Governor's budget calls for borrowing to avoid scrimping

PHOENIX (AP) - Gov. Janet Napolitano on Friday proposed a state budget that includes new state spending for highway construction and teacher pay raises with expanded borrowing to avoid scrimping on her priorities.

Napolitano's proposed $10.4 billion budget for the state's 2007-2008 fiscal year that begins July 1 is based on a relatively conservative revenue forecast but would spend the vast majority of the sizable surplus expected at the end of the current fiscal year.

The proposed budget, up from $10.0 billion of general funding spending in the current fiscal year, did not include any additional tax cuts beyond ones previously approved and still scheduled to take effect.

Napolitano said her budget offers a way to meet pressing spending needs at a time when revenue growth is slowing from recent boom times. "I think by financing our long-term capital assets we free up funds that we need right now as opposed to waiting, and I'm pleased with that."

The Democratic governor released her budget on a day when the Republican-led Legislature was not in session, and few lawmakers were familiar with its contents. However, several GOP lawmakers immediately expressed reservations about several key aspects.

Napolitano called for providing roughly $400 million of additional funding for transportation improvements.

Highway construction is a priority shared by both the Democratic governor and the Republican-led Legislature, though Napolitano also is talking about alternative forms of transportation as well.

She requested roughly $200 million for various education projects, including $50 million for teacher pay raises, $8.5 million to computerize student testing, $15.5 million for math and science initiatives in K-12 public schools and $20 million for a new College of Construction at Arizona State University. Half of the teacher pay money would go to raise the minimum base salary to $33,000 per year.

Napolitano said low teacher salaries are especially prevalent in small and rural districts. "You've got the problem of districts raiding other districts for new teachers and we're trying to get around that," she said.

Napolitano's budget includes $70 million for a 3.5-percent pay raise for state employees. Legislative leaders have signaled they have a 2.5-percent increase in mind.

Napolitano would pay for the transportation work by refinancing existing bonds over longer periods, and she also suggested that the state return to lease-purchase financing, a form of borrowing, to raise $407 million for building 36 new elementary, middle and high schools statewide under the Students First program.

"This is going to be used over time, by students over time," Napolitano said of the school construction. "To pay cash for schools is not the highest use of our dollars."

Key GOP lawmakers predicted a bumpy ride for Napolitano's proposal to borrow money to pay for building schools instead of paying cash.

"It should be paid right out of the state budget," said House Majority Leader Tom Boone, R-Peoria. He noted that the state faces annual expenses for building more schools because of population growth.

Borrowing stretches out the cost burden over a number of years but also adds interest to the state's bottom-line pricetag. "Bonding is expensive," said Senate Appropriations Chairman Bob Burns, R-Peoria.

The state has used lease-purchasing financing to help pay for building schools but lawmakers a year ago balked at Napolitano's desire to continue that financing method at a time when the state's coffers were bulging. Instead, the budget compromise for the current fiscal year has the state paying cash for building new schools.

Republican state senators are pushing a proposal to spend $450 million from the state's $650 million rainy day fund to accelerate highway construction, but Napolitano said she wants to leave the reserve fund intact to prop up important services if the economy sours. "I think it is a nice savings account."

Along with proposed borrowing, another budget-balancing approach chosen by Napolitano would be to use nearly all the $421.6 million surplus she projects the state will have when the current fiscal year ends June 30. Her proposed budget for the next fiscal year would spend most of that money, leaving a much smaller carryforward of $62.4 million.

Napolitano said she didn't include tax cuts because the new budget will cover a year when the state is already implementing the second year of a two-year income tax cut and because the state needs increasingly scarce dollars. "Our investment needs are great," she said.

Napolitano's budget summary put the increase in state general find spending at 6.9 percent above the current fiscal year.

Her budget was based on a projection for a 3.2-percent increase in the state government's tax revenue. The legislative budget staff had projected a 4.7 increase but it was not immediately clear whether those figures could be compared.