DALLAS — With its credit outlook already negative from two rating agencies, Arizona faces increasing pressure to balance its budget after the state’s projected revenue shortfall soared to $2 billion.
A Joint Legislative Budget Committee report last week showed the shortfall rising from the previous estimate of $1.5 billion on a $7.1 billion budget.
Amid heavy short-term borrowing and sweeps of state agency funds, Arizona still operates with an unbalanced budget, a factor Standard & Poor’s noted when giving its AA rating a negative outlook.
“The state’s revenue streams have softened, leading to diminished financial flexibility,” said Standard & Poor’s analyst Matthew Reining in the Aug. 21 report. “Additionally, the state lacks a final, full fiscal 2010 budget, which is a break from the state’s history of regular and timely budget action.”
“We’re continuing to follow the situation,” Reining said Friday.
In September, Moody’s Investors Service also placed the state’s Aa3 issuer rating on negative outlook, reflecting “ongoing economic and financial weakening, leading to significant revenue under-performance, sizable budget deficits, and tightening liquidity.”
While Arizona’s conservative fiscal practices have left it in better shape than neighboring California, its frugality means that any cuts on top of the $1.6 billion made in the previous fiscal year would cause great pain. Early release of prison inmates, reductions in highway patrol coverage to 1999 levels, and further cuts in mental health and university budgets are among the savings targets.
The growing deficit makes a call for a special session more urgent, according to House Appropriations chairman John Kavanagh, R-Fountain Hills.
However, the last special session in August, designed to overcome an impasse between Gov. Jan Brewer and Republican legislative leaders, failed to deliver a compromise of a three-year sales tax increase, which would have required voter approval. The hike was not in the budget package submitted to the governor.
Additionally, Brewer’s line-item vetoes of cuts in spending for the Department of Economic Security and Department of Education added to the budget shortfall.
The 2010 budget forecast relied on base revenue growth of 0.9%, but actual revenues are likely to fall 8.7%, according to the Joint Legislative Budget Committee report. Through September, revenues are 16.1% below last year’s and $233 million below the forecast.
One of the measures the Legislature enacted to raise $735 million in revenues is the sale and lease-back of state buildings. So far, the state has not arranged a deal on the state buildings, nor on its plans to lease prisons to private operators.
“Based on input from the state’s financial advisers, there appears to be a sufficient market to generate this level of proceeds,” the committee report noted. “We will know more in the next several months as the offering is made.”
In a report issued Friday, Standard & Poor’s noted Arizona’s status as one of the states hardest hit by the housing crisis, another bad sign for future state revenues.
While the housing market is recovering in some states, Arizona is still in steep decline. And any upturn would not be reflected in revenues for some time, according to analysts.
Also, a lag exists between market value declines and tax revenues. “Essentially, the housing market values of today become the basis for tax revenue 18-24 months from now,” the report said. “As a result, most governments’ property tax revenues are just now starting to experience the effects of the housing bust as taxes are levied on lower assessed valuations.”