fy2012 executive budget summary

8/6/2019 FY2012 Executive Budget Summary

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TheExecutiveBudgetSUMMARY

FISCALYEARS2012AND2013

JaniceK.BrewerGOV E RNOR

JANUARY2011


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S U M M A R Y

TheExecutiveBudgetFISCALYEARS2012AND2013

JaniceK.BrewerG O V E RN O R

ProvisionsforIndividualswithDisabilitiesIndividuals who have a disability and require reasonable

accommodation inorder touse thisdocumentareencouraged to

contacttheGovernorsOfficeofStrategicPlanningandBudgeting

at6025425381.

JANUARY2011


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January 2011

To the Honorable Members of the50th Arizona Legislature:

Despite dramatic, courageous and successful budget-balancing efforts of the Legislative andExecutive branches during our nations protracted recession, Arizona continues to face an enormousbudget deficit. At the deficits core is the explosive growth in Medicaid spending, which, over the lastfour years, has soared by almost 65% and now consumes 29% of our State budget. If we are to regaincontrol of State spending, we must reform Medicaid and free Arizona from the fiscal manipulation of the

federal government.

Never during our nearly 100 years of Statehood has federal interference in Arizonas affairs beenmore blatant than in 2010. After we adopted a balanced State budget, Congress passed the PatientProtection and Affordable Care Act and, in essence, determined that we no longer have the authority tomake our own decisions regarding the priorities of our state. Worst of all, Congress committed us to anunsustainable level of General Fund support for Arizonas Medicaid program, making our state coffersthe financing mechanism for their dictates.

In Fiscal Year 2011, the federal government usurped our power to manage our finances,effectively seizing control ofevery major component of our General Fund budget except the State prisonsystem. Spending for our K-12 education, spending for our Universities and Community Colleges, and

spending for Medicaid fell under Washingtons control. While the requirements for education-relatedappropriations are being lifted, federal standards for Medicaid spending continue. As a consequence, wecannot balance our budget without federal permission.

In 1788, Alexander Hamilton said:

The State governments possess inherent advantages, which will ever give them an influenceand ascendancy over the National Government, and will forever preclude the possibility of Federalencroachments. That their liberties, indeed, can be subverted by the federal head is repugnant toevery rule of political calculation.

I, too, find the federal governments actions repugnant, and we will take appropriate action.Arizona can and will be a leader in the national fight to restore proper balance between state and federal

authority, and we will reassume control of our affairs and our destiny and restore fiscal stability in waysthat can be achieved only at the state level, free of the federal governments fiscal and political shackles.

State Governments daunting budget shortfalls for the current fiscal year and the next are part of alarger, long-evolving structural deficit. After eliminating one-time funding sources e.g., debt, rolloversand federal stimulus funds the remaining structural deficit is close to $1.5 billion, or 16% of thecontinuing budget.

STATEOFARIZONA

JANICEK.BREWER OFFICEOFTHEGOVERNOR MAINPHONE:602-542-4331GOVERNOR 1700WESTWASHINGTONSTREET,PHOENIX,ARIZONA85007 FACSIMILE:602-542-7601


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January 2011Page 2

Arizonas FY 2011 budget cut the States structural deficit by more than half. The ExecutiveRecommendation for FY 2012 makes even greater progress, reducing the remaining structural deficit tojust over $100 million.

Once the structural deficit is overcome, we must take steps to ensure future budget stability. Tothat end, I am proposing a spending limit that will allow for natural budget growth while limiting ourability to use bubble revenues to expand government. The budget reforms I propose will help produce amore stable State Government, even in periods of economic uncertainty, and ensure that repaying thedebts that we have incurred over that last few years remain among our highest priorities.

Funding stability must also be achieved in K-12 education. Last year we established a newbaseline for State support. We fought hard for that expenditure level; the people of Arizona supported oureffort, and we must recognize and honor the resulting mandate. Unfortunately, for the last two years thefederal government has forced us to inflate our K-12 spending to a level that we cannot sustain. Thefederal funding that supported that spending will run out in FY 2012.

The loss of federal funding, while difficult to overcome, is no justification to shrink from ourcommitment to improve our educational outcomes. To that end, the Executive Branch, working withArizonas education community, has developed a long-term plan to improve our education system. Thefirst stages of these plans include establishing a P-20 entity that will track education outcomes frompreschool all the way through our institutions of higher learning.

Similar to K-12, higher education has also been propped up by federal spending and expendituremandates. I have long warned our higher education systems that their current funding models areunsustainable. To date, the leaders of our Universities have developed some successful lower cost modelsthat, in time, will be expanded, refined and employed. Unfortunately, we can no longer wait forwidespread implementation of these options. We must impose financial reform at the Universities now,and the Executive Recommendation reflects that necessity.

If there is any good to be found in the State of Arizonas ongoing budget struggles, it is theopportunity to redefine State Governments role and scope, and to make the General Fund budget a toolof efficiency and responsible stewardship. Our budget crisis has forced us to focus narrowly on thoseservices that a state government must provide, and to provide them in the most effective and prudentmanner possible.

By the time our national and state economies regain their health, and State revenues providebudgetary breathing room, we will be able to look back with a measure of gratitude for the shareddiscipline that allowed us to emerge victorious not only from the worst economic threat of our adult lives,but also from the most daunting fiscal crisis that the State of Arizona has ever faced.

Yours very truly,

Janice K. BrewerGovernor

JKB/neh


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TA B L E OF CONT ENT S

BUDGETMESSAGEBudgetOverview.........................................................................................1EconomyandRevenues ............................................................................. 5GeneralFundRevenueSummary............................................................. 8BudgetPlan ..................................................................................................9GeneralFundSourcesandUses .............................................................. 13GeneralFundStructuralShortfallSourcesandUses ...........................14PublicSafetyandCriminalJustice.......................................................... 15Education.................................................................................................... 17HealthandWelfare ...................................................................................21NaturalResources ..................................................................................... 24BudgetReform........................................................................................... 25CapitalOutlay............................................................................................ 27

BUDGETSUMMARYBudgetinaFlash ....................................................................................... 31AllFundsFY2012ExecutiveRecommendation ................................... 33GeneralFundFY2012OperatingBudgetsSummary .......................... 36OtherAppropriatedFundsOperatingBudgetsSummary.................. 38

RESOURCESACKNOWLEDGEMENT


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B UDG E T OV E R V I EW

TheBudgetCrisis:anHistoricalPerspectiveFour years of balancing the budget in a major recession have redefined and reshaped State Government

ONTINUOUS REVENUE SHORTFALLS since FY 2007 have

forced

the

State

to

evaluate

the

best

use

of

its

increasingly

limited resources.This isespeciallychallenging in lightof the

tremendous growth in mandatory populations, particularly

Medicaid.

Asa resultof thegrowth invoterprotectedand federally

mandated programs, the remaining core functions of State

governmenthave enduredunprecedented expenditure reduc

tions.

K12education,Medicaid,theuniversitiesandadultcorrec

tionsnowcomposeover88%oftheStatesGeneralFundobli

gations.1 Incontrast, in theFY2007budget, thoseareasmade

upjust80%oftotalGeneralFundspending.

Because there is very limited capacity to reduce expendi

tures inthoseareas,theotherareasofgovernmenthavetaken

disproportionately large shares of the enactedbudget reduc

tions.Programsthatfallwithintheothercategoryincludethe

DepartmentofPublicSafety(DPS),childcareassistance,Child

ProtectiveServices (CPS),BehavioralHealthServices, theAri

zona StateHospital (ASH), transportation, all elected offices,

andtheCourtsystem.

IndevelopingabalancedbudgetforFY2012,theExecutive

consideredthereductionsthatwerealreadyenacted,including

thefollowing.

HEALTHANDWELFARE

AHCCCS.Inthethreeandahalfyearssincethebeginning

ofthebudgetcrisis,theArizonaHealthCareCostContainment

System(AHCCCS)haseliminatedallStateonlyprograms,seen

itscoreadministrationcutbyover20%,andtakenpainfulcuts

inmanyprogramareas.At thesame time, theAHCCCScapi

tatedpopulationhasgrownby368,200,or46%.

Amongthecutswere:

afreezeinnewmembershipintheKidsCareprogram,

eliminationofnonmandatorybenefits(includingsomeor

gantransplants),

removalofcoveragefortheparentsofKidsCarechildren,

eliminationofdentalcoverageforlongtermcarepatients,

and

eliminationoftheSocialSecurityDisabilityIncomeTempo

raryMedicalCoverageprogram,whichprovidedAHCCCScoverageforthetwoyeargapbetweenthetimeaperson

wasdeclareddisabledandthebeginningoftheirmedical

insuranceunderMedicare.

AHCCCS has also stopped paying Medicare Part D co

paymentsforprescriptiondrugsformemberswhoareeligible

forbothMedicareandAHCCCS.

1 This figure includes inter-agency fund transfers.

C

OngoingFY2011GeneralFundResponsibilites

Education

39%

Medicaid

28%

Universities

9%

Corrections

10%

DebtService

2%

Other

12%

OngoingFY2007GeneralFundResponsibilities

Education

44%

Medicaid

17%

Universities

10%

Corrections

9%

DebtService

1%

Other

19%

FY2007FY2011PercentageChange

60%

40%

20%

0%

20%

40%

60%

80%

100%

120%

Education Medicaid Universities Corrections DebtS er vi ce O th er

Budget Message


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Hospitals have seen their reimbursement rates frozen for

three years,while physicians and other healthcare providers

have endured rate cutsofup to 5%. InApril 2011,hospitals,

physiciansandotherproviderswillreceiveanother5%ratecut.

Hospitals have also seen the elimination of Statefunded

GraduateMedicalEducationsubsidies,eliminationof the loan

program that helped them startmedical residency programs,

andareductioninoutlierpaymentsforhighcostindividuals.

In its administration, AHCCCS has reduced staffing by31.5%,orover 400FTE, and suspendedplans for anoverdue

replacementofacomputersystem.

