Arizona boosts rainy day fund after long recovery
After a decade of recovery from the last recession, Arizona will continue to grow its rainy day fund under Gov. Doug Ducey’s $12.3 billion budget.
Ducey’s budget would add $25 million to the state’s rainy day fund a year after it rose to $1 billion.
“With a booming economy, hundreds of new residents every day, and our highest credit rating ever, Arizona’s finances have never been better,” Ducey said in his budget introduction. “But we’re not going on a spending spree. Instead, this budget maintains fiscal discipline, saves more for a rainy day and ensures the important investments we’re making in public schools, students and beyond are sustainable.”
On Nov. 19, Moody's Investors Service upgraded Arizona's issuer rating to Aa1 from Aa2, citing the state's “continued economic growth, the rebuilding of its reserves and the reduction to its already-low debt burden.”
“At the same time the state has steadily paid down debt incurred prior to and during the recession, while limiting new borrowing, reducing an already-low debt burden,” Moody’s analyst Kenneth Kurtz noted. “Other key factors in the Aa1 rating include below average pension liabilities and demonstrated budget discipline.”
In affirming its AA issuer credit rating in December, S&P Global Ratings cited economic factors and the state government’s return to structural stability.
“Arizona, which we view as having cyclical economic and financial characteristics, currently appears to be at a high point of the credit cycle,” S&P analyst David Hitchcock said. “After 10 years, the state achieved structural budgetary balance between ongoing revenues and expenditures in fiscal 2018, and it projects continued balance for the foreseeable future.”
After last year’s legislative session Ducey signed a bill to pay off $190 million in state debt incurred after the 2008 recession.
The bill retired a lease-purchase agreement for some state buildings taken out in 2010, eliminating annual $24 million payments and saving about $50 million in interest payment over the next decade. Faced with revenue shortfalls, Arizona raised $1.4 billion by mortgaging state buildings, including the capitol, and leasing them back.
“We’ve learned from the mistakes of the past,” Ducey told lawmakers in his January State of the State address in the Capitol. “This building? We now own the deed.”
Arizona’s constitution all but bans general obligation bonds, forcing the state to rely on certificates of participation for borrowing.
In connection with the November upgrade, Moody’s raised Arizona’s COPs to Aa2 with a stable outlook.
Ducey’s budget would raise spending by $659 million from the $11.65 billion in the current fiscal year 2020 that ends June 30. But the Republican governor took a strong stance in his State of the State address against any tax increase for education or other needs.
“We’re running a billion-dollar surplus, and somehow that still isn’t enough? Give us a break,” Ducey told lawmakers. “Even better — give the hard-working taxpayers a break.”
Ducey called for spending on roads that would contribute to the state’s economic growth, particularly in rural areas.
“We’ve fully and permanently restored transportation dollars for our rural communities,” he said. “The Phoenix-Tucson corridor is an economic artery for our state and it needs expanding. It’s time to accelerate completion of I-10’s widening, in both directions, between our two largest cities.”
Ducey also called for tripling investment in rural broadband grants, and also invest $50 million in Smart Highway Corridors to install broadband along our rural interstates.
‘This will make our highways safer and smarter than ever before and pave the way to get all of rural Arizona logged on,” he said.
With a population of 7 million, Arizona is the fourteenth largest state. Its state gross domestic product, $347 billion, is the twenty-first largest in the nation, per Moody’s. However, income levels are below average, in part because of a large retiree population. The state's per capita personal income is equal to 81.4% of the U.S. level and its poverty rate is among the five highest in the nation.
Hard-hit by the housing market collapse, Arizona lost 11% of its jobs from 2007 to 2010, compared to 5.6% for the U.S. Unemployment peaked at 10.4% in 2010, versus 9.6% for the U.S.
Over the past five years, the economy has rebounded, buoyed by new construction, finance, healthcare and education in addition to tourism and hospitality.
The recession produced state budget gaps exceeding $1 billion. In fiscal years 2010 and 2011, the state closed the gaps in large part with one-time measures. Those included draw-downs of reserves, deferrals of payments to other government units, primarily education, transfers from the state highway fund, deficit financings, and a temporary, voter-approved one-cent sales tax beginning in 2011.
The state balanced operations for fiscal year 2011 and achieved large operating surpluses in fiscal 2012 and 2013.
With the expiration of the temporary sales tax in May 2013, the state returned to structural imbalance and reserves were drawn down through fiscal 2017. At the end of fiscal 2017, budget-basis reserves equaled $612.3 million or 6.5% of revenues.
As result of steady revenue growth, the state was able to return to structural balance by fiscal 2018. Budget basis reserves grew to $907.4 million or 9% of revenues at the end of that year.
“Extremely strong revenue growth in fiscal 2019 fueled a significant increase in reserves,” Moody’s said. “At year-end budget-basis reserves totaled an estimated $1,670.7 million or 15% of revenues, including $713.4 million in the budget stabilization fund.”
Arizona's housing market continues to recover from its significant decline during the recession, with the S&P/Case-Shiller Home Price Index indicating the Phoenix metroplex's housing stock values growing 6.02% in the 12 months through September 2019.
“Nevertheless, the index is still only at 83% of its 2006 peak,” S&P pointed out. “Even during the downturn, the state's population growth remained above that of the U.S., and it continues to outpace the nation.”