Loan to Pay Arizona’s Bills

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State Treasurer Dean Martin discusses the $700 million loan the State of Arizona is seeking to meet its financial obligations.

Ted Simons: Good evening. I'm Ted Simons. A special session on the state budget will carry into next week. The senate adjourned until Monday after coming up a vote shy of the majority need to pass about $300 million in budget cuts. The senate expects to have enough members present next week to approve those cuts. Arizona is preparing to take out a $700 million loan as the state faces a $2 billion current deficit and an even bigger problem next year. Here with more is state treasurer Dean Martin. Thanks for joining us.

Dean Martin: thank you for having me.

Ted Simons: $700 million. From whom will the state borrow?

Dean Martin: We went out to bid the beginning of September. Bank of America won the bid to set up a facility to basically buy $700 million worth of IOU's.

Ted Simons: What terms are we talking about?

Dean Martin: It did pretty good. A half percent over labor, basically three-quarters of a percent annual interest rate.

Ted Simons: The cost in general?

Dean Martin: Based on our forecast for how much we are going to need, about $3 million, could be as much as 5 million with fees if things get worse. We're projecting about $3 million in interest costs. It's paid back on a daily basis. The revenues that come in will pay off the debt before they go anywhere else, so it lowers revenues by 3 million.

Ted Simons: First time since the depression that Arizona has borrowed money from an external source?

Dean Martin: Yes. Unfortunately, the records are not that great in the great depression. This is the first time anything of this magnitude has ever been done. We're not sure how they did it in the great depression because the records don't exist, but this is unprecedented. Arizona has never done anything like this.

Ted Simons: until now we have been borrowing from internal sources.

Dean Martin: That's correct.

Ted Simons: Explain that.

Dean Martin: There's 1800 funds in the state. The general fund is only one of those. There are 1300 funds that are allowed to basically not earn interest. They basically get lumped in with the general fund. The general fund uses that money on a daily basis. There's another 500 that are allowed to earn interest. Those funds would normally invest in treasuries or other agency type investments. We have been putting half that money towards lending to the general fund instead of to the federal government through treasuries. The most we can do is about a half billion, which is what we're doing now. We basically tapped out our internal line of credit.

Ted Simons: That involves IOU's?

Dean Martin: Yes. This whole process is essentially IOU's. We're selling them to raise the cash rather than sending them out.

Ted Simons: Is there some reason we couldn't sell them?

Dean Martin: This is what happened in California basically. They weren't balancing the budget. The banks eventually said, we're tired of this. We're going to cut you off. That hasn't happened for us. What we did today was get a facility in place that should last us the rest of this fiscal year. So we won't have to worry about it for the rest of the fiscal year unless the economy worsens or they don't balance the budget.

Ted Simons: Yeah. We'll get to that. Is there -- I guess it's a pretty good likelihood we'll see this again next year.

Dean Martin: Yes. By January we're looking at being as much as $1 billion in the red because of the lease-back that keeps us from going worse than that. Assume they just balance the budget and get this $2 billion hole fixed. That means we stop digging the hole deeper on a cash flow basis. It doesn't replenish the reserves of the state. We need revenues to exceed expectations before we see the balances improve.

Ted Simons: As far as this short term cash shortfall business, how long has it been going on?

Dean Martin: We predicted last year that this would happen on April 15, that the state would run out. It happened exactly as we predicted, right on April 15th of this year we ran out of money. Put this in perspective. In January of 2007 we had cash in the bank. In January of '08, 1.8 billion. By April 15 next year it's totally gone.

Ted Simons: We have all sorts of folks on all sorts of angles coming on this program, trying to decide how to raise revenue or what needs to be cut or what shouldn't be cut or how revenues should not be raised. What do you see from where you sit, what needs to be done? Does it have to be a combination of taxes and cuts? If so, why isn't the legislature working on a combination like that?

Dean Martin: The solution is simple. Don't spend more than you make. We got into this mess because the state continued to grow the budget as the economy got worse. If you look at this study that just came out, the Pugh research study, Arizona is the second worst state after California. Our budget deficit is 42% of our budget. The average state is 17%. If you look at what happened over the last couple of years, they increased operating liabilities 10.5% in '08 and compounded another 6.6% in '09. If you get rid of that compounded increase, we're the same as almost every other state out there. Half our problem is self-inflicted. If we're going to get through this, you have to say, look, the last two years there were a lot of increases we need to put on pause until the economy comes back.

Ted Simons: Yet we hear from folks who are saying for the last 20 some odd years we have been cutting income taxes in general, time to raise that revenue side.

Dean Martin: There's never a good time to raise taxes but right now it's the worst. You have people struggling to make ends meet, people having a hard time paying their mortgage, their rent. To raise taxes on them, that's only going to cause more foreclosures, more people not to be able to get through this tough time. Think of it like a business. When you're having trouble selling cars or selling TVs you don't raise prices, you lower them. If you were to raise like a sales tax, that's going to raise prices on everything. It will, I think, prolong our recession. We have data that shows that.

Ted Simons: Are we too dependent on sales tax? Should property taxes go in the mix?

Dean Martin: Everyone talks about having a flat, stable revenue stream. That's like asking for a unicorn. It doesn't exist. Every type of taxation has volatility. You tax people or things. Either income or property. You need to realize every property, every type of tax, property, sales, income, has volatility. Recognize the volatility rather than trying to find one that's stable because you can never find one that's perfectly stable.

Ted Simons: We have to stop it right there. Good luck getting that money.

Dean Martin: Thank you. You know, if we don't, the checks bounce. We can't let that happen.

Dean Martin:Arizona State Treasurer;

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