John Arnold, the Governor’s budget director, discusses the latest State revenue forecast and its impact on budget negotiations.
Ted Simons: Good evening, and welcome to "Arizona Horizon." I'm Ted Simons. Legislative budget analysts recently lowered their forecast for Arizona's revenue growth in the next three years. And here now to tell us how that plays in state budget negotiations is john Arnold, director of the governor's office of strategic planning and budgeting. Good to see you again. Thanks for being here. The latest assessment of the state's economy, A, and B, how that's playing into negotiations.
John Arnold: All right. Thank you. As you mentioned, we met with the legislature puts together a team of economists, and they review the state of the economy and come back and advise the legislature on revenue projections. And we had that meeting earlier late last week, and it was one of the most positive meetings we've had in years. A number of very positive signs about the economy, housing is stabilized, the employment market is getting stronger, it's not where it needs to be yet. But it getting stronger. We're adding jobs back. And revenue growth at the state level, our tax collections have reflected that. We're up over 8% year to date, coming off a year last year, revenues grew over 12%. And so overall it was a very positive report. In fact, two of the economists put the risk of a double dip recession at zero at this point. That all signs point towards not a fast recovery, but steady recovery over the next few years.
Ted Simons: And yet it sounds as though the report downgrades growth for FY-13. I think they had a five something and now they've downgraded to three something. So you're saying positive but they're downgrading?
John Arnold: You know, I'll be honest, I don't quite follow the logic. Again, all signs point positive, they came in and said, we want to be more cautious than that. And one thing they do, the way the legislature develops their revenue projection is they do four revenue projections and then average them. And they purposely take one of those four and assume a recession. And so the recession they assumed for this forecast was much worse than the recession they assumed for the last forecast. And I don't know why, I asked that projection comes out of the U of A and I asked the professor that does that and he said, well, it's just a scenario. It doesn't really mean anything. And quite frankly, if you remove that one quarter of their projection, the recession quarter, their projections are really in line with what the governor has been projecting.
Ted Simons: Legislature though says with these -- with the downgrade, 160-some-odd million lost, they're saying you need to be cautious. This is an indication that the economy is not necessarily -- can't necessarily be counted on, I know the double dip somewhere, looking at that regardless of what the experts are saying, how do you work past that, how do you work with that and get some sort of agreement?
John Arnold: It has been difficult to look at those competing priorities. What we're looking at is a few things. We're in fiscal '12 right now, so we're setting a budget for fiscal '13. We want to be cognizant of the upcoming years, fiscal '14 and '15 because of the major law changes that will come into being over the next couple years. The one cent sales tax expired at the end of '13, so we have that revenue loss in fiscal '14. I think we've shown a budget that takes us through fiscal '14 with a loss of that one cent, and yet keeps the state's budget balanced. You look into fiscal '15, you have federal health care reform. And the vast expansion of Medicaid. Which also costs the state money. But again, I think we've shown with conservative revenue projections that we're going to be OK through fiscal '15. But that's the concern. You look out two or three years from now, and subtle changes in revenue projections and subtle changes in expenditure projections leave -- make large changes out in fiscal '15 because it's cumulative year after year. And that's really where we're divided from the legislature, is how serious are our problems in '15 and what does that mean for spending decisions today? And the governor's position has been, yes, she's here through fiscal '15, she wants to leave the state with a balanced budget. We need to be cognizant of that but we have real problems today that we need to address.
Ted Simons: What are some of those -- you mentioned fiscal year '14 and '15. I've seen $134 million needed to be made up, I've seen up to $500 million for '15 because of affordable health care and the loss of the one cent sales tax. Legislature says let's put this money, let's put 400 and some odd million into a rainy day fund, there's no need to spend now, save it, have it at the ready. Is that wise?
John Arnold: You know, to a degree. And the governor agreed with that. We need to reserve some funds because there are some unknowns out there, and the economy while strengthening still isn't strong. And so we're in agreement, we should put some money in a reserve fund. We should be cautious as we move forward in our revenue projections, but we also have to be realistic in the problems that we have today and how we face those. So for a couple of examples. The state is almost out of maximum security beds. While our general prison population is stabilized, we're not really growing in new prisoners. We continue to grow in maximum security prisoners. And so we're out of beds. That's one area where the governor says we don't have a choice here, we need to add more maximum security beds. That's expensive to do. We're understaffed inside our DOC, our department of corrections. Part of that, we did have growth in our prison population, but weren't able to fund new officers because of our budget situation. So we actually have less correctional officers today than we had in 2005. And we've added about 6,000 inmates over that time period. So it's to a point where it's getting a little bit unsafe. Other areas, the state's accounting system, and I know this is not exciting or sexy, but it's failing. And it's the system that makes the state go. We haven't upgraded it for over 20 years, and it's dying. Then let me touch on K-12 for a second. Last year -- two years ago we passed a law that said if you can't pass the reading portion of the aims exam in the third grade, you can no longer be promoted to the fourth grade. We had 4500 students fail that section of the aims test last year. And starting next year, they will no longer be able to move forward into fourth grade. And so the governor has proposed some intervention dollars to be used in kindergarten, first, and second grade to make sure all of our students are prepared for that test, and are able to read in the fourth grade. So these aren't major spending items, a lot of them are one-time in nature, capital improvements, that the governor feels we need to do now, but they don't really jeopardize our fiscal '15 situation.
Ted Simons: With that in mind, how far apart is what you're looking at, and what the legislature is looking at? I get the feeling from afar that sometimes the goalposts seem to be moving. How steady is this particular contest?
John Arnold: You know, we're all on the same team down here at the capitol, and we're working together. We have some competing priorities. But we're working through that. I think we'll have a budget deal done here in fairly short order. Just everybody needs to compromise a little bit, and the governor has the items she needs to get done, and they do too. So we'll get that done.
All right. We'll see when you get that done. Good to have you here.
Ted Simons: And we'll have more on the budget tomorrow with the vice chairman of the house Oprah Winfrey rations committee. Coming up in just a moment, we'll take a lock at the ongoing parade of scandals involving Arizona politicians.
John Arnold:Governor's Budget Director