Colorado Legislative Strategies Updates 6.20.23

6/20/2023

COLORADO LEGISLATIVE STRATEGIES NEWSLETTER

June Economic & Revenue Forecast

June 20, 2023

Introduction

As the seasons change so do the economic and revenue forecasts. Tomorrow is the summer solstice, but today was the presentation of the June economic and revenue forecasts. The quarterly ritual brings Legislative Council Staff (LCS, non-partisan economists for the General Assembly) and the Office of State Planning and Budgeting (OSPB, the Governor’s economists) in front of the Joint Budget Committee (JBC).

Before we dive into all the numbers and projections. Since economists try to be precise, the summer solstice – the moment when the north pole has its maximum tilt towards the sun – will occur in Colorado around 8:57 am on Wednesday, June 21. Perfect timing now that the sun is (generally) shining again in Colorado. Anyone reading this newsletter from a fabulous vacation in the southern hemisphere will instead experience the winter solstice, when the south pole has its maximum tilt away from the sun.

Now that you know a little more about the solstice, let’s go over what the forecasts had to say about the overall economic outlook in the US and Colorado and the specific revenue/budget outlook in Colorado.

Economic Outlook

Similar to the March Economic and Revenue Forecast, slow but positive economic growth is anticipated through 2023. It’s expected that this expansion will pick up to a more moderate pace in 2024 and 2025. The projected economic growth suggests that the possibility of a recession is still a consideration, but the risk of a recession is now projected lower than in March.

The chart below forecasts 1.4 percent growth in 2023, which is a slight increase from the March forecast, and 1.7 percent and 2.3 percent growth in 2024 and 2025, respectively.

Colorado’s unemployment rate is lower than the national average, but employment growth is beginning to slow down. However, personal income has seen consistent growth and debt levels have stayed relatively normal despite high household spending.

Colorado’s inflation is starting to slow down, but it’s still significantly higher than the national average. Energy and transportation costs have eased, but pressure from housing costs are now the largest driver of inflation in Colorado. However, wage growth has started to outpace inflation and data suggests home prices are starting to stabilize.

Overall, the economic outlook in both forecasts continues to show slow but positive growth. Consistent inflationary pressures remain a risk to the forecasts, although it’s beginning to slow down.

Revenue Outlook

While both forecasts were mostly in line with their economic outlook, the OSPB forecast projected more of an economic slowdown, especially in fiscal year 2023-24, and that has big impacts on the TABOR refund projections – a difference of about $1.5 billion in potential refund obligations!

First, the chart below shows LCS’s general fund revenue projections and the changes relative to the March forecast. After a historic increase of 23.7 percent in 2021-22, the forecast shows flat general fund growth this year and just 0.4 percent growth next year, and then 4.5 percent growth in the out year.

However, in a state with TABOR (the taxpayer bill of rights, which constrains the growth in government spending), the gross general fund revenue doesn’t tell the whole story. We continue to be well above the TABOR cap even though the cap increased significantly due to prior high inflation (see the top red circle in the chart below). For fiscal year 2021-22 there was a historic refund amount of $3.73 billion, and LCS is projecting that refund obligations will continue to be in the multiple billions of dollars for the forecasted period – $3.31 billion in the current year, $2.06 billion next year, and $1.97 billion in the out year.

By far the biggest difference between the two forecasts is the projected refund obligation next year. While LCS is projecting $2.06 billion in refunds, OSPB is only projecting $536 million for the refund obligation. The chart below shows OSPB’s refund projections, which are roughly in line for this year and the out year but differ dramatically in their projection for next year.

The JBC will surely be keeping a close eye on what happens with those divergent projections as we get to the next forecasts in September, December, and March before they will ultimately choose one of the forecasts as the baseline for next year’s budget.

Turning back to the LCS forecast, which provides different scenarios for next year’s budget. In the chart below, scenario A shows that the legislature will technically have over $1 billion above last year’s budget to either spend or save. Scenario B, on the other hand, factors in budget and caseload pressures and includes projected amounts that are likely to be included in next year’s budget. When you factor in all of those pressures on the budget you end up in negative territory by $78 million.

Thus, the budget next year is once again expected to be very tight despite generally good news on the economic and revenue front. Any downside risks to the forecasts will be absorbed by the large TABOR refund obligations and the budget next year will be more constrained by the spending cap and not revenue collections. Lastly, watch for how these projections potentially change in the next forecast.

Links to All Forecast Documents

Legislative Council Staff

Office of State Planning and Budgeting

Education & Resources