Arizona At An Impasse

by francine Hardaway on April 9, 2009

I just came from Greater Phoenix Economic Council’s “Convening Arizona’s Community”, an emergency summit held by an organization founded twenty years ago during Arizona’s last big downturn. While I commend GPEC for holding the summit, I can only say that it’s work over the past twenty years has been a big FAIL, because none of our problems have changed. They are only bigger.

The somber opening notes were struck by Mayor Hugh Hallman of Tempe, who said the state was facing unprecedented challenges and couldn’t afford competition among government entities. We have to collaborate, he said, to make the state sustainable, a good place to do business and to raise a family. He said that because the Arizona Governor and the state’s legislature are at an impasse on what to do to face these challenges. Both the legislature and the Governor are Republican, so this isn’t an ordinary political impasse.

In case you don’t live in Arizona, some background. Arizona faces a $3.2 billion deficit next year, and by 2014 will have a $15.4 billion deficit it nothing is done. And Richard Florida, a man economic developers listen to, says Arizona will not be a winner coming out of this downturn.

Governor Brewer takes pains to remind us that she has inherited the deficit, implicitly pointing at former Governor Napolitano, who used money during the upturn to make big increases in education funding, including instituting all-day kindergarten, hoping to close the state’s huge education deficit — about which we’ve been talking since I’ve lived here.

Arizona has always had an education system that ranked between 40th and 50th among the states. It has 220 separate school districts, with ridiculous redundancies in administration and boards, and no one has the political will to combine them. We are a state of local control. We therefore have wildly discrepant results, depending on where you live, on our standardized tests.

Brewer goes on to assure us that more spending cuts are on the way, and that she doesn’t condone or endorse ARRA, but will take the money. Stimulus dollars will not fix the underlying problem.
Then, surprisingly for a Republican in Arizona, she admits that we must raise taxes. At least she’s being real.

The way the state’s budget is currently structured, 46% of state revenues come from sales tax and 36% from individual income. Only 8% of our tax base is from corporate taxes, although we have very high corporate taxes.

Both of our largest sources of revenue are highly volatile, and this year they have both fallen off a cliff. In addition, our sales tax revenues are based on contracting and auto sales! Cars and appliances.

On the spending side, 41% goes for K-12 education, 16% for Medicaid ( AHCCCS), 10% for universities, 10% for corrections, and 14% for health services and economic security. Since the state government is mandated to provide those, there are clearly no easy cuts. AHCCCS is growing, and the Department of Corrections is adding 150 new inmates a month, which adds up to a new prison every two years. The state has already had a round of agency reductions, tapped its rainy day funds, and borrowed from K-12’s allotment.

So, the governor says, it is time for budget and tax reform, focusing on long term planning and better forecasting. The state operates on a cash basis now, and she would like to move it to accrual. Thank God. Nothing should run on a cash basis. Among her other proposals she lists other funding cuts, a reform of the tax system and –drum roll here — a temporary tax increase of $1 billion.

The legislature, also dominated by Republicans says no. They speak next, saying that AZ’s private sector has lost more jobs than any state but Michigan, and that a tax increase makes consumer purchases more expensive and causes more job losses. The legislative leaders propose privatization, asset sales, fund transfers, securitization, and rollovers. I think of those as gimmicks to avoid the real elephant in the room.

The elephant in the room is residential property taxes. I am no tax specialist, but my property taxes are 3x in California what they are in Arizona. We have ridiculously low property taxes because our state is run by the real estate community, which lobbies to keep them low so we can have cheap housing and development. Not that California is great, but it’s time to take the industries that benefit the most from Arizona and let them pay their fair share. I also think that citizens really want to pay taxes for a good education system and for Child Protective Services. They just want the money used responsibly.

The most depressing part of the meeting was the panel of education leaders talking about how they were dealing with the deficit and its effects on their own institutions.

Dr. Michael Crow, ASU’s president, and a man with grand visions of high quality education, semi-sarcastically reported that he’s proud he can finish the semester after 900 layoffs and 12000 furloughs. He still sees record demand for the university, record productivity of the students, record output of both graduates and research. Crow says we still need to graduate more educated people and that the university must have some time to restructure. But he did encourage the audience to ask itself whether it had a real commitment to quality education. (ASU is going to have to do tuition surcharges in the four figure range to fund itself next year and into the future.)

The last speaker, an economist who has been speaking at these events for thirty-five years, and a good friend of mine, said we have to take better care of our base jobs to be competitive. Don’t even get me started on this one. We have very few base jobs because we chose, over the years, not to create them. We have no way to grow companies in this state. We start them, because we are very entrepreneurial, but we can’t grow them because we have no capital formation here and no political will to help companies grow. Now that the Motorolas and the Intels are shrinking, we can’t fund their laid off engineers to grow companies to replace them.

I think everyone walked away stunned. But I’ve lived here for all my adult life, and I know what will happen. The overhang of housing will clear away, and we will all be back to “normal, “scraping the desert, creating the suburbs, and planning for growth.

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