Governor unveils budget cuts, limits school suit costs

Gov. Doug Ducey proposed a budget Friday that closes the state's $1.5 billion shortfalls by dipping into the "rainy-day fund," sweeping $300 million from agency accounts and cutting programs by $384 million.

The spending plans for the remainder of this budget year and for fiscal 2016 largely sidestep the state's costliest and most contentious problem: a court-ordered funding hike in K-12 education. Schools seek to enforce the order that puts the state on the hook for at least an extra $331 million each year.

Instead, Ducey incorporates in his budget the Legislature's $74 million settlement offer, despite his calling this week for the parties to reach an agreement and suggesting he was open to other settlement amounts.

The state's general-fund budget for 2016 would total $9.1 billion under Ducey's plan, compared with the current $9.3 billion. The centerpiece of the plan is the transfer of $124 million in school administrative funding to Arizona's classrooms while adding $10 million in net spending on schools.

The budget preserves tax cuts, mainly for businesses, that have already been passed into law and assumes growth in jobs and personal income that the state hasn't sustained since before the Great Recession.

It also passes additional costs on to cities and counties and, in one case, presumes voter approval for changing how state trust lands are run, as well as approval of cuts to health-care reimbursements from federal officials within three months.

Spending cuts dominate the budget and suggest a line-by-line review of services rather than an across-the-board cutting strategy, as the governor promised. Ducey long ago ruled out tax increases, though residents could see higher fees. They could pay $15 to register vehicles, compared with the current $8.

There is $44 million in additional spending next year, for such things as prisons and protections for children and seniors who suffer neglect and abuse. Ducey would also leave intact the state's controversial expansion of Medicaid, something the Legislature is suing to overturn. He calls for an 18-month hiring freeze as agencies search for ways to save nearly $21 million annually.

At a news conference held before he released the spending plan, Ducey, a Republican, said his budget would help the state close its current shortfalls and leave the state on course to permanently put revenues and expenditures back in sync by fiscal 2017.

"It's a responsible budget that balances by 2017 and eliminates our structural deficit. It focuses on classrooms first," Ducey said.

"This protects taxpayers by rejecting calls to raise taxes. It asks all areas of government to share in the work to develop and find savings. ... This budget doesn't just give the appearance of spending discipline, it offers the reality of spending discipline."

He was joined in a show of general agreement by state Senate President Andy Biggs, R-Gilbert, and House Speaker David Gowan, R-Sierra Vista, as well as the chairmen of each chamber's appropriations committee.

"Having seen budgets come and go for more than a decade, I can tell you it's really exciting for me to stand with the governor," Biggs said. He said he is enthused at the prospect of a structurally balanced budget and said Ducey's budget moves the state in the "right direction."

Gowan echoed that sentiment.

Democrats said Ducey's budget actually cuts total education funding, cuts tools intended to bring in new businesses and invests in private prisons that can cost more to operate.

"Actions speak louder than words, and today we've seen that the words Gov. Ducey spoke at the State of the State were hollow," Senate Minority Leader Katie Hobbs, D-Phoenix, said in a statement. "The budget he revealed (Friday) cuts funding for neighborhood schools, universities and economic development efforts, all of which we know give taxpayers a return on their investment.

"And while his budget takes from our schools and universities, forcing tuition raises on Arizona's middle class, it gives away more than $100 million to private prisons," she said. "Is this what Gov. Ducey meant when he closed his State of the State address by saying, 'Let's give our best for Arizona'?"

Overall, the budget proposes to take $126 million from the rainy-day fund, which has $454 million at the moment, to help close the budget shortfall.

The budget would also rely on sweeping $304 million from agencies. About a third of that comes from the Arizona Commerce Authority, which has unspent funds used to recruit new businesses and train new workers.

Under the Ducey plan, Arizona State University would lose about $40 million, about 10 percent of its budget from the state and less than 2 percent of its revenue from all sources. The University of Arizona would lose about $22 million and Northern Arizona University about $13 million.

Community colleges in Maricopa, Pima and Pinal counties would lose a combined $9 million, representing half their state funding. But those schools have for years relied far more on local property taxes and tuition for revenue.

Medical-service providers treating patients through the Arizona Health Care Cost Containment System, or AHCCCS, the state's Medicaid program, would take a 3 percent rate cut under the budget plan. The move is expected to save the state $40 million this budget year beginning April 1, though the Centers for Medicare and Medicaid Services in Washington must approve changes to the federally supported program. If such approval drags on, it could create additional headaches at the end of the budget year.

There are also efficiencies that could yield more money. Ducey proposes to outsource examination of potentially fraudulent tax returns to a private company. Using tax information submitted to the state, the private vendor would collect up to $3.1 million for its services and the state would keep whatever the company collects beyond that, estimated at nearly $6 million. The hiring freeze is also supposed to lift as more savings are identified.

The state would save $20 million by capping its liability for property taxes under what is known as the Homeowner's Rebate program. Ducey proposes to limit the state's subsidy to $1 million and make local, county and education officials in Pima and Pinal counties, where this is an issue, pay the difference.

The governor favors having the Highway Patrol be entirely funded from vehicle-registration fees. To cover the full costs of the patrol, the fees would need to raise an extra $35 million, which roughly translates into an extra $7 per vehicle. The fees are currently collected by the Highway User Revenue Fund, which would stand to lose $89 million from all sources for at least three years.

The governor's budget is the starting point for negotiations with the Legislature. Budget hearings will begin Jan. 27 in the House and Senate appropriations committees and run through Feb. 18.