Arizona legislative leaders touted the fiscal year 2012 "balanced" budget by claiming their cuts-only philosophy and practice - especially as pertaining to health care and education - were their only options. They also said such action was exactly what voters wanted.
Their claims, however, do not hold up under even cursory examination. And the budget, in terms of strategically positioning Arizona today for the continuing demands and foreseeable needs of tomorrow, is anything but balanced.
As it stands, nearly $1.25 billion in cuts will be made to Arizona's Medicaid program, K-12 education, universities and human services programs for the remainder of fiscal year 2011 and upcoming FY2012, which begins July 1.
Legislators' claim of doing only what Arizonans want is literally both questionable and answerable. A Morrison Institute/Knowledge Networks Poll found that just 9 percent of Arizona voters surveyed said they favored such initial cuts to Medicaid. Nonetheless, Arizona Health Care Cost Containment System - the state's Medicaid program - wound up being reduced by nearly a half-billion dollars with more than 136,000 people eventually being denied AHCCCS coverage.
Still fewer Arizona voters - just 4 percent - said they'd choose to target K-12 funding, according to the survey of 429 residents with voting behaviors ranging from "right," "center" and "left." The poll was taken in the weeks leading up to the opening of the legislative session in January, but the sentiments were clear: Education and health care matter.
Further evidence of Arizonans' commitment to education was made in May 2010. That's when voters convincingly approved Proposition 100, which added a one-cent sales tax to protect education from additional cuts. It should be noted that voter approval came after the Legislature refused to even place the measure on the ballot the previous year, effectively costing upwards to $1 billion in potential annual revenue.
Despite voters' resounding message of a willingness to pay more to protect education, and assurances a year ago that their vote would do just that, the Legislature went ahead and cut nearly $200 million in K-12 General Fund support anyway. Funding for the three state-¬ supported universities was cut by $198 million, with community colleges taking a $72 million hit.
No choice but to cut?
Legislative leaders proclaimed to have little choice. Speaker of the House Kirk Adams said that critics of the budget "have no solutions other than to let the state fall into a fiscal black hole."
Several other viable solutions, however, were offered. If followed, the result would have moved Arizona from the red and into the black, ensuring a stable state government in balance with its needs and ambitions for years to come.
The key word, of course, is balance.
Before the Legislature convened last January, Arizona was advised by respected and renowned economists and analysts to seek - in addition to prudent cuts - new, traditional and broad-¬based forms of revenue as a way to return to the days of balance. Their good advice fell on deaf ears.
The Joint Legislative Budget Committee (the nonpartisan budget staff for the Legislature) reports that nearly half of Arizona's General Fund revenue continues to be generated from sales tax. That's excessively unbalanced financing, making the state highly vulnerable to the whims of the economy and at risk for historic deficits, which is where Arizona found itself.
In many respects, we were victims of our own success. Yesteryear such tax practice might have seemed by many lawmakers to be an acceptable primary funding approach since the state was experiencing phenomenal growth. As a result, over a 17-year period - when adjusted for inflation, population growth and per capita income growth - cumulative tax cuts totaled $2.9 billion in Arizona. That tactic ultimately was revealed to be poor strategy when the flood of sales tax dollars quickly turned into a trickle during the economic downturn and without other forms of revenue we were whirled into fiscal crisis.
In technical terms, Arizona was experiencing both a cyclical deficit (from the economic crash) and a structural deficit (which predated the recession). In the report, Structurally Unbalanced: Cyclical and Structural Deficits in Arizona, released in early January by Morrison Institute for Public Policy and Brookings Mountain West, Arizona was advised to "commit to a balanced approach" in solving the state's fiscal crisis:
Lawmakers should embrace balance as a watchword as they seek to stabilize year- to-year finances and narrow structural gaps. One sort of balance should be a balance of revenue- and spending-side responses. The state's massive budget gaps simply cannot be responsibly closed with only spending reductions.
Other sources for revenue
The fact is, there are several potential and sustainable sources of revenue available to Arizona. But lawmakers last session never explored the possibilities, donning "cuts only" blinders of partisan politics and viewing today's fiscal challenges through yesteryear's antiquated and fogged lenses.
For example, a Morrison Institute brief, "Taxing Services: Arizona's Untapped Revenue Resource", released in February noted:
"When Arizona's founders conceived a state tax system, no one could have foreseen the transformation and eventual dominance of the service economy. In 2010, it is estimated service industries accounted for 80 percent of U.S economy. "
This is not 1912. We live in a service economy today, but our tax system still does not reflect that fact. How much possible revenue is being ignored by not taxing services? Again, from the "Taxing Services brief":
"In January 2010 ... the Department of Revenue estimated revenues in excess of $2 billion were lost due to exemptions is service categories including health care, personal care and education. Updated figures of forgone revenue (have) DOR reporting a total of $3.3 billion of potential tax revenue available from all these sources combined.
Of course not all services should be taxed. And business-to-business taxes can actually result in additional burden to taxpayers, as economists cite in recommending that particular exemption. But to ignore the reality of a service-based society and its overall potential revenue - not only in times of fiscal crisis, but to build fiscal stability to compete regionally, nationally and globally - must be brought into serious question.
