Horizon, Host: Ted Simons

August 20, 2009


Host: Ted Simons

Arizona Cash Flow

  |   Video
  • State Treasurer Dean Martin talks about Arizona‚Äôs budget crisis and cash flow problems.
Guests:
  • Dean Martin - State Treasurer
Category: Legislature

View Transcript
Ted Simons:
Good evening and welcome to "Horizon." I'm Ted Simons. Arizona's unemployment rate for last month jumped to 9.2% -- that's up from 8.7% in June. The Arizona department of commerce reports it was the third straight month that the unemployment rate jumped by half a percentage point. The state lost 26,000 jobs in July, with eight of 11 sectors losing employment. On the plus side -- natural resources, nursing and information sectors all showed job gains. Earlier today, state lawmakers sent a budget to the governor that's nearly identical to one she already vetoed. It's unclear if the governor will sign the plan. It still doesn't include a ballot referral for temporary sales tax increase, something the governor had previously demanded. The governor has until Wednesday to sign, veto or allow the budget bills to become law without her signature. State treasurer dean Martin has weighed in on Arizona's budget mess. He says he is against a tax increase, saying that could put us deeper into recession. He thinks the governor should sign the package passed by the lawmakers. Martin says if nothing is done, the state will run out of money by October. Here now to tell us more about Arizona's cash flow situation is state treasurer Dean Martin. Thanks for being on the program.

Dean Martin:
Thank you for having me.

Ted Simons:
The state has something sent over, a budget sent to the governor. She has technically until Wednesday to do something with it. How long has she got?

Dean Martin:
The sooner the better. Because the state is broke, the general fund had to borrow $386 million to keep the lights on yesterday. And the sooner she can pass a balanced budget, the better off we're going to be. Without one, we're looking at a California-type situation soon.

Ted Simons:
Let's say she hasn't acted by Tuesday of next week, what happens?

Dean Martin:
If it's vetoed or doesn't -- for whatever reason doesn't let it become law, we're in a situation where we can loan -- as the treasurer, I can loan the state about $500 million, $600 million from funds we control. Beyond that, we have to go to outside banks but they've said we can't loan you money unless you can pay us back. The state is no different than an individual. Our forecast says that can happen the latter parts of October.

Ted Simons:
You're saying $500 million to $600 million, that's interagency?

Dean Martin:
That's what we can do from other state funds, we can lend to the general fund. Beyond that, we have to go to outside banks. How bad this is, a year ago, we had $650 million cash in the bank. That's a -- the state is still spending at the same rate as last year.

Ted Simons:
That's not written in stone, that's more of a fluid thing as to the availability of funds.

Dean Martin:
We've got to run the other agencies. They need to be able to operate. It varies between $500 million to $600 million and once that's tapped out -- it's like having a credit card with a limit. Once it's tapped out, you have no way to pay bills and we're talking California IOUs.

Ted Simons:
The banks need how long to set a borrowing program?

Dean Martin:
That's why we need the governor to act quickly. Six to eight weeks to set up a credit facility. We need to borrow somewhere between $1.5 billion to $3 billion.

Ted Simons:
Can that be expedited?

Dean Martin:
We're working on the assumption we'll get a signed budget. We're starting the process now but this has never been done before. The last time the state was in the red was back during the great depression. We're doing something that hasn't been done in modern banks' history in the state of Arizona. All of these banks have cut California off and so if they're going to cut California off, they're not going to extend us credit.

Ted Simons:
As far as our credit rating, we're on the watch list as far as Standard & Poor's, correct?

Dean Martin:
It's been put on negative watch because of the fiscal year situation. They have something called negative watch. They're watching the state of Arizona and likely to do a downgrade unless we fix the problem.

Ted Simons:
What does that mean?

Dean Martin:
More interest costs. It's going to cost more to do the same things in government because the cost to borrow money is higher.

Ted Simons:
Does it also mean a fewer range of banks to work with?

Dean Martin:
It may mean fewer borrowers. Because some people will only buy highly rated debt.

Ted Simons:
If the state can't get bank loans and the budget isn't done or they have to start over again and the banks are saying not now, not us, what happens?

Dean Martin:
Near the end of October, after we make the school payment and the university payments or other distributions we'll hit a point where there's no money left and the governor will have to make a decision who gets paid and who doesn't. Who gets a real check, and we'll be living hand-to-mouth. How much money came in today, that's how much we can pay that today.

