DALLAS — As Arizona voters go to the polls today to decide whether to boost revenues by $1 billion through a temporary sales tax increase, the distressed state is also preparing to issue $450 million of lottery bonds to keep its wobbly budget in balance.

If voters reject Proposition 100 today, pre-approved legislation would automatically cut $900 million in state spending, including $450 million in education funding.

The budget-balancing proposal from Republican Gov. Jan Brewer would add one cent to Arizona’s 5.6-cent sales tax for three years.

The proposal was narrowly approved by lawmakers in February after repeated attempts in special sessions last year.

In the regular session that ended last week, the Republican-controlled Legislature also approved the sale of bonds backed by lottery revenue to help patch the $1.6 billion hole in the budget that begins July 1.

The move followed a decision to sell state buildings for $750 million and lease them back from a nonprofit shell corporation. Proceeds from the lease-revenue bonds were used for state ­operating costs, the first time long-term debt had been issued for that purpose.

The lottery bonds are expected to price next week through negotiation with JPMorgan as senior manager and RBC Capital Markets as financial adviser.

The bonds carry an A1 rating from Moody’s Investors Service and AA-minus from Standard & Poor’s, both with stable outlooks.

Moody’s has a negative outlook on Arizona’s Aa2 issuer credit rating.

“The A1 rating reflects the relatively stable historic performance of the state lottery, adequate debt service coverage provided by pledged revenues, and debt issuance limited by a two times additional bonds test,” Moody’s analysts Maria ­Coritsidis and Kimberly Lyons wrote.

Standard & Poor’s also maintains a negative outlook on Arizona after lowering its issuer credit rating to AA-minus from AA in December.

“Sales and income taxes, which boosted reserves during the economic boom earlier this decade, have since declined, ­putting pressure on budgets,” Standard & Poor’s noted.

Seeking signs of an improving economy, some optimists see rising sales of lottery tickets as a harbinger of hope. Through April, the Arizona Lottery had already registered higher sales than in all of 2009, which was a record year.

“At 12%, Arizona was one of only three states that experienced double-digit sales increases in 2009,” said Jeff Hatch-Miller, executive director of the Arizona Lottery. “Chief among our objectives, obviously, is to increase revenue for the state of Arizona.”

Under state law, net lottery revenues go toward transportation, economic development, health and social services, as well as the general fund — where the proceeds from this sale will end up.

In the recent legislative session, lawmakers approved an extension of the lottery program without requiring a public vote.

The new law authorized the lottery bonds and shifted the distribution of revenue.

Beginning July 1, 2012, the lottery bonds’ debt service also has a first lien on net lottery revenues, ahead of any other distributions.

One former recipient of bond net revenues, the Local Transportation Assistance Fund, will lose about $31 million annually under the new law.

The Arizona Center for Law in the Public Interest said it will file suit unless the funding is restored.

“While the ultimate impact of such a legal claim or suit is unknown, there is the potential that a successful action could decrease annual pledged revenues for the period through July 1, 2012, by the previous funding to LTAF,” Moody’s noted. “However, based on stress-scenario situations, we expect debt-service coverage on the lottery bonds to remain sufficient even in the event of this decline in pledged revenues.”

Treasurer Dean Martin, who is running against Brewer in the Republican primary for governor, has harshly criticized the use of debt to cover operating costs and says spending continues to rise, despite the cuts.

“It was a mistake to sell the Arizona Lottery revenue and our state buildings because it continues to put our state’s credit rating at risk and looks foolish to the rest of the country,” Martin said in a statement last week.

Overall state spending is $299 million higher than when the recession began in December 2007, Martin said.

“Most of the budget reductions you hear about have been to eliminate planned increases,” he said. “In total, spending has only been reduced by $207 million from the peak in FY 2009. Much of what got Arizona in trouble was increasing spending in FY 2008 and FY 2009 while the recession was in full force.”

With the Aug. 24 party primaries still three months away, Brewer holds a slight lead over Martin, Yavapai businessman Buz Mills, and Tucson attorney John Munger, according to a Behavior Research Center poll.

Pollsters noted that the results came before Brewer signed a controversial state immigration law that targeted illegal aliens from Latin America but specifically banned “racial profiling.”

Other polls indicated that Brewer’s popularity rose significantly after she signed the law, which prompted a national boycott campaign against Arizona.

In its first comment on the impact of Brewer’s signing of SB 1070 requiring state and local police to enforce immigration laws, Moody’s said a state boycott “threatens to reduce tourism and have a potential negative impact on the state’s sales tax revenue.”

Still to be determined, pollsters indicated, is whether Brewer’s popularity will take a sizable hit for her promotion of the tax increase.

The main group promoting the tax hike known as “Yes on 100” and other campaigns supporting the ballot proposition have raised at least $1.6 million, according to the Arizona secretary of state’s office.

Among those supporting the tax hike are the Arizona Chamber of Commerce and Industry, the Arizona Education Association, the Professional Fire Fighters Association, the Gila River Indian Community, and Blue Cross Blue Shield of Arizona.

In campaign finance reports filed last week with the secretary of state’s office, the Yes on 100 committee said it had raised $2.2 million as of May 8. Expenditures totaled almost $2 million, according to the report.

The pro-tax committee raised almost $150,000 last week, which is not included in the May 8 total, based on mandatory, immediate reports of individual donations of more than $10,000.

In the past week, proponents have collected another $146,950, according to reports that must be filed when donations greater than $10,000 are received.

The Ax the Tax committee, which opposes the increase, said it had raised $1,215 and spent $375.

The largest single contribution to the anti-tax group was a loan of $615 from a political consultant in Phoenix.

The largest contributions to the pro-tax committee include $250,000 from the University of Arizona Foundation, $145,000 from the Arizona State University Foundation, and $50,000 from a large teachers union.

Health care and human services groups, including Blue Cross Blue Shield Arizona and St. Luke’s Medical Center, contributed a total of $320,000.

Ax the Tax was created by Republican state Sen. Thayer Verschoor, and its biggest event was an appearance by Joe Wurzelbacher, better known as “Joe the Plumber,” an Ohio tradesman who campaigned for Republican U.S. Sen. John McCain for president in 2008.

Despite the increase in lottery sales, the outlook on the state’s credit rating remains uncertain, Moody’s affirmed in a May 6 report.

Its analysts wrote: “The state’s issuer rating reflects Arizona’s economic and financial weakness, leading to significant revenue underperformance, sizable budget deficits, depletion of reserves, reliance on non-recurring budget solutions causing significant structural budget imbalance, and tightening of liquidity in the current fiscal year.”

Jim Watts contributed to this story.

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