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2:56 AM Wed, Dec. 12th

State: Arizona budget picture improves amid warning signs

PHOENIX - Arizona's economy and fiscal health are improving, but legislators are being cautioned that there are several significant unknowns ahead and one near-certain big budget problem looming for state government.

Tax collections last fiscal year were above expectations, mainly due to increased individual income tax collections. That erased a projected $330 million shortfall and puts Arizona on track to be nearly that much in the black in the current fiscal year, which began July 1.

After years of cutting health care and other programs and resorting to borrowing to close budget shortfalls, Arizona legislators during their next session will debate whether to spend or sock away the additional money when they work on the next state budget.

But legislative budget analysts warned Tuesday during a meeting of an economic advisory panel that the state still faces big challenges.

Aside from overall uncertainty about the economy's direction, a near-certain problem facing the state will be the $1 billion of annual revenue lost when a temporary sales tax increase ends in mid-2013. That amount represents about one-eighth of the current state budget.

Depending on which of two revenue forecast scenarios proves more accurate, the state could face a 2014 shortfall of $610 million or $1.2 million, legislative budget director Richard Stavneak said.

Voters overwhelmingly approved the temporary sales tax increase at the urging of Republican Gov. Jan Brewer, who has acknowledged that the state will face a "cliff" when its revenue ends.

Stavneak and other analysts said the state also has to consider that the federal government may cut its funding for states to help close Washington's budget deficit and that Arizona could lose pending lawsuits challenging some past budget cuts in health care and education.

"There are risks on the revenue side. There are risks on the spending side," Stavneak said.

Some legislative Democrats have said the state should use increased revenue to reverse budget cuts, but House Appropriations Chairman John Kavanagh said any extra cash this year and next sought to be put into a rainy day fund to prop up the budget when the sales tax expires.

Economists serving on the advisory panel generally voiced caution during Tuesday's meeting.

With consumer spending levels indicating increased confidence among Arizonans, at least among those with jobs, the outlook is positive, said Jim Rounds, a private economists. "Everything is growing -- just barely."

University of Arizona economist Marshall Vest said there are unanswered questions about the causes for the state's revenue increase. "You have to be cautious at this point," he said.