Budget Deficit

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Arizona faces a budget deficit of about $2 billion over the next 18 months. Governor Brewer has released a plan to shrink the deficit. John Arnold, the Governor’s Budget Director, discusses the plan.

Ted Simons: Well Arizona face a budget deficit of about $2 billion over the next 18 months. Governor Brewer has released a plan to shrink the deficit and earlier today her budget director presented that plan to a joint meeting of the house and senate appropriations committees. Here to tell us what he told lawmakers is John Arnold, director of the governor's office of strategic planning and budgeting. Good to see you again. Thanks for joining us.

John Arnold: thank you.

Ted Simons: What is the deficit for the current fiscal year?

John Arnold: Fiscal '11 budget deficit is about $763 million.

John Arnold: What is the deficit for the next fiscal year?

John Arnold: Were projecting a deficit for fiscal '12 of about $1.15 billion.

Ted Simons: Are those numbers both of them, are they pretty much following form here? Are things getting a little better in terms of revenue? Or are there ways to balance things out?

John Arnold: Yes. Our revenue streams are improving. The major problems with the budget for both this fiscal year and next fiscal year is during our down revenue times, we used a number of fiscal bridges or one-time measures to plug budget holes. Those one-time measures are going away, they're washing out of the system, so we have to replace them with something else. And our revenues are not increasing enough to replace them on their own.

Ted Simons: Can you tell, or give us an indication about the impact so far of the one cent increase, the sales tax increase?

John Arnold: Sure. The one cent is providing about $850 million this year. The bulk of those dollars are going to go into the K-12 system. Two-third's the K-12 system, about one-third into the health and human services public safety systems, so it's providing an extra $600 plus million into the K-12 system this year that otherwise would not be there.

Ted Simons: Let's talk about education. $245 million rollover for public education, is that correct? Explain that works.

John Arnold: What we do is it's a little bit of a budget gimmick. Instead of -- we pay the K-12 system on a monthly basis. We give them about $3.5 billion per year. Our last payment due to the K-12 system is on June 30th. The state's fiscal year runs from July 1st through June 30th. So to balance the budget we're going to defer that payment and make it in July instead of making it in June. So it falls into fiscal '12 instead of fiscal '11 and we save $245 million in fiscal '11.

Ted Simons: But aren't there previous rollovers at play here as well? And if so, how many?

John Arnold: There's about 3½ rollovers that are already in play. About $950 million that we've already rolled from one fiscal year to the next.

Ted Simons: So, we're talking about pushing that debt to, what, close to a million dollars.

John Arnold: Over a billion, about $1.2 billion we will be deferring from one fiscal year to the next.

Ted Simons: What does that do as far as cash flow problems, or concerns to schools?

John Arnold: It does create a cash flow concern for school districts, but we've had discussions with a number of school districts, the school district leadership, and we've also talked to their underlying banks which provide short-term loans if necessary, and there does not seem to be a cash flow problem in the K-12 system. As of yet. And with this particular rollover, we're just moving it a few weeks. So we do not anticipate any cash flow problems with the K-12 system.

Ted Simons: But those kinds of rollovers or gimmicks, as they're described, can't keep doing them forever can you?

John Arnold That is correct. And we're really trying to wean ourselves off of these one-time fixes as we move forward into the upcoming fiscal years.

Ted Simons: The higher education looks as though state aid is reduced by, some what, $170 million. Talk to us about that.

John Arnold: That's -- we're looking at fiscal '12, and so the rollover and other budget gimmicks were really limiting those to solving fiscal '11. And that's -- we don't have a lot of options because we're so late into the fiscal year. But as we look into fiscal '12, we tried to make real reductions in what the state is spending, and certainly higher education is a big portion of the state budget. We spend about $900 million on the University system. So what we are proposing is a reduction of that support of $170 million, it's about 20% of their total state support.

Ted Simons: And you've been quoted as saying the schools have other sources of revenue, which might be able to help mitigate this particular cut. Talk to us about what you mean by that.

