PHOENIX — As part of her $10.4 million budget proposal, Gov. Janet Napolitano wants to increase state spending by 7 percent and to get there is relying on debt financing to build new schools and issue longer-term bonds to speed up high construction.

The school construction financing plan looks to be the major budget battle this year between Republican state lawmakers and the Democratic governor.

George Cunningham, the governor’s budget director, likened the school construction plan to a home mortgage, saying it will help build more schools and keep up with population growth.

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The state currently uses a ‘pay as you go’ approach to school construction allocating money yearly to pay for current projects.

House Majority Leader Tom Boone, R-Glendale, questioned the use of lease-to-own debt financing for school construction saying it is an item that can be paid for with state cash. He compared the governor’s plan to running up a credit card bill instead of paying cash for items one can afford. Boone dismissed the mortgage analogy saying unlike a homeowner buying a house for three to five times their annual income, the state can afford its current track of spending $200 million to $500 million annually on school construction without incurring debt.

“That’s a bad fiscal policy,” said Boone.

Republicans also are concerned about the capital costs and possible debt of local schools expanding and building classrooms to accommodate the rollout of all-day kindergarten programs - a Napolitano favorite.

The governor’s plan seeks to bring in $400 million in new money for highway construction by refinancing bonds to 30 years instead of their current 20-year term. Napolitano does not favor a Republican plan to take $450 million out of state budget reserves for highways. Boone said both plans deserve examination and study.

The governor’s budget increases overall spending but also foresees slowing tax revenue. The budget expands government health programs for uninsured children; puts more money towards the biomedical sector and economic development; boosts teacher pay; and offers more financial aid to college students.

Napolitano’s budget proposal grows state government spending by 7 percent but forecasts revenue growth of only 3 percent, a slowdown from previous years. That slowed revenue stems from a cooled housing market and the state bringing in less tax revenue after recent property and income tax cuts.

The governor’s budget does not include any tax hikes or cuts. Business and real estate groups are pushing hard for more property tax relief this session.

Napolitano’s budget offers more money for biotechnology and science including $35 million for the Science Foundation Arizona biotech group; $25 million of a new downtown Phoenix biomedical campus; $16 million to bolster sagging math and science education; and more spending to attract foreign companies, recruit and retain more doctors during residency training and build more research buildings at state universities.

Cunningham said doctors tend to set up practices and work where they serve their medical internships and residency and creating more of those opportunities in Arizona will help with state’s physician shortage.

Fiscal conservatives and some Republicans question Napolitano’s plan.

“The governor acknowledges a slowing economy, yet proposes an awful lot of government spending to drive certain sectors of the economy. That’s not a workable recipe,” said Steve Voeller, president of the Arizona Free Enterprise Club, which favors more tax cuts and limited government growth.

E-mail comments for publication to editor@azbiz.com. Contact Mike Sunnucks, at the The Business Journal of Phoenix, by e-mail at msunnucks@bizjournals.com.

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