Arizona State and Local Government Documents Collection

Students FIRST (Fair and Immediate Resources for Students Today) was enacted July 9, 1998. This paper will focus on (1) the facts and direct rationale behind the payment for K-12 school construction from a pool of current general fund dollars, as mandated in the Students FIRST provisions; and (2) the implications and logical consequences of bonding versus paying for capital improvements with cash on an annual basis. 'Track 1' designates the status quo strategy of cash payment for capital improvements, while 'Track 2' represents a strategy for bonding that distributes the costs of the projects to taxpayers over the course of their useful life.

Various measures of Arizona state government expenditures suggest that state spending has increased substantially, both in recent years and during a longer period stretching back to 1990. However, increases are much more modest after adjusting for inflation and the state's rapid population growth. Further, the spending increases generally have been in line with the gains in various measures of income.

The state government general fund shortfall in the next fiscal year is projected to be $2.4 billion. A projected shortfall of $1.6 billion will need to be closed through spending reductions and/or revenue enhancements. The Legislature has focused on reductions in funding to state agencies. However demand does not decline for most public-sector services during a recession. Spending reductions by governments during recessions also worsen economic conditions. State spending cuts would worsen and lengthen the economic recession. The negative economic effects from a personal tax increase would be less than those of a governmental spending decrease. The demand for university services also does not drop during recessions. Any reduction in funding for universities will have a negative and direct effect. A substantial decrease in state government funding for universities will have negative consequences beyond these short-term effects. Any action--such as budget cuts--that undermines the success of the state's universities also impairs the state's economy.

This brief report provides conceptual perspectives on public investment using debt financing. Empirical evidence of the relationship between public investment and economic activity is provided, showing that moderate levels of debt do not impair economic growth and may provide a stimulus to growth. Arizona's public debt currently is low relative to national standards. Related to this low debt, public investment in infrastructure has fallen behind the state's population and economic growth over the last 15 years. Because of low interest rates and a construction slump that will reduce construction costs, current conditions are ideal for public investment using debt financing.