Arizona meets budget deadline with late-session deal

Arizona governor's office

Arizona wrapped up its legislative session in late June with a last-minute budget deal, a fix for a school funding shortfall, and a plan to renovate a professional sports stadium. 

Just days before the July 1 start of fiscal 2026, the Republican-controlled legislature completed passage of a $17.6 billion general fund budget that has a projected ending balance of $208.87 million, down from an estimated  $1.09 billion at the end of fiscal 2025.

Gov. Katie Hobbs, a Democrat, had vetoed previous "partisan, sham budgets" that she said would cut funding for health care and K-12 schools.

House Speaker Steve Montenegro blasted the vetoes.

"I'm disappointed the governor has now vetoed two responsible budgets passed by the House—each of which would have prevented a government shutdown and kept essential state services running," he said in a June 25 statement.

The governor hailed the final bundle of budget bills as being bipartisan and balanced.

"There is still more to do to achieve opportunity, security and freedom for all Arizonans," Hobbs said at a ceremonial budget signing last week. "This budget moves us in the right direction, but it's not the end of our efforts."

At the event, she warned that Congress' tax and spending cuts bill, which was subsequently signed by President Donald Trump on Friday, will be devastating for the state.

"We don't have the capacity in our $17 billion budget to mitigate (federal funding cuts)," she said.

The budget gives public schools a $100.26 million boost in basic state aid. Public education advocacy group Save Our Schools Arizona called the increase "the bare minimum required by law."

Lawmakers also addressed a $200 million shortfall in the state's June basic state aid payment to schools with a supplemental appropriation, according to Chuck Essigs, government relations director at the Arizona Association of School Business Officials. 

About $69 million of the shortfall stemmed from property tax refunds owed by Maricopa County districts that resulted from class-action litigation, an Arizona Department of Education spokesman said. Last year, the legislature approved a recalculation in basic state aid to boost funding for affected districts.

Another contributor to the shortfall was the escalating price tag for empowerment scholarship accounts, a universal school voucher program Arizona enacted in 2022. The cost exceeded a Joint Legislative Board Committee estimate by about $50 million, according to the spokesman. 

The voucher program, along with a 2021 law that ditched graduated income tax rates for a 2.5% flat rate, have squeezed Arizona's budgets in recent years. 

In her January State of the State address, Hobbs called for guardrails on vouchers, including "responsible income caps" and greater transparency on how the money is spent by parents and guardians.

Essigs said nothing was passed this session to control ESA costs, which are estimated to top $1 billion in fiscal 2026.

As of July 2, 83,704 students were enrolled in the ESA program for the 2025-26 school year. In fiscal 2025, the majority of students received between $7,000 and $8,000 and the cost of ESAs on an annualized basis was pegged at $901 million, according to a May quarterly report.

A bill to fund renovations at Chase Field, the Phoenix home of Major League Baseball's Arizona Diamondbacks, made it to the finish line. The facility, which is owned by the Maricopa County Stadium District, opened in 1998.

The measure signed by Hobbs on June 27 creates a tax recapture mechanism, but does not authorize bond issuance, according to Jason Berry, the county's communication director. 

"Tax revenues from sales at Chase Field, as well as certain player and employee state income taxes, are diverted from the state, county and city of Phoenix into a fund to handle those stadium costs, with a cap of $500 million," he said in an email.

The 30-year plan would cost the state $9.2 million a year starting in fiscal 2027, while affected local governments would lose $5.8 million annually, according to Joint Legislative Budget Committee estimates. The team will contribute at least $250 million.

Other bills that passed include Senate Bill 1611, which creates an agriculture to urban groundwater conservation voluntary program allowing irrigated land to convert to lower-water-use developments.

"I am proud to have brokered a bipartisan, historic water deal that will save millions of acre-feet of water, help lower the cost of housing, and create jobs," Hobbs said when she announced the bill's enactment on June 30.

Money for the state's long-term water augmentation fund, which was created in 2022 with the aim of appropriating a total of $1 billion over three years, was not included in the final budget. The spending plan claws back about $84 million from the fund, leaving a balance of around $376 million, according to Ben Alteneder, a spokesman for the Arizona Water Infrastructure Finance Authority. 

"While we strongly opposed the sweeps to this fund, our mission remains clear and we are moving forward with our solicitation process and expect to formally announce qualified teams in October," he said in an email. 

Lawmakers placed a proposed constitutional amendment on the November ballot that would prohibit the state and its local governments from imposing a fee or tax that is based on vehicle miles traveled.

In 2015, Oregon was the first to adopt this revenue method as an option for vehicle owners. Over the years, VMT-based taxes have been discussed as lawmakers and transportation officials weigh supplementing traditional fuel taxes that have declining revenue potential because of more fuel-efficient and electrified vehicles. Four states have active programs, according to the Tax Foundation, all of which are at this point optional.

Hobbs vetoed a bill to allow the state treasurer and state retirement funds to invest up to 10% of their assets in virtual currencies, as well as a measure to establish a digital assets strategic reserve fund with state appropriations.

"Current volatility in cryptocurrency markets does not make a prudent fit for general fund dollars," she wrote in her veto message for the reserve fund bill.

In July 2024, S&P Global Ratings revised the outlook on the state's AA issuer rating to positive from stable, citing "strengthening reserves and ongoing revenue and expenditure management, supported by strong economic momentum that we expect will continue, could lead to upward rating potential should the state also demonstrate budgetary discipline."

Arizona has an Aa1 issuer rating and stable outlook from Moody's Ratings. 

The state, which does not issue general obligation debt, had $1.17 billion of revenue bonds, grant anticipation notes, and certificates of participation  outstanding as of June 30, 2024, according to an unaudited fiscal 2024 comprehensive financial report posted on the Municipal Securities Rulemaking Board's EMMA website.