Research

Arizona Town Hall calls for bold action to solve the state's fiscal crisis

Last week about 140 of Arizona's leaders gathered at the Grand Canyon for the 95th Arizona Town Hall — designed to bring Arizonans together for three days of discussion, culminating in a plenary session where participants adopt a final report of findings and recommendations. The topic was governmental revenue — an urgent issue for many states in the wake of recession but especially in Arizona, where a crippling budget crisis casts a forbidding shadow over the next several years. The background report, sent to participants in advance of the Town Hall meeting, was prepared by the L. William Seidman Research Institute at the W. P. Carey School of Business.

2009-11-10

Last week about 140 of Arizona's leaders gathered at the Grand Canyon for the 95th Arizona Town Hall. These meetings are designed to bring Arizonans together for three days of discussion, culminating in a plenary session where participants adopt a final report of findings and recommendations.

The topic, governmental revenue, is urgent in a state where a crippling budget crisis casts a forbidding shadow over the next several years. The background report, sent to participants in advance of the Town Hall meeting, was prepared by the L. William Seidman Research Institute at the W. P. Carey School of Business.

Where we are — the brutal facts

Confronting the brutal facts, as one Town Hall participant put it, was the first order of business last week at the Grand Canyon. Arizona Governor Jan Brewer told the group, "Combined with anticipated continued growth in caseloads for health and human services, as well as the need for other mid-year budget adjustments, the state faces an operating deficit of at least $1.75 billion for the current fiscal year."

That's nearly 20 percent of the state's budget. "And," Brewer added, "without intervention, the deficit is likely to recur by the same amount each year for the next several years." Governor Brewer has been sounding this alarm for many months now, and Town Hall participants heard it.

"Emergency is what I heard," said Dennis Hoffman, director of the L. William Seidman Research Institute at the W. P. Carey School and co-editor of the Town Hall background report. It's an emergency that requires an immediate resolution, the Town Hall concluded.

"The 95th Arizona Town Hall acknowledges the critical nature of the current fiscal crisis, [and] believes an immediate, temporary revenue-raising response by the state legislature is imperative" reads the final report — a set of consensus recommendations generated through three days of intense discussion at the Grand Canyon. The Town Hall consensus was in line with Governor Brewer's statements on the necessity of both revenue increases and spending cuts.

"We cannot manage our budget crisis or the long-term needs of the state by pretending we can cut our way out of this problem," she said. The difficulty Governor Brewer has faced — trying to balance between one side of the aisle that only wants to consider spending cuts and another that is narrowly focused on revenue increases — is one that California and many other states face.

"Instead of finding solutions that really work, California split the Democrat/Republican baby in the middle. Instead of raising taxes, cutting spending, or both, we borrowed," said Californian Jim Brulte, a former legislator. "Let California serve as a lesson — study what we did, and don't do it." But even the best short-term resolution to the state's immediate fiscal crisis won't prevent the same thing from happening the next time that the economy contracts, participants said.

It's a cycle that has been repeated since the state's founding nearly a hundred years ago. It's why this Town Hall was named "Riding the Fiscal Roller Coaster: Government Revenue in Arizona." In fact, what looks like a Six Flags roller coaster on the report's cover is actually a graph of the state's revenue.

But while the state's fiscal woes are particularly acute today, economists say they're the result not only of cyclical deficits — which arise when the economy contracts and revenue falls — but also of deeply seeded structural imbalances, which have been a long time in the making.

"A structural deficit means that revenue is insufficient on average over the economic cycle to pay for the state's expenditures," wrote Hoffman in the background report. "We have a structural imbalance between revenues and expenditures because spending (on kids in schools, prisoners, AHCCCS roles, etc.) is largely formula driven, with pressures exerted by the initiative process," he explained.

"In contrast revenues are highly dependent upon the purchase of consumer durables, housing, cars, capital gains income and volatile corporate incomes — these have proven far more volatile than the economy as a whole. The imbalance persists over the business cycle because revenue surges in expansions and craters in downturns, while expenditure obligations march relentlessly onward."