OtherAgenciesandPrograms.OutsideofAHCCCS,there

have been significant cuts to other health and welfare pro

grams. Child care assistance for lowincome working (LIW)

familieshasbeenfrozen,andtherearemorethan8,000families

with young children on thewaiting list for this service. The

numberofLIWclientshasbeenreducedbynearly18,000fami

liessincetheimplementationofthewaitinglist.

InFY 2010, theState reduced thedurationofCashAssis

tanceeligibilityfrom60monthsto36monthsandimplemented

tightereligibilitystandards forhouseholds.Asaresult,nearly

19,000

families

have

stopped

receiving

this

form

of

monthly

assistance.

Reductions to Children Services have meant that CPS,

whichwasalreadyunderstaffed,nolongerinvestigates100%of

reportedincidentsofabuseorneglect.

Individualswho suffered from seriousmental illness and

did not qualify for Medicaid lost supplemental treatments

previously provided by General Fund programs. They now

receiveprescriptiondrugassistance and crisis servicesonly if

theybecomeadangertothemselvesorothers.

Additionally, State support for community health centers

was eliminated, aswas funding for several smallerprograms

suchasSummerYouthEmployment,DiabetesPreventionand

Control, and State support for vaccines.When possible, pro

gramswereshiftedtoaselffundingarrangement,oftenresult

ing in client fees many times higher than those previously

subsidizedbytheGeneralFund.

EDUCATION

K12. FederalMaintenance of Effort (MOE) requirements,

whichrequireStateformulafundingatoraboveFY2006levels,

have spared K12 education from reductions proportional to

thoseexperiencedelsewhereinStategovernment.

However, therewere still significant reductions, including

theeliminationof funding forFullDayKindergartenand the

eliminationoffundingfornonformulaprogramssuchasAdult

Education,ChemicalAbuse,andEarlyChildhood.The locally

fundedExcessUtilitiesprovisionwasalsoabolishedduringthis

period.Todate,manyofthereductionstoK12havebeenoffset

by increased federal stimulus funding, but those additional

dollarswillnolongerbeavailablebeginninginFY2012.

Universities. Federal MOE requirements also protected

highereducation from cutsbelowFY2006 levels.During this

period,StatesupportfortheUniversitysystemshrankby20%.

Inresponse toState fundingcuts,theBoardofRegentsal

lowedtheuniversitiestoincreasetuitionratesbyanequivalent

amount tomakeup for the resultingshortfalls.Evenwith the

tuition increases,however, theuniversitieshavereducedstaff

ingbyhundredsofpositions,eliminatedprogramsandreduced

classofferings.After reaching peak levels of funding from the General

FundinFY2008,inexcessof$1.1billion,fundingdecreasedto

$890millionforFY2010andFY2011.WhileStatefundinghas

declined,other revenue sourceshave continued togrow.Pro

jected total revenues,allsources, forFY2011are$750million

greaterthanFY2008.ForFY2009andFY2010,theuniversities

receivedapproximately$225millioninStateFiscalStabilization

FundmoniestooffsetportionsofStatefundingcuts.

Impact of Budget Reductions on Cash Assistance

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

July06

Oct06

Jan07

Apr07

July07

Oct07

Jan08

Apr08

July08

Oct08

Jan09

Apr09

July09

Oct09

Jan10

Apr10

July10

Oct10

Families on Cash Assistance

AHCCCS All TXIX Capitation Member MonthsActuals Only

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

Jan-02

Jul-02

Jan-03

Jul-03

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

AHCCCS All Title XIX Capitation Member Months

KidsCare Children Member Months

2 FY 2012 and FY 2013 Executive Budg


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School Construction. The School Facilities Board (SFB),

which funds new school construction and building renewal

projects, saw its nondebt service General Fund support re

ducedfrom$338million inFY2007to$4.1millioninFY2011.

Ofthatreduction,$250millionwasrelatedtonewconstruction,

whichexperiencednaturaldeclineandwasreplacedwithdebt.

However,thereductionsinBuildingRenewalfundinghaveled

schooldistrictstodefercriticalmaintenanceprojects.

PUBLICSAFETY

Asthecorefunctionofstategovernment,theStatehaspri

oritized public safety expenditures. However, efficiencies

throughout thepublic safety systemhavebeen identifiedand

implemented. TheDepartment of Corrections (DOC) inmate

population has grown since FY 2007while staff hasbeen re

duced, leadingtoanovercrowdingofprisoncomplexes.Early

inFY2011,DOCopened6,000newbeds,enablingall inmates

housedoutofstatetooccupyArizonacorrectionalfacilitiesand

returning $86million of State spendingback to the Arizona

economy.

DOChasvery limitedcapacitytoreduceexpendituresfur

ther,

due

chiefly

to

safety

concerns.

However,

a

few

initiatives

haveproducedsavings:

DOCpeggedreimbursementsforoutsidemedicaltreat

mentsatAHCCCSrates,savinganestimated$6millionin

thefirstyearofimplementation.PriortopeggingtheDOC

medicalservicesratetoAHCCCSrates,theDepartment

waspayingupto310%ofAHCCCSratesforinmatehealth

care.

Privateprisonperdiemrateswererenegotiated,generating

asavings.

DOChaseliminatedover150FTEadministrativepositions.

TheDepartment ofPublicSafety (DPS) has largelybeen

sparedcutsbecauseHighwayFunddollarshavebeendiverted

fromtheDepartmentofTransportationtooffsetGeneralFund

reductionswithinDPS.

However,therewereafewreductionsofnote.Throughat

tritionand layoffs,DPShasreduced itsworkforceby130FTE

positions.Asaresult,theCrimeLabhasbeenslowertoprocess

cases, and certainunits (e.g.,Aviation)havenotbeen able to

respondtoasmanyemergenciesasinthepast.

Funding for replacement equipment was also reduced,

whichhasresultedinanagingvehicleinventory.Almosthalfof

allhighwaypatrolcarsinusewillhavemorethan100,000miles

bytheendofFY2011.

Finally, theArizonaCriminal JusticeCommissionshifted

$4.1million in General Fund obligations onto higher Court

derivedpenaltiesandfees.

NATURALRESOURCESANDINFRASTRUCTURE

Over the last twoyears, theExecutivehasemployeda fee

for service strategy for Government oversight of natural re

sources. In FY 2007,Arizonas natural resource programs re

ceivedapproximately$60millionGeneralFundsupport.ByFY

2011, support had waned to $17.2million from the General

Fundandto$19millionfromnew,selffundingsourcessuchas

theLandTrustandWaterResourcesFunds.

TheLandDepartmenthassustaineda27%reductiontoits

operatingbudget and, as a result, antitrespassing and anti

dumping activities were hindered. The Department is now

heavily reliant on local law enforcement to protect the nine

millionacresofStateTrust lands.Further,planningandengi

neering studies forundeveloped landwere reducedover this

period.

TheDepartmentofWaterResources(DWR)hassustained

a40%budgetcutsinceFY2007and,asaconsequence,itswork

forcewascutinhalf.DWRhasclosedfourregionalofficesand

planstoconductfewerwaterlevelmeasurements.

AhandfulofStateParkshavebeen closed since 2007.Of

theparks that remain open, two out of three rely on outside

supportandaresubjecttoclosureifthatsupportdisappears.

TheDepartmentofEnvironmental Quality(DEQ),through

budget reductions and increased reliance on user fees, has

eliminatedover$25millioninGeneralFundobligations.

WhiletheDepartmentofTransportation(ADOT)doesnot

receive General Fund dollars, significant transfers from its

dedicated funds have necessitated dramatic changes. For ex

ample,$99.9millioninfundingdedicatedtolocalandstatewide

transportation is transferred annually to DPS to offset cuts

within that agency (see theDPS section above).As a result,

sinceFY2007,13ofADOTs18highwayreststopsand12of61

FY 2008 Appropriated Fund Breakout

Crime Lab Funds

2%

Highway User

Revenue Fund

4%

General Fund

74%

Highway Patrol Fund

9%

State Highway Fund

4%

All Other Appropriated

Funds

7%

DPS Funding Sources

FY 2011 Appropriated Fund Breakout

General Fund

20%

Highway Patrol Fund

9%

Highway User

Revenue Fund

36%

State Highway Fund

19%

Crime Lab Funds

5%

Photo Enforcement

Fund 5%

All Other

Appropriated Funds

6%

Budget Message


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MotorVehicleDivision (MVD)officeshavebeen closed.State

revenues are insufficient for State participation in highway

construction, slowing the maintenance and construction of

Arizonathoroughfares.

PERSONNEL

Personnelreductions,attritionandlimitedhiringduringthe

past threeyears reduced theStatesactivenonuniversityem

ployee headcountby 5,713, or 12.9%.General Fund personalservicesexpendituresduringthattimefellby18.9%.

For FY 2011, State employee salaries were reduced by

2.75%.Also,mostemployeeswererequiredtotakesixfurlough

days,bringingtheirtotalpayreductionsto5%.Legislativeand

Judicialstaffwereexemptfromthesereductions.

OTHERSTATEAGENCIES

InFY2011,GeneralFundsupportfortheOfficeofTourism

was eliminated, effectively reducing the Offices fundingby

50%.Inresponse,theOfficeeliminatedmorethanathirdof is

staffandsignificantlyreduceditsmarketingefforts.

SinceFY2007,theDepartmentofHousinghastransferred

$69.1million to theGeneralFund tohelpbalance thebudget.UntilFY2009, theDepartmentreceived55%ofproceeds from

UnclaimedProperty at theDepartmentofRevenue foruse in

providinghousingassistancetocitizens.InFY2009alone,this

amountwas$28.6million.

InFY2010, theLegislaturecapped theDepartments reve

nue from thissource to$10.5million,diverting therestof the

proceedstotheDepartmentofRevenue(tooffsetGeneralFund

reductions)anddirectlytotheGeneralFund.Thesereductions

haveforcedtheDepartmentofHousingtoreducestaffby25%

and eliminate several programs for homebuyer assistance,

homelessnesspreventionandhomerepairassistance.

