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Arizona’s state budget outlook has improved compared to last year and the state has more than $500 million than it expected, but fiscal challenges are expected to emerge in the coming years, according to legislative budget analysts.
Since lawmakers passed a budget in mid-June, revenues have surged beyond projections. The prior fiscal year, which ended June 30, concluded with $425 million more than lawmakers predicted, and the first quarter of the current budget year ended with $109 million more than the forecast.
In their briefing to the Finance Advisory Committee, a panel of state and private economists that advises lawmakers on the economy and budget, Joint Legislative Budget Committee analysts detailed the strong revenue collections and the short- and long-term outlooks for state finances.
The state’s general fund is projected to maintain a positive cash balance through fiscal year 2028. However, these balances are forecasted to decline over time, reaching a low of $159 million by FY 2028.
And those future budget years are only in the black because JLBC’s baseline spending assumptions don’t include a continuation of $183 million in state spending on school building repair and another $140 million for state employee health insurance. It also anticipates lawmakers ending $360 million in other spending, about half of which goes to K-12 education and the Department of Economic Security for developmental disabilities programs.
But that baseline spending for the 2026 fiscal year, which begins in July 2025, includes $524 million in new K-12 spending — though only $179 million would be new money to schools, to account for 2% inflation.
The plan calls for spending another $90 million on private school vouchers — for a total of $912 million — based on a “highly speculative” estimate that voucher use will grow by 88%.
And more than half of the new K-12 spending, $286 million, would be a replacement of current funding that schools get from the state’s trust land.
In 2014, voters passed Proposition 123 to settle a lawsuit against the state that accused it of failing to follow a different voter-approved measure requiring K-12 funding increases every year to, at a minimum, keep pace with inflation. The proposal, spearheaded by then-Gov. Doug Ducey, boosted the amount of money from the state land trust, a portfolio of land given to Arizona by the federal government to benefit schools and other public entities.
But it was set to expire after a decade, and the clock is ticking on the 2025 end of the roughly $300 million in revenue that Prop. 123 provides schools each year. GOP lawmakers and Gov. Katie Hobbs last year offered competing proposals to extend Prop. 123, but neither advanced to this year’s ballot.
That means lawmakers will have to foot the bill to backfill the lost K-12 funding when Prop. 123 goes away.
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