Arizona is not prepared for the next recession

Pew Charitable Trusts last week issued an analysis that ought to worry the incoming members of the 54th Legislature, which was elected earlier this month and will convene for the first time in January, about the fiscal health of Arizona.

In an analysis of all 50 states, Pew found that Arizona is among the states most ill-equipped to deal with an economic downturn.

The researchers evaluated each state and gave each a “volatility score” based on changes in revenue collections over 20 years. They also determined how much each state has in reserve funds, compared to how much it spends annually. The states were then categorized by how they scored in each category.

Unsurprisingly to anyone who has covered Arizona’s budget process, or the lack of response from policymakers to give the state tools to weather an economic downturn in the wake of the Great Recession, Arizona is firmly in the “above average volatility, below average reserves” category.

“Meeting both these criteria and appearing in this quadrant should be a warning sign. These states experience larger revenue fluctuations than the typical state, so they are more likely to face significant declines in tax collections during a recession,” the researchers wrote.

Arizona had the fifth-highest volatility score, but ranks only 37 in cash reserves, with about 5.1 percent of annual spending it its “rainy day fund.”

Three other western neighbors – California, Colorado and New Mexico – all have slightly higher volatility scores, but each has at least 10 percent of annual spending in reserve, more than the national average.

Arizona law actually limits how much the state can set aside in what is formally known as the Budget Stabilization Fund to 7 percent of the general fund revenues collected in a given year. The fund has about $462 million, far short of the $721 million it could have if lawmakers deposited enough to hit that statutory cap.

In recent years, the state has actually saved proportionally less money: In 2016, the BSF was at 5 percent of revenues, and it has dipped to 4.5 percent this year.