Experts are mixed on whether Arizona is ready for the next recession.
A recent Pew Trusts report titled “Rainy Day Funds in 2019: Are states ready for the next recession?” examined how well positioned U.S. states are to weather a recession by looking at a variety of factors including using cash reserves, commonly known as “rainy day funds,” to offset a budget gap as well as spending reductions or tax increases.
In the case of Arizona's fiscal readiness, as gauged by its rainy day fund, the answer is not exactly black and white but more a shade of grey.
Arizona’s rainy day fund currently sits at just over $1 billion, or 9.2 percent of the state’s general fund revenues, following a deposit of $542 million at the beginning of the fiscal year, which began on July 1, according to Steve Bailey, manager of the state fiscal health project at Pew Charitable Trusts.
Gov. Doug Ducey touted the deposit as “making good” on a commitment to boost the fund to better prepare Arizona in the event of an economic downturn.
“By saving these dollars, Arizona is better equipped to protect our growing investments in areas like K-12 public education, public safety and child safety while avoiding the budget gimmicks and band-aids of the past,” Ducey said.
Bailey noted that the odds that a next recession will be as bad as the last recession are unlikely and that we are more likely to have an average to moderate recession.
He added that in many ways “states haven't fully recovered from the Great Recession,” regarding things like infrastructure spending and other non-education related spending.
Bailey said that some states have recovered more than others but overall, state governments are now leaner and “there's not as much fat that needs to be cut,” so there's less flexibility to cut things in the event of a recession.
Overall, Bailey said Pew tells states to do more to study what would happen to their economies under certain recession scenarios, better known as "fiscal or budget stress tests." One example is a comparison to see how well covered a state is for either an average or a severe recession.
Asked just how much a state needs to save, Bailey said that Arizona’s current reserves are “pretty good” and vastly improved with more flexibility than in recent years.
But Sean McCarthy, a senior research analyst with the Arizona Tax Research Association, is not sold on the idea that more cash reserves will make the state impervious to a recession.
“There's a balance between the idea of having a reserve that can get you through difficult periods, such as a tough lawsuit or an economic downtown,” McCarthy said, “but it would also be a disservice to taxpayers to be hoarding money.”
McCarthy said he believes that taxpayer money is not better served sitting in government coffers rather than having it work for people, helping with basic services such as education, transportation, public safety and health care.
“A moderate rainy-day fund can be useful to keep a government running on-time without disturbing vital services,” McCarthy said.
He added that rainy day funds "won't save governments” from a recession and that even a billion dollar fund is not an “elixir" to help get through even a mild recession.
“Rainy day funds will not be a governments’ fiscal bridge to the end of a recession,” said McCarthy, but “they can help you build a bridge."
He noted that the biggest thing that needs to happen during a recession is to “curtail growth and hold the line on costs.”
“No one wants to cut the salaries of municipal employees such as teachers, corrections officers and those charged with guarding public safety,” McCarthy added.