Arizona's fiscal situation isn't great. This economist says state should use rainy day fund

A group of economists that helps state lawmakers get a feel for Arizona’s fiscal situation says the news isn’t fantastic.

The Finance Advisory Committee estimates the state has about $200 million less now to spend than it did in January — and that could have a significant impact on what the new state budget looks like.

Economist Jim Rounds with Rounds Consulting is a member of that committee; he joined The Show to talk about what happened at the group’s meeting on Friday.

Full conversation

MARK BRODIE: Jim, good morning.

JIM ROUNDS: Good morning.

MARK BRODIE: So, you know the old saying, "a million here, a million there, pretty soon we're talking about real money" — $200 million, that's real money.

JIM ROUNDS: It is a lot of money, but at the same time we're talking about multiple years and we're also talking about a budget that's $15-17 billion depending on the — how you want to look at it. So, it's a relatively small percentage. But all the decisions that are made in terms of what we spend is made at the margin. It's made based on the extra revenue that comes in and we're not in a recession yet, but revenues are tight.

Jim Rounds

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MARK BRODIE: OK, so you say not in a recession yet. Does that mean you think one might be on the horizon?

JIM ROUNDS: Well, I always get into a lot of trouble when I say that there could be a recession. Even just saying "could" makes you an outlier, because most people are predicting just the economy slowing and just being at a very slow rate of growth the next handful of years.

But business cycles are always up and down. We're probably going to get a little bit worse before we get better. And then we'll have a very, very strong economic expansion after that. So we do have to be cautious and we have to prepare for revenues maybe coming in below what the consensus is forecasting. Because I still feel like they're a little bit high in terms of the revenues in the short term and they're a little bit low in the long term.

MARK BRODIE: So do you think it might actually be more than $200 million that we're down at this point?

JIM ROUNDS: Potentially, but it's going to have to do with things like additional tariff issues. I know that there's a lot of refunds coming in, and they're going to be going out of state even though we would have paid them. So the way that they're distributing the money really isn't going to be helping us a whole lot but will be helping other states where the headquarters are.

The Iran issue — whether or not we can keep the strait open and we can have oil flowing so we can have more affordable gas and other products that use oil. There's so many uncertain things.

And we used to always say it would just take one or two shocks if the economy's already slowing, but there's nothing left to shock us anymore. I mean, no matter what you wake up to, no matter what story you hear, is it really a shock? And so investors I don't think are impacted as much, so you don't see the stock market with the fluctuations for these shocks for a longer period of time.

Like instead of a 20% correction in the Dow after Iran, we didn't — we saw a hit to the stock market, but it wasn't a major impact for a long period of time.

MARK BRODIE: OK, so you mentioned Iran, and I know that was something that came up at the meeting last week. Is that a matter of — with gas being so much more expensive than it was — that people are spending more money on gas so they're not able to buy big-ticket items and the state is bringing in less in sales tax revenue?

JIM ROUNDS: Yeah, it would disproportionately impact lower-income people. And that's why people are calling this a K-shaped recession. I know that sounds weird, but it means the upward part of the K, if you picture it in your head, is the higher-income individuals that still have strong stock market portfolios ... and they still have a strong value in their homes. Lower-income people don't have that, so it's going to be a "haves and a have-nots" type of a slowdown.

And that'll be important, but there's a lot of potential negative things that could happen to us just from the normal business cycle. And so I feel like it is smart to be cautious. But again, I think I'm a little bit more optimistic about the state's long-term opportunities, but I'm more realistic about the short-term potential problems. We don't have the federal government spending trillions of dollars to keep the economy moving forward like it was in prior years. That's got to have some impact.

MARK BRODIE: So, is it mostly, from your mind Iran, and tariffs that are causing this, or other factors? In addition to the federal COVID money not being a factor anymore, are those sort of the main factors? Are there others?

JIM ROUNDS: You normally have a business cycle that's just from the ebb and flow of overinvestment, overspending, and then you have corrections. We decided to use Keynesian economics — the theory is when you are in bad times, the government spends more, and when you're in good times, you spend less.

Well, we've been imposing Keynesian economics on good times and bad times. We've just been spending more regardless. And when you add $10-15 trillion to the national debt over a short period of time, obviously you're boosting the economy — you're borrowing from the future. We can't keep doing that. And that impacts states because the federal government can print money — we can't. And so we have to live within our means and even that's difficult sometimes.

MARK BRODIE: So what advice would you give to lawmakers and the governor? I mean, in theory, budget talks are starting to ramp up — they have to pass a budget by the end of June. What advice would you give them based on sort of the general economic factors you're seeing and the numbers that came out last week?

JIM ROUNDS: Well, their No. 1 job is to balance the budget. It's not to have any, you know, economic development gimmicks or anything like that. It's balance the budget. And you're going to have a lot of debate on conformity related to the federal government tax-law changes. Again, they have more ability to cut whatever they want, because the state — and the state doesn't because we can't print our money.

I would say be cautious. What I would like to see is what we did with the income tax cut a few years back where we had a really good debate about what to do with the extra money. There was debate about taking that 2.5 % down to maybe 1 or 1.5 —

MARK BRODIE: With the flat tax?

JIM ROUNDS: Yeah. We ended up setting aside money and paying off a lot of state debt, and we put extra money in the rainy day fund. And that's why we have such a large amount right now — larger than it normally would have been. And I'd like to actually see some of that money used to get through any kind of slowing in the economy that's not recession-related, because that's why we set the money aside. We actually were in the room when we were discussing these types of issues. That's why I feel like part of the rainy day fund is for the rainy day and part of it is just for imperfect management of the state's budget.

MARK BRODIE: So just in the 30 or so seconds we have left ... when you talk about this maybe being a time to use the rainy day fund, would you see this as more of like a drizzle? It sounds like you're not saying we're like quite in a downpour at this moment.

JIM ROUNDS: No, just part of the money in there was for exactly what's happening right now. This was predictable. We knew the federal government wasn't going to keep spending like they were spending and it was going to slow, and that's why things kind of balanced out. A lot of people put a lot of thought into it. But the state will need to be cautious and they will have to make decisions about that tax conformity bill at some point. There's a lot of political pressure to do it.

MARK BRODIE: And there has been since January really, and before that even since the One Big Beautiful Bill Act was enacted by Congress. All right, that is economist Jim Rounds with Rounds Consulting Group. Jim, good as always to talk to you, thank you.

JIM ROUNDS: Good to see you.