Fiscal Year Wrap Up

We’ll get a fiscal year end update on the state’s finances and a look at the upcoming fiscal year with economist Jim Rounds of Rounds Consulting Group.

Transcript:

Ted Simons: Coming up next on "Arizona Horizon" -- we'll review the state's finances as the fiscal year comes to a close and we'll see how high school students are learning real world skills like the culinary arts. Those stories next on "Arizona Horizon."

Video: Arizona Horizon Members of your PBS station. Thank you.

Ted Simons: Good evening. Welcome to "Arizona Horizon." I'm Ted Simons. A confirmed case of the measles has been reported in Maricopa County. That makes 14 cases statewide with most confirmed in Pinal County. The new case like the others is linked to a private immigration detention center in Eloy, a case involves a patient not infectious and is not a threat to the general public.

Ted Simons: State's fiscal year is drawing to a close. Here to look ahead to fiscal year '17 is economist Jim Rounds of rounds consulting group. Good to see you again.

Jim Rounds: Good to be here.

Ted Simons: Fiscal year wrap-up, how are we doing?

Jim Rounds: Much better than in the past. We had a tough recovery. When you see weak numbers it means weak tax collections, so the state struggled but the last year we really saw things turn around. We started getting back to more normal conditions. Not a boom period but more normal. So as of the last report from the legislature we were growing revenues, general funds base revenues, by about 3.7%. We'll probably finish close to that, not bad considering where we have been in the past.

Ted Simons: Where were we in the past, pre-recession times?

Jim Rounds: Back when I worked at the capitol, forecasting was really easy. During boom periods our expansion, what's the forecast for sales tax, 10%. What's the forecast for income growth, 7%. Everything was around 7%. I want to say this is a new normal but I think people are using that too much. It's the normal for this expansion. I think the next expansion after we get into the -- things will slow eventually and then ramp up. I don't think we'll be back at the 7% figure. We'll have to do more fiscal planning.

Ted Simons: 4% by the ends of the year, not a bad thing?

Jim Rounds: Not a bad thing.

Ted Simons: Job growth. We're talking about that in general here. Are we getting past the 2%? Are we getting past that kinds of thing? Sounds like we are. What kinds of jobs are these?

Jim Rounds: The numbers are pretty about. Arizona is growing by around 3%. A little bit better. Greater Phoenix area starting to approach 4%. Even Tucson is getting close to around 3%. That was an area I was worried about because they were lagging everybody. The job growth numbers are good. We're top ten now. I think we'll be top five by the end of the calendar year. This next fiscal year in terms of statistics will look really good but it's not necessarily the same jobs. We're still way down in construction. We lot a lot of manufacturing jobs that we won't get back for the next decade or so but we're doing well in leisure and hospitality but incomes are a little weaker than what we would have seen in one of our normal expansions.

Ted Simons: Sounds like data centers, technology doing pretty well.

Jim Rounds: Growth is across the board except for the growth industries like construction. That will come back. In fact if we get back to normal conditions maybe by the ends of the decade, 2021, we'll have to see strong rates of growth. You fall by quite a bit, you have to pull strong rates of growth just to get back to where you were love. In absolute numbers we're not there. We're creating some of these Tech jobs and people in economic development, the governor's office, everybody is working hard to create this stuff but it doesn't change the bottom line health of the economy except over longer period of time. It takes a while for this to show up in numbers.

Ted Simons: The insurance industry seems like it's booming as well. That will take time.

Jim Rounds: Yes, not necessarily booming but we are seeing diverse job growth.

Ted Simons: Yes.

Jim Rounds: It's just the wage component isn't quite as exciting as we would normally hope. We might get there eventually but I think what will happen is the broader economy might start to slow right when we're hitting our stride. That will impact us. What will be nice this next downturn it will be more like 2001 rather than 2008.

Ted Simons: You mentioned wages, per a capita looks like it's dropped again. What's going on?

Jim Rounds: We'll be okay. You have to look at where you would normally position yourself. It's not as if we were number 2 and dropped down low. You have to look at who you are. We are creating a lot of high wage jobs but our broader base isn't necessarily made up of everybody making silicon valley type of incomes. What you want to look at is are we seeing improvements over time and we finally got to the point where we're starting to see upward movement in terms of the quality. It's just more modest. The quantity numbers are starting to look really G. the quality is going to be more slow to develop.

Ted Simons: In the grand scheme of things what about in migration, population growth in Arizona. Our growth was that kind of growth. Obviously that change with the recession. Are people starting to come back a little bit more?

Jim Rounds: Yeah. In fact I think the numbers people quote are understating the growth. That's because you can get job numbers based on surveys every month. We just saw that with the U.S. You can get numbers every month. With population numbers, we still reference numbers from last July. That put us outside the top ten in terms of population growth. Domestically we were about top ten. I think we may be closer to top 5 in population growth than people realize. That's because all the other economic data is looking good. You're not going to see job growth and other things that we're doing and not see anybody moving. It's going to be a combination. It's all interrelated.

Ted Simons: With that in mind, economic policies. Passed by the legislature -- lots involving tax cuts. We're hearing that they are not necessarily bringing in what they promised to bring in. Will that change in the coming years?

Jim Rounds: I think that we're evolving in terms of what we analyze. Years ago we had to figure out if we had competitive tax rates. I even did some of the analysis. I know thought was put into whether or not our corporate takes was appropriately based and we just need to be competitive. Then we moved into economic development. Now we're getting back to fundamentals, talking about infrastructure. You had shows talking about education. Not everybody is happy with some of the results but we're talking about it. We're working on it. We made some improvements in how we fund education at least in my opinion. Everyone is talking about infrastructure improvement. Basic things. What I'm excited most about as somebody that doesn't like to just throw money around on economic development, we're being qualitative in our policy development to quantitative. The governor, commerce authority, all the other economic development groups want to do math to figure out where we stand and I love this economic opportunity office because the whole premise is to get different groups together, to get them talking, to actually analyze policy before it's implemented.

