On Wednesday morning, State Treasurer Dean Martin gave a presentation during which he predicted the state would “be running RED INK in as little as five weeks if a revised budget is not passed,” and that "without immediate intervention, the General Fund will be overdrawn as soon as April 23 but no later than May 5." The Governor's office, while saying it "recognizes urgency of budget situation," has refused to endorse Martin's outlook... to say the least. 

PolitickerAZ: Yesterday the Governor said you were "being a Chicken Little" regarding the state's financial outlook, and today I spoke with the Governor's communications director, Jeanine L'Ecuyer, who said you didn't have enough information to make accurate predictions about when the state will be insolvent. What do you say?

Dean Martin: I say Jeanine L’Ecuyer doesn’t know what she’s talking about. We are the bank. Every dollar the state receives is deposited with us. We see every penny that comes in and out.

PAZ: During your presentation yesterday, you said there are about six weeks' worth of expenditures left in the General Fund. What happens if no budget has been passed by the time the money's gone?

DM: I don’t think that’s going to happen. I think there’s going to be enough pressure on the Governor and legislature to get a budget passed in time. But if it doesn’t there can be a release of the rainy day fund. That’ll get us a few more weeks down the road.

The real problem is if nothing happens – no temporary measure, no nothing. At that point it isn’t a problem for our office – we're not in trouble. It's a problem for [Gov. Napolitano's] agencies. At that point the question is: Can agencies cut checks on accounts with no money in them? They'd be essentially cutting bad checks.

The agencies have been appropriated to $10.6 billion, and at the current spending rate we have $9.2 billion we can warrant. We will have to cover that $10.6 billion warrant, but we can't go into the rainy day fund without approval. At that point she will have violated the balanced budget amendment in the state constitution if we run over. I’m not in trouble – it doesn’t affect us as a bank. It’ll just be writing checks on an account with no money.  This has never happened before, so there’s no clear answer on how this will function. I don’t think it will result in a government shut down, but it puts every head of a state agency in potential legal jeopardy.  It’s not worth testing. That’s why we’re telling them with five or six weeks’ notice.

PAZ: Does the hiring freeze yield any immediate dividends?

DM: We have not seen a drop in expenditures since she instituted the hiring freeze [in state agencies]. That would take a while to show results, with positions becoming vacant and being left open. However, the spending freeze she vetoed would have bought the state time. Take that $580 million [in state agency funding that would have been tied up indefinitely], take another $600 million from the rainy day fund and you’re just about there. If the recession’s worse than they estimate, you may need another $200 million.

PAZ: The Republicans in the Legislature have finally capitulated on using bonding to help resolve the crisis. Will that help?

DM: The debt markets right now are not good markets to go out into. The auction rate securities market collapsed. The state of California's interest rate went from 3% to 15%. You could refinance down the road, but my recommendation would be, because of the financial markets right now, I would say if you’re going to do bonding don’t do it for right now. You’ve got a $3 billion to $3.5 billion shortfall in next 18 months. Use the rainy day fund, use cuts, and if you're going to use bonds wait until next fiscal year.

PAZ: Is some of this the result of the general downturn in the economy? Arizona has the fourth highest foreclosure rate in the country - that's got to be drawing down revenues.

DM: The state of Arizona partied pretty hard in last few years. The guy who parties hardest on Friday has the worst hangover on Saturday. The surprise about the recession is in the magnitude, but not in the timing. I predicted this. Last year all indicators we were seeing, including our own revenue numbers, were off. [The Legislature and Governor] ignored that advice and went ahead and grew the budget. Back in September I said we were going to be in a recession in the next couple of months.

I hate to sound like a broken record, but I went through the first recession in 2001 and said we were going to be prepared next time. When I was in the legislature I tried to pass larger deposits into the rainy day fund, so if and when the next recession came we would have more money and fewer expenditures.

All of this could’ve been avoided by better planning. You can do about $1.5 billion without cuts in the budget. You can’t do more than that. The rest will have to come out of spending reductions. Last year the legislature grew the budget by $900 million. If it had only been the $400 million that was built in, it would’ve cut this year’s shortfall in half. The thing with these shortfalls is the quicker they get solved the easier it is. Now my main concern is trying to avoid a tax increase. Our lack of planning shouldn’t result in a raise in taxes for the citizens of Arizona.

The largest city in Arizona has already made a 10% across-the-board reduction, and Phoenix isn’t exactly a bastion of conservatism. What surprises me is the Governor won’t even talk about reductions. I gave this same presentation to the Legislature the first week of session. Nothing’s really changed from January except the recession’s getting worse.

The Governor thinks I’m Chicken Little. I don’t know if she ever watched that movie, but he was right at the end.  

PAZ: So what can be done?

DM: We need to stop spending. Even if the state stopped doing everything except make school payments, there would still not be enough money left for rest of fiscal year. You can’t make $9.2 billion go all the way to 10.6. Math is not partisan. If she orders all her agencies to shut down non-essential functions, we may get there. 

PAZ: There's been talk about you running for governor in 2010? Any indication you can give me about where your mind is on that?

DM: You're talking about Howie Fischer's theory. I never said I was interested in running for governor – I was never interested in running for treasurer. I got drafted. I had people trying to convince me to run for a year and thought it was just disgruntled ex-employees venting. When I finally realized how bad things really were...

I mean, I was running against a member of my own party. But it was just a total mess in the treasurer's office. They had a 162% employee turnover rate. The guy he had running the trading room had his SEC license stripped due to embezzlement charges in CA... this was before [fmr. Treasurer David Petersen] was indicted. When I took office I discovered as long as anyone could remember, they had never balanced the checkbook. They never reconciled the annual auditor's report from the executive and compared it to the treasurer’s office's audit. They had only one person in trading room for $12 billion in investment accounts.

The previous administration had scratched out the bottom line at end of the year and added on $28 million. You can't just make up $28 million. That’s a federal crime. They had known since December that they’d taken $25 million in federal healthcare dollars and $3 million in others and put it into the General Fund. At some point in time we found $14 million that the previous administration had lost...well, lost track of. Now we're doing a report for the previous years trying to track down that extra $14 million. The whole first year I was in office was just dedicated to cleaning up the mess from the previous administration.

PAZ: Okay... so are you thinking about running?

DM: Late '09 is when I’ll start to think about it. With the senior senator from the state running for president, way too many things could happen between now and then. Anyway, it's nice to take an election cycle off. I ran three times for the Legislature, and then last time it was statewide. I calculated that I did 17,000 miles of driving in six months – and I don’t have a chauffeur.