Journalists’ Roundtable

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Ted Simons: Coming up next on Arizona Horizon's Journalists' Roundtable. Governor Ducey releases his budget proposal which includes a $75 million cut to universities but does not include a court ordered spending hike on K-12 education. The Journalists' Roundtable is next on Arizona Horizon.

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Ted Simons: Good evening and welcome to Arizona Horizon's Journalists' Roundtable, I'm Ted Simons, joining us tonight, Jim Small of the Arizona Capitol Times, and Howard Fischer of capital media services, and Luige del Puerto of the Arizona Capitol Times. Governor Ducey releases his budget plans today. Jim, do we have -- what do we have? There is a lot to go over here. What have we got?

Jim Small: It's $9.1 billion, right around that, in spending and, you know, they talk about how, basically, this is going to get us through -- fix the deficit in the current year and in the upcoming year which begins in July. Set us on a track to be structurally balanced by 2017, which would mean the revenue we take in on an ongoing basis would match or exceed the revenue we spend and the state wouldn't have to be always trying to find ways to paper over the deficits.

Howard Fischer: There is contingent on a couple things, including, let's say, certain lawsuits over school funding, as you protection at the top of the show, is contingent on questions -- questions of the legality of the things they would like to do, like making the land department self-funded. You could increase the license fee, without a two-thirds vote. It's funny when they increase the fee to the hospitals, the lawmakers argued it was a tax, now it's not a tax. Then, the really wonderful part of this, he's the education governor. He's going to increase funding by $134 million. Well, first of all you, that 134 million is, basically, the inflation money, not the full inflation money, the lower inflation money, and second of all, he's forcing the schools to pay themselves. He's saying take it out of your non classroom stuff, utility bills because APS doesn't need their money, the lunch ladies, and pay yourself to put it in the classrooms. The total net increase in a three plus billion dollar education fund is $11 million.

Luigi del Puerto: Well, there is at no time thing, you hope for the best and you prepare for the worst. This budget is hoping for the best and definitely not preparing for the worst. The big -- the elephant here in the room is the K-12 inflation money. Even jail B.C. is more conservative than the other research budget units. In their -- in their baseline presentation, included, you know, what would it be? What scenario are we facing if we are forced to pay the $330 million in reset K-12 inflation funding starting this year, and what happens if they say, and yeah, those years, that you did not pay the schools their funds, you are supposed to pay them back. All those things are not -- are not included.

Howard Fischer: You are so persnickety. He's the education Governor.

Ted Simons: That changes it. The current shortfall, instead of 500 million with a billion, whatever it is next year now is reduced to $160 million this year and $500 million next year. And that's wonderful. I know that John Arnold and the others don't want a plan B. There needs to be a plan B out there.

Jim Small: My guess, you know, realistically, I think that's what they are working on, but I think you can kind of understand, or maybe rationalize why this looks the way it is. You have a governor in office for two weeks now. This is a huge monumental task to deal with, you know, trying to hit the ground running and to get the administration in shape. And they are required by law to put there out. If there is a way to, you know, cut the size of the problem into a third of what it really ought to be, in order to meet that, that way you can buy yourself time to kind of figure out how are we going to deal with maybe what is a more realistic problem, with what other budget analysts view as a realistic problem. I kind of understand it from that sense, but certainly, there needs to be -- a lot of questions, and they will have to answer them is what do you do in the event or the likelihood that the courts find that you owe $330 plus million every year on this education funding, not to mention the $1.7 billion going backwards.

Howard Fischer: But it goes beyond that. Even assuming, somehow they can convince the judge it's only 80 million in inflation funding and no back money, 10% of state funding from the universities, where's it supposed to come from? When we talked to the Governor before we had the details, he said well, universities are the priority for the state. They ought to be for the students. Code for, raise tuition. I seem to remember something from the gubernatorial campaign where Fred Duval got the, you know what beat out of him because during his six years on the board they doubled tuition because the legislature was cutting funding, and the -- they said, Doug Ducey will protect student funding and never let this happen. Guess what he's letting happen? Guess what he's promoting to happen?

