Where's a $2.5 billion surplus when you need it?

The consequences of squandering it on a pork-barrel spending spree start to hit.

To fully understand the state budget situation requires an intensely short-term examination, but also some intermediate perspective.

The proximate cause of the current projected deficit for Fiscal Year 2024, which began in July, was the fiscally irresponsible decision by GOP legislative leaders to spend all of an inherited $2.5 billion surplus.

The enacted budget only had a $10 million reserve. That’s grossly insufficient for a nearly $18 billion spending enterprise. There are always mid-year unanticipated expenses that crop up. And revenue projections are just that, projections. They aren’t money in the bank. A cushion needs to be provided in case actual collections run below projections. 

Which is currently happening. The legislature’s budget staff is now estimating that FY 2024 revenue will fall roughly $400 million short of original projections, putting the state’s budget into red ink territory.

Moreover, GOP legislative leaders did the irresponsible thing an irresponsible way. Instead of deliberations and debates about the highest priorities for the state, they just gave each legislator millions of dollars to spend on whatever he or she wanted. It was a pork-barrel spending feast.

None of this should have been necessary. Gov. Katie Hobbs got budget deliberations off on the wrong foot by attacking the universal education voucher program and promoting politically unachievable reforms. But, looking past that rhetoric, her spending asks were actually quite modest. There were ample resources to preserve the recent conservative advances of the vouchers and a flat individual income tax, accommodate Hobbs’ spending requests, and have a sufficient reserve to cope with revenues running below original projections.

Although Hobbs signed the budget, the blame rests almost entirely with the GOP leaders. By the time the budget got to her, she was presented with the appropriately denominated Hobson’s choice of accepting it or having a state government shutdown of indeterminable length. The GOP leadership didn’t want to do the hard work of working their caucuses or attempting a reasoned bipartisan consensus. So, they just turned on the spending spigot full bore.

There’s been an attempt by voucher opponents to blame the deficit on that program. But the voucher program is only running $40 million over budget. That will probably go up some, but this is an attempted misdirection from the real culprit, the pork-barrel spending spree. If you strip voucher expenses from the equation, state spending on the rest of state government is scheduled to go up more than 11% this year compared to last. If the increase had been held to 8%, there wouldn’t be a deficit. 

The intermediate perspective provides some exoneration for the other fingered culprit, the flat tax. FY 2019 was the last budget before the Covid pandemic hit. State revenues recovered sharply when the economy was opened back up. This funded healthy increases in spending and a strong state fisc, evidenced by the $2.5 billion surplus that was rolled into this fiscal year.

State revenue growth is slower now. In fact, the legislature’s budget staff now expects FY 2024 revenues to be relatively flat compared to FY 2023, with a decline of less than 1%. 

But, even with this lower projection and the fully cooked effects of the flat tax, state revenues in FY 2024 will still be nearly 50% higher than they were in FY 2019. That translates into an annual growth rate of 8%. 

The state’s budget hole is actually deeper than commonly being reported. One of the games the legislature has played is to label ongoing spending as one-time expenditures. A good example is building renewal grants for schools. Litigation from the 1990s obligates the state to fund this expense. And the state already faces additional litigation claiming that the duty is being shirked. Yet what is being spent in building renewal grants is labeled as a one-time expense in the state budget.

The relevance of this concerns the estimated deficit for FY 2025. The legislature’s budget staff projects a deficit of about $400 million for this year and $450 million for next. But the FY 2025 projected deficit excludes these mislabeled one-time expenditures. The real, likely deficit is considerably larger.

This isn’t the fault of the budget staff, who collectively are a real gem of state government. They have no choice but to treat expenditures the way the legislators, their bosses, have chosen to characterize them. 

That the deficit for FY 2025 is highly likely to be considerably deeper than currently being depicted, however, underscores the fiscal irresponsibility of the pork-barrel spending spree GOP leaders unleashed for this budget year.

There can always be, and should be, a debate about how much state government should be spending and on what. And how the revenue should be raised.

That said, prudently managed, the state could have absorbed the flat tax and universal vouchers, while also providing steady and growing support for the rest of state programs. 

Instead, the imprudent management of today's GOP legislative leadership has created a budget hole that won’t be as easily patched as they seem to imagine.   

Reach Robb at robtrobb@gmail.com.