Hobbs' $16 billion budget plan depends on cutting school vouchers

PHOENIX — Gov. Katie Hobbs proposes a $16.2 billion spending plan, built on cuts to school vouchers that are unlikely to survive the Republican-controlled Legislature.

Her budget includes spending that exceeds anticipated revenues. But the Democratic governor is counting on filling the gap with a nearly $1 billion mix of cuts, raids on special agency funds, and clawbacks of money already earmarked for transportation, water and other capital projects in the current and future budgets.

The spending plan Hobbs announced Friday also boosts spending on K-12 schools to meet legal rules for yearly inflation adjustments, while increasing spending on the state Medicaid program needed to deal with a cut in federal reimbursement rates and increases in provider costs. New spending on prison health care to meet terms of a federal judge’s order is also in the plan.

On the other side of the equation, Hobbs wants big cuts to the state’s new universal school vouchers program — a non-starter with Republicans who control the Legislature — and elimination of a tax credit program that helps parents pay for private school tuition. That “school tuition organization” program is likely to see big drops in usage anyway because of vouchers so its elimination might have a better chance of being approved by GOP lawmakers.

But the Governor’s Office is unwilling to say how Hobbs will make up the difference — and pay for all that new spending — if lawmakers balk.

“We have to see if they fly first,’’ said Hobbs’ press aide Christian Slater. “This is our budget.’’

Vouchers, tax cuts

Hobbs, who took office a year ago, had asked lawmakers last year to repeal the 2022 law that allows any student to get a voucher of state funds to attend private or parochial schools. Before eligibility was opened up, students had to show some special need, such as a disability or having attended a public school rated D or F, to get a voucher.

Voucher enrollment has ballooned to more than 74,000 from about 12,000, with a majority of the students having already been attending private schools with their parents picking up the tab.

Hobbs’ new proposal leaves universal vouchers in place — but with a caveat: Only students who at one time had attended public school for at least 100 days could get the vouchers.

The Governor’s office acknowledged, though, they really don’t expect any parents of all those newly enrolled students to actually pull their kids out of private schools for 100 days to continue to qualify for the vouchers, which start at $7,300 a year.

Instead, they assume parents will not apply again for vouchers but will simply reassume the out-of-pocket costs if Hobbs’ proposal passes the Legislature. That would save the state about $244 million, money Hobbs wants to divert to some of her own priorities.

Hobbs can’t do anything about one other factor that reduced state revenues: A flat-rate income tax that Republican Gov. Doug Ducey pushed through the Legislature in 2021 has now fully taken effect.

It would take a politically impossible two-thirds vote of the GOP-controlled Legislature to overturn that.

Deficit projections

All in all, Hobbs’ staff estimates that without spending cuts, the state will end its current fiscal year on June 30 about $463 million in the red — and will have a deficit of close to $890 million by the end of the new budget year.

That may be optimistic.

Legislative budget analysts released their own new figures at midday Friday that show the deficit could be almost twice as large. Hobbs’ staffers said their revenue estimates are based on a middle-of-the-road consensus they think is accurate.

AHCCCS; prisons

Hobbs wants the money for a combination of must-have and politically desirable projects.

In the first category is the Arizona Health Care Cost Containment System.

Enrollment in the state’s Medicaid program is running higher than anticipated. That will add another $213 million in state dollars to its budget which, with other changes, will bring AHCCCS’ total spending to more than $2.75 billion, or close to 17% of every dollar in the state’s general fund.

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The state also will have to add another $284 million to the budget at the Department of Corrections.

Most of that is going to make fixes ordered by a federal judge, who in 2020 found the mental and physical health in the state prison system is “plainly grossly inadequate.’’ Judge Roslyn Silver said state officials were acting “with deliberate indifference’’ to the substantial risk of harm to inmates.

There’s also another $10.6 million for inmate food services and $55.3 million to cover the higher cost of housing some inmates in private prisons.

Home ownership, child care

On the list of things the governor would like is $13 million to provide down-payment assistance and mortgage interest rate relief to low- and moderate-income individuals. But the Governor’s Office declined to provide any details about how many would-be homeowners that would help.

Hobbs also wants lawmakers to ante up $100 million in state funds to help underwrite the cost of child care for eligible families. That is designed to replace federal COVID relief dollars that are drying up.

Aides to the governor are promoting the funding as good for economic development. They said without the money, some parents may be forced to miss work, skip opportunities for promotion — or leave the workforce entirely.

Also in the governor’s budget is $545,200 to set up a new state office that would be in charge of approving drug price increases, setting co-pay caps on frequently prescribed medications and regulating what can be charged by pharmacy benefit managers who negotiate with drug manufacturers to obtain medications for insurance companies. Slater insisted this isn’t about telling drug companies and benefit managers how much they should be able to make in profits.

“It’s about bringing accountability to some of these companies,’’ Hobbs’ spokesman said. “There’s certainly a role for companies to make profits. But there’s also a role for the government to bring accountability to some of these practices.’’

Canceling projects

One way the governor would balance the current-year budget is by canceling more than $120 million in pet projects placed in the budget by Republican lawmakers when it was assumed the state was running a surplus.

That was part of a deal Republican lawmakers made with Hobbs and Democrats. But unlike Republicans, the Democrats pooled the funds they had to divvy up in 2023, setting aside $300 million in one-time funds for K-12 education and $150 million into the Housing Trust Fund.

Among the projects being defunded are a $15.3 million grant to make improvements to the rodeo grounds in Prescott. Those dollars have been tied up by a court dispute.

Also on the governor’s hit list is a $10 million grant to the International Dark Sky Center that is supposed to be built in the Phoenix-area suburb of Fountain Hills. State Treasurer Kimberly Yee has raised some questions about that allocation.

Other priorities

Other funding priorities listed by Hobbs include:

$77.9 million to build seven new schools, including in Agua Fria, Queen Creek, Snowflake and Saddle Mountain;

$46 million to the three state universities to create and expand medical education;

$15 million to help stop the flow of fentanyl and other drugs into Arizona and expand access to treatment especially in rural communities;

$15 million in new funds for the Arizona Teachers Academy on top of another $15 million in ongoing cash;

$ 7 million to continue creation of a “major incident division’’ at the Department of Public Safety whose duties would include investigating allegations of criminal conduct by peace officers around the state;

$4.8 million to improve licensing, inspections and complaint investigations against long-term care institutions.