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July 14, 2009

Host: Ted Simons

Bashas’ Bankruptcy

  |   Video
  • The Arizona owned Bashas’ grocery store chain has filed for Chapter 11 protection is federal bankruptcy court. Later this month, the company plans to close ten stores and shed 1,000 jobs. ASU Economist Matthew Croucher discusses the economic impact of the bankruptcy on the State of Arizona.
  • Matthew Croucher - ASU Economist

View Transcript
Ted Simons: Bashas' and its family of stores has filed for federal protection in bankruptcy court. Here to talk about that is Matthew Croucher, an economist with the W.P. Carey School of Business at Arizona State University. Bashas' files for bankruptcy. How much of an impact on the valley's economy?
Matthew Croucher I think it's going to have a significant effect. Bashas' has a lot of stores in Arizona and they employ quite a lot of people. And given that we are already in a difficult situation and circumstances, it's going to have a significant impact, given the job losses that are potentially expected.
Ted Simons: We're talking 10 stores, a thousand jobs with more to come likely?
Matthew Croucher: Essentially, yeah. They are not closing all otheir stores down tomorrow, because that's a very large feeling which consumes the thinking, tomorrow we're going to see going out of business signs. It becomes a self-fulfilling prophecy. We might see more layoffs, but it's not doors going to close tomorrow, that sort of thing.
Ted Simons: The company says, we will emerge from Chapter 11 next year, strong and are better. Possible?
Matthew Croucher: It's entirely possible. The problems have been, first of all, the economy and how the economy has -- we've gone into a recession quickly and quite a severe recession. Importantly, it's the competition. The grocery industry is already a competitive market where profit margins are small. Wal-Mart, Frye's, Safeway are competing for the same consumer dollars, it's been very difficult for Bashas' to compete. They go in and attempt to provide goods and services at an extremely low price, it's been difficult for Bashas' to match Wal-Mart.
Ted Simons: I know there are union issues at Bashas'. People are all in a lather talking about this sort of thing. But how much impact does this have on Bashas'?
Matthew Croucher I don't think it's been a contributing factor. I think the biggest factor is the economy going into such a downturn. We are creatures of habit. We probably used to go to the same grocery store once a week for the last five years. Why? We like the store and the convenience and we know where products are. When money becomes tight and income becomes a factor, people start to shop around and say, where are the best deals to be had? Lots of grocery stores, one way to get business is run loss-leaders, or products priced very close to cost and get you in the door. Consumers are looking saying, I will go and purchase those goods and services, but then I will go to Frye's to buy what they have on offer, and the same to Safeway. One major issue in Arizona, we grow outwards, we don't grow upwards. We have this very low population density. As a result, grocery stores are always chasing the market, chasing the people and going outwards. It's very difficult to make profits in that environment where there's simply not as many people around to support that many stores.
Ted Simons: With that in mind, how can Bashas' remake itself?
Matthew Croucher: I think it's got to find its niche. It was locally owned, and people said, I'm shopping at a store that's locally owned. That loyalty was costly, the products were slightly higher than the competition. They attempted to compete in price, but that obviously hasn't worked yet. People want to go to Bashas', 16 maybe it could be the price, but I find it difficult for them to come out and compete on price. There's got to be some other reason to get people in the door.
Ted Simons: Can you see the Bashas' becoming something like Fresh and Easy, smaller stores, more specialized product?
Matthew Croucher: Well, in their kind of portfolio, they already have A.J.'s as being that kind of smaller market for an upscale kind of consumer. I think Fresh and Easy is attempting to compete in that market, kind of small and boutique-y. We might see a smaller, leaner more focused Bashas' come out of bankruptcy.
Ted Simons: Will we see a Frye's, a Safeway, but some of these other grocery chains having the same troubles?
Matthew Croucher: I think all grocery stores will have some struggles. Even Wal-Mart has been successful in some areas, but in others there are some struggles going on. All grocery stores are going to see some difficult times ahead. However, the larger you are and the more dispersed you are nationally, Bashas' has struggled to compete with that.
Ted Simons: Very good. Thanks for joining us tonight on "Horizon."