During the past three years, theDepartment ofAdmini

stration (DOA)has lost a totalof 272 filledFTEpositions,or

34% of its staff, largely inGeneral Services andHuman Re

sources.Custodialserviceshavebeenprivatizedandreducedto

aminimum; therepairshopandprintshophavebeenclosed;

and other services have been consolidated or eliminated in

ordertomaximizescarceresources.

The $20millionArtsEndowmentwas eliminated, and its

fundbalancewastransferredbacktotheGeneralFund.

AftertheStateLibrary,Archives,andPublicRecordsap

propriationsandfundbalanceswerereducedby$1.5millionin

midFY2009, theAgency letgoapproximately19%of itsstaff

andreducedoperatinghours insixof itssevendivisions.ThePolly Rosenbaum Archives Building was closed to regular

publicaccesswithinweeksofitsdedication.

TheDepartmentof InsurancesGeneralFundbudgetwas

reducedbynearly$1millioninmidFY2009,forcingtheAgen

cyto letgo23of87GeneralFundemployees.Remainingstaff

werefurloughedonedayaweekfor18weeks.

LOCALIMPACTS

Severalbudget measures adopted by the State have im

pacted localgovernments in addition toState agencies. In FY

2011,theStateeliminatedtheCountyAssistanceFund,County

Hold Harmless, and Local Transportation Assistance Fund

(LTAF)

support.

Expenditure

shifts

in

sexually

violent

person

programs and Superior Courtjudges salaries have also im

pactedlocalgovernments.

ONETIMESOLUTIONS

TheStatehasalsousedover$9billioninfiscalbridgesthat

temporarilyoffsetState expenditures and revenue losses.Fol

lowingisapartiallistofthoseefforts.

Temporary Solutions FY 2008 FY 2009 FY 2010 FY 2011 Total

K-12 & University Rollover $602,600.0 $100,000.0 $450,000.0 $1,152,600.0

BSF Sweep $560,036.5 $150,000.0 $710,036.5

Fund Transfers $290,186.0 $813,135.2 $358,815.4 $151,834.1 $1,613,970.7

DPS use o f HURF and SHF $42,000.0 $106,001.0 $99 ,882.0 $99,882.0 $347,765.0

Midnight Reversion $50,000.0 $50,000.0

SFB NC Recapture/DS Holiday $344,000.0 $60,000.0 $404,000.0

SFB New Construction $237,000.0 $237,000.0

DES & AHCCCS Rollovers $25,000.0 $159,900.0 $184,900.0

Federal Stimulus $642,100.0 $1,418,400.0 $659,600.0 $2,720,100.0

K-12 Local Fund Balances $184,000.0 $184,000.0

Sale Leaseback $1,035,419.3 $1,035,419.3

Lottery Bonds $450,000.0 $450,000.0

Total $1,544,822.5 $2,417,236.2 $4,156,416.7 $971,316.1 $9,089,791.5



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E C ONOMY AND R E V ENU E S

SignsofModestRecoveryAs the nation slowly emerges from its severe recession, some of the dynamics that historically have been

important for Arizona recoveries will return, and the state should achieve discernible progress as 2011

and 2012 unfold

LTHOUGHNEARLY18MONTHShave

passedsincethedeclaredendof

therecession, theeconomycontinuesto

languish,with certain sectorsstillquite

depressed. Some economists have

voicedtheirfrustrationaboutthepolicy

response;others are concerned that the

private sector simply remains hesitant;

and still others point out that slow re

coveriesareactuallythenormfollow

ingmajorfinancialcrises.

Regardless, even withmoderate to

robustgrowthrates,thecurrentdepthof

the cycle is so low that a return to in

come,wealthandspendinglevelsofthe

peakofthelastcycleisstillseveralyears

away.Nevertheless,thenationisslowly

recovering; some of the dynamics that

historically have been important for

Arizona recoverieswill return, and the

statewill see somediscernibleprogress

as2011and2012unfold.

NATIONALOUTLOOK

ThemostrecentoutlookfromGlobal

Insightsuggestsaslowgrowthrecovery

period through 2011, with real GDP

growth at subpar levels (below 3%)

until 2012. This is essentially the same

outlookthatwasdescribedinlastyears

ExecutiveBudgetRecommendation.

Afewoptimistsbelievethatthecon

sensus is overly pessimistic and that

significant growth could occur as early

asmid2011.These voices arebalanced

against a few contrarians who worry

aboutanotherroundoffinancialshocks.

Employment.The employmentpic

tureappearstobestabilizingafterayearof stubbornly sluggish growth. Hiring

should improve,but therewillbe little

statistical improvement in the unem

ployment rate, which will likely end

2011nearcurrentlevelsdespiteprogress

inoverallnetjobcreation.

Current projections from national

forecasters suggest that the unemploy

ment rate will remain at historically

highlevels(e.g.,9%)through2013.

Consumer Spending. Consumers

will emerge fromwhatwas, formost,

the worst recession of their lifetimes

with cautious attitudes about major

outlays.As a result, purchases of con

sumerdurableswillpickupincompari

son to the seemingly Depressionlike

levelsobserved in200910,butnotwith

thevigorofpreviousrecoveryperiods.

Credit remains relatively tight,but

the relative lack of borrowing is not

entirely due tobanks refusing to lend;

rather, there are many creditworthy

consumerswhoaresimplyunwillingto

take on debt, even at historically low

interestrates.

While themood ofU.S. consumers

continues to be depressed, Global In

sightsmost likely scenario is that con

sumerconfidencewillslowlybutstead

ily return over the next three years,

resulting inmodest growth in demand

forconsumerdurables.Thiswillhaveto

be monitored closely, since items likeautomobilesarebeingtransactedatlow

levels that arewithouthistoricalprece

dent, and this situation has now pre

vailedforovertwoyears.

Overall,itisverydifficulttopredict

consumerpsychologyatthispointinthe

cycle;while therearesignsof improve

ment, consumer confidence remains

fragile, and this ebb and flow has per

sistedthroughout2010.

However, as 2010 drew to a close,

there appeared to be significant signs

that

consumer

attitudes

are

improving.

With respect to durable goods, this is

crucial,asevenaslightimprovementin

attitudes toward acquiring certaindur

ableswillresultinconsiderableincrease

inoveralldemand.

InterestRates.Following twoyears

ofaggressiveeasing,theFederalReserve

continues to indicate that interest rates

willnottighteninthenearfuture.

At some point, aggressive easing

willbereplacedbyamorenormalcredit

policy thatcanhelpavertany inflation

ary tendencies. It is noteworthy that

GlobalInsightcontinuestoseenosignifi

cantinflationrisk,regardlessofitsfore

cast scenarios. Commodity prices may

spikeinsomeareas,butnooverallcore

inflationwilloccuraslongasthereisso

muchslackintheeconomy.

While thiswillbe good for the fi

nancialmarkets,retailerswillbelimited

in pricing power for the foreseeable

future.Thatwillcontinuetodampenthe

pace of overall nominal retail sales

activity.

Business Spending. The corporate

profitpicturein2011willbedetermined

ultimatelyby the pace of the recovery.

Business investment in the last several

years has been fueled by inventory

replenishment. In2011, investmentwill

likelybe ledby improved outlooks on

thepartofbusinesses inanticipationof

an improving economy. And, historically, expansionary Federal Reserve

policy has created a positive environ

mentforbusinesses.

TheDollar.Thevalueof thedollar

eroded significantly in 2009 as U.S.

interest rates remained relatively low

and the flight to thedollar frenzyof

late 2008 lessened. In 2010, the dollar

continued eroding against most major

currencies until very late in the year,

whentheeconomicoutlookimproved.

Some economists have argued that

aggressive

monetary

policy

and

looming

fiscalimbalanceswillpressurethedollar

downward, ultimately kindling an

inflationary spiral driven by higher

import and commodity prices. How

ever, as has been the case for several

years,Global Insightdoesnot seemuch

furtherdeterioration in thevalueof the

dollar in any of its current scenarios.

A

Budget Message


16/62

Still, significant appreciation of the

dollarseemsunlikelyatthispoint.

Current Events and Risks. Many

indicatorsof theU.S.economy support

theslow, steady recovery scenario,and

theoverallconsensusisthat,nationally,

growthwillbeslowbutsteady,barring

any unforeseen shocks. Still, Global

Insightadheres to itsyearlongpositionthatthechanceofadoubledipreces

sionisanuncomfortablyhigh20%.

The risks today remain unaltered

fromtheriskscenarioovermuchofthe

last year. The recession scenario could

be triggeredby any number of factors:

e.g., a geopolitical or financial shock,

withthelattercomingfromthecollapse

ofamajorbank,municipalityordevel

oped country succumbing to pressures

from real estateor someother external

factor.Any event or development that

shakes

the

re

emerging

but

still

fragile

consumer confidence will push the

nation toward the precipice of another

downturn;withit,parallelstotheGreat

Depression will be recast, thereby de

pressingthingsfurther.

On the flip side, confidence could

revert tomore normal levels all on its

own and provide aboost that willbe

both self fulfillingand reinforcing.This

will place growth on the high side of

GlobalInsightsrangeofforecasts.

ARIZONAOUTLOOK

In a typical recession,Arizona is

generally one of the first states to re

cover. The states primary catalysts for

cyclical growth are technology and

aerospacerelated service andmanufac

turing contracts, along with what is

historically a significant resurgence in

domesticinmigration.

Whilecertainfactorssupportthisre

surgence scenario forArizona from the

current recession affordable housing,

excellent climate and lifestyle, etc.

until very recently the state has been

missing a fundamental component:job

availability. Admittedly, some of Ari

zonas historically robust job creation

has coincidedwith population growth.

People come to Arizona for affordable

housingandaplace togetajob,and

some of thejobs are inbusinesses that

depend on population growth. Hence,

significantjobgrowthwontreturnuntil

inmigration occurs, and people wont

movetoArizona insignificantnumbers

untilthejoboutlookimproves.

