Court decisions share blame for Arizona’s budget deficit

by Nick Dranias
Goldwater Institute
 
During the Great Depression, Chief Justice Alfred C. Lockwood dissented against a string of Arizona Supreme Court decisions that allowed the state to deviate from the Arizona Constitution’s pay-as-you-go budget rules. In one case, Lockwood warned, “Facilis descensus Averno. Sed retro!” Translation: “The road to hell is easy. Reconsider!

Seventy years later, Arizona faces one of the nation’s largest budget deficits. The JLBC reports that the state finished fiscal year 2009 $500 million short. And there is already nearly a $500 million deficit for fiscal year 2010. But even that could be understated as revenues continue to decline.

A major hole in the 2010 budget was plugged by “sale/lease-back” schemes that, in substance, authorize mortgaging state assets for $750 million, which the state will be obligated to pay off in 20 years or less. But these deals are not required to generate more than $250 million before December 31, 2009, and the $500 million balance is not required to materialize before June 30, 2010. Given the shaky economy, it is fantasy to bank on these revenues. If no one buys the assets, the state government could easily be short this $750 million for fiscal year 2010, on top of the existing deficit that hasn’t been addressed.

In short, we have reached the dead end of the road taken in the 1930s. While it is easy to blame the Governor and the Legislature, much institutional responsibility lies with the Arizona Supreme Court for pragmatically breaking the Constitution’s strict budgetary rules seven decades ago, despite Chief Justice Lockwood’s warnings.  Even the state’s sale/lease-back schemes follow the Arizona Supreme Court’s own guidance on how to evade the Constitution’s limit on long term debt financing.

Allowing the state to run a billion-dollar deficit over two fiscal years is openly contemptuous of Article 9, Sections 3 through 5, of the Arizona Constitution. At the first opportunity, the Arizona Supreme Court must vindicate Chief Justice Lockwood and purge such contempt from its own precedent.
 
Nick Dranias holds the Goldwater Institute Clarence J. and Katherine P. Duncan chair for constitutional government and is the director of the Institute’s Dorothy D. and Joseph A. Moller Center for Constitutional Government.


Comments

  1. Yeah, let’s look at that Arizona Constitution. The Goldwater Institute seems to be doing a bit o’ cherry picking:

    Article IX, Section 3 starts:

    “The legislature shall provide by law for an annual tax sufficient, with other sources of revenue, to defray the necessary and ordinary expenses of the state for each fiscal year.”

    –The JLBC (Joint Legislative Budget Committee) currently estimates that Arizona’s budget is $500 million short for LAST fiscal year (FY2009).

    –Our legislature has thus far refused to provide for an annual tax (or ‘other sources of revenue) sufficient to cover the state expenditures for 2009.

    –Our legislature and certain special interest groups (including Goldwater) have instead been advocating for revenue CUTS in the hope that tax reductions will someday result in job growth and greater consumer spending.

    Ideological arguments aside, that kind of budget action is NOT supported by the constitutional articles mentioned in the articles above. You can’t blame ‘the courts’ for our situation either — the legislature bears the constitutional responsibility for our current fiscal crisis.

    It is time that we all start paying attention to the Constitution again.

  2. Nick Dranias says

    Parent X,

    Thank you for your comment. I suggest that you read not just section 3, but also sections 4 and 5. Section 3 is leaves open the question, what are “other revenues” and “ordinary expenses?” If borrowing can be “other revenues” and if expenses are deemed “extraordinary” then section 3 guarantees very little. It is only with the reinforcement of section 4, which underscores deficiencies in revenues and expenditures must be met, and the further reinforcement of section 5, which bars debt in excess of $350k, that the Arizona generates a strict budgetary requirement of “pay-as-you-go.” The Court, of course, did not attack these provisions head on until much, much later. Instead, it chipped away at them on the margins, as the cases in which Lockwood dissented showed, by undermining the pay-as-you-go concept via allowing warrants to be issued and accure interest without sufficient funds in the general fund and via allowing borrowing against “special funds.” Lockwood saw that these seemingly minor deviations from pay-as-you-go logically led to the abandonment of pay-as-you-go as ever more sophisticated evasions were sanctioned by the court. And he was right, eventually in the sixties the Court outlined how to disguise a long term debt as a long term lease, then in the seventies the Court declared that long term liabilities were not debt. The former decision underpins the sale/leaseback scheme and the latter decision laid the logical framework for the rollover of liabilities from one fiscal year to the next. The pay-as-you-go budgeting requirements sections 3 through 5 are now meaningless unless a poorly trained lawyer is unleashed on the House and Senate. And it all began with just a couple of short steps down the road to Averno. Yes, the Court shares in the blame. It changed the rules of the game, and the game was played according to those rules.

  3. NIck:

    I have read the entirety of the Article.

