State Budget

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Just weeks after the Governor signed the latest round of budget bills, state agencies are being told to prepare for additional cuts. Eileen Klein, Director of the Governor’s Office of Strategic Planning and Budgeting, talks about the budget probklems.

Ted Simons: Good evening and welcome to "Horizon." I'm Ted Simons. Just weeks after the governor signed the latest round of budget bills, state agencies are being told to prepare for additional cuts. Here with more on the state's financial problems is Eileen Klein, director of the Governor's Office of Strategic Planning and Budgeting. Good to have you here. Thanks for joining us.

Eileen Klein: Good evening.

Ted Simons: Let's talk about the cash flow problems as the state stands right now. How bad is it?

Eileen Klein: It is bad. This deficit is different than those we have experienced in the past because for the first time we're having significant cash flow problems. So already to date, the state treasurer has been creating a means by which we can borrow from monies currently invested with the state but it's very clear by winter or spring, we'll likely need to borrow externally and he's working to set up a process by which we can go to the private sector, to banks to create a backstop of liquidity and to create, in essence, a line of credit for the state so we can be sure to pay our bills timely.

Ted Simons: And there's concern from the treasurer that if we don't have a budget, that the cost of that money is going to be higher?

Eileen Klein: It's very true. Our potential lenders and creditors have said it's imperative we have a balanced budget. They want to be sure that we're committed to solving the deficit. That we won't be relying on them permanently to create the resources the state needs.

Ted Simons: You have mentioned it's a different cash flow problem, and a different situation from years past. Talk more about that.

Eileen Klein: You bet. It is different that, in the past, the structural deficit was largely a discussion more in theory, on paper. Obviously, it was real but we didn't have these types of pressures with cash and things that made it imperative for us to address it sufficiently. And now we face deficits that are larger and for a more continued period of time, it's clear that the situation is going to continue.

Ted Simons: In the past, words were used words were used somewhat pejoratively-- accounting gimmicks and maneuvers and these things were used. Are they not being used now? Have they been used and can't be used again? What's the status of those things?

Eileen Klein: Many of those- First I should say, it will take multiple solutions to solve this problem. Trying to balance the budget is like trying to solve a rubix cube puzzle. There are many options. Some things include deferring payments from one fiscal year to another. Asking contractors to wait for a payment. Those things are often considered to be accounting gimmicks but the state has used in the past and relied on to balance the budget. They've been used in the past fiscal year and we're not forwarding payments to schools by about $600 million. So we owe right now $600 million in payments to the K-12 system and in turn, they're issuing warrants because the state has issued payments and those are likely to continue absent a real solution like a revenue source to support the current expenditure level.

Ted Simons: And I want to talk about permanent source revenue options in a second, but mid year cuts. The governor telling agencies she's batten down the hatches.

Eileen Klein: Correct, so on Friday the Governor issued a notice asking that they prepare for reductions on the order of 15%. And that is significant and the number is due to two things. First, we have an unresolved budget gap from the current fiscal year. Obviously we have ongoing budget negotiations with the legislature. We have about a $400 million gap for the current fiscal year. But we also have a lingering deficit from fiscal year 2009 that's yet to be addressed. So as we're going through the accounting reconciliation process, we've discovered at least $500 million possibly $800 million still needs to be recovered from fiscal year '09. So when you put those two numbers together obviously we're looking at another billion dollars that we have to address this fiscal year.

Ted Simons: Are those cuts that the governor is going to say, and so it shall be, or the kind of things she wants the legislature to work on?

Eileen Klein: I think it will be a continuing discussion. Governor Brewer has called for additional reductions all along in her 5-point plan. She's noted that we've got to make expenditure reductions and provide for temporary revenue resources until the economy sufficiently recovers and provides the state sufficient resources. And in the meantime what we need to evaluate is: what can we really do in terms of cuts? Because we're quickly reaching the point with certain programs that either butting up against constitutional requirements, court-mandates, voter-protected initiatives and it will make it difficult to make reductions and that means the cuts will be magnified in certain areas of the state budget.