Ted Simons:
Late payments and IOU's a possibility nothing happens by --

Dean Martin:
The end of October. This is exactly what happens to California. California was told the banks were going to cut them off. It took 10 days after they were cut off before they get a balanced budget.

Ted Simons:
What about the stimulus money?

Dean Martin:
The biggest chunk we have is half a billion of K-12 money. They didn't follow the rules and so the budget that was in place now doesn't follow the K-12 rules. There's a half a billion we've been approved for sitting back in D.C. The budget that the legislature sent over allows us to draw that money down. That will improve our cash situation.

Ted Simons:
The governor's office said the state is not in danger of running out of money to pay bills.

Dean Martin:
That means she's going to sign the budget, that's true. If the budget is vetoed then we're -- the possibility of this happening, the odds get greater the longer this waits.

Ted Simons:
And the governor's office says talk of IOUs is premature.

Dean Martin:
I run the bank; I like to warn my customers when they're in trouble before they get to that point. I'm trying to provide two months of warning so we can make the corrections necessary to avoid this. You don't want to wait to the last minute to be warned you're out of money. The state is literally out of money. $386 million in the red yesterday. Probably in the same range over the weekend.

Ted Simons:
You're ideas on what the legislature and/or the governor should be doing now and should have done back then.

Dean Martin:
This idea of a sales tax increase is not going to help in year's budget. It's a 2011, 2012, 2013 issue. What they need to do is what was done for them when the senate couldn't get the votes. Send up the budget and sign that and start over for 2011. We can't hold 2010 budget hostage. We need that to operate.

Ted Simons:
Your quote, you've been very disappointed with Governor Brewer.

Dean Martin:
There's an adage, there's a thousand ways to skin the cat and I don't think there was enough flexibility to allow for -- the legislature, you've got 90 people who have different ideas how to do things and you need flexibility to get things passed. I know, I served there. Not everything goes exactly to plan. That flexibility is necessary to get the job done and that's not been the case. There's a lot of blame to go around. There isn't just one person to blame. But it's disappointing we've gone this long. We should have had a balanced budget the end of June.

Ted Simons:
Are you disappointed to the point that you would consider running against a Republican incumbent governor?

Dean Martin:
A lot of people asked me to consider it. I'm planning on running for re-election as treasurer but I'm thinking about it, because it's such a mess. There's a serious question whether or not she's going to run again and -- you know, what do we do to get out of this mess. I don't care who is doing the job, just that it gets done.

Ted Simons:
If she were to run again you wouldn't necessarily hesitate to run against her?

Dean Martin:
I'm not going to speculate.

Ted Simons:
We'll have to wait and see what the governor is going to do. The sooner the better or there's trouble down the road.

Dean Martin:
If you want to guarantee we don't go down the road of IOUs.

Ted Simons:
Thank you for joining us.

Dean Martin:
Thank you.

Tuition Tax Credits

  |   Video
  • How to improve Arizona's tuition tax credit law. A recent investigative series by the East Valley Tribune indicates the law is rife with abuse.
Guests:
  • David Schapira - State Representative
  • Clint Bolick - Goldwater Institute and chairman of the Arizona School Choice Trust
Category: Government   |   Keywords: tuition,

View Transcript
Ted Simons:
Next, month, state lawmakers will take a look at reported abuses of Arizona's tuition tax credit law. The law was designed to help low-income kids gain access to private schools. To qualify for a dollar-for-dollar state income tax credit, an individual must make a charitable donation to a school tuition organization. Those STOs then use the money to give private school scholarships to kids. They're supposed to be kids who can't otherwise afford private school, but an investigative series by "The East Valley Tribune" revealed that's not always the case. I spoke with Tribune reporter Ryan Gabrielson about that earlier this week on "Horizon."

Ryan Gabrielson:
Federal tax law forbids donations that are earmarked or designated for a -- to benefit one person. It's not charity if you're saying I'm just going to give money to help this one person. If you're giving money to a charity to disperse based on need and other things, that's charity. So instead of calling these earmarks or designated donations, they -- designations, they call them recommendations and we found by talking to parents and schools and reading the surprisingly blunt details that the schools publish on their website, these aren't recommendations. They're designations and they changed the wording thinking that would allow them to be within what the law allows and the state law doesn't even address it. So, yeah.

