Arizona Budget Status

January 08, 2010 Office of Governor Janice K. Brewer 1

Arizona Budget Status

FY 2010 and FY 2011


Topics

• What’s the Problem?• How did we get here?• What action has the State taken?


What’s the Problem?

There are three interconnected problems

Current year deficit

Structural deficit

Cash flow



The 5th Special Session reduced the budget by $193 million $75.2 million GF Reduction $45.5 million Other Fund Reduction $53.6 million Fund Sweeps $19.0 million Other



Remaining Deficit

$0.0

$500,000.0

$1,000,000.0

$1,500,000.0

$2,000,000.0

$2,500,000.0

$3,000,000.0

$3,500,000.0

Special Session FY 2010 FY 2011

$3.2 B

$1.4 B

$0.2 B


What’s the Problem?Current Year Deficit

Current year deficit is anticipated to be $1.4 billion $480 million left over from FY 2009

The $1.4 billion deficit is approximately:• 46% of the General Fund revenues anticipated for the rest of

the year• 36% of the remaining General Fund appropriations for the

fiscal year


What’s the Problem?Structural Deficit

Arizona has a structural deficit – our revenues and expenditures are out of alignment.

This misalignment will produce a $3.2 billion deficit in FY 2011.

A $3.2 billion deficit in FY 2011 amounts to:• 47% of anticipated General Fund revenues in FY 2011.• 33% of the General Fund “continuation” budget for FY 2011.


What’s the Problem? -Structural Deficit

General Fund Ongoing Revenue and Expenditures before Solutions

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010Est.

FY 2011Est.

FY 2012Est.

FY 2013Est.

FY 2014Est.

$ in

mill

ion

s

Expenditures with ARRA & Rollover GF Expenditures GF Revenue

Assumptions: Revenue: Ongoing revenue does not include one time items such as fund transfer, asset sales, etc. Growth rates assumptions: FY10: -9.2%, FY11:7%, FY12 and 7%. Expenditure: Ongoing expenditure does not include rollover or ARRA. FY10 and FY11 estimated Expenditure from most current S&U, FY12 and beyond assuming 7% growth.


What’s the Problem?Cash Flow

Every day the General Fund is borrowing every dollar of uncommitted state cash in the state’s custody approximately $1.5 billion. The General Fund plus these uncommitted dollars are known as the Operating Fund.

In addition, the State has created two facilities to borrow non state funds, an internal line of credit worth approximately $500 million and an external line of credit with Bank of America worth $700 million.

Total available daily credit of $2.7billion.

Currently the State makes daily calculations to determine if the state has sufficient cash to cover expenses.


Cash Flows

Operating Cash Balance

($1,000,000.0)

($800,000.0)

($600,000.0)

($400,000.0)

($200,000.0)

$0.0

$200,000.0

$400,000.0

$600,000.0

July Aug Sept Oct Nov Dec


Topics

• What’s the Problem?• How did we get here?• What steps has the State taken?


How did we get here?There are at least six reasons that led us to

this point: The Economy Reduced Revenues Added Spending State Actions Constraints Imposed by the Voters The Federal Government


How did we get here?

The EconomyJob Losses

Peak Employment – 2.68 million jobs– August 2007

Current Employment – 2.4 million jobs– Total loss of 280,000 jobs


How did we get here?Arizona

Number of Months needed to surpass a peak in employment.

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49

Number of Months After Peak Employment

Pe

rce

nt

Ch

ang

e fr

om

Pe

ak E

mp

loym

ent

1948 1953 1974 1981 1991 2001 2007


Arizona Jobs Projection

1,500.00

1,700.00

1,900.00

2,100.00

2,300.00

2,500.00

2,700.00

2,900.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


7 yrs

Developed by the AZ Department of Commerce


How did we get here?Reduced Revenues

Before the recession• A series of tax cuts in personal income and

corporate income taxes. When the recession hit

• Since FY 2007 Sales (TPT) Tax down 22%• Since FY 2007 Personal Income Tax down 38%• Since FY 2007 Corporate Income Tax down 57%



State tax revenues have declined 34 percent in three years. Arizona Base Revenues

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

10,000.0

FY2001

FY2002

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009

FY2010Est.


How did we get here?Added Spending

Before the recession• The State took on major expenditure programs without

any adjustments to revenues, e.g. property tax reform shifted the support of the cost of K-12 to the General Fund; courts forced responsibility for building and maintaining school facilities; voter initiative expanded AHCCCS

When the recession hit• Major increases in the AHCCCS population



K-12 Spending ShiftQualified Tax Rate

FY 1998 Rate: $4.40 FY 2010 Rate: $2.74

Approximate Value: $700 million


Growing Populations – Including FY 2011 EstimatesCurrent revenues = FY 2004 Since FY 2004, Arizona has added 121,500 K-12 students and more than $1.0 billion

in annual costs to the K-12 system.

Since FY 2004, enrollment in State universities has increased enrollment by 18,100 students and annual General Fund costs of $393.5 million.

Since FY 2004, Corrections has added 10,800 prisoners and annual General Fund costs of $405.4 million.