John Arnold: Sure. You look at the total funds the state University system, and there's state support, there's tuition dollars, the flow into the system, enterprise funds that come into the system. And then also federal dollars. Federal dollars are largely dedicated to specific projects, but it's money that comes into the University system. So the question has been, if you reduce state support, does that necessarily mean that tuition goes up? And we don't believe so. What the governor has called on the state University system to do, and she called for this two years ago, recognizing that this cliff, this budget cliff was coming, she said, we need to you look into your processes, what you're doing, how -- what your education and finance models are, and find new ways to educate Arizonans at a high standard at a lower cost. So we've been working with the systems over the last couple of years to try to develop those types of newer models, and we're seeing some of that develop. NAU has come up with a system where you can go to school continually for three years and graduate after three years. There's other ideas in the pipeline.

Ted Simons: We should note that recent cuts so far, 25% student -- per student funding, 11% of the work force, and yet enrollment continues to increase. That's got to be a factor to the whole equation as well.

John Arnold: Absolutely. And there's no question that budget reductions are placing a strain on the University system as they have on all of state government.

Ted Simons: Indeed. Let's get to Medicaid, because that's a big one there. $541 million.

John Arnold: Yes, sir. When we look at the structural budget problems that the state has, we very quickly turn our eyes to Medicaid. And we go back to 2007, which was sort of our peak budget year, when we had the most money, we've been in budget cutting since 2007. So really for the last five years. The rest of state government has continued to shrink while Medicaid has continued to expand. Since 2007, Medicaid expenditures are up 65%. While the rest of the state budget has gone down. As a percent of the total budget, Medicaid has grown from 17% of the state budget to today it's 29% of the state budget. It's literally consuming everything else we do in state government. And so we look at Medicaid and say we've got to gate handle on this program. So how do you reduce expenditures in Medicaid? There's really three areas. You change the service package that we provide in Medicaid, and we've eliminated all the services that we can under federal law. In Medicaid. Two, you cut the providers how much you're paying for those services, and we've announced a 5% across-the-board provider rate cut that starts April 1st. We've held providers flat for the last three years, so no inflation at all. And now we're actually reducing what we provide -- what we pay to providers. Or you reduce eligibility. And that's really what this proposal is about. In 2000, in the year 2000, Arizona expanded eligibility to cover all populations under 100% of the federal poverty limit. We're one of six states in the country that does that. And what we're proposing is to reduce our eligibility levels in certain classes of population to line us up with what most other states provide in their Medicaid systems. Unfortunately there's a real human cost to that. We estimate about 280,000 Arizonans will lose health care coverage if we roll back to '04, if we reduce eligibility. These are all adults, no children will lose coverage. And most of them are what we call childless adults. These are people that don't have a dependent child at home. Most of them are empty nesters, people that are in their 40s and 50s that don't qualify for Medicare yet, but are dependent on Medicaid for health services.

Ted Simons: but reducing the eligibility is a gamble, is it not? Because you need the cooperation of the federal government, and I know the governor is going to call a special session I think as early as tomorrow to try to get lawmakers to address this and take this further. But what -- you need a waiver from the federal government to get these numbers to work. What happens if that waiver doesn't happen?

John Arnold: That is correct. A year ago this population was optional. We did not have to cover it under federal law. But when federal health care reform was passed last spring, they froze every state system in place. Even though all the state systems are different, they said, nobody can change. And so we have to go to the Obama administration and ask them to waive that requirement that maintenance of effort requirement. And we've certainly contemplated what happens if it doesn't pass, but this is our plan, and we're moving forward with it, the governor has already been in contact with the secretary, we're putting that documentation together, and we need the legislature to grant us authority to seek that waiver, which we will do in this upcoming week. If the federal government does not grant the waiver, it will be catastrophic to the other areas of our state budget. Where are we going to find $600 million?

Ted Simons: I was going to ask you that. Are there contingency cuts?

John Arnold: There are not. This is the governor's plan, to move forward with Medicaid reform. It is where we need to make these cuts. You start looking at the other areas of state government, where we could find $600 million, and as I said, it would be catastrophic to take $600 million out of the K-12 system, or out of the University system, or out of the correctional system, or out of local governments, or anywhere else you turn, we have already reduced state expenditures significantly except for Medicaid. It's time that we reform and take those steps inside the Medicaid system.

