Budget Fluctuations in Arizona - Factors to Consider

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1 Policy Brief January 2013 Swept Away: The Impact of Increased Reliance on User Fees During the recent economic downturn, policy makers were faced with a host of difficult decisions to balance the state s historic budget deficit. One of the options has been a greater reliance on user fees to fund general state government. The Legislature has transitioned several state agencies, such as the Department of Environmental Quality, from the state General Fund appropriations entirely to user fees. Additionally, policy makers have used one-time budget balancing measures, called fund transfers or Budget Balancing Measures FY fund sweeps from dedicated fund balances, to bridge the revenue gap until further solutions were achieved (i.e. new revenues or permanent spending reductions). According to the Joint Legislative Budget Committee (JLBC), the Arizona Legislature has enacted nearly $13.4 billion in cumulative budget measures from fiscal year 2008 to 2012 to address the state budget shortfall. Fourteen percent, or $1.9 billion, of these budget balancing measures have come from various fund sweeps (if sweeps from FY 2013 are also included, the total number exceeds $2B). The revenue sources for a number of these impacted funds include fees paid by businesses or specific industries for a dedicated purpose. The state General Fund does not generally support these funds and, in fact, regulatory boards (also called boards) pay ten percent of their collections from the industries they regulate into the General Fund. Despite the fact that many of these funds have not contributed the overall budget shortfall, their balances have been disproportionately used as a tool to balance the state budget. In short, these funds are not being used in accordance with the statutory purpose for which they were collected. The result has been that some of the government agencies administering the funds have increased the fees or assessments paid by businesses to ensure solvency of the fund and regulatory function after a sweep took place. The increase in fees after such fund sweeps results in a back-door tax increase on the regulated community. The growing number of state agencies that are now being funded via user fees, versus the General Fund, causes concern within the regulated community, as monies that are being paid as part of a legitimate regulatory oversight process have the potential to be swept for uses for which they were not intended. In addition, exorbitant fees may skew participant behavior The Arizona Chamber Foundation (501(c)3) is a non-partisan, objective educational and research foundation. The mission of the Arizona Chamber Foundation is to be a leading resource for forwarding-thinking, expert research and analysis on public policy issues that impact Arizona s business environment with a focus on the core drivers of economic prosperity - strong infrastructure, competitive tax structure, qualified workforce, minimal regulations, and efficient government. 1

2 A lawsuit was commenced in September 2009 by agricultural interests including the Arizona Farm Bureau, Western Growers Association, Arizona Wheat Growers Association and the Yuma Fresh Vegetable Association. In July 2009, a Superior Court judge ruled that the $161,400 sweep from the various councils were illegal, as these monies were held in trust for the purposes in which they were collected and thus must be used for such purposes and cannot be swept into the General Fund. However, in November 2010, a unanimous Appeals Court overturned that decision. The Appellate Court recognized a broad authority for the Legislature to make fund transfers, noting: because the legislature established the funds, it can redirect the use of those funds without specifically amending the enabling statutes, provided the change is constitutional. The Court also did not agree that the funds were held in trust, citing specific examples of trusts created by the Legislature [A.R.S (A) where fees are collected from cotton crop producers and shall be deposand cause members of the public to avoid filing with the regulating agency as required. This policy paper will look at the implications of these fee policies. Fund Transfers from FY The $2 billion in authorized fund transfers from FY 2008 to FY 2013, according to JLBC, can be broken down into three categories: Fund Transfers (in millions) A full list of fund transfers can be found at: Fund Reduction and Transfer (FRAT). A non- General Fund agency s operating budget is reduced and the savings are transferred to the General Fund. While spending authority is decreased, the level of fees or assessments that supply revenue to a fund is not decreased. Excess Balance Transfer (EBT). A portion of the anticipated balance of a nongeneral fund funds at the end of a fiscal year are transferred to the General Fund. Again, while spending authority is decreased, the level of fees or assessments that supply revenue to a fund is not decreased. Other Fund Transfers represent sweeps not generally complying with EBT or FRAT guidelines. Public Monies or Held in Trust? Agriculture In 2008, the Legislature swept $550,000 in agricultural funds, including $161,400 from three agricultural councils funded by grower assessments for commodity research and other programs ($80,000 from the Arizona Grain Research and Promotion Council, $41,400 from the Arizona Iceberg Lettuce Research Council, and $40,000 from the Arizona Citrus Research Council see note on lawsuit below). In addition to the council sweeps, lawmakers swept $300,000 from the fertilizer materials fund, $25,000 from the seed law fund, $15,000 from the pesticide fund, $20,000 from the aquaculture fund, and $30,000 from the commodity promotion fund. After the sweep of the pesticide funds, the Legislature swept another $75,000 in It later granted the Department of Agriculture the authority to increase fees, which it did in July 2010 by increasing the fee to register a pesticide from $100 to $110. FY08 FY09 FY10 FY11 FY12 FY13 Subtotal FRATs $4.7M $60.5M $123M $99M $97M - Subtotal EBTs $288M $615M $264M $158M $210M $106M TOTAL FY08-13 TOTAL $293M $675M $387M $258M $306M $106M $2.025B *Voters disapproved fund sweeps (Prop. 301 and 302) totaling $325,000,000 from the Early Childhood Development and Health Board and $123,538,600 from the State Parks Board s Land Conservation Fund in November 2010, otherwise the FY 2011 Fund Transfer Total would have been increased by $448,538,600. 2

