CLS Newsletter: March Economic & Revenue Forecast

​Introduction

Saint Patrick’s Day brought some good luck to the Joint Budget Committee today. The March Forecast made clear that the budget is still in a big hole but it at least broke the trend of the last couple of forecasts that presented a worse outlook with each subsequent forecast.

The big takeaway is that Legislative Council Staff (LCS) is projecting a deficit of [only] $1.161 billion. That’s better than the $1.2 billion (and even higher in some estimations) deficit previously projected. So things are still bad but at least it didn’t get even worse. 

The other big takeaway is the difference between LCS and the Office of State Planning and Budgeting (OSPB) forecast as it relates to the TABOR surplus for this year. Across the totality of both forecasts the numbers are very similar, but there is a roughly $200 million dollar difference when it comes to how big the TABOR refund obligation is for this year. And that in turn could have big implications as it relates to potential forecast error. 

As a quick reminder, both LCS and OSPB present their own independent projections four times a year. The March Forecast is a big one because it is the final forecast before the budget. However, it’s important to remember these are projections from economists and very much subject to change. That’s because tax collection data comes in throughout the year and right now they only have about two-thirds of that data. 

Additionally, remember LCS are nonpartisan economists that work for the General Assembly and OSPB are essentially the Governor’s economists. The JBC will next select one of the forecasts to use as they make final decisions on the budget, which should happen tomorrow. 

Below is an overview of the economic outlook, the budget outlook, and links to all of the forecast documents. All of the charts included are from the LCS forecast presentation. 

Economic Outlook

Overall, the U.S. economy continues to grow at a moderate pace but expectations were downgraded from the December Forecast. The last three years the economy grew by between 2.5 percent and 2.9 percent each year. The next three years, on the other hand, are projected to grow by only 1.3 percent to 1.9 percent. So we aren’t quite staring down the barrel of a recession but are getting closer. And risks to the forecast are tipped to the downside. 

Colorado and U.S. unemployment rates remain low but the rates continue to tick up. Colorado now exceeds the U.S. with 4.7 percent employment compared to 4.1 percent overall. But unemployment is projected to go down to roughly 1 percent. 

Inflation remains above the Federal Reserve’s 2 percent target but is very close. Headline inflation is now 2.8 percent for the U.S. and 2.3 percent for Colorado. Housing inflation has greatly decreased in Colorado and transportation inflation is now the biggest driver. 

Uncertainty from tariffs and other federal action loomed large over the forecast and made this forecast particularly difficult for economists to predict. 

Budget Outlook

Overall, General Fund revenue was revised down with the economic expectations. Cash Fund revenue also went down due to a unique major downgrade to severance tax revenue for this year. As those two revenue sources go down, TABOR refunds also went down and are particularly small for this year. 

The chart below shows the March 2025 General Fund forecast and changes relative to the December Forecast. 

​The next chart shows the March 2025 Cash Fund forecast and changes relative to the December Forecast. 

​The revisions down for both of those revenue sources then brings us to the TABOR outlook. The chart below shows the revenue subject to TABOR and the amount of revenue above the Referendum C cap. Anything above that line is what must be reserved for TABOR refunds. 

​After years of historically high TABOR refunds we are now facing a refund obligation of just $108 million. It is important to note that OSPB projects the TABOR surplus to be higher at $320 million, which was the only major difference between the two forecasts. 

Why does that matter (other than the fact you aren’t going to be getting a refund check) – because these forecasts are projections and there are risks to any forecast error. When we’ve had massive TABOR surpluses the risks to the forecast would be absorbed by simply having a lower surplus number. Now, however, normal errors in the forecast could actually drop us below the Ref C cap and imperil the budget itself and not just the TABOR refunds. 

Moreover, the current surplus projection is less than what the state is required to reimburse local governments for homestead property tax reductions. That means that if LCS is right then the state is going to have to come up with over $100 million dollars next year that would normally be paid out in the first TABOR refund mechanism. And it means no income tax cut or six-tier sales tax refund (the check you would get) as those are the next two refund mechanisms that wouldn’t be triggered. 

As always, LCS presented two “scenarios” at the end of their presentation. “Scenario A” is simply if the state spent the same in this year’s budget as they did in last year’s budget. That scenario shows the state would have an extra $320 million available for this year’s budget. 

But that doesn't really give a full picture of what the budget is facing so “scenario B” is also presented that includes caseload growth, inflationary pressures, and JBC actions taken so far. The chart below shows the true deficit the budget is facing with all of those inputs. 

Note that this scenario is showing the full $130 million for law enforcement pursuant to Prop 130 in this budget. The JBC has yet to decide how to fund that voter-approved ballot measure and there will likely be a bill forthcoming on that. Additionally, this scenario doesn’t reflect JBC actions that will require legislation where the content hasn’t been approved yet.

The JBC will have a big bill of transfers (cuts to existing programs) and other changes to help balance the budget that is not yet reflected in this scenario. Tomorrow the JBC will have a presentation from JBC staff on an overview of actions to date and the remaining big ticket items that need to be decided to produce a balanced budget.

Conclusion

Stay tuned for more information as the JBC makes their final decisions and closes out the budget this week. This forecast was lucky in the sense that things didn’t get dramatically worse. However, there is still a large deficit for this year and things could get even worse in the future if downside risks to the forecasts ultimately bear out. It was said multiple times during the presentations that the word of the day is uncertainty. 

Links to All Forecast Documents

Legislative Council Staff (LCS)

• Presentation
• Full Report
• Consumer Price Index

Office of State Planning and Budgeting (OSPB)

• Presentation
• Full Report
• Supplemental ​