The Arizona Republic

February 19, 2010

Arizona faces another fiscal year of budget challenges.

State lawmakers and the governor must deal with the immediate challenges of the current and coming fiscal years.

However, it is important that the actions taken also contribute to a long-term, ongoing solution to the state’s fiscal challenges. One important step would be some simple but essential changes to the ways the state forecasts, tracks and categorizes General Fund receipts and how it spends them based on those categories.

Currently and historically, every dollar in the General Fund is treated much like every other dollar. But, in reality, the money in the fund varies in important ways. Let’s discuss just three categories of receipts: one-time receipts, cyclical revenue receipts and ongoing tax revenues.

“One-time receipts” are just that: money received on a one-time basis. Some easy examples of one-time revenue include a one-time grant or gift; an unspent balance from the prior year; or even a one-time tax-receipt windfall as a result of a federal tax-law change, like the jump in capital-gains-related income taxes following the change in the federal capital gains tax treatment a few years ago.

There are more difficult-to-recognize one-time receipts that should also be considered such as sales taxes and income taxes derived from construction activity.

The second category, “cyclical revenue,” includes the increases in tax revenue that occur during a typical economic expansion as new jobs are created, household incomes rise and consumer spending increases. The changes in the economy result in substantial increases in sales-tax and income-tax collections. What is important to keep in mind is that, as the economy cools off or goes into recession, that increased revenue will disappear!

The third category, “ongoing tax revenue,” entails General Fund tax receipts that can be reasonably relied on throughout the entire economic cycle from economic expansion to recession and back to recovery. This revenue is generated by the core of economic activity in the state that continues throughout the economic cycles.

The distinctions among these three categories are not absolute, and proper categorization requires sophisticated estimation and informed judgment. There also may be other categories that could be considered. But, at a minimum, estimating General Fund receipts into these three categories and ensuring state spending decisions reflect that their important differences would greatly assist state lawmakers in averting another fiscal crisis like that currently facing the state.

One-time receipts should be used for one-time spending and not committed to ongoing programs. Some examples of one-time spending would include: pre-paying capital lease obligations, capital facility construction, infrastructure improvements, and even one-time tax rebates.

Cyclical revenue increases should be used much the same as one-time receipts, with the addition of making scheduled deposits to a budget-stabilization fund that can be used to offset later revenue declines during economic slowdowns

Finally, ongoing tax revenue should be the only revenue used to fund permanent, ongoing state programs. This is especially important as more and more of state government’s spending is dedicated to programs, like health care for the poor, that expand during recessions – the very same time that cyclical state revenue is contracting.

More careful budgeting, over the past 10 years, that recognized the character of different General Fund receipts and utilized them differently, would have substantially reduced the magnitude of the current crisis. Going forward, better categorization of receipts and appropriate budgeting of them can positively contribute to the state’s fiscal stability.