Hobbs writes herself into a bind on state budget

What she ultimately signs will probably closely resemble what she vetoed.

If Gov. Katie Hobbs intended to be the playwright and heroine of this year’s state budget melodrama, she’s written herself into a bind.

In Act I, she revealed her budget proposal for next fiscal year, which begins in July. GOP lawmakers lampooned, ridiculed, and harshly criticized it.

In Act II, Hobbs announced that she was walking away from private negotiations with the GOP leadership until they publicly revealed their own proposed budget. That was presumably premised on the belief that the result would be too ugly for contemplation and give her the upper hand in resumed negotiations.

In Act III, Hobbs increased the pressure, vowing to veto any legislation whatsoever, irrespective of whether budget related, until GOP lawmakers went public with a budget proposal.

In Act IV, GOP lawmakers not only publicly revealed a budget, they passed it. Hobbs promptly vetoed it.

And now we are in Act V, the resumption of private negotiations. Despite Hobbs’s machinations designed to give her the upper hand, the result is highly likely to be something that closely resembles what the Legislature has already passed and Hobbs vetoed.

There are two reasons for this. First, the GOP legislative budget is pretty much all the state government expected revenues can support.

Second, a government shutdown would be far more damaging, in terms of policy and politics, to Hobbs than to GOP lawmakers largely running in safe districts. Hobbs would care more about the consequences of a government shutdown than many of the MAGA legislators. Given the enlarged Republican registration advantage since she last ran, Hobbs has an uphill climb to reelection. A government shutdown would reinforce doubts that she’s up to the job. She has more reasons to blink.

Hobbs’s initial budget proposal was reckless and fiscally irresponsible. It was based on the assumption that the federal government would give the state, sometime during the fiscal year, $760 million in a grant for border security reimbursement from a pot established by the big, but not beautiful, reconciliation bill. Without that money, Hobbs’s budget had a deficit of around $370 million.

It would obviously be imprudent to embark on a pattern of spending based on this revenue without knowing that it was coming in. And as a bet on the future, it would be a very bad one, both with respect to timing and Arizona’s likelihood of getting that large a share of the pot. Bureaucracies move at bureaucratic speed. And the Trump administration has weaponized federal grants, rewarding states with Republican governors and shortchanging those with Democratic ones. There’s more than a little irony in Hobbs, a Democratic critic of the Trump administration, basing her budget on the Trump administration acting quickly and treating her administration fairly.

The GOP legislative budget projects that state revenues will grow 3.4% next year. That’s roughly the current pace. That’s a historically low growth rate. However, there is little reason at this point to assume a notable economic uptick in the 12 months beginning in July. Assuming a continuation of sluggish economic conditions and the current pace in revenue growth is the prudent beginning point.

If anything, the argument can be made that the GOP budget spends too much. It actually would appropriate $680 million more from the general fund than state revenue collections are estimated to be for the fiscal year. That’s made up through a carryforward surplus and sweeps from other state funds. The GOP budget isn’t fairly described as either balanced or putting state finances on a sustainable footing.

There’s been a huge focus on the $700 million difference between what Hobbs proposed to spend next fiscal year and what the GOP budget came in at. However, some perspective is in order.

FY 2019 was the last sort of normal year for state budgeting, before Covid created distortions on both sides of the ledger, revenues and spending. Despite absorbing the flat tax, projected revenues in the GOP budget are nearly 60% higher than they were in 2019, an annual growth rate of a little less than 6%. Expenditures in the GOP budget are up 73% compared to 2019, an annual growth rate of over 7%.

There can always be a debate over whether state government is doing all it should and whether some significant increase in revenue should be enacted to facilitate an expansion. However, Hobbs isn’t making that argument. And within the general contours of the existing revenue structure, and not counting on the federal government to be a sugar daddy, the options to do something meaningfully different than the GOP budget are limited.

The difference between what Hobbs proposes on conformity and what was in the GOP budget for FY 2027 is roughly $90 million. Her proposed income cap on Empowerment Scholarship Accounts would save the state about the same. However, I suspect GOP lawmakers would be willing to shut down state government over either.

Democrats are making a big deal out of the GOP budget not eliminating a tax credit for data centers. But that would generate less than $40 million for the state. The GOP budget does eliminate $75 million in other tax credits. I would get rid of all of them, so would welcome a bidding war to eliminate tax credits and deductions. But it’s not going to happen.

The only other big general fund revenue proposal from Hobbs is to increase the state’s take from legalized sports gambling, which she pegs at producing an additional $146 million for FY 2027. I have no idea about the practical effects and legality of Hobbs’s proposal. But I do know this: when sports gambling was legalized, former Gov. Doug Ducey gave away the store to the professional sports teams and grossly shortchanged the state for the legal oligopoly that was established. An exploration of increasing the state’s take is very much in order.

However, none of this produces the revenue or savings for a state budget radically different than the one the GOP Legislature previously passed. The GOP budget included a 5% reduction in the appropriation for most state agencies. That produced a savings of around $100 million. Perhaps enough could be squeezed elsewhere to avoid that.

In addition to not having much room to maneuver based upon revenue restrictions, the GOP budget already funded several of Hobbs’s priorities. A continuation of enhanced child care subsidies and increased spending for Department of Child Safety congregate care are already in there.

A lot of attention is also being directed at the standoff over a Prop. 123 renewal. I’ve long been an advocate of a higher distribution from the state’s land trust to schools. But the additional $300 million, if routed outside the general fund as additional money for the schools, as every proposal so far has done, wouldn’t change the general fund budget math. And it would represent just a 2% increase in overall school funding from state and local sources. It’s not as important as the political attention it is getting would suggest.

There are changes in the GOP budget that Hobbs might be able to wrangle that would be worthwhile. But they are likely to be on the margins. It’s hard to envision a scenario in which Hobbs doesn’t end up largely accepting how much the GOP budget proposed to spend and what it proposed to spend it on.

And it’s too late for Hobbs to do a rewrite.

Reach Robb at robtrobb@gmail.com.