    Section 4:
    “The fiscal year shall commence on the first day of July in each year. An accurate statement of the receipts and expenditures of the public money shall be published annually, in such manner as shall be provided by law. Whenever the expenses of any fiscal year shall exceed the income, the legislature may provide for levying a tax for the ensuing fiscal year sufficient, with other sources of income, to pay the deficiency, as well as the estimated expenses of the ensuing fiscal year”.

    First of all, I want to highlight again that our state is short by at least $500 million for LAST fiscal year (2009). Article 3 (cited in my post above) and Article 4 are both very clear: the legislature must provide income to cover our state expenses.

    In this case, you can argue about what Arizona’s ‘ordinary expenses’ should be for 2011, but we’ve already spent the money in FY2009. You can’t reduce the expenses for last year.

    As you pointed out, Section 5 reads:

    “The state may contract debts to supply the casual deficits or failures of revenue, or to meet expenses not otherwise provided for; but the aggregate amount of such debts, direct and contingent, whether contracted by virtue of one or more laws, or at different periods of time, shall never exceed the sum of three hundred and fifty thousand dollars; and the money arising from the creation of such debts shall be applied to the purpose for which it was obtained or to repay the debts so contracted, and to no other purpose”…(it goes on to say that we can borrow money to repel invasion, etc.)

    Again, our state has exceeded that $350 million dollar window for *last* year. Our legislature has chosen to ignore this, just as they are ignoring the mandates in Articles 3 and 4.

    I personally don’t agree with the ridiculous sale/leaseback scheme or the rollover payments (a few of which were not repaid as promised). The last thing out state needs right now is some more Enron-style financial tricks.

    BUT –make no mistake – it is our legislature who is discussing tax cuts right now instead of the revenue side of the equation that is highlighted in the Articles above. It is our legislative leadership who has decided to ignore their constitutional obligations because some Washington special interest guy named Grover asked them to sign a ‘special pledge’.

    Groups like the Goldwater Institute are trying to deflect blame for this fiscal catastrophe onto other, non-libertarian-leaning groups. The Courts! The former Governor! The media!

    We, the people of Arizona, have been watching our legislature play 3am budget games all year. Quite a few of us have also taken notice how your special interest groups has been leading the bull by the nose, so to speak. If I had to guess what spurned this article, I would bet that you are hoping that if you throw enough BS on the wall, something will stick and attract the flies.

    Don’t count on it.

  4. Nick Dranias says

    Your reply is all over the map and ad hominem to boot. If anyone has an agenda here, it’s you and your goal is obviously to blame everything on the legislature and nothing on anything or anyone else. Given the rollovers and rocketing spending under the prior legislature and governor, it is a wee bit disingenuous not to ask, how did that fiscal practice arise in the first place? How did the state cease spending on a pay-as-you-go basis? And the truth about this is that the court failed to stand up and hold the line on this crucial concept decades ago, leading to the almost routine practice of imbalanced budgets being papered over with various tricks. So go ahead, blame the current legislature, stick your head in the sand and pretend all it takes is a new cast of characters in office to fix everything, but don’t be surprised when things don’t work out for you.

  5. Nick, how about doing us the courtesy of citing the various AZ Supreme Court decisions you want to call into question?

    I hope you don’t take that as an attack, after all, you did write about those decisions, didn’t you?

  6. Nick Dranias says

    Sure:

    The three cases killing pay-as-you-go concept over Lockwood dissents are linked in my original article (at http://www.goldwaterinstitute.org/article/3728).

    Killing pay-as-you-go was the first step logical step to gutting the debt clause itself, which happened in the 1960s and 70s. Why? Because “debt” can be narrowly construed to exclude what we normally call debt only if you purge the state constitution of its pay-as-you-go orientation. If anything, a pay-as-you-go budgeting rule would require a broader understanding of “debt” than ordinarily understood. This is why Lockwood warned about the seemingly innocuous decisions to honor warrants issued without cash in the general fund or borrowing against “special funds.”

    Anyhow, as predicted by Lockwood, here’s the case that strikes down a particular disguised lease deal, but which also lays out how to structure them to avoid the debt clause(s) of Ariz Const.: City of Phoenix v. Phoenix Civic Auditorium & Convention Center Ass’n, 99 Ariz. 270, 289 (1965). Note that if pay-as-you-go were the rule, no lease-purchase or sale-leaseback scheme would ever be permitted to fund expenses. Killing pay-as-you-go was the first step to unleashing lawyers to devise clever lease-purchase and sale/lease-back schemes for revenue purposes.

    Next, here’s the case that said long term liability is not debt, in the context of pension liabilities: Rochlin v. State, 112 Ariz. 171, 175 (1975). There is no way to have a pension fund system that obligates future generations of taxpayers without abandoning the principle of pay-as-you-go. And the roll-over trick, the idea that you’re not incurring debt by delaying payment on a liability is premised on the logic of Rochlin.

    Does that help?