This Catch 22 situation could be

solved as retirees regain some of their

lostwealth andbegin to reassumemi

grationpatternsatmorenormallevels

or even above normal, given that the

BabyBoomgenerationhasbegunentering retirement. Thiswill provide some

population growth employment oppor

tunities thatwill attractworkers of all

ages,andtheinmigrationcyclethathas

characterized Arizona for decadeswill

begin.

While this is occurring, our basic

manufacturing and financial service

industries will see some growth in

alignment with an improving national

economy. Until very recently, it ap

peared thatArizonawouldnot reclaim

its

normal

position

as

an

employment

leader in theexpansionaryphaseof the

business cycle,butjobcreationappears

now to be taking place, at rates that

eclipsethatofthenation.Moreover,the

datafrommotorvehiclelicensessuggest

that the pace of young adult in

migrationremainssteady.

Employment.Thegoodnewsonthe

employment front is that Arizona job

growthmayapproach2% in2011,with

potential for upside momentum if the

paceoftheeconomyaccelerates.

However, a return tonormal3% to

4% yearoveryear employment growth

will probablybe delayed until 2012 or

2013. Construction and real estate

related areasof employmentwill serve

as headwinds to job creation, as will

state and local government employ

ment.

Personal Income. Aggregate per

sonal income growth in Arizona, as

reportedbytheU.S.BureauofEconomic

Analysis, grew very slowly in 2010, at

ratesnearhistorical lows.Slightlyheal

thier growth will return in 2011; fore

casts fortheyearrange from1% to5%,with the consensus splitting the differ

enceat3%.

Asgrowthinoverallincomereturns,

itislikelythatconsumerconfidencewill

bounce from historical low levels and

consumer durable purchases will im

prove from what appear tobe unsus

tainablylowlevels.

Population.Fordecades,thepaceof

domestic inmigrationhasheld thekey

toArizonagrowth.Byallaccounts,2009

and2010weretheslowestyearsfornew

arrivals from other states in recorded

history;however,datafromtheIRSand

theU.S.Census Bureau have yet tobe

compiled.

As was mentioned earlier, historically theattractionofArizonahasbeen

jobs,affordablehousingandclimate.At

thistime,impedimentsaretheweakness

intheoveralleconomy,slowhomesales

inwouldbe residents states of origin,

and the massive loss of wealth that

many potentialmovers incurred in the

last15months.Yet,manyof theattrib

utesthathavesustainedArizonasmag

netismfordecadesremaininplace,and

it is likely that inmigration rates will

improve in 2011 andbeyond. It is the

pace

of

that

resurgence

that

will

be

important for Arizonas growth trajec

tory.

Risks. The risks to the Arizona

economy remain significant,mostnota

bly the possibility that, as discussed

earlier, the nationwill relapse into an

otherrecession.Thiswouldsignificantly

delay recovery inArizona, since itwill

damage the states cyclically sensitive

sectorswhileimpedingtheinmigration

flow that has consistently fueled eco

nomicgrowth.

Another aspect of risk is the rela

tively significant exposureofArizonas

financial institutions and investor com

munity toacollapseofcommercialreal

estate.Virtuallyalleconomistsacknowl

edge thatcommercialrealestate facesa

hugeuphillbattleatthispointandthat

there is littleneed foradditionalcapac

ity inArizonawithin thenext seven to

ten years.What remains tobe seen is

whetherthesectorwillundergoanother

significant round of foreclosures and

defaults that send more real estate

related shockwaves through the finan

cialsystem.Geopolitical shocks could threaten

the hospitality and travel industry,

which ispositioned to grow from very

lowlevels.

Upside Potential. A considerable

share of Arizonas economic woes re

lates to theshatteredpsychologyof the

consumer,especiallypotentialbuyersof



17/62

durables, such as automobiles and

homes. This erosion is likely linked to

the sharp declines in housing wealth

that have occurred over the last 15

months.

Ifthepaceoftheeconomypicksup,

psychologycanquicklyimprove,and,as

notedearlier,evenmodestimprovement

canprovideasignificant catalyst in thepace of retail transactions.This growth

will help reinforce the initial improve

mentinpsychologythatwillthenresult

in more transactions, unfreezing of

creditlines,andmorenormalconsumer

behavior. This chain of events could

playoutat a fasteror slowerpace,de

pendingon ahostof factors, including

inflation,foreclosures,realGDPgrowth

andinmigration.

REVENUEFORECAST

Revenue

flows

appear

to

have

stabi

lized, after several years of significant

declines.

TheFY2011forecastisconservative,

showing slight growth over reported

2010figures.Achievingtheforecastwill

requirerelativelylittleeconomicgrowth

in spring 2011, a slight upward trajec

tory in consumer confidence, and no

majorgeopoliticalorfinancialshocks.

FY 2012 revenue forecasts aremore

conservativethanthebaselineeconomic

projections contained in the current

monthlyreportpreparedfortheGover

nors Office of Strategic Planning &

Budgeting (OSPB)by the Seidman Re

searchInstituteatArizonaStateUniver

sity.Thepersonal income and employ

mentgrowthprojectionsprovidedinthe

baselinescenarioareconsistentwiththe

consensus views of most private and

publiceconomicforecasters.Among forecasters there remains a

relatively large spread between pessi

misticandoptimisticrevenuescenarios.

Factors contributing to the disparity of

outlooksincludeuncertaintiesaboutthe

potentialrealizationofcapitalgains,the

pace of potential improvement in con

sumer confidence, and the continuing

uncertainties about how corporations

reassess prior liabilities and request

refunds.Because of theseuncertainties,

theExecutive,whilenotrecommending

the

pessimistic

forecast,

is

recommend

ing revenue levels below the baseline

forecast.

It is clear that these uncertainties

havemitigatedsomewhatover thepast

year, removing someof theheadwinds

observed in revenue flows in 2009 and

2010.

Revenuegrowthwill likelyoutpace

economic growthbecause, as the econ

omy stabilizes and improves, it will

bringwith itamarked improvement in

consumer psychology that has damp

enedrevenuegrowthinrecentyears.

Asaresult,modestemployment,in

comeandwealthgrowthinFY2012will

beaccompaniedbyeven stronger reve

nue growth.However, a return to the

lofty revenue levelsofFY 2006 andFY

2007isstillseveralyearsaway.

UPSIDE/DOWNSIDEPOTENTIALThe pessimistic and optimistic eco

nomic scenarios are depicted in the

current monthly report prepared by

ASUs Seidman Research Institute.

However, the revenue volatility associ

ated with these economic scenarios is

greater than thevolatility suggestedby

thealternativeeconomicscenarios.This

again stems from the likely dampened

consumer psychology that will accom

panythepessimisticeconomicscenarios

andthebolsteredconsumerpsychology

that

will

accompany

the

optimistic

scenario.

In addition, accelerated economic

growth will be accompanied by in

creased corporate profits and more

capital gains, while the converse will

apply if the economy grows below

consensusexpectations.Thevolatilityof

these factorshas greatly contributed to

revenueflowvolatilityhistorically.

Budget Message


18/62

Actual Estimate Estimate

TAXES FY2010 FY2011 FY2012CorporateIncome 413,193.3 531,162.1 601,791.1IndividualIncome 2,416,296.3 2,576,555.6 2,886,474.2PropertyTaxes 20,269.6 20,000.0 20,000.0SalesandUse 3,422,528.4 3,472,755.6 3,608,245.5LuxuryTaxes 55,352.3 55,600.7 57,465.8InsurancePremiumTaxes 406,617.6 386,600.0 402,500.0EstateTaxes 363.8 0.0 0.0OtherTaxes 3,071.8 3,000.0 3,000.0

TOTALTAXES 6,737,693.1 7,045,674.0 7,579,476.6

OTHERREVENUESLicenses,Fees&Permits/Misc. 196,887.1 97,100.0 106,024.0InterestEarnings 202.7 1,200.0 1,200.0Lottery 67,808.5 77,564.0 80,094.0

Transfers&Reimbursements 67,629.5 21,000.0 21,000.0DisproportionateShare 18,722.2 61,592.3 52,318.1

TOTALOTHERREVENUES 351,250.1 258,456.3 260,636.1

TOTALREVENUES 7,088,943.1 7,304,130.3 7,840,112.7

ADJUSTMENTSUrbanRevenueSharing (628,644.6) (474,006.5) (424,423.4)

GRANDTOTALREVENUES 6,460,298.5 6,830,123.8 7,415,689.3

(inthousands)

STATEOFARIZONAGENERALFUND

BASEREVENUESUMMARYFY2010THROUGHFY2012



19/62

B U D G E T P L A N

ResolvingtheBudgetCrisisThe Executives decisive plan addresses the current shortfall, significantly reduces the structural deficit,

and imposes difficult cuts in core State services to balance the FY 2012 budget

HEBUDGETSHORTFALLSforFY2011andFY2012arepartof

State governments larger and ongoing structural deficit.

After eliminating onetime funding sources e.g., debt, roll

overs and federal stimulus funds the remaining structural

deficitiscloseto$1.5billion,or16%ofthecontinuingbudget.

The structuraldeficitmustbeaddressedandclosed;how

ever,thatcannotbeachieved inoneyear.TheFY2011budget

tooksignificant steps in thatdirection,reducing the structural

deficitbymore thanhalf.TheExecutiveRecommendation for

FY 2012 makes even greater progress, reducing the current

structuraldeficittojustover$100million.

The FY 2011 solution and the FY 2012 Executive Budget

Recommendation are the next steps in achieving permanent

budgetrestructuring.WithStateGovernmentinthefifthyearofbudget reductions, the Executives prior steps have already

impactedvirtuallyeveryareaofStateGovernmentandelimi

natedareasdeemedtobeoutsidethescopeofcoreservices.

Thenextroundofsolutionswillbeevenharsher,ascircum

stances dictate even deeper funding cuts for State Govern

ments core services. In determining the priority for budget

reductionsandkeyinvestments,theExecutiveusedthefollow

ingbudgetplanningprinciples:

PublicsafetyisthecorefunctionofStategovernment.