Ted Simons: Will a group like that, though, when the policy is let's cut more taxes, say no?

Jim Rounds: I think it depends on how they analyze it. If they decide to proceed like they are indicating, we are going to analyze this. We are going to do a thorough analysis of regulation, not just say we overregulate. We're going to see if there are any areas in tax policy that could cause economic growth but you do the study first. We have to -- we have talked about this before. How do we blend economic development and tourism. Now they are going to be part of this coalition. Coalition is a bad word. The commerce authority, Arizona, they are supposed to be working together. If they do the analysis before the policy is written I think we'll be in good shape. This is the most excited I have been about economic development in Arizona since we started looking at the stuff in 2010.

Ted Simons: Development in Arizona or in Maricopa County and Phoenix area in general? It seems like that is the 800 pounds gorilla in the state. You said Tucson is doing better, but still -- Phoenix area is doing pretty doggone well and the rest of the state not so much.

Jim Rounds: Well, you can almost go community by community and figure out what the problem is. There might be a community that was really dependent on defense sector spending. Well, their economic development goal is to fill the jobs that were lost when the federal government cut back. Tucson is posting stronger rates of growth but they did that at the ends of the last calendar year. The growth might slip a bit but I'm finally a little bit optimistic about them turning it around and they put together some really good economic development policies. I week what Pima and Tucson have been doing. In greater Phoenix, Prescott valley has opportunities. You have opportunities in Pinal County. You could almost do a region by region analysis of the state. There's at least a little bright spot in each area.

Ted Simons: With that in mind, the U.S. economy could be what puts the brakes on things or continues to go in a different direction.

Jim Rounds: Yes.

Ted Simons: How much of the -- I'm hearing talk there could be another recession around the corner. The last one, over ten years ago.

Jim Rounds: Yeah.

Ted Simons: Started over ten years ago.

Jim Rounds: This has been one of the longest expansions on record but it's not just based on calendar. It's based on a lot of economic factors. It's not even two consecutive quarters of decline in GDP, what worries me is that not just the recent job number but the last few months have been relatively weak. This is going to be a downturn that doesn't just blind side us. It's going to be something where things build slowly. I think that we can probably anticipate some of this happening if we're honest about what's happening and we pay attention to it, but we're going to fare far better than the U.S. this next downturn.

Ted Simons: If there is another downturn -- 2007 I think when things really started going sideways. If it goes sideways again we are not so dependent on real estate, construction, that sort of sector, are we?

Jim Rounds: You're right. In fact we -- it wasn't by choice but we took a slower approach. It ended up being by default more of a marathon approach where we had slow growth going into this recovery. We're now hitting our stride but we don't have the excesses. If we have a U.S. downturn economists say 33% chance in the next 12 months, we can also say it's only a 33% chance in the next 12 months. We will get hit at some point but I don't think it will be nearly as bad. If you look back at what we saw in 2001, this is what I recommend to all government entities. Run your revenue forecast and plug in the rates of growth from 2001 because after modeling that's about what it's going to look like with a mild downturn. See if you're prepared. I know some counties and communities are prepared. Others are not. We'll see this coming. Except for maybe something in the stock market. It's a little overvalued. That's the one area where I think we could develop a bubble but not yet.

Ted Simons: The world economy affecting the United States economy, the world is supposed to be flat according to Thomas Friedmann. Nothing has changed in past few years. Could we get dinged by problems, conflicts, concerns elsewhere?

Jim Rounds: Yes. The best way to describe this as last time the recession we got knocked down on the canvas. This time we'll see all these little things pile up in the bucket and the bucket will get heavier and heavier and eventually -- it could be international issues, domestic issue, some imbalances related to the stock market, a bubble. Things go sideways in-housing. The Fed could raise rates too quickly. You could list a couple dozen things. Eventually that bucket will get too heavy. It's going to cause a downturn. It's not going to impact Arizona as much but even a mild downturn in Arizona means an awful lot of lost tax revenue at the state and local level and a lot of people are talking about a half billion dollars of surplus. The smallest hiccup in the economy is going to wipe that out. So I'm actually on the side of the policy makers this year that wanted to be more conservative. That money could go very quickly with the most mild downturn. That's the most likely scenario.

Ted Simons: I'm hearing a little bit of chicken little here and cheerleading over here. You're all over the place here.

Jim Rounds: I have been called chicken little by telling people to be responsible and plan for that scenario. Keep it in your back pocket. You don't have to forecast it necessarily in your primary forecast but keep it in your back pocket. That last jobs report makes me feel a little bit better about people no longer saying don't raise that pessimistic scenario. We have to plan. It's okay to plan.

Ted Simons: All right, good to have you here. Thanks for joining us.

Jim Rounds: Thank you.

Video: In the far southwestern corner of the state where interstate 8 enters Arizona from California, is a monument to a time worn spot where countless before us have crossed the mighty Colorado. Native tribes once lived here. Europeans arrived in 1540 when Spanish soldiers took row boats north along the river of good guidance. In 1700, Jesuit missionary father KENO spread Christianity and made maps here after a harrowing journey from Sonora along the aptly named devil's highway. In the mid 1800 soldiers protected gold seekers headed for California while Steamboats as long as 140 feet plied the Colorado hauling gold dust from California. The railroad crossed in 1877. It's hard for today's speedy traveler to even catch a glimpse of the Colorado River and the place so many came to cross it. Yuma Crossing.