As recently as 2006, state revenue was climbing nearly 17 percent per year and few imagined that Arizona could be facing today’s financial crisis. Flush with cash, the state had three consecutive years of double-digit spending growth.
The state’s fiscal fortunes changed quickly. December 2009 was the 17th month in a row of double-digit tax revenue declines, consuming the state’s savings and putting Arizona $1 billion in debt just to maintain day-to-day operations.
Arizona’s financial volatility came in spite of the state’s constitutional spending limit, which is based on growth in personal income and aimed at keeping government spending in line with taxpayers’ ability to pay for government. Avoiding future fiscal crises will require amending the state’s spending limit so that inflation-adjusted spending cannot grow faster than the population.
Had the state established such a spending limit in 2001, its fiscal situation would be less dire. Fiscal year 2008, for example, would have ended nearly $500 million in the black instead of $1.5 billion in the red.
Arizona’s current spending limit is ineffective because it allows spending to expand considerably and unsustainably during good economic times. When the economy hits the inevitable downturn, the state must resort to spending reductions because the state’s budget stabilization fund is inadequate and can be easily accessed by legislators.
Colorado enacted a population-based spending limit in the 1990s and is an example of how successful limits can be. Although Colorado’s limit had some correctable defects, the evidence shows the spending limit helped Colorado avoid most of the fiscal emergencies other states now face. Additionally, during the 1990s, Colorado outpaced all other states in reducing poverty.
Arizona can enjoy long-term fiscal health by adopting a constitutional amendment that keeps spending in line with population growth, creates a substantial budget stabilization fund, and an emergency fund with strictly limited access.
Editors note: In the original copy of Put Arizona on a Real Budget, Figure 3 was the same graph as Figure 1. The correct graph has now been inserted into Figure 3.