Educationfundingisthekeytolongtermsocietalandeco

nomicdevelopment.

Programreductionsshouldbestrategic,notarbitrary.

Evenwithadherencetotheseprinciples,closingthebudget

deficit requires savings and reductions in every core area of

StateGovernment.

FY2012BUDGETDEFICIT

TheExecutiveprojectsanFY2011budgetdeficitof$763.6

millionandaFY2012budgetdeficitof$1.15billion.

TheFY2011deficitislargelydrivenbythelossofplanned

temporary revenue solutions, including Propositions 301 and

302, underperformance in Transaction Privilege Tax (TPT)

revenues, and less than anticipated federal stimulus funds.

Further, theK12 formulaproducedanestimated$103million

morethanestimated.

TheFY2012budgetdeficit iscausedbycaseload increases

and the loss of onetime savings and revenues. The FY 2011

budgetincluded$497millioninonetimerevenuesorpayment

deferrals and $806million in temporary federal assistance. In

additiontoreplacingonetimemeasures,caseloadgrowthwill

contribute$208.7milliontoexpendituresandSFBdebtservice

growsby$96.6million.TheStatewillalsoexperienceanaddi

tionalpayrollperiod in FY 2012 thatwill add an $81million

onetimecost.

Medicaid is themajordriver inboth the lossoftemporary

revenues and caseload growth.Medicaid accounts for $812.5

million of the increased expenditure pressure, amounting to

$659.6millionofthefederalfundingcliffand$152.9millionof

Medicaidpopulationgrowth.

Naturalrevenuegrowthprovidesapproximately$490mil

liontooffsetincreasedcosts.

SUMMARYOFSOLUTIONS

ForFY2011,whichendsJune30,2011,theprojectedshort

fallis$763.6million.TheExecutivesapproachtoresolvingthat

deficitincludesthefollowing:

BudgetReductions: $107million

Rollovers: 245million

NewDebt: 330million

FederalFunds: 101million

FundTransfers: 66million

ForFY2012,theprojectedshortfall isestimatedat$1.2bil

lion. The Executive Budget plan for resolving this deficit is

composedofthefollowingmajorelements:

NetBudgetReductions: $1.1billion

ReestablishtheMedicaidRollover: 115.4million

FundTransfers:

LocalContributions:

85.7million

52.4million

Thediscussions that followhighlight themajor featuresof

the Executive Plan for the remainder of FY 2011 and for FY

2012.TheExecutivesStatementofSourcesandUsesofFunds

T

FY 2012 General Fund

Revenue Changes

Base Revenue Grow th $489,980,300

Loss of One Time Revenues ($494,653,000)

FY 2011 Ending Balance Adjustment ($35,264,500)

Total Revenue Change ($39,937,200)

Expenditure Changes

Federal Funding Cliff ($805,600,000)

Medicaid Population Grow th ($152,877,400)

School Facilities Board Debt ($96,585,300)

27th Payroll ($81,000,000)

Education Grow th ($55,784,300)

Other Agency Adjustments $14,224,800

Education Property Tax Change $70,500,000

Total Expenditure Change ($1,107,122,200)

Shortfall ($1,147,059,400)

Budget Message


20/62

for the General Fund and the Structural Deficit Calculation

appearattheendofthisdiscussion.

BUDGETREDUCTIONS

MajorbudgetreductionsarerequiredbecausetheStatecan

nolongeraffordmanyprogramsandservicesastheycurrently

exist.As painful asmost of the recommended spending cuts

willbe,theyareneverthelessessentialtothenecessaryrealign

mentoftheStatesrevenuesandexpenditures.

Thefollowingdiscussionisanintroductiontothesereduc

tions,with additionaldetail contained in the followingpages

andinthemoredetailedbudgetrecommendations.

Medicaid. The Executive recommendswithdrawingGen

eralFund support for theArizonaHealthCareCostContain

ment System (AHCCCS) Proposition 204 population, leaving

theTobaccofundsasthelonefundingsource.Thiswillresultin

the elimination of health coverage for childless adults, and a

tighteningoftheeligibilitystandardsforparents.

Because the Prop. 204 population is protectedby federal

law, therecommendation isbasedonanOctober1,2011,start

date, giving the federal government time to either grant a

waiver

or

change

the

maintenance

of

effort

(MOE)

require

mentsthroughCongressionalaction.

Inaddition to theeligibilitychange, theExecutivehasan

nounced a 5%provider rate reduction.This reductionwillbe

implemented on April 1, 2011, for AHCCCS providers and

DepartmentofHealthServices(DHS)providers.

TheExecutivedoes recommendanFY2011minorsupple

mental forDHS andDES to cover the lowerthananticipated

federal enhanced Federal Medical Assistance Percentages

(FMAP) in theChildrensRehabilitativeServicesprogramand

the Developmental Disabilities program, respectively. How

ever, the Executive has identified sufficient savings in the

budgets for AHCCCS and DHS to cover thebalance of the

increasedStateshareofFMAP(approximately$54.6million).

Department of Economic Security. The Executive recom

mendsreducingtheDESbudgetby$91millionfromtheGen

eralFund,13%belowtheFY2011appropriation.

The recommended cut is largelydrivenby savingsgener

ated frompolicy changes implemented in the currentbudget.

The reduction incashassistancebenefitsand thecaponchild

carehavereducedthosepopulationsbyagreaterthanexpected

amount.Inaddition,DESwasabletoleverageprivatepartner

shipstodrawdownadditional federaldollars thatoffsetGen

eralFundexpenditures.

K12Education.Duringthelasttwofiscalyears,Statesup

portforK12fundinghasbeenprotectedbyfederalrestrictions.

Additionally, funding implemented as part of the American

RecoveryandReinvestmentActof2009(ARRA)proppedupK

12spendingaboveStatesupportlevels.InFY2011,thefederal

governmentextendedsupportbyprovidinganadditional$212

millioninfederalaidtotheK12system.

The Executive recommends recognizing a portion of that

aidaspartoftheFY2011BasicStateAidformula.Withthose

dollars, federal aid now adds approximately $143million to

Statesupport.Unlessthereisfurtherfederalaction,thisfederal

aidwillnotbeavailableinFY2012.

The Executive recommends rebasing State support levels

forK12attheFY2011 level;therefore,theExecutivedoesnot

supportbackfillingthelossoffederaldollarsbutdoesprovide

inflationandgrowthfromtheStatebase.

Universities. In FY 2009, University system fundingwas

reducedtoFY2006levels,byroughly25%perstudent.InFYs

2010and2011,Universityfundinghasbeenprotectedunderthe

federalMOEumbrella.ThatprotectionliftsinFY2012.

Sinceearly2009,theExecutivehastwicecalledontheUni

versity system to prepare lowercost educationmodels.With

the loss of federal funds and ongoing revenue shortages, the

Executive can no longer protect the University system from

additional reductions. In FY 2012, theExecutive recommends

reducingUniversityfundingby$170million.

CommunityColleges.Operating funding for theCommu

nityCollege system is a combination of local property taxes,

tuitionrevenuesandStateaid.Thepercentoftotalfundsrepre

sentedbyStateaidvarieswithlocalpropertyvalue.

ForFY 2012, theExecutive recommendsmaintaining total

operating revenues for the Community Colleges at FY 2011

estimates.This represents a reductionof 6.2% from totalpro

jected

FY

2012

operating

revenues.

To

achieve

the

6.2%

reduc

tion, the Executive recommends reducingGeneral Fund sup

portby$72.9million.

PublicSafety.ForFY2011theExecutivehasidentified$10

million in onetime savings in theDepartment ofCorrections

(DOC).For theDepartmentofJuvenileCorrections (DJC), the

Executiverecommendsabudgetreductionthatcorrespondsto

thecontinuingdeclineintheincarceratedpopulation.

With respect to law enforcement, the Executive recom

mendseliminatingtheFY2012transferoffundstotheDepart

ment of Public Safety (DPS) from the State Highway Fund

(SHF) and, instead, transferring the same amount fromHigh

wayUserRevenueFund(HURF)revenue.

Health InsurancePaymentReform.TheExecutive recom

mends changing the methodology the State uses to collect

healthinsurancepaymentsfromStateagencies.

In lieu of the firstquarter fund sweep, theExecutive rec

ommendsthatinsuranceforallemployeesbepaidperpayroll.

Under thisproposal,monies currentlyappropriated for insur

ancesweepswouldbereallocatedamongagenciestoaccurately

reflect the cost of each agencys annual insurance premiums.

Becausethesweepswereoverfundedlastfiscalyear,movingto

aperpayrollpaymentwillreducethetotalcosttotheState.

AGENCYCONSOLIDATIONS

TheExecutiverecommendsthefollowingagencyconsolida

tions:

theDepartmentofMinesandMineralResourceswiththe

ArizonaGeologicalSurvey,

theGovernmentInformationTechnologyAgency(GITA)

withtheDepartmentofAdministration(DOA),

theStateForestertotheDepartmentofEmergencyandMil

itaryAffairs(DEMA),

theDepartmentofRacingwiththeDepartmentofGaming,

and



21/62

theBiomedicalResearchCommissionwithDHS.

While these consolidations will provide only marginal

budgetsavings,theywillimprovegovernmentoperations.

ROLLOVERS

ForFY2011,theExecutiverecommendsanadditional$245

millionineducationrollovers.

NEWDEBT

ForFY2011theExecutiverecommendsa$330millionloan

fromFirstThingsFirst.Tominimize interestcosts, theExecu

tive recommends a oneday loan tobe taken out onJune 30,

2011, and repaid July 1, 2011. The Executive is proposing

budget reforms to dedicate a portion of future revenue in

creasestodebtreduction.

FUNDTRANSFERS

TheExecutiveproposesadditionalfundsweepsinFY2011

andinFY2012.

INVESTMENTS

Whilebudgetreductionsareclearly the theme for thecur

rent fiscal year and next, the Executive does propose invest

mentsinafewkeyareasofStateGovernment.

