DALLAS - Arizona was recovering from a painful recession when Gov. Janet Napolitano delivered her first state of the state address in 2003. Yesterday, the state was facing an even deeper economic crisis as she delivered her final appraisal.

Napolitano, who oversaw an impressive Arizona boom between recessions, leaves Phoenix today for confirmation hearings as head of Homeland Security in the Obama administration.

As a Democrat in a Republican-dominated state, Napolitano transfers the governorship to the rival party by way of Secretary of State Jan Brewer. Brewer plans to make her first public address as governor after taking the oath of office Jan. 21.

In her final state-of-the-state address yesterday, Napolitano asked lawmakers to protect children and the poor as they pursued efforts to correct record budget shortfalls.

"We must remember that Arizonans years from now won't ask how we balanced the budget," Napolitano told a joint session of the House and Senate, repeating a line from her first state of the state address. "Instead, they'll ask how we improved education, ensured their safety, built a prosperous economy, and planned for explosive growth."

Although the state's economy was still limping from the 2001 recession and terrorist attacks in January 2003, the $300 million budget gap was small compared to the $1.6 billion that the legislature must overcome this year.

Arizona Treasurer Dean Martin last week warned that the state will face bankruptcy in fiscal 2010 unless steps are taken by the Legislature in the session that opened yesterday.

"The new Legislature and governor must address this problem quickly or the state will be looking at bankruptcy next year," he said.

Martin said the state will exhaust its financial resources in the next 60 to 90 days, and will need to borrow up to $5.7 billion over the next 100 days to pay its bills. The state's fund balance could be negative $50 million as early as Feb. 23, he said, and the $130 million budget stabilization fund could run dry by March.

If the operating balance falls below zero, state law requires the liquidation of the rainy-day fund, and then the state would have to call in $110 million in loans it has made to the Arizona Department of Transportation for highway projects.

Martin said calling the AzDOT loans this year would devastate the department's operations and hamper road maintenance and construction efforts.

"But that will not be enough," he said. "At the current rate of spending, we will need $2.5 billion to $5.7 billion in loans just to continue to make payroll."

Napolitano urged the Legislature to move ahead with a bond-funded plan to expand college campuses, a program designed as both a short- and long-term economic stimulus.

"We can afford it, and we should put it into action now," she said.

Napolitano, previously the state's attorney general who succeeded Republican Gov. Jane Dee Hull, was the first elected female governor to follow another. Now, with Brewer, Arizona will have three female governors in a row.

Saying she had mixed emotions as she delivered her last speech, Napolitano urged lawmakers to "meet the challenges in ways that do not dim the bright hopes of this state."

"We don't have to go back," she said. "We do have to go forward."

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