Legislative Update

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  • Senator John Huppenthal (R-Chandler) and Representative David Lujan (D-Phoenix)talk about Governor Jan Brewer’s request to send a temporary tax increase to the ballot.
  • John Huppenthal, State Senator,(R-Chandler)
  • David Lujan - State Representative,(D-Phoenix)

View Transcript
Ted Simons: Good evening, and welcome to "Horizon," I'm Ted Simons. We now know who's behind a $105,000 contribution to the Republican Party just before last November's election. The money was used to pay for ads against Democrats challenging Maricopa County Sheriff Joe Arpaio and Andrew Thomas. To avoid a $315,000 fine, S.C.A. treasurer Maricopa County Sheriff’s Captain Joel Fox released the names of contributors to S.C.A. Its part of an agreement with the Maricopa County elections department, which says S.C.A. is a political action committee, and therefore must abide by campaign finance laws, which require disclosure of campaign contributors. Phoenix developer Steve Ellman donated $25,000, and was S.C.A’s largest contributor. Several officials from the sheriff’s department contributed a total of more than $12,000 to S.C.A. We're in week two of the special session and lawmakers are still looking for votes to send a special sales tax increase to the ballot. Here with more on that, Senator John Huppenthal, David Lujan, House Minority Leader.
Guests: Great to be here.
Ted Simons: John, let's start with you. You've got a special session going last I checked. Anything going on right now?
John Huppenthal: We had a lengthy meeting with all the caucus members, the first time we've had a closed-door caucus meeting. We sort of let it rip, the challenges that we have. We have a little over $7 billion in revenue and a $3.7 billion deficit and that's just monstrous. We have members absolutely pledged to oppose the sales tax referral. As of now we don't have the votes to put the referral out. We have a governor absolutely determined to get her sales tax referral or take us all over the cliff, from what we can gather.
Ted Simons: Sounds like it was a raucous caucus over there. What was the problem? Was it folks saying it's going to be my way, and that's it?
John Huppenthal: I thought the caucus was very positive. Everybody sort of talked it out a little bit, a little bit of emotional stuff. Then we just started rationally pounding away at the options in front of us, how the leadership team will deal with the challenges, some of the leadership has absolutely pledged to oppose the tax referral. They feel like that's an oath they can't violate. How do we get out of this: I've got a box and I'm handcuffed with a bag over my head and I've got a toothpick.
Ted Simons: Democrats not all that excited about this one-cent sales tax. Why not? Why send it to the voters? Why is that a problem?
David Lujan: We don't have a problem with sending it to the voters. First of all, we think it's the legislature's job to do this. People elected us to do that, to balance the budget, that's our number one responsibility. If we can't do this amongst ourselves in the legislature, I think we should send it to the ballot. The sales tax piece, Democrats have issues with it because we're looking at what is the cost to the average Arizonan of a sales tax increase, and what are the other options. We think there are other options that will cost middle-class families less on a per capita basis every year, and are more stable revenue sources.
John Huppenthal: I have to challenge that a little bit. When David says they are not opposed to a sales tax referral, our understanding is all the Democrats would say vote no on that, so is that the truth?
David Lujan: Ya, that’s true. What I'm saying is we are open to having those discussions with Governor Brewer, and let's talk about other options. We've been saying since she took office, bring the parties together and let's talk about what the options are out there. We still have not had those meetings.
Ted Simons: Sounds like you're saying we can go along with the tax referral, but you need some of the things you want in there, as well. What are some of the things you want?
David Lujan: I don't know if we can go along with the sales tax referral. We want to have those talks and look at other options. To agree to a budget, the things that are important to us are protecting education and protecting health care and other programs that are important to our Democratic caucus. Making sure that we have a revenue source, whatever it is, that's going to provide a stable revenue stream to adequately fund those things.
John Huppenthal: I think the Democrats have been trying to say they want to be a part of negotiations. I think you've seen an example here where first David says, well, we're not opposed to the referral. Well, in fact, they are unanimously opposed to it. We're willing to negotiate with the Democrats. In all 18 years of my legislative development, we're in the biggest crisis situation. $3.7 billion short. Even if you get the billion from the sales tax revenue we still have to make massive cuts. It's a very difficult situation. Without moving left to accommodate the Democrats, our budget is already irresponsible in terms of spending levels. We do not have enough money to make it through the year.
David Lujan: Democrats have put out two budget proposals. I think it’s the first time in the history of the state that the minority party has put out two very responsible budget proposals, two that have gotten a lot of positive feedback from a lot of people, both Democrats and Republicans. We have been willing to work with Republicans since February. So we've been calling on that, we just haven't had the opportunity.