Another source of potential revenue to fund state programs is user fees. A January briefing by Morrison Institute, "User Fees: The Hidden, ‘Other' Tax," examined the pros and cons of user fees, as well as the proven areas for successful employment of such fees. The "User Fees" briefing noted:
"Arizona lags behind the rest of the country in fee collection, regardless of how we measure it. The U.S. Census Bureau collects data on state budgets. The most recent data (2008) ranks Arizona near the bottom in terms of total current charges. Arizona collected $1.7 billion in current charges in 2008, ranking 33rd in the nation in terms of total fees collected. As a percent of total state revenue generated by fees, Arizona ranks near the bottom at 47th. Governing's State and Local Sourcebook for 2006 ranks Arizona last for local and state fees collected per capita.
Another possible revenue source that has not been widely discussed but could help reduce the need for new restrictions in eligibility for AHCCCS's health care program for low-income individuals is a provider assessment, or tax, sometimes referred to as a "bed" tax.
This option, examined in the Morrison Institute briefing, "Provider Assessments: A New Revenue Option for Low-¬Income Health Care," potentially could be levied on hospitals, nursing care facilities, health plans, or other health care providers to help fund AHCCCS without the drastic purging of eligibility roster. Proponents of the tax estimate it could generate up to $465 million.
But as with all these options, the political equation of the budget process cannot be ignored. The Legislature, controlled by the conservative and libertarian wing of the Republican Party, dictated a cuts-only budget with little input from moderate Republicans and virtually no input from Democratic colleagues. The Republican governor, Jan Brewer, went along with the majority leadership in signing into law the $8.3 billion FY 2012 budget (complete with $1.1 billion in cuts, deferring $1.3 billion in payments to various state programs and shifting costs to local governments).
Politics trumped public policy
But the dismissal went beyond party politics. Reasoned public-policy assessments and recommendations by economists and analysts were patently ignored, as were business leaders and community groups calling for balance in addition to a balanced budget. The budget essentially was crafted, drafted and decided behind closed doors in party caucus.
In many respects, the fiscal crisis - largely brought on by poor public-policy decisions of the past, including the over-reliance on sales tax, choking off nearly all other revenue streams and continual creation of unfunded programs - provided the perfect excuse to dismantle government, rather than repair its foundations caused by a $2.1 billion structural deficit that by percentage was twice that of California's structural deficit.
Legislative leaders and their supporters no doubt will argue that the fact remains: The budget is balanced without new or reinstated revenue (taxes, fees, assessments). Not counting gimmicks and gimmes that are anything but certain - such as federal signoff of mandatory levels of certain programs and lawsuits not overturning or at least halting certain cost-cutting provisions - the state budget indeed has been more or less balanced on paper.
But what of the human cost? Exactly how the numbers translate into real impact on Arizonans in terms of health care, child care, K-12 education, community colleges and universities, as well as various programs for the most vulnerable citizens at a time of greatest need, has yet to be truly calculated. That's because people are not numbers. And the ripple effect - such as suddenly uninsured individuals going to emergency rooms for care since they no longer have AHCCCS coverage for a doctor's visit or a working single parent foregoing employment because child care subsidies have evaporated - are never included as part of such mathematical equations.
Also, does short-changing the future make good economic sense? Business and community leaders at the State of Our State Conference, held in Phoenix the week before the legislative session opened, stressed that Arizona must invest in itself if it truly seeks to compete for top jobs, new businesses and innovative entrepreneurship. That certainly means more dollars - not less - for better schools and a better-educated workforce. Continuing to rank near the bottom nationally in funding per pupil and academic achievement will not accomplish the goal of a high-skilled, competitive workforce.
The Wall Street and bank investment scandal, ensuing market crash and resulting housing bubble burst caused the economy to plummet and unemployment to soar. The Domino Effect was harshest on states such as Arizona that rely on growth as their economic drivers, with Arizona especially vulnerable with its one-trick-pony sales/income tax mechanism. Unfortunately, at least for these last two budgets, the underlying root of Arizona's deficit - again, largely caused by substantial tax reductions during boom times - was never fully acknowledged or addressed except through forced extinction of whole programs and harmful cuts elsewhere.
Overall, there is little that can be done about the current or pending fiscal budget. Therefore, Arizona must begin the process today of ensuring the FY 2013 budget is much more balanced to fit the state's many layers of needs - in terms of human and economic equation. As Morrison Institute research, analysis and briefings have noted, there are options. But as a state and legislative body we must become comfortable and confident in using an algorithm instead of just simple math focused on subtraction alone.
We must be willing to consider all options instead of dismissing them without discussion, discourse or debate. And the budget process must be open to all, not controlled and decided behind closed doors by a few.
As the Morrison Institute poll indicates, Arizonans have very definite ideas about what they feel strongly about. They have a good sense of the priorities. They want to have a say. Perhaps we should listen to them for a change. As we've successfully done previously, in both up and down times, Arizona must find its balance. We can start by understanding that budgets - when not used as weapons of politics wielded in weakened moment - can be fiscal tools to support strategic decisions of sound public policy that can make and shape a state great for years to come.
• Joseph Garcia is director of communications for the Morrison Institute for Public Policy, a nonpartisan research organization at Arizona State University.