Ted Simons: So we have $75 million cut to the universities. Sweeps. We have got rainy day fund, and how much --

Luigi del Puerto: I think it's $127 million in the rainy day fund, they are taking it out to fix the fiscal year 2015 budget. It's a smaller number because they are assuming that they don't have -- they are hoping that we don't have to deal with the K-12 inflation lawsuit, but you are right, I think $304 million in fund transfer, sweeps from agencies, and one agency, in particular, I think, a special place in Doug Ducey's heart, the Arizona Commerce Authority, and I think 100 million is getting swept from that agency. That's painful.

Ted Simons: Is that signaling anything there? What's that saying?

Jim Small: I think it's a signal that, you know, Doug Ducey is probably more of a fan of the broad-based tax reform issues, and treating business as equally as opposed to having, you know, picking winners and losers and having an agency that goes out and gives certain deals to certain companies, and in an attempt to lure them to Arizona.

Ted Simons: That's -- ACA was a bit of a Brewer institution. Ducey comes in and says bye, bye to 100 million?

Howard Fischer: Close to 100 million.

Ted Simons: That's a lot to say goodbye to.

Howard Fischer: The budget director says oh, no, there is money in there to lure companies. I'm going to go more simplistic than what Jim is saying. I think that he just figured, where do I find the money? He's out there with his little tin cup, what agency has money? What can we raid? What can we do to do this? He's only been Governor a few weeks, but I think that I don't think that he had the foggiest idea, this is a guy who got elected on sound bites, on broad policy, and now he has to deal with it. And I think he's finding it to be not quite what he expected.

Ted Simons: And Luige, no mention of tax hikes, no mention of postponing tax, corporate tax credits.

Luigi del Puerto: No, none because Ducey has been adamant on that point. He will not allow for us to turn back on our word when the state decided a couple of years ago that we were going to give away the tax cuts and stagger them, so it does not hurt too much. He's saying that look, businesses have planned around those tax cuts. If we are not going to pull out of that, then, you know, that's not good for us and that's not good for them. What does that say about our word and we're trying to lure this business to the state. Now, we're turning back.

Howard Fischer: You have also got to understand his pro-business attitude on another level. One of the things he has to raise money is to send some people out to find companies that collected but didn't pay their sales tax. But, they were very careful to say, we're not hiring auditors. We're not going to send anybody in to look at companies books to find out if they are paying the tax. We just are going to say, here's the taxes that you reported and didn't pay. So, he's very careful in there. This is a very, very pro-business administration.

Luigi del Puerto: And there is -- there was one thing that was striking about this budget. During the campaign, Ducey said, I want to get to as close as zero income tax as possible, but that's missing in this budget, and I think Howard is right and Jim is right, we're starting to see a Governor deal with the, you know, the problem. He looks at the budget, and he realizes that, you know, the promises that he's made, maybe he cannot do, you know, the big ones right away. So, that's why we're not seeing any proposal for the cuts, except those that already are phased in.

Jim Small: While there is no -- there is nothing that, that they are going to call a tax increase in here, there are ways that they are planning on increasing revenue. Howie talked about the vehicle license fee, the tax. I think it's called the vehicle license tax, and the increasing that, and they want to -- they cost $35 million a year now and they want to double that and get to $65 million a year, take another $30 million there, and there is a plan to -- there is a thing called the homeowner rebate, which the state subsidizes every homeowner's property tax bill and, they want to limit that, which, in effect, is not an increase in the taxes but in effect on people who own houses it, means they are going to be paying more to the counties, for their property taxes, and there was, also, you know, some cost shifting of taking things, juvenile corrections costs, and moving them from the state level and having the counties pay a share of that and pay a portion of the operating revenue, or the operating cost for the department of revenue. So, you have things -- which we saw in the last recession and the counties were hopping that at Jan Brewer for doing the same thing, shifting costs down, the old adage it rolls downhill, and it kind of does. You have the state and the counties and the cities at the bottom, they push off things to the other lower level governments, which in turn, they have to raise taxes. The state can say, we did not raise taxes but in effect, you forced other governments to do that.