ForFY2012,theExecutiverecommendsanumberofcare

fully identified investments.As one key example, growth in

healthcarecaseloadsandK12enrollment isfunded.Addition

ally,theExecutiverecommendsthesefundinginitiatives:

EconomicDevelopment:thenewCommerceAuthorityandajobsfocusedtaxpackage.

Corrections:safetyconcernscausedbyprisonunderstaffing.

Proposition204Transition:afederallymatcheduncompensatedcareprogramtoassistpatientswhohavecritical

needsandwilllosehealthcarecoveragethroughtheProp.

204rollback.

CapitalOutlay:anewcapitalprogramfortheDepartmentofCorrections,expandingschoolcapitalexpenditures,and

expandingcapitalresourcesintheDepartmentofAdmini

stration(DOA)system.

FurloughDay:reinvestingintothepersonnelsystemthesavingsintheemployeehealthcareplan,inordertoeliminate

thefurloughday(duetosavingsintheemployeehealth

planandgreaterthanexpectedsavingsfromtheemployee

paycut,thiscanbeaccomplishedwithoutincreasingState

personnelexpenditures).

SUMMARYOFTHEBUDGETPLAN

Followingarethemajorcomponentsofthebudgetplanfor

FY2011,whichhasaprojected$763.6millionshortfall:

SolutionstoShortfallFTFLoan: $330.0million

K12Rollover: 245.0million

K12UseofFederalJobsFunds: 101.2million

DESReductions: 91.0million

FundTransfers: 65.6million

MedicaidProviderCut: 17.3million

OneTimeCorrectionsSavings: 10.0million

Recommended

Investment

EliminateAHCCCSRollover: $37.8million

Followingarethemajorcomponentsofthebudgetplanfor

FY2012,whichhasaprojected$1.15billionshortfall:

SolutionstoShortfallProp204Rollback: $541.5million

UniversityReductions: 170.0million

ReinstateAHCCCSRollover: 115.4million

FundTransfers: 85.7million

DESReductions: 91.0million

AnnualizedProviderCut: 89.0million

CommunityCollegeReductions: 72.9million

ADECORL/Addl.AssistanceReduction: 66.6million

CountyContributions: 21.0million

PhoenixConventionCenter: 15.0million

HealthInsurancePayment: 12.3million

ADEOnlineInstructionCapital: 11.5million

JuvenileCorrections: 7.2million

ADECareerLaddersPhaseDown: 5.6million

RecommendedInvestmentProp.204Transition: $50.0million

EconomicDevelopmentPackage: 39.8million

EliminateFurloughDay: 17.2million

Prop.204RollbackImpactonSMI: 10.3million

AdditionalCorrectionalOfficers: 8.4million

SFBBuildingRenewal: 7.3million

EducationGrowth: 6.6million

SOURCESANDUSESOFFUNDS

The General Fund Sources and Uses of Funds statement

that follows summarizes the Executive Recommendation in

tabularform.TheStatementpresentsthefollowing:

TheFY2010Actualcolumnreflectsactualrevenuesand

expendituresforFY2010takenfromtheStatesAccounting

andFinancialInformationSystem.Thefiscalyearsdeficit

of$5.7millionisreflectedastheendingbalance.

TheFY2011EstimatecolumnreflectstheExecutivesFY

2011revenueprojectionsandappropriationsforFY2011

madebytheLegislatureinthe2010Legislativesessions.

TheautomaticreductionintheDESappropriationdueto

thefailureofProposition302isnotreflected.Thiscolumn

alsoincludestheExecutiveprojectedneedforsupplemental

appropriations.TheprojectedFY2011deficitof$764mil

lionisreflectedastheendingbalanceinthiscolumn.

TheFY2012ExecutiveBaselinecolumnreflectstheEx

ecutivescalculationoftheStatesfiscalsituationintheab

senceoftheExecutivesFY2012restructuringplan.The

projected$1.15billiondeficitintheabsenceoftheExecutive

recommendationisreflectedastheendingbalanceinthis

Budget Message


22/62

column.

The FY 2011 Executive Recommendation and FY 2012

Executive Recommendation columns reflect the Executives

revenueprojectionsandplanforbalancingthebudget.

IMPACTONLOCALGOVERNMENTS

TheExecutiveBudgetRecommendationposesanumberof

impactsonlocalgovernments.Forexample,theshiftintheDPS

transfer from SHF toHURFwill impactboth city and county

governments.

Additionally,theExecutiverecommends:

shiftingpartofthecostoftheDepartmentofWaterRe

sourcestowaterproviders(mainlycities),

shiftingArizonaCriminalJusticeCommissiongrantsfor

publicdefenderstoDPS,and

increasingthesharethatcountiespayforsexuallyviolent

personshousedattheStateHospital.

OUTCOMES

The Executive Recommendation provides total General

Fund expenditure levels of $8.2billion in FY 2011 and $8.9

billioninFY2012.

The$700 millionincreaseinFY2012ismisleading;when

federalstimulusfundsandexpendituredeferrals(rollovers)are

included, the current FY 2011 real expenditure level is $9.5

billion,whileFY2012dropsto$9.0billion.



23/62

STATE OF ARIZONA

SOURCES AND USES OF FUNDS

GENERAL FUND

(Dollars in Thousands)

FY 2011 FY 2012 FY 2012

FY 2010 FY 2011 Executive Executive Executive

SOURCES OF FUNDS Actual Estimate Recommendation Baseline Recommendation

Balance Forward (480,713.0) (5,723.2) (5,723.2) 0.0 50,038.9

Base Revenues 7,088,943.1 7,304,130.3 7,304,130.3 7,840,112.7 7,840,112.7

Urban Revenue Sharing (628,644.6) (474,006.5) (474,006.5) (424,423.4) (424,423.4)

Adjusted Base Revenues 6,460,298.5 6,830,123.7 6,830,123.7 7,415,689.3 7,415,689.3

Enacted Budget Fund Transfers 358,815.4 151,834.1 217,478.4 94,384.0 169,802.3

SFB QSCB Federal Interest Subsidy 6,213.8 6,213.8

Other Revenues 46,270.6 46,270.6 46,270.6 69,859.1

County Transfer 22,000.0 34,600.0 34,600.0 21,000.0

Commerce Authority (31,500.0)

Economic Development Credits (8,300.0)

Sale Leaseback 1,035,419.3

Lottery Revenue Bonds 450,000.0

Redirection of Lottery Fund Revenue

Borrowing from First Things First 330,000.0 330,000.0Temporary One Cent Sales Tax 845,719.6 845,719.6 902,353.2 902,353.2

TOTAL SOURCES OF FUNDS 7,845,820.2 7,902,824.8 8,298,469.1 8,464,910.9 8,925,156.5

USES OF FUNDS

Agencies Operating Budget 7,919,527.0 8,641,545.6 8,226,013.7 9,522,202.6 8,474,343.4

27th Payroll 81,000.0 81,000.0

Health Insurance Recapture (12,254.2)

5% Salary Reductions (uncaptured savings) (5,340.4) (5,340.4)

Eliminate Furlough Day 2,875.7 17,243.4

Total Operating Budget 7,919,527.0 8,641,545.6 8,223,549.0 9,603,202.6 8,554,992.2

Phoenix Convention Center (15,000.0)

FTF Loan Repayment 330,000.0

Other 3,891.0

TWN Interest and Fees 3,856.0

Prior-Year Continuing Approps Expenditures 31,299.8

Reversions of Continuing Appropriations (38,035.2) (1,000.0)

Agency Backfills 998.0

DOA Lease Purchase Debt Service 52,066.9 52,066.9 49,030.6 49,030.6

Capital 10,400.0 4,000.0 4,000.0 4,000.0 0.0

Capital Outlay Prior Year Reversion (450.0)

COSF Rate Reduction (6,825.8)

DOA Building Renewal Charge 4,587.6

Administrative Adjustments 38,692.0 85,763.9 85,763.9 79,525.7 79,525.7Revertments (118,635.2) (116,949.6) (116,949.6) (123,788.6) (110,166.5)

TOTAL USES OF FUNDS 7,851,543.4 8,666,426.9 8,248,430.3 9,611,970.3 8,885,143.8

ENDING BALANCE (5,723.2) (763,602.0) 50,038.9 (1,147,059.4) 40,012.7

NOTE: Funds and Adjustments that Reduced General Fund Uses of Funds

Deferred Payments (rollovers) 567,000.0 0.0 130,311.0 0.0 115,374.9

Federal Stimulus 1,418,400.0 805,600.0 805,600.0 0.0 0.0

Total Adjusted Uses Of Funds 9,836,943.4 9,472,026.9 9,184,341.3 9,611,970.3 9,000,518.7

Budget Message


24/62

FY 2011 FY 2012

OSPB Estimate OSPB Estimate

REVENUES

Ongoing Revenues $7,304,130.2 $7,840,112.7Urban Revenue Sharing ($474,006.5) ($424,423.4)

Sales Tax Increase -May Ballot $845,719.6 $902,353.2

Withholdings to the Commerce Authority $0.0 ($31,500.0)

Economic Development Tools $0.0 ($8,300.0)

Other Revenues $46,270.6 $69,859.1

SFB QSCB Federal Interest Subsidy $0.0 $6,213.8

Fund Transfers - FRATS $151,834.1 $84,032.9

Net On-going Revenues $7,873,948.0 $8,438,348.3

One-Time Financing Sources

Balance Forward ($5,723.2) $50,038.8

First Things First Loan $330,000.0 $330,000.0

County Transfers $34,600.0 $21,000.0Funds Transfers - EBTs $65,644.3 $85,769.4

Subtotal One-time Revenues $424,521.1 $486,808.2

TOTAL REVENUES $8,298,469.1 $8,925,156.5

EXPENDITURES

Agency Operating Budgets $9,336,613.7 $8,589,718.3

ADOA 2010 Lease Purchase Debt Service $52,066.9 $49,030.6

Eliminate Furlough Day $2,875.7 $17,243.4

COSF Rate Reduction $0.0 ($6,825.8)

Additional Pay Cut ($5,340.4) ($5,340.4)

