DALLAS - After signing legislation to cover a $1.6 billion funding gap in the current budget, new Arizona Gov. Jan Brewer warned that even more difficult decisions remain as the state confronts a $3.4 billion deficit for fiscal year 2010.

Brewer, a Republican sworn in last month to replace Democratic Gov. Janet Napolitano, signed legislation Saturday that balances the current budget through spending cuts. Napolitano, who joined President Obama's administration as head of Homeland Security, had struggled with falling revenues in her last months in office.

Brewer's comments on the spending cuts were critical of her Democratic predecessor as well as the Republican-controlled Legislature.

"The seeds of this significant budget crisis have been sown for many years, and thus the solutions are neither easy nor painless," Brewer said in her prepared statement. "In just over five years, spending in the state budget increased from approximately $6 billion to $10 billion.

"Last year, with most economic indicators suggesting significant economic downturn, a new state budget was built on the false hope of increasing state revenues," she said. "More shockingly, new discretionary spending was approved without realistic funding and the state's rainy-day fund was drained. This insatiable appetite for spending has left us with enormous challenges and few options."

In a three-day special session, lawmakers made deep cuts in funding for public schools and higher education, despite pleas from Democrats that education be spared.

Funding to school districts and charter schools saw cuts of $130 million, including a $21 million slice of annual funding for computers and other equipment and a $98 million reduction accomplished by not overriding a constitutional spending limit for districts.

Although the Legislature's $135 million reduction in higher education spending was less severe than the earlier estimate of $243 million, officials at the state universities bemoaned the sacrifice.

"While some have described these cuts as small, they have, in fact, set in motion a Force 4 financial hurricane whose destructive force has not yet begun to be felt," Arizona State University president Michael Crow said after the cuts.

"At the very time our nation is calling its universities to action in this most important of economic battles, Arizona has gone in the opposite direction, the equivalent of grounding the state's economic air force in the hope that we can fight a high-tech economic war on horseback," he said.

Since June the reduction of state investment in ASU has been $88 million, or 18% of the university's base state funding in a single fiscal year, Crow noted. ASU's per-student funding from the state general fund has now been reduced to what it was 10 years ago.

The university has already been forced to furlough 550 staff members, including four deans and two dozen academic department chairs, and impose 10-to-15-day furloughs on all employees.

At Northern Arizona University, based in Flagstaff, hiring has been frozen, expansion of new health-professional programs has been halted, and two research centers have been closed as faculty work loads have increased.

"Now we must cut an additional $11-plus million from an already strained budget," said NAU president John Haeger. "After we resolve the current budget situation, the university will move on to face the task of preparing for the FY 10 budget, which could be worse than the current budget."

So far, Arizona's budget woes have not hurt its credit rating.

Standard & Poor's last month said analysts viewed prospects of short-term borrowing to cover cash flow gaps as a neutral factor in the AA issuer credit rating.

"The state treasurer estimates that Arizona could need to issue short-term debt for cash needs before March 2009 if revenue and expenditure trends continue," analysts noted. "Although Arizona does not have a history of issuing warrants to cover short-term cash needs through recent recessions, many other states use cash-flow borrowing to match the timing of receipts to disbursements."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.