A $520 million projected state budget shortfall will impact all sectors including public education and require Arizona legislators to work together to find solutions, said Richard Stavneak, director of the Joint Legislative Budget Committee.
Stagnant growth, slowing revenues and the impact of litigation are the three underlying issues behind the state’s fiscal problems, said Stavneak, during a presentation at a legislative workshop in Phoenix on Nov. 14 hosted by three statewide education organizations.
“Education is obviously a large part of the state budget – about 41 percent – and if the (public schools’ inflation cost funding) reset ruling remains in place you’ll be closer to 45 percent,” Stavneak said.
Arizona’s Supreme Court has ruled in September 2013 that the state must comply with a public school inflation cost funding mandate approved by voters.
Recently, Governor Elect Doug Ducey formed a budget study committee and said he is open to reaching a settlement in the school funding lawsuit because he’d “rather be paying teachers than be paying lawyers,” according to a Cronkite News Service story.
“We come out with a budget every year that has different investments in our state and our education system,” said Arizona Rep. Eric Meyer, (D-28), the House minority leader who has served on the education committee for many years and was part of a panel that spoke at the event. “Hopefully, we’ll make some of those choices this time to meet the needs of our schools, teachers and state.”
In May, the Joint Legislative Budget Committee projected a $130 million surplus in 2015. Then in October, the non-partisan office that provides the Arizona Legislature with estimates on projected revenues found that “revenue has slowed substantially” leading to a shortfall of $189 million in 2015. The most current forecast takes into consideration the October update and the court’s K-12 inflation funding reset.
“If that ruling on the reset were to hold and we were to pay it back in the current fiscal year, the shortfall this year would be about $520 million and then next year a billion dollars,” Stavneak said.
The back payment requires an additional $200 million annually for public schools for the next five years.
“We really need to make sure we’re working as a community of people who care about education, informing our constituents … so everyone understands the budget situation that we’re under right now,” said Arizona Rep. Heather Carter (R-15), who has served as an education committee member for years.
Forecasting revenues is challenging because some state revenue sources are volatile and the state’s recent experience is “at odds with national economic news,” Stavneak said.
While the national economy seems to be improving, that hasn’t been the case in Arizona, Stavneak said.
Between 1982 and 2007, Arizona had revenue growth on average of about seven percent, but now the state’s growth is significantly slower, Stavneak said.
“We had budgeted growth of about four percent, but we ended up with something less than three percent,” Stavneak said. “In the first seven months of this year, it hasn’t gotten any better. We’re still in a slump that’s affecting our overall collection.”
Capital gains – individual income taxes on real estate and stock market profits – are among Arizona’s volatile revenue sources, Stavneak said.
“We’ve seen swings of about $500 million over the course of the past decade,” Stavneak said. “Suddenly the state gets a lot of money or the state loses a lot of money.”
“In 2007, Arizona had $9.6 billion in general fund revenue – that was the peak year,” Stavneak said. “We’re finally going to get back to that point in 2018 if the projections hold.”
The main drivers of general fund spending are education (41 percent), healthcare (21 percent), prisons (11 percent), and higher education (9 percent), Stavneak said.
“Those factors constitute over 82 percent of the general fund budget,” Stavneak said. “Anytime the Legislature looks at budget issues on the spending side, you have to know that the money is in those slices.”
What do things look like for the next three years? Education remains the largest component of the state budget with a JLBC forecast increase of $175 million next year, about $209 million in 2017 and $162 million in 2018, Stavneak said.
“It is a difficult task we have ahead of us in terms of trying to find more resources,” said Sen. David Bradley (D-1), president pro tempore of the senate and an education committee member for years.
As the new governor and new legislators focus on solutions for the current situation, they may consider how previous shortfalls were resolved, Stavneak said.
“Whether that’s temporary tax increases, delaying some of the items passed in the last year, or other options that are politically viable we have to put on the table,” said Sen. Carlyle Begay (D-7) who has served on the education committee for years.