The solution is to first fix the short-term problem — the nearly $2 billion gap between the state's revenues and expenditures — and then to institute structural changes so that this problem doesn't crop up again in another decade, said the Town Hall. Doing that requires an understanding of how we got here in the first place.

How we got here

"From a cross-section of interests — business, government, across the political spectrum — I heard a lot of frustration with the current system — with the inaction by the legislature, the difficult partisanship, the bickering," said Ken Strobeck, executive director of the League of Arizona Cities and Towns. Despite a constitutional requirement that the legislature balance the budget, for example, the state carried over a deficit of $400 million into the current fiscal year.

"The balanced budget requirement has no teeth," said Paul Bender, a professor in the Sandra Day O'Connor College of Law at Arizona State University (ASU). And doing nothing has been easy for policymakers, participants suggested. "Some policymakers want to cut services, some want to increase taxes, but everyone can agree to do nothing and roll on into next year," said Peter Burns, a former state budget director.

In an op-ed piece in the Arizona Republic last month, former Supreme Court justice (and former Arizona Senate majority leader) Sandra Day O'Connor wrote of the bi-partisan cooperation that was a hallmark of the legislature during her tenure more than three decades ago — and its absence today. "As we've seen recently in the news, 'civil talk' seems to be something that is missing in much of our politics today."

O'Connor's theme apparently resonated throughout the Town Hall: "Elected officials on the ideological extremes often are not willing, and have no incentive, to reach bipartisan agreements necessary to address the state's financial challenges," reads the final consensus report. Participants suggested that institutional factors have created a system that incentivizes ideologically-driven behavior — and an entrenchment of the structural deficit.

"What might seem to be ideological behavior on the part of legislators is actually quite rational given the people who vote to put, and keep, those legislators in office. Therefore, it is not the people in the Legislature that are the problem, it is the system," reads the Town Hall background report, prepared in part by the W. P. Carey School's Dennis Hoffman.

The concept of systemic, or structural, factors that lead to short-sighted policymaking, partisan bickering, and inaction at the legislature was echoed by Californians Jim Brulte and Joe Nation — both former legislators who came to the Town Hall to educate participants on what not to do.

According to the Town Hall consensus report, a number of those structural factors have impeded Arizona's passage of comprehensive revenue reform in the past, including:

• Term limits, which "undermine long-term perspectives among legislators and increase the influence of unelected legislative staff and lobbyists"
• Noncompetitive legislative districts (where one party is all but guaranteed victory) and public campaign financing ("Clean Elections"), which "both reward and encourage candidates representing political extremes"
• Voter initiatives and legislative enactments, "particularly those without periodic reviews or sunset provisions, which have committed the state to increased spending programs while also hindering the government's ability to raise additional funds"
• The supermajority requirement (passed as a ballot initiative in 1992), which mandates a two-thirds vote on any legislation that would increase state revenues through taxation or fees, and "has created a seemingly insurmountable barrier to increasing taxes and fees, regardless of necessity"

It's those structural impediments that must be changed for real fiscal reform be effective, concluded the Town Hall.

Where we're going

How do we get from here to a place where comprehensive reform is not impeded? The first step, said political consultant Jaime Molera, is to decide what kind of government we want to have. "We've got to confront a new economic reality," said the former budget director Peter Burns.

"This isn't a dip in the curve but a shift in the curve — revenues won't come back to what we think of as historical norms." If that is true, the question becomes: How will the state adapt to this new economic reality? "Change happens" said Town Hall Board Chair Bruce Dusenberry.

"Do we let it happen to us or do we direct it?" While the Town Hall was charged with examining the state's revenue system, many speakers argued that a stronger and more direct connection between revenues and expenditures is needed. "The government should be able to explain what services it provides in exchange for tax dollars, because many people don't understand what the government does," one participant said.

