Arizona rides rising economy to record budget

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Riding an economic rebound, Arizona enters the 2020 fiscal year July 1 with a record $11.8 billion budget that boosts spending on transportation and education while building reserves and paying down debt.

“This is by far the best budget I have signed, and such a contrast to where our state was just four years ago,” Gov. Doug Ducey said on signing the bill last month. “This budget learns from the mistakes of the past, and it makes an historic down payment on Arizona’s future.”

Ducey also signed a budget companion Senate Bill 1215 to pay off $190 million in state debt. The bill retires debt from a lease-purchase agreement made in the wake of the global financial crisis.

Arizona raised $1.4 billion in 2010 by selling state buildings and leasing them back. In January, Ducey restructured the debt on the state Capitol complex and some other buildings so they were no longer used as collateral. At the time, he opposed paying off the $190 million in debt. Since 2015, Arizona has paid off $810 million.

"S.B. 1215 is going to save the state a lot of money," said Sen. David Livingston, R-Peoria, sponsor of the bill. "It immediately frees up $24 million in ongoing revenue that can be used for something else in the General Fund, such as K-12 education or public safety. Over 10 years, we are going to save $50 million, because we're not paying 5% interest for another decade."

State agencies use revenue bonds because of restrictions on general obligation debt in Arizona. Revenue bonds are backed primarily by the revenues generated by the project being funded. The state universities use revenue bonds, certificates of participation, lease purchases and third party financing. The Greater Arizona Development Authority issues general obligation bonds, supported by payments made by the local jurisdictions.

Arizona’s issuer credit rating from S&P Global Ratings is AA with a stable outlook. Moody’s Investors Service rates the state an equivalent Aa2.

With revenues running nearly twice as high as those a decade ago, lawmakers set aside $542 million for Arizona’s Rainy Day Fund for FY 2020, bringing the total to a record $1 billion. A structural balance of nearly $300 million is designed to keep finances on sustainable footing. The spending plan also simplifies Arizona’s tax code, with a focus on providing tax relief to middle- and low-income individuals and families, Ducey said.

State income-tax is reduced by about $325 million. About $85 million of that is replaced by a new sales tax on online purchases made by Arizona residents. The tax comes after last year’s U.S. Supreme Court decision in South Dakota v. Wayfair that states could require sales taxes to be collected on online purchases from out-of-state sellers.

“This budget offsets those tax increases while reforming our tax code by reducing the number of brackets, reducing tax rates, and increasing the standard deduction to match that of the federal government,” said House Majority Leader Warren Petersen, R-Gilbert.

The Arizona Tax Research Association said that the tax-reform bill, HB 2757, alongside 2013-2014 reforms, is moving the Grand Canyon State toward a sales tax system that makes compliance easier and is less vulnerable to legal challenges.

“For the first time in many years, strong economic growth has driven state tax collections above budgeted estimates for two fiscal years, dramatically improving the state’s fiscal condition,” the association noted.

With more money in the coffers, the state is planning to invest $283 million in Arizona’s infrastructure, including $130 million to expand Interstate 17 in the Phoenix area and $95 million for roadway and bridge construction projects across the state.

“Although it's possible we will use bond funding on the I-17 project, it's too early to say for sure,” Arizona Department of Transportation spokesman Steve Elliott told The Bond Buyer. “We expect it to be another year before the project is ready to fund, so we'll be evaluating the type of funding for it as we develop our next capital program, for 2021-2025.”

The Arizona Trucking Association said the state still has a transportation funding shortfall, but ATA said it was glad to see money directed toward infrastructure.

The Maricopa Association of Governments in the Phoenix area is working with AzDOT and the Federal Highway Administration on a master plan for the I-10 and I-17 corridor. The corridor is known as the “Spine” because it serves as the major conduit for transportation in the metropolitan Phoenix area, handling more than 40% of all daily freeway traffic in the region.

The MAG Regional Transportation Plan has budgeted $1.47 billion for the Spine Corridor and is providing $50 million in regional funds to help fund the widening of I-17 between Black Canyon City and Anthem.

In another sign of an improving economy, a $32 fee that was added to vehicle registrations in 2018 will be phased out.

The new budget provides $165 million for a 5% teacher raise in the 2019 school year and accelerates the restoration of recession-era cuts by providing an additional $136 million of assistance for district and charter schools. Those funds can be used for new textbooks, updated technology, support staff salaries and other purposes. Schools get $543 million in added funding.

Arizona teachers, who joined those in other states in a walkout strike over pay and working conditions in April 2018, said the additional funding fell short of what was needed.

“Teachers are still leaving Arizona, classrooms are still overcrowded, and our students still need nearly $700 million in public education funding,” the Arizona Education Association said. “Arizona legislators had an opportunity to provide our students with the public education they deserve and, once again, they have failed to listen to their constituents.”

Lawmakers also provided $71 million for raises for state troopers, correctional officers, child safety caseworkers and additional public safety positions.

Arizona’s Republican leaders have struggled since the 2008 financial crash to match spending with revenue. But the tide has been turning with April General Fund revenues of $1.24 billion rising 4% year-over-year to a record for the month.

“The Arizona economy continues its long winning streak. Employment is expanding, population growth is solid, and wages are rising,” George W. Hammond, director of the University of Arizona’s Economic and Business Research Center, said in a June 1 report.

“The only smudge on this picture is the state unemployment rate, which remains stubbornly above the U.S. average,” he added. “The likely explanation for that lies in the state’s strong job growth, which is drawing more residents to the state and more discouraged workers off the sidelines and into the labor market.”

Arizona added 78,800 jobs in 2018, a growth rate of 2.8%, according to the latest revised data from the U.S. Bureau of Labor Statistics.

Arizona home prices rose 8.9% over the year in the fourth quarter of 2018, according to the latest data from the Federal Housing Finance Agency.

The state’s economy has shrugged off President Donald Trump’s intermittent threats to close the border with Mexico, build a wall and impose punitive tariffs on imports. Ducey has supported Trump on those issues.

The upcoming budget provides $700,000 to build a new cold room inspection facility at the Mariposa Port of Entry in Nogales. Nogales Arizona's trade volume four the first four months of 2019 rose 10.76%, to $9.42 billion from the same period last year, according to U.S. Census Bureau data.

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State budgets State and local finance Transportation industry Doug Ducey Arizona