Ted Simons: I was going to ask about that, are we going to see municipalities having to pick up the pieces where the state decides, no tax, no tax hikes here, and everyone else and their brother is raising taxes to make up for it?

Howard Fischer: A lot of it is, I want to call it nickels and dimes because it's 10 million here, 5 million here so it would be hard to say if the city of Peoria increased its tax rate, it would be due to this. But very clearly, this Governor is nickel and diming the local Governments, and he figures, if I can get 10 million here, 5 million there, 3 million here, from Pima county, I can get this in the city of Peoria, and this from this level of government, and he's solving his problem. Now, maybe it should be at the local level. Maybe the department of revenue should be partially funded by the folks who get urban revenue sharing, but there is something that got lost. Urban revenue sharing occurred as a deal. So the cities would not levy their income taxes, so the state said don't worry, we'll share ours with you, and now they want to charge them for the privilege of sharing their own revenues.

Luigi del Puerto: The Governor did, during his inauguration speech, he warned, not promised but warned, he said, look, special interest groups, you will not be happy with my budget. This budget delivers on that promise.

Ted Simons: Well, hold on a second there. Let me ask about one, in particular, that a lot of folks are concerned about. Corrections. Cut --

Luigi del Puerto: No cuts. No cuts. I mean, this is one agency that has, through the years, during the fiscal downturn, has been stared with the cuts. The reason is the fact that we have prisoner and is we're adding more prisoners each year, so Doug Ducey, it's a formula thing. They need -- they have more people to house, and they need more bed so he's saying, look, we need 3,000 beds, over three years, and you know, it is what it is.

Howard Fischer: No, no, it is not what it is. Here's the deal. Over the years, as we, we're going to get tough on crime. We have got mandatory sentencing and we have got mandatory minimums, and we have, you know, truth and sentencing laws, you need to serve 85%, and it's all -- a lot of these things were pushed by the private prison industry. This is not the state building beds, this is the state paying $60 million a year by the third year for private prisons because nobody wants to say, well, maybe instead of telling people they are going to serve 85%, they should serve 75% or they could be put on intense probation with that ankle bracelet instead of sitting in a prison.

Luigi del Puerto: Be that as it may, whatever the reasons for the system that we have right now, the fact is that we are adding prisoners and unless Ducey and our lawmakers said look, we're going to do massive sentencing reform, we're going to look at this issue, this is the one thing adding to the deficit and let's try to find ways to -

Howard Fischer: They don't want it. This is a billion dollars, 9 billion is the Department of Corrections, and they don't want to look at it because the last two Republicans who suggested this were ejected.

Ted Simons: With that in mind, though, what did -- would the legislature take a second look at sentencing reform to a bunch of new folks in the ninth floor? What do you think?

Jim Small: Maybe. It's hard to -- first, we don't really know. We are still trying to get a grass look at the legislature and who they are and their attitudes towards certain things. But considering, like Howie mentioned, Bill and Cecil talked about this very thing, and some of the minor things, the intense probation, the letting out folks who are ill, you know, who are gravely ill instead of having them through state medical care sending them home. Things like that, that even when we were in the worst budget crisis the state has seen, those were never even seriously entertained. I don't know, I'm skeptical that at this point it would be something that would get traction.

Luigi del Puerto: There is a sliver of light, if you will, in Ducey's budget about this issue, and in his budget he says look, for juveniles, juvenile offenders, I want them to be 14 years old and over. I want them to have felony offenses, and I want to exempt those who are seriously mentally ill. There is a bit of reform, very minor one because it's only going to save the state 3 million.

Howard Fischer: No, no, I think that you are looking at it backwards. This is not reform. This is saying to the county, if you have got a juvenile, who is 16, who is guilty of a misdemeanor, we are just not going to take them. You keep them at home at your expense. This is not reform. This is not saying, we don't think that they should be incarcerated, just saying, we ain't going to pick up the cost.

