Janet Napolitano is Making Ends Meet in Fast-Growing Arizona

Janet Napolitano has a familiar problem. Since 2002, when she became the first Democratic governor of Arizona in 12 years, Napolitano has been putting her fast-growing state's fiscal house in order. After turning a $1 billion deficit into a $1.5 billion surplus, she won re-election in a landslide. Then, the housing bubble burst, and Arizona, along with at least 22 other states, found itself staring into a budgetary void. Earlier this year, Napolitano was forced to drain the state's rainy-day fund to close a $1.2 billion budget gap, only to see the credit crunch create another $700 million shortfall this fall. She talked with U.S. News about the fiscal crisis sweeping the states. Excerpts:

With tax revenues evaporating and no housing bubble propping up the economy, how serious is the situation in the states?
It's quite serious, in part because no one can predict when it is going to end. In Arizona, we have underlying confidence that we will come out of this. Our population continues to grow; it's a great place to live. But historically, our economy has been tied to housing, so when the housing bubble burst, California, Arizona, Nevada, Florida—those states got hit early and particularly hard. Other states are now joining us.

You imposed a state hiring freeze in February and recently froze all state contracts over $50,000. Why?
I wanted to make sure that we were not simply signing on contract extensions without somebody really thinking through "Is this a contract that we need to continue to fulfill the mission-critical functions of government?" It's not that we're not approving any contracts over $50,000, but they now have to go through a justification analysis outside the particular agency to make sure we're doing everything we can to rein in and control costs.

Why is the state tax revenue picture so grim right now?
One of the challenges for us has been the shifty nature of this. You don't know when the credit crunch is going to break open enough so consumers start spending again. When a state budget, as ours is, is half dependent on sales tax and people stop buying, at some point, they're going to start buying again, but you don't really know when and how fast. You don't know when you've hit bottom on housing. You don't know what the federal government is going to do by way of stimulus. You don't know how the global economy is going to react, and you don't know what the effect of the $700 billion [federal] bailout is going to be.

States in the past have had to raise taxes to close budget gaps. Will you?
I'm not going to propose a general tax increase. I think what we need to be looking for is stimulus.

What kind of stimulus from the federal government would help you?
To be a true stimulus, it has to be something that goes right into the economy and helps people. I think the first stimulus, which was the check in people's pockets, was kind of nice but very short-lived. I'm hopeful that when Congress and the new president really look at this, they will allocate money for infrastructure investment, they'll allocate money for Medicaid, which would allow us to make sure we don't increase the number of uninsured. I hope they understand they're going to have to do something with the extension of unemployment benefits and food stamps. You've got to cover, in the short term, working people who are beginning to fall through the safety net.

How much have your efforts to curb illegal immigration affected your state's economy?
I think it's impossible to tell because our employer sanctions law went into effect at the same time the housing bubble was bursting and the national economy was starting to sink. We do believe that for a variety of reasons, the number of illegal workers in Arizona has gone down. The question will be, "Will there be a labor shortage once the economy starts coming back?" We simply don't know the answer.

You recently sent a bill to the federal government asking for $500 million for policing and jailing illegal immigrants. Do you think that check is in the mail?
There's a federal law that says they're supposed to reimburse states for the cost of incarcerating illegal immigrants. When I learned this, I said, "Well, are they paying us?" It turns out they're paying us pennies on the dollar. So, I've been sending the attorney general of the United States a bill for uncompensated costs, and I've started tacking on interest and a late fee because I'm getting really irritated. It's a half a billion dollars! In a state like Arizona, where your annual budget is $10 billion, that's a lot of money.