That, said the W. P. Carey School's Dennis Hoffman, would "really help to right-size government." "The lesson that I learned from the California folks is that you get more efficient government; you get government right-sized when you ask people to pay for the public services that they apparently want," he said.

"In California, the middle class doesn't bear its share of the burden; 50 percent of the state income tax is paid by 1 percent of the population. That disincentivizes people who create wealth and incentivizes people who consume government services," said the former California legislator Jim Brulte. "Expenditures should be connected to revenues," recommended the Town Hall in its final report. But how do we get to a place where government is right-sized, where expenditures are connected to revenues?

Desperate times …

One of the group's recommendations was a non-partisan "blue ribbon" commission, created by the legislature and made up of civic and business leaders, former lawmakers, and other experts. "The commission's recommendations would be presented to the legislature for an up or down vote, without amendment.

If not approved by the legislature, the commission's recommendations would be presented to voters through initiative or referendum," reads the final report. Many of the Town Hall's proposals involve constitutional changes — a repeal of the supermajority requirement, of public financing for campaigns, of term limits.

But some participants suggested that changing those constitutional provisions one at a time may be less efficient and effective than re-examining the entire constitution. "We're going through this death by a thousand cuts," said Ken Strobeck, of the League of Arizona Cities and Towns.

"Whether it's inflexible voter-approved expenditures, whether it's the supermajority requirement — all of those things compounded over time have led to this system that we have, that's the big problem. It's the consensus of the Town Hall group that we need to have some fundamental changes."

"Maybe it's time to do something bold," said Rep. Tom Chabin, a Democrat from Flagstaff, as he proposed recommending a limited constitutional convention. "That's not in lieu of what we have to do short term," Chabin said. "Clearly, we have to put the fire out first. But then we need to look to making long-term changes. Short-term reform is necessary but not sufficient." Arizona's Constitution was written in 1910.

Since then, some 200 amendments have been passed by the voters. Some Town Hall participants suggested that those kinds of piecemeal changes to the state's governing document have made effective, coherent governance more difficult. There was some question as to whether a constitutional convention would open up a Pandora's box — subjecting every area of Arizona law to debate and potential change.

But ASU law Professor Paul Bender said that it would be feasible to limit a convention to certain subjects — issues that relate specifically to revenue, for example. Voters would have input at two points in the process, Bender said. "First, the public would vote on the questions, 'Should we have a constitutional convention? What will the rules be?' Second, the public would vote on the constitutional changes proposed by the convention."

"All Arizonans are in this crisis together," concludes the Town Hall report, but participants suggested that there may be no time like a crisis to inspire action to propel the state forward — out of the fiscal crisis, and beyond.

Bottom Line:

• Arizona is in crisis: the state faces an operating deficit of at least $1.75 billion for the current fiscal year — a deficit likely to recur by the same amount each year for the next several years.
• The Town Hall recommended an "immediate, temporary revenue-raising response by the state legislature."
• In addition to emergency measures to solve the state's immediate crisis, structural changes must also be made to "create a highly rated fiscal system," wrote W. P. Carey's Dennis Hoffman in the background report.
• The Town Hall concluded that institutional factors — including term limits, noncompetitive legislative districts, public financing for campaigns, voter initiatives and legislative enactments, and the supermajority requirement — have created a system that incentivizes ideologically-driven behavior, and an entrenchment of the structural deficit.
• "We've got to confront a new economic reality. This isn't a dip in the curve but a shift in the curve — revenues won't come back to what we think of as historical norms," said the former state budget director Peter Burns.
• While the Town Hall was charged with examining the state's revenue system, participants observed that there needs to be a stronger and more direct connection between revenues and expenditures.
• One recommendation was a non-partisan "blue ribbon" commission that would present its proposals to the legislature for an up or down vote, and take the proposals directly to voters if not approved by the legislature.
• Another recommendation is a limited constitutional convention. "Maybe it's time to do something bold."

Economics