Ted Simons: All right. I want to get back to this idea of the structural deficit being erased by 2017. Does that suggest that the cuts that we're seeing now, we should expect to see more of those kinds of cuts next year as we move into -- how are we going to get this structural deficit gone? What --

Howard Fischer: Well, a lot of it is -- the unknown, unknowns, if you will, you know, the question, of course, of the school funding lawsuit, and will you have to cut the universities more? Can they make it up in tuition? How much are the private prison companies going to charge? What happens with the economy? See, that's the real thing. The problem has been, is that for all the taxes, we have cut taxes 22, out of the last 24 years? And where's the stimulus in the economy? It hasn't been stimulated.

Ted Simons: President Biggs on this program this week said if you would adjust, put those tax breaks for corporations in place when we passed them as opposed to delaying them until this year. I think they blossom. The blooms and blossoms would have begun.

Howard Fischer: I have a word for that which we don't use on this show, but take a look at all the corporate cuts that were enacted into the 1990s. Back to the Simington administration, and if all that stuff worked, we should be -- have a 5% unemployment rate, not one point above the national average, and 4% year over year growth not 2%. I am sorry.

Jim Small: The report they put out today, it talks about this -- it talks about, you know, some of the reasons for the things -- the reasons behind the lagging economy in Arizona, and the one that is striking is housing, and it always comes back to housing, and this is no different. We have -- we don't have as many people moving here. We are the housing industry is down significantly in terms of the new starts, in terms of the people being able to qualify if new loans, and those, those things, they put on a really great table that showed, basically, the difference between where things were at back in 2008 before the recession and where they are at now in terms of the year over year growth and things like that. And when you look at the numbers, those are the ones that are down -- they are less than half of what they were, and like it or not, despite the efforts of policy-makers for the last decade, Arizona's economy pivots on the housing industry, and so, until that turns around, you are not going to see our overall economy, and our own employment rate go down because of how many people lost jobs in the construction sector.

Ted Simons: That's my question. I understand, you know, the trickle down supply side, whatever you want. I understand that particular idea. However, corporations can't sell or move things to people who don't have jobs to pay for those things, who may not have the education to work in the facilities that produce those things.

Howard Fischer: And that becomes one of the issues is that yeah, we can bring people here, and we can cut corporate taxes to zero. I will give you a perfect example. One of the changes to the corporate tax law said, we're going to base your taxes on the sales in the state, if you happen to make missiles, you pay no Arizona corporate income taxes. But, if you cannot find people graduating from the University of Arizona, who can help you build those missiles, it does not matter. Part of why corporations go to some of the places that have higher taxes, is they have got qualified graduates. And you can't keep saying, when we're going to spend less on education and on K-12, and we're going to move it around, we put money in the classroom and cut $75 million from the University system and expect companies to come here.

Luigi del Puerto: And I understand the thinking behind the tax cuts. This recession has been useful. We have had to pick up and create all those jobs very quickly, when the in the first two years we're not seeing that. The economists a couple of years ago said, we're going to see, you know, back to the peak level by 15, 16, and maybe it's now fiscal year 2019. But, the thinking behind the tax cuts, and I have heard conservatives say this. Their thinking is that if we do this now, we promote ourselves, and not only that, but if we are not doing it, we'll be worse off, it's always been their argument.

Howard Fischer: But the problem becomes what are we -- are we selling ourselves as the low-cost state or as the quality state. For 20 years we sold ourselves at a low-cost state, maybe it's time to try something else.

Luigi del Puerto: In those 20 years, they will counter that -- our job growth has been among the top five in the nation. We have always attracted -

Howard Fischer: Retail and leisure and hospitality, you know, the jobs where you want fries with that? Have you looked? Our average wage in comparison, started off around 34th, and we're down around 38, 39, 40, in comparison to the rest of the nation. So, our wage growth has not kept up with the rest of the country.

Luigi del Puerto: I understand. There is a serious discussion here, and that the question is, how do we define ourselves? Do we still define ourselves? Do we still want to be a growth state and that means we are attracting people to move in here because maybe there is great weather here, and there are snowbirds coming over, and you know, with housing markets, great, cheaper than most states, and do we continue to identify and promote and make sure that that is our identity, or do we diversify? That's a problem.

Howard Fischer: We could have been a growth state if we had not driven out all the immigrants.

