Leaders strike Arizona budget deal, but battle over K-12 funding looms

State leaders expect to unveil Tuesday a $9.58 billion budget deal negotiated in recent days that gives Gov. Doug Ducey the tax cut he promised, while providing more money for K-12 public schools and universities than the governor had sought in his spending proposal.

The tentative agreement between the Arizona House and Senate would also provide additional funding for child welfare. But it does not call for restoration of the KidsCare health-insurance program for low-income children, though that could change if supporters are able to amend the deal.

According to Ducey spokesman Daniel Scarpinato, the tax cut would total $8 million and aid businesses. It would essentially allow them to write off more business expenses such as buildings or equipment. State leaders say the deal also leaves room for another $18 million in tax cuts or credits.

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House and Senate Republicans were briefed on the deal Monday afternoon. Budget documents from those meetings show funding for a state bureau to fight drug trafficking at the border, wildland fire engines, and economic "freedom schools," at Arizona State University and the University of Arizona.

As has become routine in recent years, Democratic lawmakers weren't given an advance look at the budget proposal.

'Very modest tax package'

Senate Majority Leader Steve Yarbrough, R-Chandler -- who was acting as Senate president while Andy Biggs was in Washington, D.C., Monday fundraising for a congressional campaign -- said the "tax package" will total $26 million and cover eight or 10 tax items.

"It will be a very, very modest tax package," he said.

He mentioned several items:

• $8 million for bonus depreciation for companies.
• $7 million for a sales- and use-tax exemption for the sale of electricity or natural gas to manufacturing companies.
• $350,000 to reclassify property leased or owned by for-profit universities at a lower property-tax rate.
• $2.8 million to double the amount individuals and couples can claim in tax credits for donating to qualifying charities. 

When asked about the tax cuts, Republican Rep. Justin Olson, House Appropriations chairman, declined to talk specifics, but confirmed the $26 million amount.

“The governor campaigned on a promise to cut taxes every year that he’s in office and expect that he wants to keep that promise to his constituents,” Olson said. “They had a choice in the vote that they cast for governor and they chose the governor who promised to cut taxes, so that’s certainly going to be a portion of the budget that the governor will sign this session.”

Olson noted that several tax-cut bills are already advancing, saying the proposed budget reflects some negotiation around those bills.

Rep. J.D. Mesnard, R-Chandler, said he would support a tax-cut package in that range that includes sales-tax cuts for manufacturing and write-offs for certain business expenses. "It's relatively small. I would say it depends on what we're using it for," Mesnard said.

House Democratic Minority Leader Eric Meyer, D-Paradise Valley, had not seen the proposed spending plan, but said of the proposed cuts: “The idea of giving tax cuts before we restore the billions of dollars we have cut from our school system and universities makes absolutely no sense to me.”

Children's Action Alliance President and CEO Dana Wolfe Naimark said she too is wary of the tax proposal, particularly given the needs of schools.

"We have a lot of questions," she said. "After 25 years of tax cuts and very little evidence of benefits like jobs, what are we hoping to gain? What's the vision for the future? Is this meant to be the first in a series of tax cuts?"

K-12 funding

Yarbrough said the budget deal would include new money for K-12 public charter and district schools beyond the annual funding formula and beyond what Ducey proposed when he unveiled his proposed budget in January.

A group of Republican House lawmakers had been pushing to hold schools harmless from the financial impacts of several policies enacted in recent years -- decreasing funds for district-sponsored charter schools, moving from prior-year to current-year funding and adjusting the funding formula for smaller charter schools. The total budget impact of those changes is about $39 million.

Yarbrough said the proposed budget would put about half of that amount into the Classroom Site Fund as one-time money "to give them a helping hand or a softer landing." Schools use the fund for teacher and classroom needs.

"There is additional funding for K-12," Yarbrough said. "I think that's a positive and I hope we'll see more of that."

University funding

Yarbrough predicted universities "are going to be thrilled" with the budget plan.

Some lawmakers had been pushing for universities to get more than the $8 million in additional funding Ducey had proposed in January. Yarbrough said the budget deal would give universities $32 million.

Ducey and the Legislature last year cut $99 million from universities.

"Universities may very well be the greatest beneficiary of what we're trying to accomplish," Yarbrough said.

A key part of the plan, he said, is an effort to whittle down $200 million in annual deferred payments, also called rollovers, the state makes to universities. The payments have been used as a budgeting gimmick during the Great Recession -- making a payment at the start of one year instead of the end of a prior year made the prior-year numbers look better.

The move cleans up the state's balance sheet, but isn't new money for universities.

"It reduces a cost of debt service ... which has real benefit to them," Yarbrough said. "When things were extraordinarily tough, universities took a licking. We're really going the extra mile to try to help them out."

Wolfe Naimark said she sees the payoff of the rollovers as a good use of surplus funds.

"Paying off rollovers is an excellent use of one-time funds," she said. "It improves transparency as well as the state's fiscal position and helps us be more prepared for any future downturns."

Yarbrough said the budget plan would also include paying off some or all of the rollovers to the state Department of Economic Security and the state Department of Child Safety. It won't put money toward the more than $1 billion K-12 rollover.

Senate Republicans expected to approve

Yarbrough said he expects Senate Republicans will support the budget plan, and doesn't expect many significant changes from the upper chamber.

He said he's unsure how the House will respond, or what amendments they might introduce.

Republican Rep. Vince Leach, of Tucson, said he is pleased with the direction the budget is heading. But, he said, to think lawmakers will show up Tuesday ready to advance the spending plan “is ambitious.”

"We have 36 members in our caucus and we each ... have our own vote, we each have our own constituency,” said Leach. “And so to think that it’s going to coalesce – I don’t think it will take that long – but it’s going to take a couple of days to take this clay and mold it into something 31 votes can agree on."

Yarbrough said the proposed budget would not sweep money from the Highway User Revenue Fund, which helps fund road construction and maintenance. In prior years, significant portions of that money have been used to help fund the state Department of Public Safety.

He also said this version of the budget does not seek federal funding to restore KidsCare, Arizona’s version of the Children’s Health Insurance Program that was cut in 2010. State estimates show 30,000 or more children could gain health insurance if the Legislature restored KidsCare.

"We could very well see somebody want to put KidsCare back in, but it's not in there currently," Yarbrough said.

Monday, Scarpinato confirmed the Governor's Office and legislative leadership had agreed on the framework for a budget. He said the agreement came about after "productive" meetings last week and over the weekend.

Scarpinato said Ducey's “priorities” are reflected in the budget plan, including the tax cuts.

“The governor’s committed to that,” Scarpinato said. “And I think he’s been very clear."