The Road to Bankruptcy

Nothing Down! No Payments until 2010. (Plus license and dock fees, O.A.C., some restrictions apply.  See dealer for details).  Su Trabajo es su credito. 

We've all heard pitches like that.  It's amazing how much you can buy if you don't have to put any money down and don't have to make payments for a few years.  Since most of us assume we will be making more money in the future, it seems OK to buy things now and defer the payments until later. 

Most of us rationalize that we are making "investments."  It's not like we are going to Disneyland on credit cards, we are buying a house or a much needed car for goodness sake.  Ultimately, it doesn't matter how worthy the investment is, if you can't make the payments, you are going to be bankrupt.  Perhaps that's why Arizona has one of the highest foreclosure rates in the nation.

The same principles apply to the State budget.  You can only go so long spending money that you don't have. 

There have been plenty of articles about Arizona's bleeding budget, but I'm going to be the first to use the "B" word.  Arizona is heading for bankruptcy.  We are not going to grow our way out of this problem. 

Eventually, the bleeding will stop and state revenue will return to its traditional growth rates.  But let me be clear.  Arizona's revenue traditionally increases about $700 million each year.  However, left unchanged, the automatic increases that voters have built into education and health care will increase the budget by $500 to $600 million annually. 

Furthermore, the Governor's delayed payment, no-money-down $2.3 billion financing plan will cost over $200 million annually when the interest payments start coming due.  Sure, there are gimmicks--delaying school payments, forcing business to pre-pay sales taxes--that can balance the budget on paper.  But those tricks are one-time accounting gimmicks.  The legislature will use them up just to try to make payroll for the current fiscal year. 

In the not-too-distant future, the gimmicks will be used up, the rainy day fund will be gone and mandatory spending increases plus debt service payments will be higher than incremental revenue.  And that's without increasing spending in any other area of state government. 

The Governor, unwilling to suggest actual cuts, will compel one more round of borrowing.  But every $100 million of additional debt costs $10 million a year in interest payments and the financial markets are quickly going to realize that the scheme can't continue forever.  Wall Street will either charge exorbitant interest or the money will simply dry up. 

The Payday lenders will be gone by then, so the Legislature will try to raise revenue, but they can't raise revenue without a two thirds vote and it takes time to put a tax increase on the ballot.  So they will be stuck.

Faced with the choice of missing payroll, or "restructuring" the state's massive debt, they will make the choice that used to be reserved for Latin American countries and New York City.  That's the Big BK baby.

I'm not the first one to figure this out.  I'm just the first one to report it.  Appropriations Chairmen Bob Burns and Russell Pearce have been telling every Legislator, reporter, district meeting and Rotary Club that a train wreck is imminent.

One group that has come up with a credible budget recommendation is the Arizona Tax Research Association.  But ATRA's Recommendations are falling on deaf ears.  That's because, with the exception of Burns, none of the current crop of Legislators or the Governor's staff have ever had to make really tough budget choices.

But the easy choices have already been made; the gimmicks will soon be gone; the rainy day fund will soon be spent.  It's time for real leadership.  Instead, the Governor is saying "Nothing Down! No Payments until 2010."

Of course, she'll be gone in 2010 and we will be the ones paying off the credit cards.

 

Comments

[Walter]

Greg, interesting food for thought. Please correct the sixth paragraph re: AZ annual revenue increase. is it $700 or $700,000 or $700 million?

Also, I was excited to see ATRA's recommendations until I read them. The only place the state is overspending is on education funding? I'd also like to see $ savings associated with each of their recommendations -- most of which sound fine to me btw.

[ron]

Well, the mayor of Phoenix and city council are using their heads and bringing down the ax on their budgets. Some of them will be available to run for Gov and other offices by 2010 - may be we can elect them to run the bankrupt state - since they will have had good practice in cutting staffs, budgets and dealing with an unhappy constituency.

[Do Not Post, just correction]

Reads:
In the not-to-distant

Should read:
In the not-too-distant

[Tim]

Much easier for Phoenix to cut. They pay their employees 20 to 40 percent more than the typical state employee and also pay in the top ten percent of all cities.

The state pays in the bottom ten percent of comparable and has fewer employees per capita.

[Matt]

Worse comes to worse, I think they are hoping the Federal Government would bail them out. Possibly they think the Mexican Government will help them out.

[phaedrus]

This is one of the downsides of depending on a low-wage, low-tax growth economy. When the growth stops, so does the economy.

[ron]

Phaedrus,

Leave many comments like this around here and someone might accuse you of reading too much Jon Talton :)