Ted Simons:
I was going to ask about oversight. You're saying no state oversight?

Ryan Gabrielson:
There's no actual regulation of the system by the state. The state Department of Revenue has one person, the chief economist who oversees the program and receives annual reports about what donations and scholarships each STO received and gave out. She's not by law required -- not required -- able to get any other information about who gets scholarships, who is making donations. She doesn't have the mechanisms to even catch blatant, out-of-control lawbreaking, which is what we've found. The lawbreaking has become the norm in many cases.

Ted Simons:
Joining me now is state representative David Schapira, a Tempe democrat who, next month, will chair a taskforce looking into reported violations of the state's tuition tax credit law. And Clint Bolick, a constitutional law attorney for the Goldwater Institute and chairman of the board for the Arizona school choice trust, an STO that predates Arizona's tuition tax credit law. Good to have you both on "Horizon." Thanks for being here. Clint, the history and intent of this program. What was it, what has it become?

Clint Bolick:
Initially adopted in 1997 designed to help kids who were primarily low income, like our organization does, go to private schools if their parents chose those for them. Basically, it gives Arizona taxpayers today up to $1,000 per couple for a tax credit for scholarships for other people's kids. By and large, that is how the program works. It's helped thousands of low-income kids over the years. There's two more programs, but as Ryan Gabrielson pointed out in the "The East Valley Tribune," there's people who have been gaming the system and using it to benefit their own kids.

Ted Simons:
Gaming the system, we'll get to that. But the program, just overall, the idea and the intent, do you agree with it?

David Schapira:
I think that the Trib story does say what Clint said. It gives it slightly different proportions. What Ryan outlined was that a very large portion of the people taking advantage of this program are not low income. But the program has not expanded the enrollment at the private schools and hasn't changed the makeup as far as what he's found. I don't think the program is working and I think that's what the Trib story shows and it's necessary that the legislature come back and readdress this so it can follow its intent.

Ted Simons:
Or readdress whether or not the program should exist at all.

David Schapira:
That's not the purpose of the taskforce we formed. It's to identify the problem. To look into the allegations made in the stories, to investigate this issue and determine what changes might need to be made and craft some legislation for the next session to make changes so that the program can follow its original intent.

Ted Simons:
What kind of changes would you like to see as far as the program is concerned?

Clint Bolick:
There are other programs that have been adopted since the one we're talking about today that limit the beneficiaries to either -- low income-kids or special needs. For any charitable organization that you're benefiting other kids. This is not about benefiting your own kids and we'd like to see some monitoring by the state to make sure that the money is being spent as -- as it should be. We've been advocating these for years. We're glad Democrats are finally coming to the table on these programs because we've been trying to get them there for a long time.

Ted Simons:
Have they been trying to get you there for a long time?

David Schapira:
Since I began my service on the education committee and I've been interested in this program. To ensure that the program is doing what it was intended. One of the many programs, as Clint mentioned, we've made changes that increased the allocation of money dedicated to these programs. It was one of the few increases in allocation to funding this year other than additional money from the governor's office. And so that's something that is of concern to me. Something I've worked on this year where we're cutting funding for other educational entities, including K-12 and universities and why increasing for a program that's not doing what it was intended to do?

Ted Simons:
I would imagine there had to be at least a whisper that some things were not being done on the up and up. Why does it take the report to get you interested?

Clint Bolick:
We've been interested for a long time. When we have designed model school choice programs they have these protections in them and the more recent programs have these protections. But the abuses are recent in vintage. The early scholarship organizations like the one I chair were focused on low-income kids and unfortunately, people saw opportunities to game the system and taken them. And I've been a critic of that both inside the organization and outside for a long time now.

Ted Simons:
Can you get regulation, some kind of oversight that goes after the folks gaming the system? I know you're not big on regulation and oversight.

Clint Bolick:
We're big on accountability and I think that oversight to make sure the mission is accomplished, that money isn't skimmed, that sort of thing, we favor that for every type of program. But the violations that the "The East Valley Tribune" talked about are really tax violations because these are nonprofits that are doing things under federal law they're not supposed to do and there have been calls for I.R.S. investigations and I say let those investigations come and the chips fall where they may.

Ted Simons:
How do you keep two parents saying I'll donate for my kid and you donate for yours?