Building Renewal Charge $0.0 $4,587.6

Administrative Adjustments $85,763.9 $79,525.7Revertments ($116,949.6) ($110,166.5)

Subtotal Ongoing Expenditures $9,355,030.3 $8,617,772.9

One-Time Expenditures $0.0 $0.0

K-12 Rollover ($245,000.0) $0.0

Capital Outlay $4,000.0 $0.0

Temporary Federal Assistance ($805,600.0) $0.0

SFB Debt Refinance ($60,000.0) $0.0

AHCCCS Rollover $0.0 ($115,374.9)

27th Payroll $0.0 $81,000.0

Health Insurance Payment Freeze $0.0 ($12,254.2)

First Things First Loan Repayment $0.0 $330,000.0

Phoenix Convention Center $0.0 ($15,000.0)Reversions of Continuing Approps $0.0 ($1,000.0)

Subtotal One-Time Expenditures ($1,106,600.0) $267,370.9

TOTAL EXPENDITURES $8,248,430.3 $8,885,143.8

ENDING BALANCE $50,038.8 $40,012.7

STRUCTURAL SHORTFALL ($1,481,082.3) ($179,424.6)

STATEMENT OF GENERAL FUND

Showing One-Time Sources & Uses Items



25/62

P U B L I C S A F E T Y AND CR IM INA L J U S T I C E

ProtectingthePublicistheStatesTopCoreFunctionThe Executive Budget Recommendation continues to provide for safer communities

VENWHILESTRUGGLINGtoovercome

its

prolonged

budget

crisis,

State

Government must maintain a high

standard of public safety for Arizona

citizens and visitors and safeguard the

integrity of the States criminal justice

system.

While the Executive Budget Rec

ommendation challenges public safety

agencies tobemore efficientwith pre

ciousGeneralFunddollars,itcontinues

toprovideforsafercommunities.

ADULTCORRECTIONS

InearlyFY2011, theDepartmentof

Corrections (DOC) opened 6,000 new

adultprisonbeds4,000Stateoperated

bedsand2,000privatelyoperated.With

the opening of those beds, all outof

state beds were closed, and 4,492 in

mateswere returned toArizonacorrec

tionalfacilities.

Thesenet changes toDOCs opera

tional capacity reduced the Statesbed

deficitto2,475,awelcomecontrastfrom

the deficit peak of nearly 5,500 inAu

gust2009.

Correctional Officers. DOC has

achieved some of these reformswithin

itsapprovedbudget,butfullimplemen

tation has created a demand for addi

tional Correctional Officers. To meet

that demand, the Executive recom

mends a threeyear plan to add 306

CorrectionalOfficers to theStatespris

oncomplexes.Initsfirstyear(FY2012),

the plan calls for the addition of 102

CorrectionalOfficers.

PrisonMaintenance.DOCs10pris

on complexes include over 8.5million

squarefeetofbuildingsthatrangeinage

from 1 year tomore than 50 years.Toaddress theneedsof itsaging facilities,

DOChas identifiedandplanned for30

necessarycapitalprojects,whichcarrya

costofapproximately$115million.

Whileprisonmaintenance is the re

sponsibility of DOC, all building re

newal projects are managed by the

Department ofAdministration.Despite

theirpublic safety considerations,DOC

facilities

are

forced

to

compete

with

all

otherStatebuildings for scarcemainte

nancefunds.

Consequently, criticalneedsarego

ingunmet.Asanexample,in2001DOC

receivedan$18.5million appropriation

overthreeyearstoreplaceinoperableor

obsoleteprisondoor locks,but funding

for the project was exappropriated in

2002 tohelpbalance theGeneral Fund

budget. Other necessary building re

newal projects havebeen similarly un

funded.

The safety of our citizens demands

that the integrity of the States prison

facilitiesbemaintained.Consistentwith

that need, the FY 2012 Executive Rec

ommendation provides for the estab

lishmentofaDepartmentofCorrections

Building Renewal and Preventative

Maintenanceprogram.Funding for this

programwillbe initiallyprovidedbya

$50million, 15year revenuebond sup

portedby the State Lottery,with debt

servicebeginning in FY 2013. In addi

tiontothebondfundedcapitalprogram

the Executive recommends an ongoing

building renewal, preventativemaintenance program. This program will be

fundedby:

$564,000fromtheCorrectionsFund,

previouslyappropriatedtotheDe

partmentofAdministrationforcapi

taloutlayprojectsatprisons;

$1.7millionperyear(DOCestimate)

fromanewbackgroundcheckfee

forprisonvisitors;

$340,000(DOCestimate)inproceeds

froma1%bankingchargeonall

DOCmanagedinmatebankac

counts;

$1millionperyear(DOCestimate)

indepositsfromArizonaCorrec

tionalIndustries(adivisionof

DOC);and

$1millionperyear(DOCestimate)

fromPrisonCommissaryandPrison

Telephonereceipts.

The DOC Building Renewal and

Preventative

Maintenance

program

wouldbethesoleresponsibilityofDOC.

PUBLICSAFETY

Prior toFY2009, theDepartmentof

Public Safety (DPS) was appropriated

$6.8millionperyearforHighwayPatrol

vehiclereplacement.InFY2009,funding

was reducedby35%beforebeingcom

pletelyeliminatedduetobudgetcutting

measuresinFYs2010and2011.

Predictably, theseextended funding

cutshaveproducedarapidlyagingfleet

ofHighwayPatrolvehiclesandagrow

ing threat to public safety. Without

renewed funding, 928 Patrol vehicles

86% of DPSs 1,083vehicle fleet will

haveexceeded100,000milesbytheend

ofFY2013.

TheExecutiverecommendsmodify

ing statute to allow DPS to purchase

HighwayPatrolvehiclesinFY2012with

funding already available in thePublic

SafetyEquipmentFund.

DPSOfficerSafety.Currently, the

State provides to the counties approxi

mately$2.2million for theoperationof

CountyAttorneysofficesandforopera

tionof IndigentDefensesactivities.The

Executive recommends diverting these

monies to DPS for officers personal

safety equipment, such as radios and

ballistic vests, and to support the re

placement of obsolete Highway Patrol

vehicles.

DNA Testing. The State has taken

several steps to enhance public safety

throughtheuseofaDNAdatabase.

For example, all convicted sex of

fendersarerequiredtohavetheirDNA

analyzedandenteredintothestatewidedatabase.Thiswasexpandedto include

those convicted of certain violent of

fenses. Most recently, convicted felons

are required toprovide aDNA sample

forthedatabase.

TheExecutiverecommendsexpand

ingDNA testing to include allpersons

convicted and incarcerated. The esti

E

Budget Message


26/62

matedcosttoprovidethistestingis$2.4

million per year.TheExecutive recom

mends a 2.4% surcharge on all fines,

penalties and forfeitures to fund the

testingandenteringof theseadditional

DNAsamplesintotheDatabase.

CapitolPolice.Law enforcement at

the State Capitol is provided by the

CapitolPolice,whichisadivisionoftheDepartmentofAdministration. Inaddi

tion, DPS stations officers in strategic

locationsattheCapitol.

The Executive recommends that, in

ordertoachieveanimprovedcommand

structure andmore efficient operation,

theCapitol Policebe consolidated into

DPS.TheExecutivefurtherrecommends

appropriating$1milliontoallowDPSto

absorb theCapitolPoliceofficersat the

DPSpayscale.

OTHERRECOMMENDATIONS

JuvenileCorrections.As the above

chart illustrates, since FY 2008, theDe

partment ofJuvenileCorrections (DJC)

has seen a 34% decline in its average

daily population. Consistent with that

trend, theDJCpopulation so far in FY

2011 is 12%below the average for FY

2010.

As of December 27, 2010, DJC

housed 363 youth in its securecare

facilities and is supervising 412 youth

livinginthecommunity.

TheExecutiverecommendsaligning

DJCs funding with the continued de

cline in population, reducing the De

partments FY 2012 funding by $7.2

million.

ProjectChallenge.TheProjectChal

lenge program is an interventionist

program for nondelinquent, high

schooldropouts. It is intended to teach

life

skills

and

direct

young

people

to

ward GED completion in a residential

bootcampsetting.

In FY 2010, the program included

138 participants, of which 28% com

pleted their GED. The average annual

costperstudentis$20,380.

Budget constraints in recent years

havereducedStatefundingby14%and

federal funding by 48%, significantly

reducing the effectiveness of the pro

gram. The Executive recommends eli

minatingtheremainingfunding.

DEMA/Forestry Merger. Natural

disasters and emergencies in Arizona

are managed by two separate state

agencies: the State Forester and the

Division of EmergencyManagement at

the Department of Emergency and

MilitaryAffairs(DEMA).

The State Forester coordinates all

firefighting activities associated with

wildland

fires.

Responses

to

other

natu

rally caused emergencies (e.g., floods,

earthquakes, hurricanes and severe

storms)arecoordinatedbytheDivision

ofEmergencyManagement.

Predictably,therearemanyareasof

overlapping activities. For example,

when Emergency Management re

sponds to an emergency, it likely will

relyonvendor contractsestablishedby

the Forester. In addition, the available

funding for emergencies is statutorily

intertwinedbetweenthetwoagencies.

To obtain the most efficient man

agement of emergencies and best re

sponsetoallemergencies,theExecutive

recommends consolidating the State

ForesterandtheDivisionofEmergency

Managementasasingledivisionwithin

DEMA.

Juvenile Corrections: Secure Care and Parole

0

100

200

300

400

500

600

700

800

900

1000

FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 FY 2007 FY 2008 F Y 2009 FY 2010 FY 2011*

Secure Care

Parole



27/62

E DU CA T I ON

EnhancingPublicEducationDuringaBudgetCrisisDespite unprecedented budget shortfalls, improving public education at all levels remains a priority

ECENT ECONOMIC CONDITIONS and

the

protracted

State

budget

crisis

haveinflictedseverecutsinK12educa

tionfunding:

DeferralsofGeneralFundmoniesin

excessofonefourthofannualfund

ingarecurrentlyinplace(payable

withintwomonthsoffiscalyear

end).

