For the most part, Colorado’s economy bounced back quickly after the pandemic-induced recession in March 2020. The state’s coffers are expected to keep growing next year – albeit at a slower rate.
Last week, nonpartisan Legislative Council Staff and fiscal analysts with the governor’s Office of State Planning and Budgeting presented their respective economic forecasts for Colorado to state lawmakers on the Joint Budget Committee.
According to the Legislative Council Staff forecast, general fund revenue for the fiscal year that began July 1 is projected to increase 6.1% above last year. Analysts with the Office of State Planning and Budgeting projected slightly higher revenue growth of 7.3% from last fiscal year to the current year.
Since their respective June forecasts, both the Legislative Council Staff and OSPB improved their outlook for the current 2021-22 fiscal year. Both forecasts also revised their revenue expectations downward for the fiscal year 2020-21.
Last year’s general fund revenue – mostly made up of income and sales taxes – grew 10.7% over the previous year, preliminary figures show.
“Today’s forecast is promising news for our state, and the progress we’ve made to bounce back is something to be proud of, but we cannot let up,” Sen. Dominick Moreno, the Commerce City Democrat who leads the Joint Budget Committee, said in a statement. “Far too many low-income Coloradans and small businesses are still struggling, and it’s imperative that we focus our attention on helping them.”
The state ended the last fiscal year with a general fund reserve balance about $2.8 billion higher than the law requires, according to LCS. Based on what’s currently budgeted for this year, both LCS and OSPB predict the state will have more than $1.8 billion more reserve funds than required.
Both the LCS and OSPB forecasts predict that this year Colorado will take in over $1 billion more revenue than is allowed under the Taxpayer’s Bill of Rights, a voter-approved constitutional amendment, and a subsequent ballot measure known as Referendum C. The surplus could trigger an income tax cut and a sales tax refund for Coloradans – who are already getting a so-called TABOR refund and income tax cut because of last year’s high revenue collections.
“We could see things be worse than expected, so it’s not a surefire thing that we’ll be in a TABOR surplus situation,” Kate Watkins, chief economist for LCS, told lawmakers Tuesday.
Next year, LCS predicts Colorado’s revenue will continue to grow as the economy expands. Based on the current year’s budget, the LCS forecast projects lawmakers will have an extra $3.3 billion to spend or save next year.
LCS predicts general fund revenue will grow 5% next fiscal year, while OSPB predicts a 3.9% increase in revenue.
The LCS forecast notes that revenue could come in higher than expected for the current fiscal year and next year, seeing as that’s happened throughout the last year and a half. The state’s general fund bounced back from an economic recession more quickly than analysts had expected because of the pandemic’s unequal effects on different groups of people.
Medium- and high-earners – who pay more income and sales taxes – in general weren’t impacted as greatly as low earners, and have seen their net worth increase at several times the rate of low earners.
However, the new wave of COVID-19 infections, driven by the delta variant, could hurt the state’s economy.
“High COVID caseloads are constraining global supply chains, increasing inflation expectations,” OSPB fiscal analysts noted in their own September report.
The pandemic’s lasting economic damage could also prove to be more severe than expected once the effects of federal economic stimulus measures fade, LCS predicts. And despite a fairly rosy overall outlook, much uncertainty remains as the state’s economic recovery continues.
“Many households and businesses are still bearing the brunt of lingering distress, while others have emerged unscathed or even better off,” the LCS report says. “Spending and employment in sectors tied to in-person services still lag their pre-pandemic levels and remain sensitive to the waxing and waning of the virus.”
The economic forecasts don’t include specifics about the $3.8 billion Congress sent to Colorado through the American Rescue Plan Act, passed this spring. Lawmakers chose to deposit the money into coronavirus recovery cash funds they created for the purpose of spending the federal money.
But limited information about school finance is included in the LCS forecast. LCS predicts the state will spend at least $154 million more on K-12 education next school year than this year. Based on property values assessed in December of last year, local governments’ financial responsibility for public education is projected to increase by $122 million from this year to next year.
However, temporarily reduced assessment rates for certain types of properties – a result of legislation designed to provide a buffer in case voters approve of a property tax cut in November – could mean the local share of school finance is somewhat smaller. The upcoming December economic forecast from LCS will have more complete information about school finance, the September report says.
LCS also predicts that cash fund revenue will rebound this year, increasing 7.2% over last year even as disruptions to the crude oil market, decreased travel and reduced capacity at casinos continue to limit severance tax collections, transportation-related revenue and gaming revenue. OSPB’s forecast projects a higher 10.4% increase in cash fund revenue this year.
Meanwhile, it’s still not looking good for the state’s Unemployment Insurance Trust Fund, which took a big hit when the pandemic put millions out of work. The fund became insolvent last August, when benefits exceeded available funds, and is not projected to return to solvency until 2023, according to LCS. This means employers will pay higher premiums into the fund next year.
Colorado’s unemployment rate of 5.9% is higher than the 5.2% national average, but OSPB says this is attributable in part to the state’s higher-than-average labor force participation rate – meaning that in Colorado, a higher proportion of the people who don’t have jobs are actively looking for work.
“While job recovery in the tourism and leisure and hospitality sectors continues to lag other sectors, Colorado has seen significant recovery in demand for these services,” OSPB’s report says.
Since April, the number of U.S. job openings has exceeded the number of unemployed people, according to Bureau of Labor Statistics data that’s cited in OSPB’s report. However, despite higher unemployment now than before the pandemic, businesses across states and sectors report difficulty finding qualified workers.
One potential explanation, according to OSPB’s September report, is the “mismatch in wage expectations and skills between unemployed individuals and employers that are hiring,” along with “shifting preferences for unemployed individuals away from traditional low-wage jobs and toward other alternatives due to concerns around COVID-19 risks and the buffer of accumulated savings.”
Lack of child care access may be another factor contributing to hiring issues, OSPB’s report says, given that labor force participation among women without a college degree who have children has been “particularly low” since the beginning of the pandemic.
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