How prepared is Arizona for the next economic downturn?

Gov. Doug Ducey said in his State of the State address that he wants the state’s rainy day fund to be $1 billion, a figure that comports with recent research showing Arizona is ill prepared for the next recession.

Two of those researchers from Pew Charitable Trust, Stephen Bailey and Dr. Alexandria Zhang, presented their findings to the Senate Appropriations Committee Tuesday afternoon.

Pew Charitable Trust has conducted a study of every state’s rainy day funds and used a model created originally by Minnesota to look for patterns and determine what percentage of state revenues should be put into savings.

The general rule for states was that five percent of revenues was the aim, but after the Great Recession in 2008, many started moving towards higher amounts. Pew now says that eight percent is the new norm.

In 2008, the national average was 4.8 percent, and in 2018 it was 5.5 percent. Arizona’s fund balance, about $461 million, is at 4.8 percent.

However, some states have higher percentages to account for things like natural disasters which states like Arizona don’t exactly have to account for.

The 4.8 percent Arizona currently stands at still might not be enough even with the lack of earthquakes, tornadoes and hurricanes, according to Pew.

The researchers’ model showed that, on average, Arizona takes six years to recover from economic downturns.

They took that information to determine what percentage would be needed in order to cover the state for that six year period.

The state would need a budget stabilization of roughly seven percent to cope with a moderate downturn like the one in 2000 when the tech bubble burst.

Things take a steeper turn when an economic downturn similar to the one in 2008 is put into the same model.

A budget stabilization of roughly 16 percent would be needed to cover the state for a six-year recovery from a severe downturn like in 2008. In that scenario, nine percent would be needed to cover the first two years, equal to about $1 billion.

Pew’s findings are not entirely new, either.

Moody’s Corporation and S&P both found similar numbers.

During the first two years of the Great Recession, 19 states depleted their budget stabilization fund within the first two years. Arizona was one of the 19.

But that seven to 16 percent target could prove hard to reach, given that state law prohibits the fund from being more than seven percent of general fund spending and requires that any surplus money be transferred to the general fund.

Despite that, Gov. Doug Ducey in his state of the state said he wants the rainy day fund to reach $1 billion, meaning that the legislature would need to raise the cap for budget stabilization to at least nine percent.

The good news?

Pew found that states are more prepared than ever for the next economic downturn with many either finishing up new legislation or pursuing new legislation to increase their emergency funds.

Members of the Arizona Senate Appropriations Committee didn’t voice any positions to indicate what they may pursue in regards to budget stabilization.