Ted Simons: The one-cent sales tax, again, the concept of referring this to the voters: Why is that a problem?
John Huppenthal: Well, people view that voting today is supporting a tax increase. That's their opinion. My opinion is, I've been successful at supporting tax reduction and getting us below the national average of taxation. In my view, you have to look at this tactically. What are the best interests of the taxpayers? We are going to increase property taxes by $250 million. My fellow caucus members need to look at that and say that is disastrous, we need to focus on that $250 million, that's more important than the referral.
Ted Simons: Does there not have to be some kind of tax increase, whether it's a sales tax increase, some sort of a flat tax that's not all that flat, does something have to happen? Crisis indication: Can you just cut your way out of that problem?
John Huppenthal: I don't think you can cut your way out of it. You have to do enough cutting to convince the financial markets that you have credibility. We might have to borrow as much as $12 billion. With the $3.7 billion deficit, there's no way we will have that credibility. Our crunch will happen sometime between December and March of this year, we are going to go into a cash flow crisis that is going to boggle people's minds.
Ted Simons: The credibility issue, address that, if you would.
David Lujan: You have to look at the revenue side of things. You cannot cut your way out of this budget shortfall. We've had significant cuts to correct the 2009 fiscal year budget. We already saw the most massive cut to public education in the history of the state. We need to look at the revenue side of things. Democrats put out the two budget proposals because we were concerned about we need to have credible solutions and look at a comprehensive approach to addressing this budget crisis.
John Huppenthal: Lets be serious here. Analyzing those Democrat proposals, it's a scaffolding out over a canyon. It doesn't get out more than two years. We have to do significant cutting. Even if we do the sales tax referral there's no guarantee at all, despite the public opinion poll showing the high support levels. People are going to be motivated to come out and they will be people that realize you do economic damage with a tax increase.
Ted Simons: At what point does the cutting become too much cutting, in terms of education, social services, these sorts of things? Where's that line?
John Huppenthal: If you accept that Arizona ranks 50th in education, it's problematic. The very best research shows the quality of our schools ranks around 21st. We do very well with the resources that we have. It is going to be a challenge. But all the research indicates that we are capable of meeting that challenge, even with resources that are a little more limited to improving the quality of our schools. But we have this crescendo saying that we rank 50th, that's false. We rank slightly above the national average.
Ted Simons: You get that from where?
John Huppenthal: The Rand Corporation premiere think tank of the United States.
Ted Simons: Do you agree with these numbers?
David Lujan: No. We’re dead last in the country in terms of how we fund education, we're last in terms of class size. And there are a lot of different groups that put out very similar ranking that put us dead last. The one that I always like to cite is the one from the Alec Group, which is the American Legislative Exchange Council, a very conservative Republican group, puts out a lot of conservative policies and they rank us last.
John Huppenthal: You're hearing two different things, David is talking about spending. I'm talking about quality of our schools. We rank 21st in the nation.
Ted Simons: With that in mind, and with so much cut from education, at what point, pick a number, when does the quality of that education suffer because of budget cuts?
John Huppenthal: Well, there's a challenge there. We would love to be able to say we can increase spending in education. The truth is we have $3.7 billion short. Even if we get the billion from the sales tax referral, we're still 2.7 short. We're sort of deluding ourselves that we can't come to grips with this.
Ted Simons: Is everyone looking at this as though X, Y and Z will work when you are looking at such a chasm, such a deficit that's beyond most folk's comprehension on how to do it in the short term, and B, not to ruin long-term interests.
David Lujan: Its such a significant problem. I think what we have to do, the approach Democrats have been saying we have to take is the budget process is a process about our values. What is it that we value as a state? If we're going to value public education in this state, we need to see the appropriate level where we can provide that quality education. How do we maintain that funding both in good times and in bad times? Because you're a student going through the school system in good times, you shouldn't be the only one getting the benefit of good class sizes, it should be the student going through bad times, as well. So we need to figure out whats the revenue source to maintain that funding.
Ted Simons: Very quickly.
John Huppenthal: The quality of education, both David and I are on school boards. I’m on the board of two charter schools. We show our values, measure teacher job satisfaction twice a year. We read every comment and see how we can support our teachers. David is on the largest school board in the state, and they do not measure teacher satisfaction. There are different ways of expressing your values. Not just throwing money at a problem.
Ted Simons: We'll have to stop right there. Thanks for joining us here on "Horizon."
Guests: Thank you.

