November 14, 2012
Host: Ted Simons
- The temporary 1-cent sales tax approved by voters in 2010 to fund public education expires next year. Prop 204, which would have permanently extended that tax, failed at the ballot box this November. We’ll take a look at how that affects the funding of public schools with John Arnold, Director of the Governor’s Budget Office; Chuck Essigs, Director of Governmental Affairs for the Arizona Association of School Business Officials; and Timothy Ogle, Executive Director of the Arizona School Boards Association.
- John Arnold - Director, Governor’s Budget Office
- Chuck Essigs - , Director, Governmental Affairs for the Arizona Association of School Business Officials
- Timothy Ogle - Executive Director, Arizona School Boards Association
| Keywords: education
Ted Simons: We will start with you. the impact of prop 204, what would have happened? What’s not going to happen?
Timothy Ogle: Well, Ted, of course, the prop 204 would have been fiscally promising for our schools and our member schools. And, of course, would erase some -- have raised some significant money. And I think what is most significant out of that dynamic is that, from the cuts of 2008, 2009, our revenue to schools has been reduced nearly 22%, most in the nation. And we are residing at the bottom of revenue per student. And I think the defeat of prop 204 probably more than anything is a call to action for our leadership to say, now is the time to invest in our children. And as all of us I think would agree, there's probably no more productive investment this society can give its next generation hand to invest in education. So it's a call to action.
Ted Simons: Impact of prop 204 not making it?
Chuck Essigs: It will mean that a lot of hopes of school districts that they could reinstate some of the programs they were offering to implement some new programs, meeting some of the state mandates, that's probably not going to happen in the short-term. Hope physically the leaders of the state who said, as prop 204 was being debated, we will find other solutions, hopefully they will work with the schools and the schools will work with our state leaders to find another solution. But it's going to be long and spread out before the monies get restored.
Ted Simons: John, there are other solutions out there?
John Arnold: Absolutely. The state has a $9 billion budget. We need to prioritize those dollars. There’s a lot of pressure on the state budget these days. There has been for years. But for the governor and I believe for the legislature, k-12 funding has always been one of our key priorities. And as we look into the next, you know, two, three, four fiscal years, we see some opportunities to address the needs that were left over by the failure of Prop 204.
Ted Simons: Are there opportunities, though, when the sales tax expires? There’s concern regarding the health care act implementation. We will learn more about that at end of the week but there have to be some concerns.
John Arnold: Absolutely. We have known that the 1 cent sales tax is going to expire for the last three years. It was a temporary tax. The governor was right in calling for a temporary tax. We absolutely needed it. But we have used this time to really stabilize the state general fund, and state spending and revenues. We are balanced. And even as the 1 cent phases out we are going to remain balanced. The question is, will there be enough new revenue as the economy continues to grow, to support new investments in the k-12 and the universities and then tackle the federal health care reform and the pressures that brings to the state? You know, we believe that there are some opportunities there. And likely are going to center to reshuffle a few things and look at some options. But those options are there. And there's always important choices to make but that's why we have elected officials.
Ted Simons: The state budget stabilize to a certain degree. What’s going on out there in schools? What’s going on the ground with teachers, classrooms, school districts, school boards?
Timothy Olge: Sure. We have been fortunate to travel the state over the last couple of months. The staff and our organization, the spa. And we talk to dozens if not hundreds of school leaders around the whole state. And I would say that there's a lot of hurt out there and a lot of strong feelings about this whole dynamic that we're talking about today. And I think what we are hoping to bring and maybe the three of us here today can begin to talk about solutions with regards to people coming together and finding -- finding productive ways to solve our problems, and really, you know, merge the planes of school reform and sound fiscal policy at the state level. Because those two parallel themes are really coming together now, I believe.
Ted Simons: Coming together but again, the per pupil spending in student funding, soft capital, all these kinds of things, Arizona ranks very, very low. And in terms of percentage of the national average, it's even some cases worse. Is this something that has can gradually improve? What’s going on out there?
Chuck Essigs: I don't think it will be lurching into improvement but I think we manage to have a long term gradual plan that will bring some improvements. In a way we are lucky. John has a good background in school finance. He understands school facilities because we have both the facility and an operational problem in Arizona. And we are going to need to solve both of those with additional resources.
Ted Simons: How do we do that? Give me some ideas.
Chuck Essigs: We want john to find hundreds of millions of dollars in the state budget that nobody else was aware of and give them to us. [Laughter] probably in a crisis like this, people can sit down and hopefully come up with solutions but I think it needs to be lodge term. It can't be, we are going to fix everything this next legislative session. But it would be nice to fix some things and start to put a long-range plan in place.
