Sunday, September 27, 2009

Sept 25 2009 District 2 Breakfast with Peggy Neely

I attended my District 2 councilwoman’s monthly breakfast on Friday morning the 25th at the JW Marriott. The JWM is a great host and provides the breakfast at cost for the event. Peggy Nelly is really good at communicating with her district with regular mailings and letters to local papers and also on the local government TV channel. Her monthly breakfast is one of the primary vehicles she uses to reach interested district members on a face to face basis. The following is from notes I took during the breakfast.

The meeting opened with two topics before moving onto her guest speaker Ken Bennett:

GAIN: Peggy encouraged citizens to get involved with “GAIN” Get Arizona Involved in Neighborhoods:

GAIN is Arizona’s answer to the National Night Out held in August but because of the heat Arizona has decided to hold the event in October.

The PVUSD M&O Budget Override vote is coming up on November 3rd. A retired PVUSD administrator spoke of the critical need for renewing the Budget Override which has been regularly renewed since 1988. It means about $35 per $100,000 of a home’s assessed valuation. The override renewal was denied last year and caused a reduction in services provided by the school system through the elimination of 219 staff positions including 190 teachers and counselors … lack of renewal this year would phase out the override completely doubling the cuts made this past year.

As pointed out in the meeting and is an approach my family has used in moving to four different cities with school age kids, including Phoenix is … the First thing we look for is support for the local school system. If it is apparent in any way that the community does not support the school district we don’t even consider buying a home there. For the benefit of the kids and for the benefit of our homeowners it is my opinion that this community should do everything in its power to fund our schools to the maximum allowed by law. Please vote for this override.

Peggy’s guest speaker was Ken Bennett the past President of the Arizona Senate and more recently the Secretary of State replacing Jan Brewer who was called on as governor when Janet Napolitano became Secretary of Homeland Security.

Ken spoke briefly about the responsibilities of the office of Secretary of State which primarily is responsible for conducting statewide elections. His primary focus of discussion was illustrating the funding sources and how the money is spent for the Arizona budget of $33B. We most often hear of the $10.5B general fund but it was very enlightening to hear the full discussion as it puts all discussion of cuts and movement of money in context of the full picture. Ken also discussed how the budget has evolved since 2006 / 2007 when he left as President of the State Senate to this year’s budget.

The General Fund:

The general fund is approximately $10.5B and is the area where AZ legislators have the most influence over spending … although as pointed out later cutting funds that are matched by federal dollars can have a weighted effect. The tax revenue supporting the general fund comes from sales taxes and income taxes. A little over 50% comes from sales taxes so when times are good in home building and car sales we are flush with tax revenue and … we tend to want to spend the surplus. When times are bad we don’t react proactively with cutbacks … and we slash budgets, borrow and sweep funds to make up the shortfall. We have no relatively stable source of tax revenue at the state level such as property tax.

The $10.5B is spent in the following major buckets: $5B for K-12 (1.1M students), $1.5B for higher education, $1B for prisons and courts, $2.5B for Health and Welfare (1.2M people, DES, CPS, Mental Health), and $0.5B to fund about 150 other state agencies.

Federal Receipts:

The federal government contributes another $10.5B to the Arizona budget to cover a couple large mandate areas; $2B for K-12 special needs, $6.5B for Federal Health and Welfare (Medicaid and Access), and $2B for Higher Education (although this number includes tuition). Some of the federal receipts come with strings attached that require matching funds … if the state does not invest then the federal government will not invest.

Local Property Taxes:

Of the local communities in Arizona they contribute an additional $4B for K-12 and $1B for community colleges.

Other AZ State Funds:

Other specific funds are also established to receive funds through tax sources such as the gas tax ($1B) for transportation, alcohol & tobacco ($1B) for healthcare, the lottery ($0.5B) and workers compensation ($0.5B). Outlays also cover education ($0.5B) state administration ($0.5B), environmental ($0.5B), and capital projects ($0.5B).

