COMMENTARY: Budget woes may haunt next legislative session

By Farrell Quinlan

Special for The Arizona Republic

State Capitol watchers should get prepared to experience déjà vu next legislative session on the budget deficit. Deficit? Hasn't Arizona been in surplus the last few years?

The slowdown (crash?) in the residential real estate market has seriously impacted state revenue collections. So much so that the current fiscal year is expected to have a minimum shortfall of $600 million.

A rough estimate of “normal” annual revenue growth for the state has typically been about 7 percent. During the recently concluded go-go housing market, Arizona state revenues burst their seams at a 19-20 percent rate. The governor and Legislature recognized the unexpected boon as one-time windfalls and tried to use the bonus cash for one-time expenditures, like accelerating highway construction.

However, problems appeared this summer when it became clear that revenue growth was not returning to its normal 7 percent range. Instead, it has settled into the 2-4 percent range. Not a recession, but not our normal, healthy growth rate either.

If revenues come in on the lower end of the 2-4 percent range, look for a budget deficit of $800 million to $1 billion. Public and private sector forecasters see state revenues underperforming like this for the next three to four years. This new reality has put a damper on the 2008 session.

In September, Gov. Janet Napolitano proposed a $600 million plan to close the current year gap. It included a $200 million withdrawal from the state's $700 million rainy-day fund, $100 million in agency belt-tightening and $300 million in bonding to pay for school construction. Legislative leaders have not rushed to adopt this approach, especially the debt financing of schools.

Next year is an election year, with all 90 legislative seats on the ballot, while the governor has the luxury of not having to run for re-election. This gives her enormous leverage over the Republican-led Legislature in budget negotiations.

We've all seen this before earlier this decade after 9/11. It's a recipe for a long, contentious session with tax relief hard to come by and threats to popular spending programs all around.

After a difficult 2007 session for the business community, the 2008 session is not looking any easier.

Farrell Quinlan, president of In the Arena Public Affairs, is a public affairs adviser for the West Valley Chambers of Commerce Alliance.

Printed in the October 31, 2007 edition of the Arizona Republic.