Timothy Olge: John --
Timothy Olge: If I could, before we go to john on that topic, just to reiterate what chuck was saying, the current third graders have never attended a day of school with an appropriately staffed school environment. Because the cuts of '08, '09, and prop 204 would have given promise to reinstate some of those programs that we talked about. but what I mean when I say a call to action in the beginning is that we are endangering of losing an entire generation of young children as they move and ma trick could you lathe through a quarter of their school year. The time is now. Fortunately as Chuck described, john has a great background with school finance and they are advocating for us and I understand the governor has interest in addressing this problem but this is truly a mark in time, I believe.
Ted Simons: I hear from you the word $600 million to the good. You got $450 in the rainy day fund. We hear these different reports. I also hear that some lawmakers saying, no, we got to be careful because of health care reform and the our own little fiscal cliff. The big fiscal cliff included. What are you hearing throughout? What right options out there?
John Arnold: Thank you. [Laughter] you know, both things you are hearing are correct. The state does have some money. It’s one-time in nature because of the temporary tax. So we do have a significant budget balance this year. With health care reform we are going to lose a lot of that balance. It’s going to go away. It’s going to get sucked up by the costs that are associated with health care reform. But does that mean we can't prioritize and try to address some of the issues we have in k-12? And I would add the universities too that. And, yeah, on a per pupil basis we are on the low end of the United States. But we have a lot of hope and options here in the state to do some really good and exciting things. The governor has put in place Arizona ready council that has been studying k-12 reforms that we need, including performance funding. Including the new standards that are coming out, moving away from the Ames test toward a better instrument. Doing additional teacher training and school districts have been great partners as moving through that process. The third grade reading that we have put in place a couple of years ago. But because of our limited amount of resources we are going to have to be very, very smart about how we invest these dollars and make sure they are being used appropriately. So we get the biggest bang for the buck. but I think working in partnership with the school districts and with the university folks and with the legislature, we can come up with a package that addresses, it puts us on that long-term path to improve the things we need and address immediately the generation that's in school right now. We need to get those third graders reading. We need to get our graduation rates up. We need to get kids on a better path towards higher education and vocational skills. We need to invest in our university system. Those are all priorities that I think we can get done if we manage it properly.
Ted Simons: John mentioned standards and mandates and these sorts of things, accountability and all that. I would imagine that has put its own kind of pressure on the schools out there and are the schools handling that pressure?
Timothy Ogle: They’re working their tails off. and we have school leaders, board superintendent teams around our state working every day to implement common core standards, third grade remediation that's been talked about and those two school reforms have, are really important, and as I said folks are working hard at those kinds of things. But they do have fiscal impact. and so, you know, we need to recognize that and talk about it and at the ready council meeting the governor's ready council this week, that was discussed actually, the cost of implementing common core which we need to do. It’s a great school reform. And we will get it done. there's -- if I am betting, if I am a betting man, I would bet on our teachers because today the teacher of the year banquet we just saw exemplary teachers doing all the work we want them to do.
John Arnold: We have been very impressed at the state level at the local initiative the that, districts have seen this is coming. They have launched teacher preparation programs and they are preparing for it at the local level. So we need to do more at the state level but we have been very impressed.
Ted Simons: What about bond overrides?
Chuck Essigs: Bond elections did really well. Eight off the nine passed statewide. Overrides were about the same as they have been in other years but hopefully as the legislature looks at the solution, they empower school districts to use some of their local resources. Schools only have a third of the bonding capacity they had had a number of years ago. there's some things the legislature can do that won't cost them money but will empower local school districts to solve some of their problems and the biggest problem we all get-together and not be pointing fingers together but holding hands to solve the problem, we can get it solved but helping school, local school districts with some of their own problem solving abilities will be a big plus.
Ted Simons: That’s something you see as well?
Timothy Ogle: Absolutely. The collective power of the synergy that can be created when people work together will win the day and now is the time to do it.
Ted Simons: Last question. We have about 30 seconds. I want to ask you this regarding the bond election s and overrides and prop 204 which bent down rather handily. What message are you getting from voters out there.
Chuck Essigs: I think prop 204 was not a response to we don't think schools should receive additional funding. When you look at all the money that went into the campaign, the last couple of weeks and the pro people had no money to respond. So all of the negative campaigning people saw no response because there wasn't any money to buy TV time. But night after night on TV, you see negative ads. That’s got to have an impact and I think, I don't know if we didn't do any polling, but that certainly probably is the reason it failed.