David Schapira:
The first thing we do, and this doesn't necessarily require legislation, ensure that those parents are aware that it's against the I.R.S. -- the I.R.S. code states you cannot donate money to a 501(C)(3) and earmark it. The folks -- the STOs -- some, as was discovered, are advising parents to earmark to each other and we've heard of instances where parents are actually loaning money to someone else and that person is then making a contribution toward their kid's tuition. This is a big problem and if the STOs are making -- are part, we need to make the parents aware.

Ted Simons:
Some are saying you're making us responsible for activity we're not condoning or suggesting. It's like the IRS at blame when someone cheats on their taxes. How do you hold the STOs accountable?

David Schapira:
They came up with the idea of allowing parents to earmark their contributions. So they're not blameless in this. They came up with the program and the way of doing it. And some of them, and we hope to uncover that, are advising the parenting to do the exact thing which is against the federal law.

Clint Bolick:
The critical thing -- not to throw the baby out with the bath water. There are great STOs, the Catholic organizations and several others that have a charitable mission and not only are they providing educational life preservers for kids who desperately need them, but when they work the way they should, like the corporate tax program does, they save the state money because the corporate tax credit is capped, the tuition is capped, and you have to be a kid who was in a public school or starting kindergarten. So it can save the state money and provide educational opportunities at the same time.

Ted Simons:
The Tribune series seemed to show that private schools were no more accessible now than before the program started and that tuition at private schools is no less expensive now than it was before the programs. Indeed, that suggests a flawed program. Why are those results out there?

Clint Bolick:
I think it was a flawed report because I can attest from my own organization and several of the others, there are tens of thousands of kids who benefited who would not have been able to go to private school otherwise. And with competition from charter schools and so forth, private schools are probably going to be losing students so if there's the same number of students going, this program has been a huge part of making that possible. So I think cutting it off would be really cutting ourselves -- our own throats because it would mean a Diaspora of kids --

Ted Simons:
It seems it's not working as it was thought. Is the program fatally flawed?

David Schapira:
I don't think so. There's a way to tailor the program. Whether or not this program should continue to exist is not the purpose of me being here and us calling this taskforce that will meet next month. The purpose is to tailor the program so there aren't parents instructed to violate federal law. And one of the points that Clint made, there's a lot of STOs that are doing what they're supposed to do. Bringing students into a system that might not otherwise been able to afford to go a private school. But the same STOs are part of the problem, there are examples of parents who wanted to send their kid to one school and had people contribute to that STO so they could. They can't transfer that money, that money cannot be moved over. In many cases, the STO reduced to -- refused to give it -- that parent is not getting what they thought they would out of the system.

Ted Simons:
How should an investigation go on this? I.R.S., U.S. attorney's office -- all be included?

David Schapira:
We need to include the government agencies that have oversight over these issues and, yes, the I.R.S. and state have oversight over the 501(C) (3)'s and we need laws that are reconciled between the federal and state law. If the state law says it's ok to do earmarks and federal law says it's not --

Ted Simons:
Are there states out there along these lines doing what Arizona is doing and has done? Anything we can learn?

Clint Bolick:
Not only can we learn -- there are a number of other states doing this. Florida and Iowa doing it successfully. But we can learn from the newer programs. The corporate tax credit program. Enacted after the program we're talking about is limited to low-income kids. The tuition scholarships are capped in that program. 100% of the money in that program goes to low-income kids. So I think all we need do is make modest changes and those changes have been -- we haven't been able to get bipartisan support for them in the past. The Democrats have only wanted to kill the program rather than improve it. I'm delighted to hear what David is saying and I think that there can be a very, very easy solution to this problem.

Ted Simons:
The Goldwater Institute is not shy in going to court over everything from tattoo parlors and hockey teams.

Clint Bolick:
Unfortunately, the things that have been done are legal under Arizona law. As David mentioned there's a conflict between federal and state law. This really is a matter for the I.R.S. to enforce or for us to change legislatively and, of course, I always prefer change than sending people to jail.

Ted Simons:
What have you got?

David Schapira:
Determine who we're going to talk to in the meeting and at 10:00 in the morning, we're having a hearing of a bipartisan taskforce to work to develop legislation to be introduced in January.

Ted Simons:
Very good, thanks for joining us.

Clint Bolick:
Good to be here.

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