Ted Simons: The impact of what we've talked about so far, we should mention things like public -- funding for public safety, that is actually increasing no. Cuts there. Correct?

John Arnold: That is correct. We're generally holding them consistent or flat, and we have for the last several years. There has been a number of reductions inside the public safety system, corrections, for example, is reduced well over 100 administrative positions. The investments we want to make in our public safety system are really twofold, we need to provide some capitals for equipment funding, for our DPS officers, and also capital for our prison system. We have some very old buildings that are no longer safe. And then we want to add some correctional officers. We're understaffed inside of our prisons as we continue to add prisoners, we've not added correctional officers, and it is leading to an unsafe environment for our correctional officers.

Ted Simons: We've heard the word "reduce" and "cut" quite a bit, obviously with public safety it's a little different but one of the rare instances what is the impact, and what have you looked at and what has been discussed regarding the impact on job development and the impact on economic activity?

John Arnold: Thank you. Those are excellent questions. The governor is putting together a jobs package. And that will be released in the next week or so, it will include a number of reforms, and tools that will give to our commerce authority to go out and do job creation. There's no question that budget cutting impacts jobs. Health care is one of the only very -- one of the only healthy sectors of our employment base over the last couple of years. When we cut $560 million out of that sector, and those dollars are matched by federal dollars 2-1, so $550 million reduction means a total of about $1.5 billion that will come out of the health care sector next year. And then that will mean job losses in that area. However, one of the key aspects that companies look at when they're looking at states is political stability. And if we're unable to show a balanced state budget, we're not going to be able to grow jobs here. We need to put our fiscal house in order, say, here is a stable environment that you can operate under, and I think we'll be able to attract that job creation and move forward.

Ted Simons: And real quickly, I know that the governor's plan also includes things like reducing corporate income tax and the tax -- property taxes on equipment as well. The exemptions made here sold elsewhere. Are those things that are -- how are they looked at now? What's the timetable for stuff like that?

John Arnold: You know, we're certainly right now in the middle of a budget crisis. Additionally the governor went out and said, we need new revenues right now to bridge us through this crisis, to protect K-12, to protect some of our public safety and our most needy. And the public supported that, and we need to honor that commitment and certainly not give it away through tax cuts. So the governor has said, yes, we need to reform our tax structure, our corporate income tax is comparatively high when we look at other states that surround Arizona. So we're looking at making some reforms there, but they -- those reforms will be passed when the temporary sales tax ends. So the temporary sales tax runs through fiscal '13, we're not looking to make any tax reforms until after that. However, as we talk to businesses that are looking to relocate or to build, they want to know what's coming, and what's going to happen. And even putting those tax changes into place now, even if they don't take effect for a couple of years, helps them make decisions and we'll encourage them to come to the state.

Ted Simons: So last question, when people pass the one-cent sales tax they were hoping to mitigate some of what we're talking about right now. And I think -- I know, I've heard from folks saying, what happened? How come so many folks will be losing their health care coverage? How come so many cuts will still happen in spite of voting in that tax increase? What do you say? As far as the balance, the equation, what do you say to them?

John Arnold: The balanced budget that we put forward last year that relied on two major pieces, the one-cent sales tax and reforming Medicaid, the legislature adopted that reform, the same reform we're asking to make this year. They adopted it last year, but the federal government came in and overrode that, said you cannot make these reforms in Medicaid and here's one year's worth of funding to cover that. So they gave us money for fiscal '11 to cover that federal requirement. They're not giving us money in fiscal '12. So we have this $800 million federal cliff that we're facing come July 1st that we're going to have to close. And we fall back on the same proposal that we had in place last year. The federal government just delayed it a year.

Ted Simons: All right. John, good stuff. Thanks for enlightening us on a pretty tough situation.

John Arnold: It's been very difficult.

Ted Simons: Thank you for being here.

John Arnold: Thank you.

John Arnold: Governor's Budget Director;

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