3 ited and held in trust ); Ariz. Const. art. 10, 1 directing the state to hold lands in trust; Id. at art. 29, 1(B) noting the assets of public retirement systems are separate and independent trust funds. ] Departments of Water Resources and Environmental Quality General funding for the Arizona Department of Environmental Quality (ADEQ) has been completely eliminated and similar plans have been in place for the Arizona Department of Water Resources (ADWR). The intent was for the two agencies to become funded by user fees. Since budget balancing efforts began in FY 2008, ADEQ has faced tens of millions of dollars in fund sweeps while at the same time requesting legislation to increase fees to many of the programs that have been swept or eliminated from General Fund support. Over the past few legislative sessions, legislation was passed granting ADEQ authority to increase fees for water, air quality, as well as solid waste and hazardous waste programs. Without sufficient funding, Arizona could face losing regulatory primacy to the federal government. What this means is that the federal Environmental Protection Agency s Regional IX office could take over the administration of federally required programs. Historically, EPA Region IX has taken a more aggressive approach to regulation than Arizona s state agencies. Additionally, ADEQ programs funded through dedicated revenue streams, such as the Water Quality Assurance Revolving Fund and the Underground Storage Tank Fund, have been swept over $21M and $70M, respectively. A large portion of General Funds were removed from ADWR through FY The agency had floated proposals to increase or establish new fees on private and public water providers, create a water bottle tax, as well as increase fees for many of the agency s programs. The option that found the least resistance was an increase in program fees. However, the revenue generated from the fee increases did not produce the level of funding needed to substitute for the loss in general funds, and allow the agency to operate all of its statutory programs, thus creating an uncertain future for the agency and those businesses and other entities with which it interacts. In the FY 2012 budget, a new fee was established and charged to cities and towns on a per capita basis to assist in funding ADWR. The fee was subsequently repealed in FY 2013 and replaced with General Funds. Job Training Job Training Program is a proven economic development tool that aids in the attraction of new businesses and the expansion of existing ones. Employers pay a tax equal to one-tenth of one percent on the first $7,000 of an employee s wages or $7.00 per year, whichever is lower. Through FY 2010, $70 million from the Job Training Fund had been swept into the General Fund. Since 2010, funding has not been swept from the program. The demand for the program far exceeds the money available to fund it even when funds have not been swept. When the funds were swept, the grants available to companies for training new workers or updating the skills of incumbent workers were further limited. During those years, Arizona was the only state in the country without a functional, funded job training program. Highway User Revenue Fund (HURF) Arizona taxes motor fuels (via gasoline and use fuel taxes) and collects fees relating to the registration and operation of motor vehicles, such as Vehicle License Taxes (VLT). These revenues are deposited into HURF for highway construction and improvements, as well as distributed to the cities, towns and counties for local road projects. HURF collections totaled $1,210.6 million in FY 2012 (see chart below for fund sources and distribution charts SOURCES DISTRIBUTION 15.2% /1. The business community began funding the Arizona Job Training Program in 2001 via the Job Training Tax. The NOTES: 1. Represents ADOT s allocation of HURF for MAG and PAG regional projects 3