Since FY 2004, AHCCCS has added 475,000 new members and annual costs of nearly $1.5 billion (General Fund). -- In calendar 2009, AHCCCS has grown by 203,000 members --



How did we get here? AHCCCS All TXIX Capitation Member Months

600,000

700,000

800,000

900,000

1,000,000

1,100,000

Jan-

02

Apr

-02

Jul-

02

Oct

-02

Jan-

03

Apr

-03

Jul-

03

Oct

-03

Jan-

04

Apr

-04

Jul-

04

Oct

-04

Jan-

05

Apr

-05

Jul-

05

Oct

-05

Jan-

06

Apr

-06

Jul-

06

Oct

-06

Jan-

07

Apr

-07

Jul-

07

Oct

-07

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

Oct

-09

FY 03 FY 06FY 05FY 04 FY 09FY 08FY 07


How did we get here?Constraints Imposed by the Voters

Two primary areas

• “Proposition 108” - requires either a two thirds vote of the Legislature or a vote of the people to increase “State revenues”

• “Proposition 105” - effectively prohibits the legislature from modifying programs or revenues approved by the voters, e.g. portions of the AHCCCS, K-12 programs, and First Things First (preschool)


How did we get here?The Federal Government

Through ARRA, Arizona is scheduled to receive, over all, $4.8 billion in formula grants from FY 2009 through FY 2011.

A good portion of the ARRA formula grant money will be received by the State and concentrated in education and AHCCCS.

When the State accepted the money, it agreed to a maintenance of effort (MOE) requirement – through the end of FY 2011 for education, through December 2010 for AHCCCS.


How did we get here?The Federal Government (cont’d)

The MOE for education prohibits reducing funding below the FY 2006 funding the state provided to education (K-12, Community Colleges, Universities).

The MOE for AHCCCS provides that as long as we accept the ARRA funds for the program, we cannot reduce eligibility. ARRA funds for AHCCCS are currently scheduled to end on December 31, 2010.


FY 2010 ARRA MOE Requirements

Federally Protected Expenditures

$0.0

$500,000.0

$1,000,000.0

$1,500,000.0

$2,000,000.0

$2,500,000.0

$3,000,000.0

$3,500,000.0

$4,000,000.0

Unprotected

Protected

Approximately $2.4 billion unprotected


FY 2011 ARRA MOE Requirements

Approximately $3.2 billion unprotected

(note: Federal MOE for Medicaid currently ends on December 31, 2010)

FY 2011 Federally Protected Expenditures

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

AHCCCS Community

Colleges

Corrections Economic

Security

Education Health Services Universities Debt Service All Other

Agencies

Unprotected

Protected



Federally Protected Expenditures

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

FY 2010 FY 2011

Protected Not Protected

27%

73%

33%

67%



Unprotected Funds Judiciary $120 m Juvenile Corrections $68 m Legislature $55 m Public Safety $44 m Revenue $41 m Kids Care (AHCCCS) $30 m State Only DD (DES) $57 m State Hospital (DHS) $65 m State Only SMI (DHS) $79 m



The Federal Government (cont’d) In FY 11, the majority of the ARRA funds will discontinue and the

State will have to replace the funding that the federal government has provided in FYs 2009, 2010 and continuing into 2011.

The Table on the following page illustrates that in FY 2011 General Fund monies are to replace over $900 million of ARRA funds.



The ARRA FY 2011 CliffAHCCCS 201,806.9

DHS 90,343.5

DES 105,151.6

K-12 Education 379,314.0

Universities 64,000.0

Community Colleges 20,000.0

Corrections 50,000.0

TOTAL 910,616.0



TimeThere is not a lot of time to correct the problem.

• Half of FY 2010 will be gone by the time the Legislature returns for its Regular Session.

• FY 2011 will begin in less than six months.


Topics

• What’s the Problem?• How did we get here?• What action has the State taken?


Since FY 2008, the State has aggressively used one-time options.

What Actions Has the State Taken?

Temporary Solutions FY 2008 FY 2009 FY 2010 TotalK-12 & University Rollovers $602.6 $100.0 - $702.6BSF Sweep $560.0 $150.0 - $710.0Fund Transfers $290.2 $667.7 $326.9 $1,284.8DPS to HURF and SHF $42.0 $106.0 $106.0 $254.0Midnight Reversion $50.0 - - $50.0SFB NC Recapture - $344.0 - $344.0SFB New Construction - $237.0 - $237.0DES & AHCCCS Rollovers - $25.0 $159.9 $184.9Federal Funds - $667.4 $1,587.4 $2,254.8K-12 Local Fund Balances - - $184.0 $184.0Sale Leaseback - - $735.4 $735.4Total (in millions) $1,544.8 $2,297.1 $3,099.6 $6,941.6


What Actions Has the State Taken?

Additionally, the State has made significant budget reductions that total 31percent of unprotected funds:

As part of these reductions, the State has reduced its workforce by 10% since January 2008 (figure does not include universities or reductions made in the 5th SS).

Budget Reductions FY 2009 FY 2010 Total

Reductions as a Percent of

Unprotected Base

AHCCCS $19,000.0 $20,000.0 $39,000.0 18%K-12 $123,000.0 $149,000.0 $272,000.0 101%Universities $90,000.0 $0.0 $90,000.0 9%DES $203,000.0 $143,000.0 $346,000.0 53%DHS $28,000.0 $46,000.0 $74,000.0 27%Corrections $18,000.0 $98,000.0 $116,000.0 43%Other $69,000.0 $87,000.0 $156,000.0 20%Total (in thousands) $550,000.0 $543,000.0 $1,093,000.0 32%


Summary

FY 2010• FY 2010 remaining deficit - $1.4 billion• FY 2010 remaining unprotected fund - $1.2 billion

FY 2011• FY 2011 deficit - $3.2 billion• FY 2011 unprotected funds - $3.2 billion

Cash• Borrowing nearly $1 billion each day to cover cash needs

Documents

Arizona Budget Status