Ted Simons: The idea of a temporary sales tax, the governor strong on this?

Eileen Klein: Yes.

Ted Simons: Much to the dismay of many lawmakers. Considering lower tax revenue -- the sales taxes coming in right now are just abysmal. Will a one cent sales tax, temporary as it may be, is that going to answer the question?

Eileen Klein: The temporary sales tax was never intended to be the only solution to this problem. It was intended to be part of a complement of solutions and to be clear, Governor Brewer is steadfast and believes that sales tax is necessary, that the additional revenues are necessary to help us bridge through this problem. But we do -- we do believe that the sales tax will provide enough resources to help us get through. So we had originally projected a billion dollars and we've not changed those projections-we're concerned about how sales tax are performing but we believe there will be sufficient resources if we can get this proposal to the voters.

Ted Simons: What about federal stimulus money?

Eileen Klein: The state received about $6 million in federal stimulus monies overall. Unfortunately, not all of those were available to solve the state's general fund problem. The main areas benefit to the state's Medicaid programs. They've been deposited in the state's general fund and helped to offset the additional enrollment. As you know we've seen more than 100,000 people come on to our rolls and those will continue to grow as employers shed jobs and certainly have to shed benefits to attend to their own troubles. And we've seem the dollars come in to support education. They way those are beneficial is where we're able to substitute federal stimulus dollars for state aid payments. That's what we've been able to provide this fall. And that's what has provided immediate fiscal relief to the state treasurer in terms of cash. Those dollars have been helpful in that regard.

Ted Simons: And the additional dollars will be helpful. One-time solutions will be helpful for now. What are we looking at down the road?

Eileen Klein: That is the problem. The more we rely on one -- one-time fixes, the harder the problem is to solve in subsequent fiscal years. If you look at fiscal year '11, next year you'll have far fewer federal dollars to rely on maybe $400 million instead of $2 billion we're counting on right now. This year, we had authorized $735 million in sale and leaseback of state buildings that will not be available next year. So not only do we need to find that $735 million to replace but also have to make the first debt service payment. The more we defer payments or use temporary means to solve the problem, the more we amplify the problem in the next fiscal year.

Ted Simons: And, correct me if I'm wrong, but state recovery will have to lag the general economic recovery because those are the monies that come back to the state.

Eileen Klein: It's very true. And, in fact, you'll see even the Rockefeller institution reported it takes at least two years for states to recover. So, we're hoping we'll see signs of recovery this fall. Most economists think our revenues will recover but not enough to make up for the increased caseloads we're facing. It could take as long as five years for us to climb back out.

Ted Simosn: You've taken the reins relatively late in the game here. Early August. Were you surprised when you went over the numbers?

Eileen Klein: I think the most surprising thing is the need to deal immediately with the cash problem. Dealing again with the budget portions, those were all well anticipated and you could see many of these problems building over the years. But solving this cash situation, making sure the banks will be there as our backstop. I think that's something that nobody has yet really sufficiently prepared for. We're now operationalizing for the first time these provisions in state statute and while it's important we take care of that, it's also a clear indicator of how serious this situation is.

Ted Simons: Do you think that message is getting out that this is beyond what ideology and beyond what people may have experienced or thought about in the past?

Eileen Klein: This is very serious and after this next round of cuts in particular, it will be abundantly clear to people that we need to do something very drastic to make sure that the state can support and provide for the people who need it most.

Ted Simons: Real quickly, before we let you go, are there parts of the budgets, the cuts that might be necessary, already are necessary, that concern you the most?

Eileen Klein: I think the part that concerns me the most is the notion that we could just cut across the board 15%. That there's some sort of excess that people commonly want to say there's a lot of fraud, waste and abuse. The reality is asking for 15% reductions from these agencies will require them to analyze what services will you no longer be able to provide and that's the hardest question and one we need to get some input from the public on. What do they want the state to do from this point forward?

Ted Simons: All right. Thank you for joining us.

Eileen Klein: You're welcome.

Eileen Klein:Director, Governor's Office of Strategic Planning and Budgeting;

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