Ducey, legislators at odds over doubling of rainy day fund

Rainy day fund savings. Jar with dollar bills.

Gov. Doug Ducey wants to use surplus revenues to boost the state’s rainy-day fund to a historic high of $1 billion, but some Republican lawmakers have other ideas for spending the extra cash.

In order to more than double the state’s rainy-day fund, Ducey aims to overhaul state law that stipulates how much the state can squirrel away.

Currently, no more than 7 percent of state revenues can be stored in the rainy-day coffers.The State Treasurer’s Office estimates that works out to somewhere between $750 million and $800 million in savings.

Standing between Ducey and a statutory change are numerous lawmakers that have other ideas about what to do with the surplus cash. State budget analysts have warned lawmakers that those dollars are not meant for ongoing expenses, and should be used to cover one-time costs.

Ducey’s proposal, which he first announced in his “State of the State” address on Monday, has stirred consternation among legislative Democrats and K-12 education advocates, who hoped a roughly $900 million surplus could mean additional revenue for teachers and schools.

GOP lawmakers are also brainstorming other ways for the state to prepare for an economic downturn, like paying down the state debt and eliminating budget gimmicks lawmakers adopted during the Great Recession.

Under Arizona law, the state treasurer is required to transfer any state revenues above 7 percent in savings out of the rainy-day fund and into the state’s General Fund. The state’s rainy-day fund is hovering around $460 million, or about 4.5 percent of General Fund revenues.

Boosting that number to $1 billion would require putting between 9 to 10 percent of those revenues into the rainy-day fund.

“This would be a statutory change and included as part of the budget package,” Ducey spokesman Patrick Ptak said. Ducey released his budget Jan. 18, after deadline for this story.

Sen. J.D. Mesnard filed SB 1091 Jan. 17 to increase the cap on the state’s rainy-day fund to 10 percent.

The governor’s savings plan comes amid economists’ predictions that another economic recession could hit the country as soon as 2020. Rainy-day funds are traditionally used to shield the state’s budget from the impact of an economic downturn.

Analysts at the Pew Charitable Trusts found that it takes Arizona’s revenue streams about six years to fully recover from a recession. Alexandria Zhang, a research officer at Pew, told the Senate Appropriations Committee on Jan. 15 that $1 billion in savings would cover the costs associated with the first two years of a severe recession, an economic downturn akin to the Great Recession.

Severe recessions are typically outliers, and Arizona, like most states, won’t approach the level of savings needed to fully cover the costs associated with a six-year economic downturn.

By comparison, if Arizona suffered a moderate recession, a 7-percent reserve fund would be able to cover all six years of the downturn, she said.

While there are benefits to using the one-time surplus for saving, Treasurer Kimberly Yee offered legislators an alternative.

As a senator — she served in the Senate for years before her recent election as treasurer — Yee often espoused the benefits of paying down a $930 million rollover of K-12 public school expenses.

Beginning in 2008, the state delayed making payments to school districts to July instead of June, a maneuver that pushed the expense into the next fiscal year, thereby allowing the state to claim a “balanced” budget on paper. That gimmick was used for three consecutive years, resulting in the now $930 rollover of payments made to public school districts.

The rollover has a trickle down effect; it plagues some districts, which have been forced to resort to taking out lines of credit with county treasurers to meet their needs, Deputy Treasurer Mark Swenson told the Appropriations Committee.

“We make the rollover repayment as soon as we can in July. We have county treasurers calling us, asking, ‘where’s the repayment,’” he said.

Swenson proposed a scenario by which the rollover is gradually reduced and schools get their payments on time over an 18 to 36 month period. That would provide some immediate relief to schools, with the added benefit of ensuring the state doesn’t go into another recession with massive debt.

If the rollover is not eliminated before a severe recession, “daily operations of all state government, including distributions from tax collections to local governments, are at risk,” according to a report prepared by the treasurer’s office.

Yee declined to explicitly advise senators which path they should choose: Savings or debt payments. But she told the Arizona Capitol Times that she’s held meetings with several lawmakers who are interested in paying off debt like the K-12 rollover.

“In my opinion, we used a lot of accounting gimmicks and lending and borrowing and all of these, that, if we were in our households, we’d be paying down,” Yee said.

Sen. Heather Carter, R-Cave Creek, said the treasurer’s office “confirmed some of the research that I’ve looked at over the interim. In terms of maximizing dollars that we have available, to utilize that for debt reduction, I think we should really consider looking at paying down the rollover.”

Carter said she’d like to see a combination of the governor’s pledge to add dollars to the rainy day fund and efforts to pay down the rollover debt.