John S. Wolfe

Speaking at the Economic Outlook event at the April 22 Economic Club of Phoenix luncheon were, from left, Arizona State University professors Dr. Lee McPheters and Dennis Hoffman and John Arnold of the Arizona Governor’s Office.

If the challenge of improving Arizona’s economy was analogous to a hike, we would all be at the bottom of the Grand Canyon and looking to climb out.

The state began to see the downturn in December 2007, 28 months ago, Dr. Lee McPheters told a crowd of 200 at the April 22 Economic Outlook luncheon held by the Economic Club of Phoenix at the Arizona Biltmore.

“On the way down, all of the economic indicators – like employment, GDP, corporate profits, retail sales, consumer confidence — are falling,” he said. “When you get to the bottom of the canyon, the recession is over — but you still have a long way to climb to get back to where you came from.”

By his account, the recession in Arizona is just about over. But now there is a two- to four-year recovery ahead.

Of some concern is lagging consumer confidence and a number of foreclosures for 2010 that will exceed 2009′s.

“The No. 1 driver is unemployment,” the JPMorgan Chase Economic Outlook Center research professor said. “Jobs are the key driver to propel the economy forward but we are not seeing growth.”

He estimates that the United States has lost 8.4 million jobs in the last two years.

“2010 will be ugly,” he said in his remarks. “2011 will be homely.”

Dennis Hoffman, the director of L. William Seidman Research Institute at ASU, said this is Arizona’s first “real” recession. Other downturns have ended in two years, he said.

In 1990 Arizona faced a similar challenge with a collapse of the housing market. There were problems at the federal level and state officials raised taxes. Fast growth followed.

But, Hoffman noted, consumer spending in the state is back to 1998 levels, which is not good for state tax revenues.

As for the national picture, the jobs situation is a big concern.

“In 2001 there was not a deep slide in job losses but there was still a ‘jobless recovery,’ which took four years,” he said.

In his presentation, Hoffman compared the current recession to the Depression. The most significant difference was, in 2008-09, the nation did not see the drop in consumption that occurred in the early 1930s.

Also, in 2008-09, the federal government jumped in and backed the banks. It also used its spending to keep the economy from collapsing.

“In crises, debt-to-GDP ratios jump,” he said. “The concern should be: What is the strategy to have the economy grow faster than the debt load.”

The two economists were joined at the luncheon by John Arnold, director of the Governor’s Office of Strategic Planning and Budgeting.

Arnold said Arizona saw a 30 percent decline in revenues, to $6.2 billion, for 2010. Even by keeping spending at 2008 levels, the state will seen shortfalls going forward, like the $2 billion gap for 2010 (despite federal stimulus money).

Why not just cut more program funding from the budget? Well, Arnold said, if there state were a household, this would be “like losing 40 percent of your income and adopting three kids.”

Schools are spending at 2004 amounts but there are 112,000 more pupils, he said. The Medicaid rolls – services to low-income families – surged by 202,000 in the last year, to 475,000 recipients.

The state also has more prisoners, he said.

Arnold said it’s not like the state is not being proactive. It has increased eligibility requirements for Medicaid, eliminated mental health programs, reduced welfare assistance, eliminated services under KidsCare, reduction spending on education and state universities, dropped payroll through a hiring freeze and 5 percent salary reductions, and reduced the number of prison beds for out-of-state prisoners.

The governor’s office is projecting a 2011 budget with a structural deficit of $1 billion.

The state will present to voters a temporary sales-tax increase of 1 percent to the current 5.6 percent to close the gap.

Proposition 100 proposes that two-thirds of the revenues generated would fund K-12 education, with the other one-third going health and human services and public safety. The sales tax would be automatically repealed on May 31, 2013.

The election will take place on Tuesday, May 18, 2010.

The alternatives are additional budget reductions, additional state debt and various transfers and rollovers, Arnold said.

“If it fails, we will need to find $850 million in cuts – in K-12 education, higher education, public safety, health care and human services,” he said.