The success that has given Colorado one of the strongest economies in the U.S. has masked a troubling reality: Its state government is, by one key fiscal benchmark, among the least prepared for the next recession.

The deficiency isn’t for lack of trying. Under Gov. John Hickenlooper, state lawmakers have more than tripled the size of the state’s rainy-day fund from its 2010 low. And he has requested an even larger reserve next fiscal year.

But a new analysis from Moody’s Analytics found that the $613 million Colorado has tucked away is still less than half of the rainy-day funds it needs to weather even a moderate downturn — much less a full-on financial storm on par with the Great Recession.

The state’s relatively low reserves, coupled with other factors, have left Colorado in the sixth-worst shape of any U.S. state under the Moody’s analysis.

In his 2018-19 budget proposal, Hickenlooper asked lawmakers to sock more money away next year and to steadily increase the statutory reserve requirement for the future.

“History tells us that we have to be ready for a recession. It’s not a question of if; it’s a question of when,” Hickenlooper told the Joint Budget Committee in November when he presented his budget proposal. “If we do not set aside some of our current growth in state revenue, it will be all the more painful when a downturn does occur.”

But even increasing, as Hickenlooper suggests, the required reserve to 7 percent of general fund spending — up from 6.5 percent under current law and 2 percent at the depths of the recession — would fall well below the 15 percent mark that Moody’s now says is needed.

How much is enough?

There’s no widely adopted national standard for how much a state should keep in reserve.

In the 1980s, rating agencies suggested setting aside 3 to 5 percent of revenue, according to the National Conference of State Legislatures. In recent years, the Government Finance Officers Association recommended up to 15 percent. In practice, states have set targets of anywhere from 2 to 10 percent — and the amount they actually save varies even more wildly than that.

On average, Moody’s says, states need about 10 percent of their general fund spending saved up to withstand a moderate downturn without layoffs or other significant cuts. But their analysis also suggests that a one-size-fits-all standard isn’t a good idea, anyway.

Colorado, for instance, is more susceptible to economic shocks than most. During the last two downturns, Hickenlooper said the state saw its revenues drop by about 16 percent — partly a product of Colorado’s reliance on the oil and gas industry and other volatile sources of revenue, such as income and sales taxes, which can go through extreme dips during bad economic times.

Colorado also spends more than most states on Medicaid, the health care program for the poor, the costs of which go up when the economy tanks and people lose their jobs.

Moody’s says the drop in revenue, combined with higher Medicaid expenses, would add up to a $1.7 billion fiscal shock for Colorado in a moderate recession. That would jump to $2.9 billion in a severe recession — the equivalent of a whopping 25.9 percent reserve. Only Alaska and Wyoming have that much set aside today.

A separate study from Pew Charitable Trusts casts Colorado in a slightly better light relative to its peers, but it still saves less than the 10 percent the average state keeps in reserve. Colorado ranks 36th on the Pew list, up from 45th in the Moody’s analysis.

The implications extend beyond what happens in a recession — if credit ratings agencies adopt something close to the new Moody’s guidance, it could harm the state’s credit rating, leading to higher borrowing costs.

State in constant crisis

Hickenlooper’s argument is simple: In a good economy, Colorado should be saving — and when will the state have a better economy than it has now?

But the state government for years has seemed to lurch from one financial crisis to the next, even in good economic times. Funding for hospitals, schools and transportation have dominated the debate of the last few legislative sessions. Next year, lawmakers can expect to add the state’s badly underfunded pension to the list of outsized needs competing for limited dollars.

Against that backdrop, Democratic Rep. Millie Hamner and Republican Sen. Kent Lambert, the chair and vice chair of the Joint Budget Committee, respectively, praised Hickenlooper for making the reserves a priority.

But even some conservatives think the money could be put to better use.

State Rep. Paul Lundeen, R-Monument, last session proposed cutting the statutory reserve to 5.5 percent to free up an additional $104 million that he says would go a long way toward alleviating traffic congestion on Interstate 25.

In a recent interview with The Denver Post, he stood by his proposal, saying he’s all for building up the reserves as a general goal — “but let’s also acknowledge in this time of plenty, we need to be investing in our infrastructure.”

“Reserves are for a crisis,” he said. “Reserves are for an unforeseen crisis in the future, and the reality is we have a policy crisis today.”

On average over the last 30 years, Lundeen says, the state kept about 3.5 percent in reserve. He suggests something between that and Hickenlooper’s proposed 7 percent.

“We managed as a state not to fold up and blow away like a tumbleweed under a 3.5 percent reserve,” he said.