COVID-19 turns a $1 billion surplus into a (maybe) $1 billion deficit

Two months ago, lawmakers were arguing about how to spend an estimated $1 billion budget surplus. Today, legislative number crunchers said their best guess right now is that the state faces a $1.1 billion deficit due to the COVID-19 crisis. 

But those budget analysts warned at Tuesday’s meeting of the Finance Advisory Committee that they won’t have more reliable economic data until the summer, and said the $1.1 billion shortfall estimate could be off by a half-billion dollars in either direction. 

That means the combined budget deficit for the current fiscal year, which ends on June 30, and the 2021 fiscal year that begins the following day, could be as high as $1.6 billion, or as low as about $600 million.

For now, Joint Legislative Budget Committee staffers aren’t recommending that lawmakers return to the Capitol to make budget cuts. That’s because they say it’s too early to know exactly how bad the problem will be or what state revenue numbers will look like. 

JLBC Director Richard Stavneak said data about March tax collections won’t be available until early May. The committee will have better data in about six weeks, and will revise its estimates by early June, he said. Stavneak recommended that the legislature hold off returning to the Capitol to make budget cuts or take other actions until then. 

“I think it is very challenging to craft a solution when the magnitude of the problem is so uncertain at this point,” Stavneak said.

Those legislative quarrels over the anticipated surplus had all but ended by mid-March, when it became clear that the United States was in for a major economic downturn because of the COVID-19 pandemic and subsequent government measures taken to slow the virus’s spread, such as social distancing and shutting down many businesses.

Last month, lawmakers passed an $11.8 billion “skinny budget” that largely continued spending levels from the current fiscal year. Now, substantial cuts are certain to be on the horizon.

Adding to the uncertainty is the fact that no one knows exactly when the COVID-19 crisis will abate enough for social distancing to be relaxed and businesses to re-open. One projection that the committee is following is from the Institute for Health Metrics and Evaluation, which estimates that daily coronavirus deaths in Arizona could drop to zero by early June. 

Stavneak said those estimates seem to be tracking with reality, but that it’s too early to say. And everything will be dependent on whether a “second wave” of COVID-19 hits later in the year, as often occurs during pandemics – and is happening now in some parts of Asia – requiring the reinstatement of social distancing measures.

“Like revenue forecasting, virus modeling is equally, if not more so, speculative,” Stavneak said.

While lawmakers shouldn’t come back to deal with the budget yet, Stavneak said they should start discussing options, though he cautioned against targeting any specific dollar figures. And JLBC staff pointed to several options that lawmakers could use to deal with the projected budget shortfall. In particular, they pointed to the state’s rainy day fund, which Gov. Doug Ducey bolstered last year and has about $973 million that could be used to offset cuts. 

Increased federal matching funds for Medicaid could also generate additional revenue for the state as more people seek health benefits through the Arizona Health Care Cost Containment System. JLBC estimated that AHCCCS enrollment will jump by 30% through the end of fiscal year 2021, a figure that would exceed the 27% increase Arizona saw in Medicaid enrollment in 2009 and 2010 during the Great Recession.

Other federal funds could help mitigate the damage. JLBC staff pointed out that Arizona could receive as much as $277 million from a federal K-12 emergency relief fund and $190 million in federal money from a higher education relief fund. Arizona would only be eligible for that money if it maintained its 2017-19 average spending in those two areas. Arizona is $866 million above that threshold in K-12 and $11 million above that mark for higher education.

Congress has already provided some financial assistance to the states, though Stavneak noted that the $1.6 billion earmarked for Arizona could only be used for expenses that are directly related to the COVID crisis, such as $50 million the legislature has already appropriated for the fight against the coronavirus. 

Stavneak said additional financial relief from Congress could be forthcoming.

Regardless of what other options Arizona has, budget cuts seem certain. JLBC cited cuts to state agency budgets as another option to deal with the shortfall, though, given that Arizona is less than three months from the end of the fiscal year, that option would likely have to wait until the 2021 fiscal year begins.

Ducey addressed the possibility of budget cuts on Twitter. 

“There will be tough decisions to make about our budget, and we’re prepared to make them. Our priorities will be the priorities we’ve had throughout my administration — public health & safety and education,” the governor wrote. 

There will be tough decisions to make about our budget, and we’re prepared to make them. Our priorities will be the priorities we’ve had throughout my administration — public health & safety and education. 6/

— Doug Ducey (@dougducey) April 9, 2020

At a press briefing Thursday afternoon, Ducey said there is no need for cuts immediately. He said the state has budgeted responsibly and has a robust rainy day fund it can draw from if needed. And he emphasized that no one knows for now exactly what the economy will look like in the near future because of COVID-19.

“This is going to affect state finances. I would say the good news is, Arizona planned ahead. Arizona has a rainy day fund. Arizona is in a strong financial position,” Ducey said after a tour and briefing at St. Luke’s Medical Center in Phoenix. “Some of the announcements today are basically guesses. No one really knows, because the economy is not really operating. And without economic activity, it’s hard to make forecasts.”

Rep. Randall Friese, D-Tucson, the assistant House Democratic leader, told Arizona Mirror that cuts to state agencies will have to  be on the table, and that the state will have to pull money out of the rainy day fund. He said House Democrats are primarily focused on ensuring that K-12 education takes as few cuts as possible, though he acknowledged that some cuts may be needed.

“Our schools were cut during the last recession, and they can’t carry us through this one. We need to make sure we protect our schools, protect access to health care and make sure the most vulnerable aren’t taking the worst hit from state services,” Friese said.

Friese also suggested that Arizona increase its unemployment benefits, which, at $240 a week, are the second lowest in the United States. He noted that the state would receive generous federal matching funds if it increased its unemployment benefits.