4 source: ADOT HURF FY12 Year-End Report). As the chart highlights, over 26% of HURF revenues are being diverted to non-roadway construction or improvement purposes, specifically the state s general fund, the Motor Vehicle Department (MVD), and the Department of Public Safety (DPS). This equates to over $300M per year. While the FY 2013 budget returned General Fund support to MVD, it continued the policy of funding DPS from HURF, as well as diverting over $100M per year to the general fund from the State Highway Fund. The reduction in highway/roadway resources has translated into a policy discussion of alternative construction methods, such as toll roads. For those in the transportation industry, the policy of diverting a dedicated resource such as a gasoline tax intended to be used for highway/roadway improvements, while also instituting a new toll fee raises serious questions. 90/10 Healthcare Regulatory Boards Thirteen health care associations sued the state in 2009 after more than $13.2 million was swept from professional licensing boards during 2008 budget balancing effort. The funds administered by the healthcare licensing boards, such as the Medical Board and the Board of Pharmacy, consist entirely of fees paid by medical professionals and are used for running the day-to-day operations, licensing the health professionals and conducting investigations. The suit made the claim that transferring the monies is unconstitutional taxation under Arizona law because it levied a tax without stating distinctly the object of the tax. In this case there were motions for summary judgment and the Superior Court found in favor of the Legislature. The Arizona Court of Appeals Division One issued a Memorandum Decision in September 2011 affirming the lower court s ruling. Plaintiffs in the suit included the Arizona Athletic Trainers Association, Arizona Association of Chiropractic, Arizona Dental Association, Arizona Medical Association, Arizona College of Emergency Physicians, Arizona Nurses Association, Arizona Occupational Therapy Association, Arizona Optometric Association, Arizona Osteopathic Association, Arizona Pharmacy Alliance, Arizona Physical Therapy Association, Arizona State Association of Physician Assistants and Arizona Veterinary Medical Association. Industrial Commission Insurers that write workers compensation policies and employers that self-insure for workers compensation pay an annual premium tax or in-lieu tax to the Arizona Industrial Commission. The ICA sets the Administrative and Special Fund assessment rates on an annual basis. The maximum rate paid to the Administrative Fund is 3.0 % of the total premiums collected. The maximum rate for the Special Fund is 1.5% for general special fund liabilities, 0.5% for apportionment claims, and 0.5% for insolvent carrier/employer claims, for a total Special Fund assessment rate of 2.5% of the total premiums collected. In 2009, the Legislature passed two transfers from the Special Fund to the General Fund totaling $4,685,000. These funds are maintained by the ICA under the Workers Compensation Act for payment of benefits to injured employees for work related injuries. The ICA filed a suit to stop the sweep and the judge issued a stay in the case. Interveners included SCF Arizona, the Arizona Contractor s Association, Inc., the National Federation of Independent Businesses, the American Insurance Association, the Arizona Self-Insurers Association, the Arizona Multihousing Association, the Arizona Beef Council, the Alliance of Construction Traders, the Arizona Police Association, the Professional Firefighters of Arizona, the Arizona Building and Construction Trade Council and the Arizona Education Association. A Maricopa County Superior Court judge agreed with the plaintiffs in 2009, noting that: The proceeds held by the special fund are insurance proceeds held in trust for the benefit of employees and employers covered by the Workers Compensation Act. In November 2012, the Arizona Court of Appeals Division One overturned the lower court s ruling and upheld the fund sweep. Additionally, over $22 million has been swept from the Administrative Fund from FY02 to FY10, which was not a point of adjudication. On September 9, 2010, the ICA increased its annual Administrative Fund assessment from 2.65% to the statutory maximum of 3.0%. The rate remained at the maximum level until September 5, 2012, where the ICA decreased the rate to 2.75%. Fee Commission In response to the various fund sweeps and the ensuing requests by agencies to increase fee collection authority, a coalition of business and industry stakeholders requested that the Legislature create a Fee Commission in 2010 (HB 2586). The statute was later modified by HB 2314 in The Commission is required to: Review all state agencies, except those exempted in the Commission bylaws, at least once in each fiveyear period, beginning October 1, 2011 or whenever the Commission deems necessary. 4

5 Establish a fee review process of state agencies. Submit an annual report to the Governor and Legislature on the Commission s analysis and findings by December 31 of each year. In the Fall of 2012, the Fee Commission met to review the Departments of: Weights and Measures, Environmental Quality, Financial Institutions, and Land. The 2012 Annual Report contains several general recommendations, as well as a number of agency specific recommendations. The general recommendations include: 1) the General Fund should not benefit from program fees; 2) limit crosssubsidization among programs (i.e. keep program fees within the program and not use them to pay for the costs of another program); 3) fees should reflect the value of the service; 4) The General Fund should not fund specialty programs; 5) revenues and expenditures from fees should be as transparent as possible; and 6) agencies should continue to undergo systematic review of their fees. The fee Commission website can be found at: state.az.us/feecommission.asp Lastly, it is important when fees are increased that costs for permits and regulatory compliance are accurately reflected, related to the price and not inflated to fund general administrative functions of the agency. The creation of the Fee Commission will help greatly in this area. Many agencies, such as ADEQ and ADWR, serve in a role that benefits all of Arizona, not just businesses that require a permit to operate. When no general fund monies are appropriated to agencies that serve a statewide purpose, it creates a scenario in which permit fees are subsidizing the cost of the broader public functions of the agencies. As such, a base level of general funding should be considered while developing an annual budget. A first step in determining an appropriate level of base funding is to delineate which costs should be considered direct and which should be considered indirect. Indirect costs are those that support the basic functions of the agency while direct costs are those associated directly with administering a permit. The Fee Commission is well suited to work towards establishing acceptable definitions which would serve as a basis for future General Fund requests for agencies. Conclusion The business community understands the need for user fees when interacting with state or regulatory agencies. This is especially important when Arizona looks to maintain primacy over important environmental programs, as a reasonable and prudent fee structure ensures the viability of a locally controlled regulatory structure. There is, however, a tipping point when user fees are increased to a level where they begin to impact the viability of those being regulated. Excessive fees make Arizona a less competitive state for business. Further, from a policy perspective, it is important not to charge the regulated community twice for the same service by sweeping funds paid into dedicated accounts and in turn causing agencies to increase their fee structures so such programs remain solvent. Fees and dedicated revenue streams should be used for the purpose for which they are collected. 5