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NEWS RELEASE

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Arizona State Treasurer Dean Martin

FOR IMMEDIATE RELEASE Contact: Kimberly Yee

January 05, 2009 (602) 604-7882

ARIZONA FACES SEVERE BUDGET & CASH FLOW CRISIS

General Fund Out of Money in 60-90 days

State Needs Billions in Loans to Pay Bills

Severe Impact on Highway Projects Likely

(STATE CAPITOL, PHOENIX) – State Treasurer Dean Martin announced today the state may have to borrow $2.5 billion to as much as $5.7 billion in the next 100 days to meet state spending obligations.

The State is spending faster than revenues are coming in, and is on a present course of running out of cash to pay bills in the next 60 to 90 days. During the first half of FY2009, which ended in December, the state was spending over $28 million per day. During the first five months of the fiscal year (Jul-Nov), the state collected an average of only $22.4 million per day.

In February 2008, the state operating balance was over $1.6 billion; a year later, that balance could be below zero.

“According to Attorney General Terry Goddard, before the balance falls below zero, we are required by law to liquidate any remaining rainy day funds, and call in all loans to ADOT (AZ Dept. of Transportation) for transportation projects,” said Treasurer Dean Martin. “But that will not be enough. At the current rate of spending, we will need $2.5 billion to $5.7 billion in loans just to continue to make payroll.”

Under current projections, the State will be “in the red” as early as February 23 rd and exhaust the rainy day fund by March. “At this point we will have no choice but to call in $110 million in loans made to fund transportation projects, which ADOT has informed us will have a severe impact on construction and maintenance projects.” Treasurer Martin continued, “They use $60 million of this money as their working capital. Without it, I am not sure how many projects could be affected.”

The Treasurer’s Office has been monitoring this situation for more than a year now, and has had regular meetings scheduled with the Governor’s General Accounting Office for the last three months to discuss how the rest of the state will operate when the General Fund is out of money. ARS 35-185.01 authorizes the State Treasurer to issue Treasurer Warrant Notes (debt) to pay general fund obligations.

“According to statute, this puts the State General Fund into receivership. All funds collected each day by the General Fund are placed in the Treasurer’s Warrant Note Redemption Fund to pay any outstanding Warrant Notes. Then new warrant notes are issued to pay the next day’s bills. Statute does not allow me to stop paying or to slow payments,” explained Treasurer Martin.

“Debts will automatically continue to climb as long as the State continues to spend. Only a new revised budget passed by the Legislature and signed by the Governor can reduce spending. Unfortunately the taxpayers will be stuck with the bill for the interest costs. Should the economic situation worsen, and credit markets tighten to a point where the daily borrowing is not available, the State would begin to default on its loans, which would devastate our credit rating.”

“In anticipation of this situation, we have been negotiating with our servicing bank to establish a line of credit to meet the State’s needs.”

The Treasurer announced, “I will be calling the State Loan Commission later this week in order to set the maximum interest rate.” The State Loan Commission consists of the Treasurer, Governor, and Director of the Department of Administration.

“Unfortunately next fiscal year will be even worse. The last two years of budget spending in excess of revenues have depleted the State’s reserves. Within the first two weeks of the next fiscal year, the State will be in the red, and stay there for most of the year. Next year’s problem makes this year’s look like a drop in the bucket.”

“Even if some sort of fiscal stimulus package from the Federal Government should arrive (without spending strings attached) in time to save the State, it does not solve the fundamental problem; it just kicks the can down the road to next year. The only way to keep the state out of bankruptcy is to bring ongoing spending in line with revenues.”

In FY 2008, ongoing spending obligations of the state increased by 10.52% while revenues dropped by (8.93%). This year ongoing spending obligations increased by 6.61% to a record $11.1 billion, while revenues are on a track to drop by (11.5%) to (13.6%) at barely over $7.6 billion. “The new Legislature and Governor must address this problem quickly or the State will be looking at bankruptcy next year,” Treasurer Martin concluded.

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