Tax Policy

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  • Arizona Tax Research Association Director Kevin McCarthy offers his perspective on revenue options available to lawmakers as they look for ways to balance the current year state budget.
  • Kevin McCarthy - Director, Arizona Tax Research Association

View Transcript
Ted Simons: As lawmakers consider a temporary tax increase, we've been asking experts on tax policy and public finance to weigh in on the issue. Tonight we hear from the Arizona Tax Research Association. First, here's what Tom Rex, A.S.U. economist, had to say about a temporary sales tax last week on "Horizon."
Ted Simons: How do you get the most revenue without affecting business, the economy, and other aspects, doing the least damage there? Republicans will say tax increases are job-killers. Is that a viable argument?
Tom Rex: Well, it is, sure. Spending cuts are job-killers, too. The models show it's more of a job-killer. We’ve put ourselves into a terrible situation. There isn't a good option. Whatever option's taken is going to be negative for the economy in the short term. That's just the way it is, unfortunately. But it's going to be more negative if we decide to cut $2 billion out for the economy than if we raise taxes.
Ted Simons: The idea that a recession is the worst time to raise taxes, again, is that argument viable?
Tom Rex: Again, yeah, you don't want to really do it now, of course not. People are having a hard enough time now. I think some perspective is needed here. A $1 billion tax increase over 6.5 million Arizonans is only $150 per person. We're not talking that big of money here. It's $150 on average. The poor people with less income, those figures are going to be less than $150. It's not like we're talking huge impacts on individuals.
Ted Simons: Joining me now is Kevin McCarthy, president of the Arizona Tax Research Association, which lobbies the state legislature on behalf of its members. Thank you for being here tonight.
Kevin McCarthy: Appreciate the opportunity, Ted.
Ted Simons: The idea that state budget cuts, cuts to the general fund would cause more damage in the long term than higher taxes. Do you agree with that?
Kevin McCarthy: No, Ted. I think in a normal environment where you have the standard sort of budget deficit and challenges that lawmakers face, which is not where we're at today in Arizona, I would say that that would be a simple answer, that raising taxes would do more damage to the economy than cuts to government spending. I think there's been some recent analysis out of the Federal Reserve out of San Francisco that demonstrates that the economic impacts associated with tax increases are clearly more negative than budget cuts. But it really is kind of a moot argument at this point. We have a $3.8 billion structural deficit, a deficit that -- not in my career did I ever dream we would be where we're at. We need to cut spending and we'll probably have to raise taxes, as well. So we can engage in this debate and argue about devastating budgets to K-12 schools or anybody else, and argue about the negative impacts of the tax increases, the reality is the only way out of this is probably going to be a combination of both over the next several years.
Ted Simons: What kind of tax increases?
Kevin McCarthy: Well, our organization has early on made the point that if we're going raise taxes we ought to do that after we've substantially reduced spending. We disagree with the notion that there has been massive budget cuts to date. They have been modest when you compare what's going on in the private sector and the record job losses in Arizona and the impacts that the private sector has experienced with losses of retirements and everything. There's more budget-cutting in order. When they turn to tax increases, we ought to increase taxes in the way that it's doing the least damage to the tax system, and we feel that's probably a sales tax increase.
Ted Simons: Democrats are saying don't do that, broaden the base, and get some services in there, as well. Does that make sense?
Kevin McCarthy: That's an interesting idea. I don't believe that we're in an environment that's conducive for tax reform. By that I mean, where you have an opportunity to educate lawmakers about the varying pluses and minuses associated with the revenue-neutral type of exercise. I think where we're at now we should have a serious discussion about where to raise taxes. When you do that, it has to be simply understood by Arizona taxpayers. There's a two-thirds vote to raise taxes in Arizona. I don't think the legislature is going to muster the necessary two thirds vote in the House and Senate to do that. They are going to refer something. If you refer a tax increase, I think it has to be more along the lines of a rate increase that is simply understood by people, as opposed to a massive change in how our sales tax system works.
Ted Simons: When you mention now is not the time for a change in structure, it's not the time for a flat tax?
Kevin McCarthy: That surfaced late in the session right before the June 30th deadline and caused quite a bit of confusion at the Capitol about how personal income tax liabilities were going to change for Arizonans. And what was the definition of gross income, whether it was federally adjusted gross income or some other income. Not on the fiscal impact associated with that, if you have a flat tax, unless you are dramatically increasing that rate, you're going to lose revenue in a big way. So they dropped the marginal rate down to, I think it was 2.78, and the impact of that on the General Fund was some $450 million. The deficit that we've got, are already facing, that was a concern to lawmakers. In addition to just the impacts on citizens, who would see increases and who is going to see decreases.
Ted Simons: Last question here, we don't have too much time. I hate to throw this at the last moment. How do you balance tax cuts, if they are necessary, and budget cuts? It sounds as though each side seems to want one or the other. If you have tax increases, how do you get there without damaging business? If you have budget cuts, how do you get there without putting a lot of people at risk and making a lot of harm in tough times for a lot of the citizenry?
Kevin McCarthy: I think there is opportunity for exaggeration in this debate. There's the opportunity for huge exaggeration about the impacts, the budget cuts. There's the opportunity for exaggeration about the impacts of tax increases, and we have to fight our way through that.
Ted Simons: All right. Thank you so much for joining us.
Kevin McCarthy: I appreciate the opportunity.