the total take. This is despite the fact that FY2007 revenues showed a slight decline from FY2006.

So if even if the Lottery could meet those numbers, which history of both revenue and Lottery management provides no evidence of, why would the Legislature commit to skimming off that money for new projects when the state revenue picture is so dire?

So as far as I can see the likely budget compromise is short on knowledge of costs and long on hopes and prayers (that revenue will sharply turn around in the next year, that people will gamble more, and that people want to spend their summers in Eloy)

That my friends is called gambling.