  7. ParentX is providing a well-reasoned argument and Dranias claims he is going ‘ad hominem’ and ‘has and agenda.’ Quite amazing. Dranias is actually trying to claim he doesn’t have and agenda but ParentX does. This from someone who works at the Goldwater Institute which is an organization with a publicly state agenda of doing exactly what ParentX claims. Is he serious?

  8. Nick Dranias says

    ParentX offers no discernable argument at all, just opinion about the competency of the legislature and my motives in writing an analysis of constitutional precedent. That’s ad hominem, Todd. Regardless, do you really think voting out the Legislature will result in the election of Angels who will respect the constitution’s strict pay-as-you-go rules even though the State Supreme Court has abandoned them and blessed evasion of them? Come on, Todd. Think a bit outside of the partisan box. Dig deeper.

  9. how about turning out the lights? save money by turning down the thermastat? Put more air in your tires?
    or maybe fireing some of the people who are doing nothing in the government but collecting a paycheck?
    Arguing about the constitution is a wonderful thing, but it accomplishes nothing to help us, Arizonian’s to “conserve” money at the state level.
    Let’s get rid of the Border Patrol that is policing the interstate highways that do not cross another country borders( unless California is another country) how about not paying salary’s to people who aren’t in office any more?
    It is time to work together, not argue together

  10. Nick – not being a Democrat I am not sure how I am being ‘partisan,’ but OK.

    ParentX provided good insight and even pointed to the fact that the legislature has clear guidance on what to do with the shortfall from last year but has refused to do so.

    Look, your argument is placing the blame on our current fiscal problems on a 70 year old Arizona Supreme Court decision. Somehow the state has been able to maintain fiscal sanity for 70 years until this legislature and this governor faced with the current economic downturn have been unable to balance the budget. Being that this is most likely the most conservative combination of legislature and Governor the state has ever had, this shows either a complete failure of conservative ideas in this area or that a significant portion of the legislature and governor understand that, contrary to ‘studies’ your organization puts out, the state simply is not going to be able to cut enough government to balance the budget in any way that will be politically palatable.

    While I am no fan of Brewer, she at least has been attempting to put forward a plan that would ameliorate the train wreck that is going to happen in less than 2 years when stimulus money is gone and Arizona’s economy has not recovered sufficiently to generate the necessary tax revenue. Even on top of cuts that will likely happen next year, this drop off the cliff is going to mean dramatic cuts to education, Universities, and many other government services. Brewer tried to pose one option which would have provided for less of a drastic drop to transition off the stimulus money and provide more time for the economy to get back in shape; all without Republicans having to approve a tax.

    Now the GOP politicians are going to be in huge pot of trouble because they will either be responsible for voting for cuts which will prove much more unpopular than I think people on this blog can imagine, or they will need to vote for a tax increase which will lead to internecine feuding much greater than we have seen already.

    This is the scenario we are seeing unfolding right now. It has nothing to do with 70 year old court decisions, but rather the complete an utter vacuity of libertarian economic thought.

  11. Veritas Vincit says

    Todd, “… ParentX is providing a well-reasoned argument”

    Sorry pal but no they’re not.

    If ParentX had been paying attention to the last governor since about 2002, and if ParentX had read the fine print of the ballot initiatives passed by the voters which locked in spending increases and removed the legislatures discretion in spending escalations – then ParentX might be able to make a valid and sincere case. However it is ParentX who chooses to “cherry pick” as they please and skip about while excluding relevant factors and causes.

  12. If you cut out all of the fluff around Nick’s arguments above, I believe his main points are:

    (1) The Courts should never opened up the option to extend state debt beyond the restrictions of the constitution. He doesn’t like the sale/lease back scheme because it isn’t fiscally responsible. I agree with him on this point.

    (2) “While it is easy to blame” the (Republican) Governor and the (Republican, Libertarian-leaning) Legislature for what may be the biggest fiscal mess in the United States right now, we voters should REALLY be ticked off at the courts. They are to blame.

    While Nick agrees that an unaddressed $2B+ deficit “is openly contemptuous of Article 9, Sections 3 through 5, of the Arizona Constitution”, he’d like to spin it so the courts are the bad guy.

    Please re-read the Constitutional clauses above. The AZ Constitution is specifically addressing the duties of the legislature. The first line of Article 3 is worth repeating: “The legislature shall provide by law for an annual tax sufficient, with other sources of revenue, to defray the necessary ordinary expenses of the state for each fiscal year.”

    I don’t think it is an ad hominem attack – or even much of a personal opinion – to state that the legislature is not abiding by this constitutional requirement. Nor is it merely my opinion to state that our current legislative leadership has spent the last year proudly proclaiming that they would not raise taxes.

    I don’t think it is partisan to insist, as a voter, that my elected representatives abide by our Constitution. They signed an oath to uphold it, and the spinning frenzy of special-interest group soundbites shouldn’t deter from the core laws of our state.

Leave a Reply