Ted Simons: All right. Gentlemen, great discussion. Good to have you here. Thanks for joining us.
All: Thank you, Ted.
Ted Simons: That is it for now. Thank you so much for joining us. You have a great evening.
Impact of the “Fiscal Cliff” on Arizona
- If the federal government steps over the “fiscal cliff” will it take Arizona with it? ASU Economist Dennis Hoffman talks about the local impact of federal spending cuts and tax increases set to take effect in January unless Congress intervenes.
- Dennis Hoffman - ASU Economist
| Keywords: economy
, fiscal cliff
Ted Simons: Good evening and welcome to "Arizona horizon." I’m Ted Simons. The election may be over but the so-called fiscal cliff is still alive and unresolved. The fiscal cliff is a move to reduce the federal deficit by way of tax hikes and budget cuts that are set to take place automatically at the end of the year. Many economists think that the combination of higher taxes and reduced spending would send the country into another recession. The only way out is for lawmakers to come up with a deficit reduction plan. But that is proving difficult to say the least. Here to talk about the impact of the fiscal cliff on Arizona is ASU economist Dennis Hoffman. Good to see you again. Thanks for joining us. That’s pretty much what the fiscal cliff is.
Dennis Hoffman: Indeed. You summarized it very well, Ted.
Ted Simons: It hits at end of the year. What kind impact to Arizona here?
Dennis Hoffman: Well, let's just do the arithmetic of the cliff and not speculate about what elements are more likely than others. It’s a big deal. It’s $700 billion nationally, on that order, $700 billion nationally. Some of the aspects that are definitely going to hit Arizona in the arithmetic would be, you know, the holiday on social security taxation expiration. That’s a 2% hit, a 2% increase in taxes. So you will see your incomes fall 2% by paycheck starting January 1. And frankly there's not a lot of talk in D.C. about extending that tax holiday another year. But who knows what comes out of the sausage machine as they say. But that's definite. That will be felt by all Arizonans. There’s important defense reductions as part of sequestration plan. And those would be defense cuts that are on the docket. you know, some people have said a 10% across the board. Reduction in defense spending. it's kind of hard to believe that they would do it that way. so the question then would remain, are the operations in southern Arizona either with the bases or with, say, a Raytheon missile systems, are the operations in east mesa, are they at risk? And I’m not saying that they are. But, hey, if defense cuts are on the table, then, if I’m a producer in the defense industry, and Arizona is pretty high, if you look at procurement by the department of defense across the states. We’re a serious cob tender for defense dollars.
Ted Simons: Aerospace, drone technology which is very big in Arizona. That all has to be factored in.
Dennis Hoffman: Sure. Some of the more cutting edge drone and some of the security and surveillance areas, you know, one might speculate those would be retained. Again, it causes uncertainty. And I think uncertainty is really the name of the game here. That’s what you see with Wall Street. Wall Street hates uncertainty. And that's what this cliff debate has created.
Ted Simons: As far as Arizona, talk about direct impact. What about indirect impact, induced action? You can talk about the x's and the y's but there's another alphabet deep down below you have to consider as well.
Dennis Hoffman: Indeed. And induced effects are interesting in the economy. And you can explain these in a number of different ways. I remember stories about the great depression. And I will get to Arizona very quickly but I remember stories about the great depression, and merchants in Manhattan not worrying about almost laughing at the plight of these financiers in 1929, when the stock market crash hit. Thinking that they were somehow immune to the debacle that was taking place. In a couple of years those merchants had very, very tough times. so if you are, you know, if you are in Tucson or east mesa, what do I care about military procurement? I run an auto dealership or I run a clothing store. I run a restaurant. Well, those businesses are local. They exist because of the injection of these external dollars. And a lot of our external injections come from the department of defense. So everybody will feel it.
Ted Simons: Would Arizona get hit harder than other states?
Dennis Hoffman: I think that our reliance on defense would make us exposed at a greater level than some other states. Now, there are some states that are even more reliant, some cities that are even more reliant on the defense expenditure than cities in Arizona. but Tucson is certainly one of the ones, if you look at, say, a sequestration risk, that would be very high and that's because of the importance, the military has in the relatively small economy of the metro Tucson area.
Ted Simons: In f-a general recession were to hit -- and again this is the worst case scenario. if the fiscal cliff occurs and nothing changes, there could be incremental changes here. There could be tax hikes not quite as high, maybe higher income levels, budget cuts, maybe not quite as much. The possibility there kind of makes the equation a little scrambled.