All the above adds up to about $32-33B with over two thirds of the budget allocated to K-12 education ($11B), Higher education ($5B), and healthcare ($10B).

The Budget Machinations from 2007 to 2009:

2007 Fiscal Year ended:

Ongoing Revenue: $9.6B

Ongoing Expenses: $9.6B

Rainy Day fund: $700M

Ending balance: $350M (was originally projected at $550M but reduced by $200 as tax revenue started to drop at the end of the fiscal year)

2008 Fiscal Year started with over a 10% increase in projected spending even though revenues started to drop off due to the recession:

Ongoing Revenue: $10.1B (assumed the 2007 balance would continue as annual revenue)

Ongoing Expenses: $10.6B

Rainy Day fund: $700M

Ending balance: $0M

2008 Fiscal Year ended:

Ongoing Revenue: $8.8B

Ongoing Expenses: $10.5B ($500M rainy day fund, $300M sweeps, $300M K-12 delayed payment – rollover, $100M cuts)

Rainy Day fund: $200M

Ending balance: $0M

2009 Fiscal Year started with a projected tax revenue increase and an increased spending budget. Some expenses are mandated to grow wrt to growth in student population and voter mandates but to raise budget projections in the face of a recession

Ongoing Revenue: $9.1B (reduced to 8.0, then 7.6, then to 7.3)

Ongoing Expenses: $11.1B (reduced to 10.7, then 10)

Rainy Day fund: $200M

Ending balance: $0M

2009 Fiscal Year ended with the state of Arizona having a junk bond rating and ranked 50 out of 50 in credit worthiness among all sates. The city of Phoenix continues to have the highest credit rating but is threatened this coming year as the state may need to sweep funds from the city coffers to cover its budget.

Ongoing Revenue: $7.3B

Ongoing Expenses: $10B ($100M Rainy Day fund, $325M sweeps, $525M borrowed through school district bonding, another $300M K-12 rollover – May & June payments, $100M DPS shift, $400M cuts + selling state assets and borrowing)

Rainy Day fund: $100M

Ending balance: $0

Additional Notes:

In 2006 the state had ongoing expenses of $8.3B … as long as we stay above this 2006 threshold we will be able to receive and use federal stimulus dollars but these are only good for the next two years … by that time we will have to hope that the economy bounces back and/or we have realigned our expenditures to be in alignment with our tax revenue and just as important is to realign our tax base to provide a more stable and predictable stream of funding.

Ken Bennett guestimate related to the costs of illegal immigration for the state of $1B health, $1B education, and $0.5B related to prisons.

Ken was of the opinion that increasing taxes was not the answer. Even if it was put to the voters he did not feel Arizonans would increase their own taxes. He felt we should be making business feel welcome to move to Arizona and solicit those businesses desiring to relocate.

Ken also made a point to note that prior to a ballot initiative that corrected the problem the state has had to absorb two significant unfunded mandates from the voters; 1] all day kindergarten that costs $300M out of general fund, and 2] lower thresholds for income allowing more people to use the state Healthcare Access program. The initial redirection of $75M of tobacco settlement funds has ballooned into $500M coming from the general fund as Access has expanded from 80,000 people in 2000 to 1.2M in 2009.

My Thoughts:

  1. I found Ken Bennett to be quite engaging and offered a layman’s level explanation of how they finances of the state are constructed and how we got from a flush rainy day fund with an annual surplus to a gapping multi-billion dollar deficit within two years.
  2. The presentation was purely from an accounting perspective and did not discuss what kind of state we want … it was about how do we balance the budget
  3. Reconstructing what happened in establishing the initial 2008 and initial fiscal year 2009 fiscal year budgets would prove instructive. By mid-2007 when the 2008 FY budget would have been approved the stock market was at its peak so a bit of hubris could be expected. But by mid 2008 signs were everywhere that the economy was in recession especially here in AZ and yet the budgets were set higher.

No comments: