National League of Cities

The fiscal hit that Arizona and other states expect will trickle down to cities like Scottsdale. Here's what the National League of Cities sees.

The COVID-19 outbreak is going to blow a billion-dollar hole in state finances.

The Joint Legislative Budget Committee said the decline in state revenues – plus additional costs to the state from the effects of the virus – should leave Arizona with a $1.1 billion budget deficit by the end of the coming fiscal year. That’s out of what is basically an $11.8 billion spending plan.

The new report says that $1.1 billion deficit comes even after the state uses close to $1 billion it was expected to have left over by the end of this budget year on June 30.

There is one bright spot of sorts. The state does have about $973 million in its “rainy day’’ fund, a special account set aside for emergencies.

And legislative budget staffers said there will be some relief funds coming in from the federal government.

But it also could mean that lawmakers, who until a month ago were planning to spend what was expected to be a cash surplus, will now have to find places to cut.

Even if the more immediate revenue shortfall gets addressed, whether with the rainy-day fund or something else, budget analysts are predicting another $1 billion shortfall in the 2021-2022 fiscal year because the number of people in the state’s Medicaid program is still expected to be high. 

By that point, the extra dollars the federal government is providing to help will have disappeared.

Richard Stavneak, staff director of the JLBC, told members of the state’s Finance Advisory Committee projections at this point are risky.

But Stavneak warned that even if businesses were to start opening next month, “There is typically a second wave that comes. The hope is we would be better prepared in terms of mitigation strategies. But we’re still a year out from a vaccine.’’

Stavneak said the Arizona economy, driven by income and sales taxes, could take much longer to recover.

Gov. Doug Ducey brushed aside the projections.

“No one really knows because the economy is not operating,’’ he said. “And without economic activity it’s very hard to make forecasts.’’

For the moment, economists are looking at the indicators they have to make some forecasts.

Among those is that the Phoenix hotel occupancy rate fell by 71 percent in the last week of March. That effects not just the tax revenues from hotel rooms but the fact that people are not coming to Arizona and spending money here.

At the same time, the report says, several restaurant chains have reported a 70 percent decrease in sales, even with an increase in takeout orders.

And then there’s the fact that nearly a quarter million Arizonans have applied for unemployment benefits in the past three weeks alone. 

“That’s just incredible,’’ Stavneak said.

He said state is working with only limited data. For example, sales figures for March – and the sales taxes collected won’t be fully reported until June. There also are variables in anticipated income tax collections.

Withholding revenues – the amount taken out of employees’ paychecks – is expected to drop by 15 percent. 

Even the decline in the stock market will have an effect as taxpayers report no capital gains and actually declaring capital losses.

Then there’s the expenditure side, notably the Arizona Health Care Cost Containment System, the state’s Medicaid program, with eligibility linked to individual income. He said there was a 2.3 percent increase in enrollment at the beginning of this month alone, a figure he called “pretty dramatic for a single month.’’

What all that means, he acknowledged, is that $1.1 billion shortfall could be as little as $600 million – or as much as $1.6 billion.

Stavneak said that’s why he’s not urging state lawmakers to craft solutions at this point, given the variables, and that his staff should have better numbers in June.

Still, Stavneak said, “Legislators may well want to start holding discussions about potential solutions.’’

Economist Elliott Pollack, a member of the Finance Advisory Committee said there is reason to believe there will be a much longer-term financial hangover even after the virus goes away. He said that “social distancing’’ may become built-in to individual behavior.

“More people are going to be working from home,’’ Pollack said. “You’re going to have more takeout and less eat-in at restaurants, especially if there’s close seating. Airlines are going to have a tough problem getting people into planes.’’