Endofyearfundbalanceshave

beenusedtooffsetGeneralFundde

ferredamounts.

GeneralFundmoniesforprograms

suchasAdultEducation,Early

ChildhoodEducation,GiftedSup

port,andAimsInterventionhave

beensuspended.

Lumpsumreductionsforschool

districtsandcharterschoolshave

growntomorethan$175.1million.

Fundingofmorethan$200million

intendedforFullDayKindergarten,

addedinFY2007,hasbeenelimi

nated.

In FY 2011, the K12 system faced

additional deep budget reductions. In

lieu

of

those

reductions,

the

public

sup

portedanewrevenuestreamthatwould

maintain K12 funding at the existing

Statesupportlevels.Thatvotermandate

shouldberecognizedandhonored.

Federal stimulus monies increased

State Aid in FY 2010 and FY 2011by

$521millionand$143.8million, respec

tively. The Executive does recommend

recognizing federal dollars as an offset

toanyneededsupplementalforFY2011.

However, the Executive does not rec

ommend replacing federal dollarswith

GeneralFundsupportwhenthefederal

supportexpiresinFY2012.

Ofthe$206millionoffederalEduca

tionJobsmoneydistributed inFY2011,

the Executive anticipates that only

$101.2millionwillberecognizedaspart

oftheK12formula.Thebalanceshould

be used by districts and charters to

transitiontonewStatesupportlevelsin

FY2012.

EXECUTIVERECOMMENDATION

Growth Funding. The ExecutiveBudget Recommendation for FY 2012

providesforthefundingofgrowthover

currentFY2011appropriationlevels.

The Executive recommends $55.8

million to cover the costs of student

growth (1%), inflation (0.9%) and net

assessed valuation (NAV) changes.

While school district counts have de

clined slightly in recent years, charter

school counts continue to increase,

although at a reduced rate. The chart

below shows student count growth for

school

districts

and

charter

schools

(FY

2012 growth is projected). To align the

K12 formulawith theestablishedState

support level, the Executive recom

mendsfourformulachanges.

AdditionalStateAid.Lastyear,the

Legislature eliminatedAdditional State

Aidforcertainlocallyadoptedproperty

taxes.This change is scheduled to take

place inFY2012.TheExecutivecontin

ues to support this changebut recom

mends restoring Additional State Aid

forthesmallschooladjustment.

Career Ladder. The Career Ladder

program provides increased expendi

ture capacity for 28 of Arizonas 238

schooldistricts tooffer incentivepay to

teachers

to

improve

their

teaching

skills.

These expenditures are funded by the

GeneralFundandbylocalpropertytax.

Career Ladderwas established in 1985

asapilotprogram,and theLegislature

addeddistrictsuntil1994.

InFebruary2010,theArizonaCourt

of Appeals ruled, in Gilbert Unified

SchoolDistrictNo.41v.StateofArizona,

that excluding some districts from the

program is unconstitutional. Two op

tionsexistwithrespecttotheprogram:

expandCareerLaddertothere

maining

210

school

districts,

at

a

cost

tolocalpropertyownersandthe

GeneralFund;or

eliminatetheprogram.

The Executive recommends the lat

ter,phasingout theCareerLadderpro

gram by reducing the maximum al

lowedbudget increaseby 1% per year

forthenextfiveyearsbeginningwithFY

2012. (While a 5.5% increase is author

izedbystatute,theincreasehasalready

beencappedat5% forFY2010and for

FY2011.)

Arizona Online Instruction. ArizonaOnline Instruction (AOI)provides

R

School District and Charter School

Percentage of Student Count Growth

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 *

School District Charter School

Budget Message


28/62

funding for webbased virtual class

rooms that are available to enrolled

students24/7.Thenumberofapproved

schooldistricts and charter schoolshas

grownwith theremovalofpilotstatus,

from14inFY2010to42inFY2011.The

fundable student count generated by

AOI students has grown from 3,400 in

FY2005toover12,000forFY2010.TheExecutive recommends eliminating

transportation and facilities funding or

equivalentamountsforAOI.

CapitalOutlay&AdditionalAssis

tance. The Executive recommends re

ducing CORL andAA fundingby $62

perstudent.

OtherChanges.Asnotedabove,K

12formulasinexcessof$175millionare

suspended. Additionally, the Utilities

Adjustment formula is also suspended.

This formula was put in place in re

sponse

to

Proposition

301

(approved

in

November2000),whichprovidedforthe

termination of Excess Utilities funding

(via property taxes) at the end of FY

2009. (Budgeted ExcessUtilities for FY

2009exceeded$123.7million.)

Initsplace,aUtilitiesAdjustmentis

now provided within the equalization

formula for school districts. In most

cases,thiswouldbefundedbytheState.

However,fundingoftheadjustmenthas

been suspended forboth FY 2010 and

FY 2011. The Executive recommends

eliminatingthisformulainFY2012.

P20GOVERNANCESTRUCTURE

In2009,ExecutiveOrder200910re

established the P20 Coordinating

CouncilofArizona,whichwascharged

with providing a statewide forum for

coordination and articulation among

variousStateandlocaleducationboards

and agencies, to improve education

from preschool through advanced de

greeprogramsinhighereducation.

Initially, one of the Councils pri

mary functions was to oversee the

StatesapplicationforfederalRacetothe

Topgrantfunding.Fromthebeginning,

theGovernorstatedthat thepurposeof

theapplicationwastocreatethevehicle

forK12reform inArizona. Theresult

ing plan had statewide support from

education and business stakeholders,

andforthefirsttime,Arizonahasaplan

thatconnectsallofthegoalsoftheedu

cation system P20. AlthoughArizona

wasnotoneof the12states selected to

receivefunds,manyoftheinitiativesare

underway. However, there are addi

tionalreformscontainedintheplanthat

arejust as criticaland shouldnotwait.

Therefore, theGovernorasked theP20

Council to review and prioritize those

reforms; the resulting plan has nowbecome the blueprint for Arizonas

educationreformeffort.

A revised P20 Council is recom

mendedaspartofthatplan,withanew

role thatemphasizesperformanceover

sight and accountability of the public

educationsystem.

For FY 2012, the Executive recom

mends codifying the principles of the

original P20 Council but shifting its

corefocustoperformancemanagement.

ThenewP20Councilwillbecomprised

of

top

leaders

of

the

various

public

education agencies in Arizona along

withbusinessandphilanthropicleaders.

The Council will measure and track

progressoftheestablishedperformance

goals and outcome measures for pre

school, K12, community colleges and

universities. TheCouncilwillmeetona

semiannual basis to discuss progress

andgoalattainmentand lend transpar

ency to theoverallperformanceofAri

zonaspubliceducationsystem.

DATASYSTEMS

A stable, robust, longitudinal data

system is imperative toadvancingedu

cational performance at all levels of

publiceducationinArizona. Inorderto

measure Arizonas progress and to

updatetheinformationsystemtheState

relieson toproperlyaccount forpublic

educationmonies,thenewP20govern

ance structure will oversee the devel

opment of a highquality data system.

BecausethedatasystemwillspanK12,

community colleges, universities and

workforce programs, the Executive

recommendsmaintaining an independ

ent governance structure that coordi

nates all of these agencies rather than

making it a part of an existing agency

irrespectiveofwhere thedatasystem is

housed.

BoththeStatewideLongitudinalDa

taSystem(SLDS)andthefinancialdata

systemwillbe fundedwitha feebased

onstudentenrollmentinschooldistricts,

charter schools, the community college

system and theUniversity system.The

Council will also seek to secure grant

fundingfrompublicandprivatesources

wherever feasible. This fee will also

provide nominal funding necessary to

supportthenewP20Council. TheP20

Councilwillworkwithexistingentitiesincluding theDepartment ofEducation

and the DataGovernance Commission

to fundanddevelop thenecessary sys

tems.

The Executive is conducting a re

view of the existingP20data systems.

Thatreviewisscheduledtobecomplete

in February 2011.At that time, theEx

ecutivewillbe able to provide amore

concrete recommendation on the fee

amountbut, in themeantime,proposes

a placeholder fee of $12 per student

less

than

0.4%

of

State

funding.

As

the

following table illustrates, that feewill

produceapproximately$57millionover

fouryears.

Once thedata systemsare inplace,

thefeemaybereducedtoreflectcosts.

Projected Student Counts and FeesFY 2012 to FY 2015

ProjectedStudent Counts

Total

FY 2012 1,337,535 $8,025,210

FY 2013 1,350,974 $16,211,688

FY 2014 1,361,917 $16,343,004

FY 2015 1,372,082 $16,464,984$57,044,886

UNIVERSITIES

Universities serve as a key asset to

State economic development and as a

gateway for individual economic and

social improvement. In a period of re

duced resources, it is critical that the

State adapt service delivery to ensure

that the maximum number of citizens

continuetohaveaccesstohighereduca

tion. To that end, the Statemust con

tinue toexplore lower costhighereducation models including expansion of

two plus two programs,more regional

campuseswithrealdifferentiatedtuition

options,onlineeducation,astatecollege

system, and fouryear degrees offered

bycommunitycolleges.

In her April 2009 remarks to the

Board of Regents, Governor Brewer



29/62

requested that theUniversitiesdevelop

new, comprehensive business models

thatwouldallow them todealwith (a)

the impending loss of federal stimulus

dollars after FY 2011 and (b) possible

further cuts to State support for the

University system in FY 2012. The

Executive eagerly awaits those recom

mendations.Unfortunately, to address the cur

rent FY 2012budget shortfall, substan

tialreductionstocriticalareasneedtobe

made, including a recommended $170

millioncutinGeneralFundsupportfor

theUniversitysysteminFY2012.

Compounding this problem is the

loss of federal stimulus dollars to the

Universities after FY 2011. Student

enrollmentcontinuestogrow,asprojec

tions from University officials indicate

an increase of approximately 3% from

FY

2010

through

FY

2012.

The Exec

fy2012 executive budget summary

Documents