Ted Simons: All right, and with that we'll move on now to, actually, a side bar to this story, this inflation adjustment suit, and Jim, the judge, basically, gave a deadline and saying, I really want you guys to do this.

Jim Small: Yeah, to make sure that we are clear about what we are talking about here. This lawsuit over education funding has been split into three pieces. One as to whether the legislature, did they violate the voter protection act? The Supreme Court said yes, they did. And then you have this issue in funding and you have got two pieces, one is funding, the inflation funding and the other is funding going backwards which is the funding that the legislature improperly or illegally kept from the schools. And so, that's -- the settlement conference is all about that money going backwards, 1.5 or 1.3 or 1.7 or somewhere in that ballpark, billion dollars. Yeah, and so the judge, basically, ordered the settlement conference, and you are going to meet in front of the panel, and you are going to hash this out, and then kind of had a change of heart and said well, I strongly encourage you to do it, and at least you should show up for the first meeting, you know, attorneys, and if your clients won't authorize you to engage in a negotiation for a settlement, I guess at least we tried.

Howard Fischer: This is fascinating because the Governor in his state of the state said, I want you all to negotiate, of course, he took a swipe at the Supreme Court for their ruling but what -- we will not even go down that road but, when we were in the hearing, the first part of the hearing, the attorney for the legislature, basically, said well, you cannot force us to negotiate, and there is constitutional issues and everything else, so for all that talk about how we're going to negotiate, the legislature wants to let the clock run out on this one.

Ted Simons: And I think that today's budgeted proposal indicates where the Governor stands on this. It's not included in this budget, so, when it happens we'll deal with it.

Luigi del Puerto: That's the plan. It's plan B. At some point, there is going to be a plan B but you are right, the Governor is in good standing with the legislature, and he stood with them for a unity budget. But, you know, when this hammer falls, then we panic.

Howard Fischer: Panic is a good word you, that's what we've been doing in the state for how many years.

Ted Simons: We're waiting for them to come to the table, wherever that table might be, and however crowded that table might be, and at whatever point in the future -- I mean, who -- when is -- is there a deadline? Is there a recommended deadline?

Jim Small: For selling this? No. Realistically, you figure the funding going funding is within the next year, probably gets hashed out. The retroactive payment, sometime in the next 18 months, probably gets sorted out through negotiations or settlement or through the courts, and oh, yeah, let's not forget about the Medicaid Expansion issue, which in the next 18 months, you know, this could be really -- you could have a trifecta here of really --

Howard Fischer: To a certain extent, while judge Cooper has still his purview over the billion dollars going backwards, she also is trying to work in the 330 million already ordered going forward into these talks. Don Peters, the attorney for the school district says we're willing to talk for a while but we're not going to let this get to the end of the fiscal year so they can say that's back money and it doesn't count any more. If there is not a deal by, perhaps, March 15th, he pursues this because he wants a judgment on the ground and enforceable before the fiscal year ends before they can say there is no money left because you cannot order last year's money to be paid. So, there is a de facto deadline.

Ted Simons: So kicking a can down the road that could become a big can.

Luigi del Puerto: A very big can, and as Jim mentioned, you know, that does not factor in to the other lawsuits, namely Medicaid expansion. We could be facing $100 million more in spending and then we'll have to decide whether we want to ensure the population that we are kind of insuring, or whatever we do, do we then freeze the enrollment again? Is there going to be a lawsuit again? It's going to be real interesting looking at the legislature in the next couple of months.

Ted Simons: A very nice way to put that.

Howard Fischer: They closed one of the universities, that's a couple hundred million.

Ted Simons: Thank you, Howie. On a special Martin Luther King Jr., it's the 50th anniversary of the civil rights marches in Selma, Alabama. We look at Dr. King's involvement and hear from a man who was there in Selma at the time of those historic marches. That's Monday right here on Arizona Horizon. That is it for now. I'm Ted Simons. Thank you very much for joining us. You have a great weekend.

Jim Small:Journalist, Arizona Capitol Times; Howard Fischer:Journalist, Capitol Media Services; Luige del Puerto:Journalist, Arizona Capitol Times;

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