Arizona governor's budget faces legislative opposition

Republican lawmakers in Arizona pushed back on aspects of Gov. Katie Hobbs' proposed fiscal 2025 budget, particularly its targeting of rising costs for the state's universal school voucher program.

The spending plan, which was unveiled by the Democratic governor Friday and had its first airing Tuesday before the Republican-controlled legislature's Joint Appropriations Committee, aims to address a growing budget shortfall with new eligibility requirements for vouchers, $282 million from agency fund sweeps, and taking back nearly $620 million in unspent appropriations for capital, technology, and transportation projects.

Budgets for the executive and legislative branches would be subject to a one-time 1% cut.

Arizona Governor's Office

"We are cutting out the wasteful taxpayer spending while making critical investments," Hobbs said in a statement Friday.

Arizona's Joint Legislative Budget Committee reported Friday the general fund budget faces projected shortfalls of $835 million in the current fiscal year and nearly $879 million in fiscal 2025, which were up from an October forecast that showed gaps of $400 million and $450 million respectively.

Hobbs' $16.2 billion general fund budget is down from the current fiscal year's, which spends about $17.8 billion.

"The FY '25 executive budget reflects the priorities of the executive in this challenging time in which revenue recovery options have to be considered," Marge Zylla, director of legislative and fiscal affairs in the governor's office, told the Joint Appropriations Committee.

Republicans claimed Hobbs' budget underestimates the shortfall, while it targets their projects and priorities for spending cuts.

"Like last year's proposal, the governor's budget is an unserious mess," House Appropriations Chairman David Livingston said in a statement.

While Arizona does not issue general obligation bonds, it has issuer ratings of AA from S&P Global Ratings and Aa1 from Moody's Investors Service.

"Per our criteria, we will be watching whether the state will respond (to shortfalls) with timely, recurring, sustainable solutions, or if they will rely heavily on one-time measures to achieve balance," S&P analyst Savannah Gilmore said in a statement.

Moody's analyst Sunny Zhu said the state has healthy liquidity, including a $1.4 billion rainy-day fund that neither the governor nor lawmakers want to tap.

"They have a lot of resources to tackle the challenge," Zhu said.

Earlier this month, Hobbs announced a crackdown on the costlier-than-expected ESA program with an eligibility plan that requires a student to have attended a public school for 100 days. Her budget estimates the move would save $244 million in fiscal 2025, when ESA costs are forecast to rise to $822 million from $723 million in fiscal 2024.

Zylla pointed to Joint Legislative Budget Committee estimates that 49,500 recipients of universal ESAs never attended a public school. Republicans claimed the move would unfairly force students to leave their private schools and requested more data on ESA students. In 2022, the state enacted what then-Gov. Doug Ducey, a Republican, called the most expansive school choice law in the nation.

Hobbs' budget also calls for repealing an income tax credit that funds private school scholarships for students, a move projected to save $185 million starting in fiscal 2026.

Arizona's long-term water augmentation fund would receive only $33 million a year from the general fund in fiscal 2025, 2026, and 2027 under Hobbs' spending plan. The water fund was created under a 2022 law that called for $1 billion in funding over three years. It received $333 million in fiscal 2023 and only $189 million in fiscal 2024, according to a spokeswoman for the state's Water Infrastructure Financing Authority, which oversees the fund.

"Obviously, we are disappointed by this development," said spokeswoman Chelsea McGuire in an email, adding WIFA is taking steps to begin soliciting water supply projects.

The governor's budget includes a one-time $325 million increase in bonding authority for universities through the University Capital Improvement Lease-to-Own Bond Fund.

"The executive budget includes $14 million starting in FY 2026 from the State Lottery Revenue Bond Debt Fund monies for the state's portion of 80% of the annual payments on a $325 million 30-year debt service," the spending plan's summary said.