Ongoing Budget Morass Dims Arizona’s Outlook

DALLAS — With Arizona’s double-A rating on negative outlook from two rating agencies, Treasurer Dean Martin is again warning that failure to fix a $1 billion budget deficit will continue to raise the cost of doing business.

“We had warned that if the governor and Legislature did not get a balanced budget done, it would impact the credit rating,” he said.

Moody’s Investors Service joined Standard & Poor’s in placing 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.”

“In addition,” Moody’s analysts wrote, “the outlook reflects a depletion of reserve balances, and a strong reliance on one-time resources to balance the state’s budget, including issuance of deficit bonds.”

Standard & Poor’s rates the state AA.

Martin has had to issue IOUs 39 times so far this fiscal year. The state has been in the red since July 15, barely two weeks into fiscal 2010. He said the outlook shift is going to raise costs and that a possible downgrade would cost the state millions of dollars more in debt service.

Martin, considered a possible candidate for governor, has been critical of both Gov. Jan Brewer and state lawmakers who have been in a budgetary standoff for months over how to bridge the deficit. 

Brewer wants a temporary sales tax increase to ease the pain of budget cuts, but Republican legislative leaders have refused to comply. In the meantime, the Legislature and governor agreed to sell state buildings and lease them back to raise up-front cash, a move Martin said “makes us look like Rent-A-Center.”

“Do you want to invest in a state that’s renting its capitol building?” the treasurer said in a speech last week to a business group.

Moody’s analysts Maria Coritsidis and Kimberly Lyons echoed that criticism in their rating report.

“Because responses to the deficits have been largely nonrecurring in nature, the state must deal with an increasing structural imbalance in its budget,” they wrote. “Moreover, the state is addressing this imbalance in the face of ongoing economic weakening and uncertainty regarding the timing of an economic recovery, as well as the drop-off in federal fiscal stimulus monies scheduled for December 2010.”

Arizona’s growth began to slow in fiscal 2008, with recurring revenues ultimately falling about 8%.

Hit with one of the nation’s worst housing market downturns, the state saw virtually all of its major revenue sources fall in 2008, and the downturn deepened this year.

Individual and corporate income taxes fell more than 24% in fiscal 2009, while sales taxes declined by nearly 14%. The state projects flat revenue growth for fiscal 2010, while projections for fiscal year 2011 indicate a much stronger growth of 8.8%.

Moody’s analysts say that scenario “may be optimistic given the ongoing economic weakening.”

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