This afternoon, Gov. Katie Hobbs unveiled her second budget proposal as Arizona’s commander-in-chief—a $16 billion spending plan that seeks to offset the State’s projected $1.7 billion shortfall.

The proposed spending plan is roughly $1.8 billion lower than last year’s budget and is divvied into seven major spending categories:

Public Safety, Border Security & Corrections

• $5 million in ongoing funding to the Department of Public Safety’s (DPS) Local Border Support specific line item to aid law enforcement agencies to fund drug interdiction efforts in border communities
• $5 million in one-time funding to the Department of Emergency and Military Affairs (DEMA) to expand existing drug-interdiction efforts under the Counterdrug Task Force to curtail drug trafficking activities throughout the state
• $2 million in one-time funding to the Department of Health Services (DHS) to distribute and equip first responders with naloxone for overdose reversals
• $2 million in one-time funding to the Arizona Health Care Cost Containment System (AHCCCS) to expand access to medication-assisted treatment (MAT) in underserved rural communities
• $1 million in one-time funding to DPS to launch a statewide fentanyl awareness and education campaign in collaboration with DHS, the Governor’s Office of Youth, Faith, and Family (GOYFF), the Department of Homeland Security (DOHS), the Department of Transportation (ADOT), and DEMA
• $1 million to the Department of Homeland Security to monitor border operations, mitigate impacts of mass migration in the State’s border communities, and address humanitarian issues
• $203 million to add 84 employees at the state Department of Corrections

Healthcare Access

• $540,000 to establish a Prescription Drug Affordability Division within the Department of Insurance & Financial Institutions (DIFI) that will study ways to promote prescription drug affordability and overall healthcare savings for Arizonans
• In her budget proposal, the Governor specifically called out Pharmacy Benefit Managers (PBMs) and called for the following regulations:
• Requiring PBMs to seek approval from the Prescription Drug Affordability Division before increasing the cost of any prescription drug beyond the rate of inflation, and to provide documentation and justification for such an increase
• Mandate PBMs to report quarterly on the aggregate amount received through drug manufacturer rebates and other incentives; this will give health insurance regulators insight into how PBMs are currently pocketing profits that could be passed on as savings to consumers
• Set maximum prices for commonly prescribed medications and prohibit the practice known as “spread pricing”

Healthcare Licensing Reform

• $10 million ongoing to the Arizona Healthcare Cost Containment System (AHCCCS) for targeted rate behavioral health rate increases; these increases are limited to specific codes, and are a first step in a larger strategy to restore quality care within the AHCCCS system
• $10 million ongoing for AHCCCS to incentivize participation in behavioral health quality improvement initiatives and activities
• $1.9 million ongoing and $157,500 one-time to the Department of Health Services (ADHS) to increase workforce capacity for licensing, inspections, complaints, and enforcement; this will ensure ADHS has a robust workforce to swiftly respond to complaints while maintaining routine operations
• $500,000 ongoing and $900,000 one-time to ADHS to add sober living homes and behavioral health residential facilities to the AZ Care Check Portal, and to establish a quality rating system for residential and nursing care institutions, with ongoing funding to support systems maintenance and operations costs
• $485,500 ongoing and $10,000 one-time to the Department of Economic Security (DES) for 3 additional long-term care ombuds; these staff identify, investigate, and resolve complaints made by, or on behalf of, residents in Arizona’s long-term care facilities. The remainder of the funding will be used to support the volunteer ombuds program through the Area Agencies on Aging, which provides an important supplement to the state positions.
• $271,400 ongoing and $2,500 one-time at ADOA to add an Arizona State Hospital (ASH) ombudsman to independently review and investigate all complaints and grievances filed by patients at ASH
• $500,000 one-time to ADHS to commission an independent assessment of Arizona’s network of services for persons with mental illness, including ASH
• $100,000 ongoing at ADHS to add an in-house counsel position

Housing & Human Services

• Preserves the historic $196 million investment in housing and homelessness made in FY 24 – the largest investment made to the Housing Trust Fund in the state’s history ($150 million)
• Extends and expands the Low-Income Housing Tax Credit (LIHTC) program by 8 years (through 2033), at $8M in tax credits each year (LIHTC has been the most effective method of creating long-term affordable housing units through public-private partnerships)
• Includes $13M one-time to the Arizona is Home – Mortgage Assistance Program to provide down payment assistance and/or mortgage interest rate relief for qualifying households
• Allocates $2.5M from the Housing Trust Fund to AHCCCS as federal matching dollars for a pilot Housing and Health Opportunities (H2O) program

Education

Perhaps the most critical piece of the Governor’s budget proposal is also the most controversial. To make up for the massive revenue shortfall, she is proposing a requirement that in order to become eligible for Empowerment Scholarship Account (ESA) dollars, a student must first attend public school for at least 100 days. For context, that requirement was scrapped in 2022 when the voucher program was expanded to all students. Further, she is also proposing a repeal of the state’s school tuition organization (STO) program, which allows taxpayers to claim a tax credit for scholarship contributions to private schools. Because this would require a two-thirds vote (as it would technically be considered a tax increase), this proposal is essentially a non-starter given the makeup of the current Legislature. It remains unclear how the Governor intends to make up that estimated $430 million in savings if she’s unable to ax STOs and regulate ESAs.

Proposed education spending includes:

• $46 million in one-time funding for the AZ Healthy Tomorrow Initiative, which will fund multiple health initiatives within the three state universities aimed to address the healthcare workforce shortage. This repurposes previous investments in the New Economy Initiative (ASU: $21.2 million, NAU: $10.1 million, UArizona: $14.7 million)
• $325 million new bonding authority for universities
• $20 million one-time funding for the Arizona Promise Program, in addition to $20 million ongoing
• $15 million one-time funding for the Arizona Teachers Academy, in addition to $15 million ongoing
• $78 million to pay for construction of seven new schools, three of which are located in Queen Creek
• $70 million in one-time money to 15 schools, to cover the costs of repairs, land purchases and other building needs

Resilience, Water & Environment

• $9.5 million deposit into the Water Quality Fee Fund to ensure the cleanliness and safety of surface water, groundwater, and drinking water
• $300,000 to fund the maintenance of operation of the State’s Continuously Operating Reference Stations (CORS) network that provides critical ongoing data for monitoring of Arizona’s water supplies
• $33 million to the Long-Term Water Augmentation Fund annually in FY 25, FY 26, and FY 27 to continue investments in long-term water supply development initiatives for the State
• $27 million for proactive forest restoration to protect communities from wildfire and make progress towards healthy forests and watersheds
• $2.9 million increase for the Voluntary Vehicle Repair Fund (VVRF) to support program expansion to more Arizona drivers, providing necessary funding for emissions-related vehicle repairs that improve air quality
• $469,100 to fund three additional full-time employees to conduct air quality planning, leading to cleaner air in communities throughout Arizona

Workforce & Childcare

• $100 million in combined one-time and ongoing spending for Child Care Development Fund, to curb the cost of childcare fees
• $13.7 million to provide support to family members who care for children removed from their parents’ care due to neglect or abuse

This proposal essentially serves as the Governor’s opening bid, as she'll spend the coming months negotiating a final budget with the GOP-controlled Legislature. At this point, the only thing we know for certain is that lawmakers are required to ink a plan into law by June 30.

To download the Executive Budget Summary, click here.