State Budget

Jan. 5, 2009

Transcript:

Ted Simons:
Good evening, and welcome to "Horizon." I'm Ted Simons. The state treasury is running on fumes. So says state treasurer Dean Martin. He also says Arizona could be out of cash by February. Here to talk about the situation is state treasurer Dean Martin. Good to have you back on the program.

Dean Martin:
Thank you.

Ted Simons:
Thank you for joining us. As early as next month out of money, huh?

Dean Martin:
Yes, it's the way the state's been spending substantially more than revenues that's been coming in. It could be as early as February or definitely in the middle of March when we make the school payments.

Ted Simons:
Now, we heard similar alarms and you were making similar alarms last year. We didn't run out of money. What happened then? Why can it happen now?

Dean Martin:
Basically last year, the state still had money in the bank. We were sitting on $1.8 billion a year ago today in the bank. They were able to roll over the rainy day fund. They were able to move over other sweeps and tricks and gimmicks. At this point, the cushion is gone. There'll literally will be at zero in the general fund. You can't find these types of short-term gains anymore. You actually have to bring spending in line with revenues.

Ted Simons:
So there is as far as you can see literally no way to avoid borrowing?

Dean Martin:
It looks like it at the this point. We may be able to push it off a few days a month or so with adjusting the way we pay bills but when it comes to the April 15th double payment to schools, that'll put us at least half a billion dollars in the red.

Ted Simons:
What happened to the rainy day fund? There's still some money there, is there not?

Dean Martin:
There's $130 million left. But we're gonna take that over the next couple months just to pay bills. We'll actually go ahead and take that to operate the state.

Ted Simons:
There is some thought that a federal stimulus package, especially targeting cities and towns, would be a great benefit to the state of Arizona. In general, can that be something of a panacea, if not a magic bullet at least a good help here?

Dean Martin:
Well the devil's in the details. Unfortunately what they've been talk a lot about stimulus package for transportation or infrastructure or a lot bridges to nowhere except they want them this time. But they're all designating on what they want to spend it on. What we need is cash without strings. Everything I keep hearing about federal is you're gonna get a lot cash but it's gonna have all these strings attached to it. That doesn't really help this situation. Now, if they do have a lot of strings and a few extra dollars, that may help solve the problem but it only kicks the can farther down the road. The fundamental problem is we're spending more than we make. A one-time cash infusion from the federal government may get us through a month or two or three but 2010 is looking very dismal without adjustments.

Ted Simons:
So at best, you're saying federal aid, three months tops?

Dean Martin:
It depends on how big the check is if they write $1 billion check, that'll get us farther down the road but we're talking a structural deficit of $2.5 billion to $3.5 billion.

Ted Simons:
As far as borrowing, how much and how long and from whom?

Dean Martin:
Well we're looking, we're going to call the loan commission later this week. I've already called it. We're talking to the governor and the head of the D.O.A. Director to meet. Once that occurs, we're talking to banks, local banks here in town, primarily our servicing bank which is B of A to see if we can't establish lines of credit. They, in initial discussions, they believed they could help us through 2009 but the magnitude of the problem in 2010 may be more than any one bank on the planet could help us with.

Ted Simons:
What would, if the state was forced to borrow? What would that do to Arizona's bond rating?

Dean Martin:
If we can get the line of credit, that's ok. This is not, this has happened before back in the great depression. The state had to issue the types of treasurer warrant notes before. The problem really has you at zero which means you're dependent upon every day as to whether or not they'll lend you money before you start defaulting on the other loans. If the market seize up like they did back in September, we could be in a situation where we start defaulting on loans. If we don't get spending in line with revenues for 2010, then they'll come a point where the lenders are say we're not going to throw good money after bad. We're going to stop loaning your money and we start to go in default. Unfortunately we're looking at a situation where without changes to the spending behavior, we literally could be looking at bankruptcy this time next year.

Ted Simons:
And I want to talk about the changes in a second. Real quickly, I hear from certain corners there's a constitutional obligation, a debt limit as far as the state is concerned at $350,000. First of all is that what you see the constitution as saying?

Dean Martin:
No, I completely agree with that. That's exactly what the constitution says. Those are for debts that span a fiscal year. Something that this has been part of the statute we're using has been part of the statute since we became a state since the constitution was drafted. They've always used even back at the turn of the century a short-term borrowing to get throughout fiscal year when you had ups and downs in your revenue collections. The state has just never been faced with the problem since the sales and the income tax came in always made sure we had healthy bank balances. We'll gonna have to bring dust off those old statutes but you as long as we don't borrow between fiscal year '09 and fiscal year '10 it doesn't affect the constitution.

Ted Simons:
Away from hard numbers here and just your thoughts is Arizona too dependent on sales tax for revenue?

Dean Martin:
No. Actually, sales tax is one of the more stable revenue streams we have. Its actually corporate income and individual income that are the much more volatile revenue streams. The problem that we really face is when revenue starts to drop off, we either don't drop off spending or we don't make sure we have enough saved and set aside. If you think of a normal person, you're supposed to have three to four months minimum in reserves. Well, for the state that would be over $2.5-$3 billion. We have a rainy day fund nowhere near that. If we did, it would be dangerous because that would all get spent in one year any way.

Ted Simons:
You mentioned things have to change as far as the budget is concerned. What do you cut? You've got education, prisons, you've got transportation. What do you cut?

Dean Martin:
Well, what you really need to do is look at it is what can we afford? What can we do? Basically the last two years the budget has grown, even though revenues have gone down. So essentially the budget has continued growing as if the housing bubble never happened. The housing bubble burst and we're faced with that. If you go back to the 2006 budget and add in what you absolutely need to do and have to do, we can get through this and basically trigger -- the last two years, the legislature and the governor wrote a lot of checks that we can't cash anymore. Trigger them. Whenever the programs come in, we'll do those new programs or expand those existing programs.

Ted Simons:
Is Arizona ready for the triggers to be aimed at things like education and the prison systems?

Dean Martin:
We're not gonna have much more of a choice. Whether you're an individual or a or government, you can't spend more than you make. You can ignore your bills for a year or two but can't do it permanently.

Ted Simons:
Real quickly, did the legislature blow it by not going into special session regarding this?

Dean Martin:
It's costing us millions more in interest costs or will because they didn't solve it. The sooner you solve it the cheaper it is.

Ted Simons:
Dean, thank you for joining us. I appreciate it.

Dean Martin:
Thank you.