Dennis Hoffman: Ok. I think that's a very, very good point. It’s likely, no matter what comes out of this sausage machine, it's likely to be in phases, if there are phased-in cuts or phased-in tax hikes that take place. The one that would be most likely immediate would be that 2% increase in taxes, payroll taxes as the holiday is eliminated. That would be the one that would be the most immediate. But all in all, it's about a $700 billion shock to the economy negatively. Now, interestingly, ted, that is about the same order of magnitude as the recovery act spend that was phased in during the Obama administration in the first term.
Ted Simons: Interesting.
Dennis Hoffman: And there's certainly a number of economists that said that didn't matter, that didn't do anything. And it would be interesting to know whether or not those same economists are thinking about that. Much of that, by the way, much of that $700 billion came in the form of tax cuts. So most of this $700 billion is coming in the form of tax increases.
Ted Simons: Is Arizona, if a recession were to occur, the impact on Arizona’s economy in state business, in state commerce, just the general well-being of instate residents?
Dennis Hoffman: Ted, what I am seeing and I’m seeing -- I don't know if the event was Lehman in the fall of 2008 but it was sometime mid-2008, early 2009, I became a big believer in the impact of psychology, the so-called behavioral side of consumer attitudes. And what this economy I don't think I can afford and certainly what the Arizona economy cannot afford is a shock to consumer confidence, a negative shock to consumer confidence. Just when we are finding some footing, equity prices have found some footing and they are still quite high. Housing prices are finding footing. There are signs of life in the housing market. The pace of retail sales has been pretty strong over the last year, especially consumer durables. All those signs point to a consumer that's becoming more and more confident. But if Washington, D.C. again illustrates to us that they are completely and totally dysfunctional, unable to come to any agreement, or any terms on this, then, I fear that it would rattle confidence. And then the question is how much is it rattled? And what are the residual effects?
Ted Simons: And how do you adjust? How do you get back to unrattled status?
Dennis Hoffman: Exactly.
Ted Simons: Compare going over the cliff to what seems to be a major sticking point and that is a tax hike on those who earned income, $250,000 or more. What is a bigger jolt to the economy?
Dennis Hoffman: Well, economists are going to debate this and I think ideology, you know, would enter into some of these debates. Economists talk a lot about the impact of on incentives and marginal tax rates at high income levels. I think that's important. That’s an important discussion. There are times in our history when we reduced marginal tax rates in 1960, they were 90%. We reduced them to 70. When Mr. Reagan took office, they were 70%. And by the time, at one point in his tenure, they were down to 28%. So right now they are 35%. We are talking about elimination of the bush tax cuts, would add 4.6% on that top rate. That will be important, would have a dampening effect on the economy but nowhere near the kind of dampening effect that would take place if we were to, you know, as we have historically, jumped those rates up to 40, to 50, to 60, to 70%. And that is not in the cards.
Ted Simons: One last thing, there's talk of the U.S. credit rating dropping as well.
Dennis Hoffman: Yes.
Ted Simons: That factors into the equation.
Dennis Hoffman: Absolutely. so if this cliff opportunity can pave the way toward the more grand bargain scenario that we have talked about here a bit before, a step towards Simpson-Bolles and that may not be the right solution but if we can deal with the long run entitlement issue and indeed the entitlement challenge is, ted, you and I haven't paid enough in to Medicare to pay for the benefits we are going to get out of Medicare. We are not alone. Our generation hasn't. The prior generation hasn't. And there's really no plan for the next generation to do so either. We have got to get some resolution, some balance and some sanity into dealing with our entitlement challenge.
Ted Simons: Make that will be forged out of this particular crisis. Good to have you here. Good information and good to see you again. Thanks for joining us.
Dennis Hoffman: Great to be here, Ted.
Ted Simons: What is the future of school funding in Arizona? It’s a question that many educators are asking after the defeat of prop 204, which would have made permanent a temporary 1 cent sales tax hike, with most of the revenue going to education. Government and some lawmakers acknowledge that education has taken big cuts in recent years, and reported to be looking at increased funding plans. here to talk about all this is Timothy Ogle, Executive Director of the Arizona School Boards Association, Chuck Essigs, Director of Governmental Relations for the Arizona Association of School Business Officials, and John Arnold, Director of the Governor's Office of Strategic Planning and Budgeting. Good to have you all here.
All: Thanks for having us