Colorado Legislative Strategies Updates 9.20.23

9/20/2023

COLORADO LEGISLATIVE STRATEGIES NEWSLETTER

September Economic & Revenue Forecast

September 20, 2023

Introduction

Once again, as the seasons change so do the economic and revenue forecasts. Fall won’t officially start for a few days (September 23) but today was the presentation of the latest economic and revenue forecasts. Four times a year, Legislative Council Staff (LCS, non-partisan economists for the General Assembly) and the Office of State Planning and Budgeting (OSPB, the Governor’s economists) update the Joint Budget Committee (JBC) on their current projections.

Overall, there wasn’t any earth-shattering news in the updated forecasts. There were slight revisions upward relative to the June forecast, which will give the JBC slightly more breathing room next session, but the legislature still won’t have much money to spend on new programs. Revenue continues to exceed the TABOR cap and there will be large refunds throughout the forecasted period. And both forecasts (LCS and OSPB) had similar projections, with OSPB having a slightly rosier outlook.

Before we dive into all the details of the economic and revenue forecasts, we also want to make sure you are aware of other news from today. There isn’t a good transition to this news; Senator Faith Winter was involved in a bicycle accident where she sustained a head injury that required surgery. She is now resting and recovering and we wish her the best as she works toward a fast and full recovery.

Now let’s dive into the details of the economic and revenue forecasts. All charts included are from the LCS presentation.

Economic Outlook

The economic outlook is good but not great. The risk of a recession is lower now than in June but the risk of a recession is still present. So far, the economy has been successfully navigating between inflation and recession. The chart below shows that after the steep decline during the pandemic and fast recovery we are now in a period of slow growth in the 1-2 percent range.

The economic news indicates a slowing but resilient economy despite aggressive Federal Reserve action to rein in inflation. Inflationary pressure is going down, although at a slower pace in Colorado than nationally (shown in the chart below). The Fed is expected to slow further interest rate hikes but not to make any rate cuts until inflation approaches its 2 percent target. The largest downside risk to the economic outlook is that tightening monetary policy could trigger a recession.

Diving deeper into inflation, the chart below shows that housing costs are the primary driver of inflation in recent months. The surge in inflation in early 2022 was largely driven by energy prices, but inflationary pressure from energy dissipated quickly and is now primarily driven by housing costs. The housing component of CPI tends not to change quickly in aggregate and month-over-month growth in housing prices suggests that housing inflation may persist.

In conclusion, we are seeing slow but resilient growth and the risk of a recession has dropped. However, inflation in Colorado remains elevated, above the national average, and likely to persist.

Revenue Outlook

The revenue outlook is where the rubber really meets the road. The economic outlook affects how much revenue is coming in and thereby impacts the state budget. This is the projection of how much (or how little) the legislature will be able to spend next session.

The chart below shows general fund revenue. The bar for 2021-22 shows a historic jump in general revenue; that 23.7 percent increase was driven by high individual income tax collections. The bar for 2022-23 was revised up by $306 million to bring the general fund growth to 1.7 percent, which is driven by high corporate tax collections. The following year, in 2023-24, general fund revenue is projected to drop down by 3.1 percent to more normal levels. And in the two out years, general fund revenue is expected to return to normal growth of around 6 percent each year.

It’s good to know the overall general fund revenue, but in a state with TABOR the total amount isn’t what constrains the budget (at least in good economic times) and instead the biggest constraint on the budget is the TABOR cap (also called the Ref C cap). The chart below shows that we are projected to be well above the TABOR cap for the forecasted period. The 2022-23 refund obligation of $3.57 billion was historically large and will drop down to $1.7 billion in 2023-24, $1.77 billion in 2024-25, and $2.28 billion in 2025-26. Part of what’s driving down the future refund obligations is last year’s inflation hitting the TABOR cap calculation (you can see the yellow line rise from 2022-23 to 2023-24).

So once again the state is taking in plenty of money but a good chunk of it (billions of dollars) are required to be set aside to pay for TABOR refunds. When the whole general fund is about $18 billion, a few billion is a big bite out of what’s available to save or spend. Which brings us to how much money is going to be available for next year’s budget. The chart below shows two scenarios to consider as we think about next year’s budget. Scenario A simply holds all the appropriations constant from the current budget, and under that scenario there is $1.195 billion available. Scenario B, on the other hand, makes some assumptions about what the JBC will need to fund next year. This scenario includes increased spending on things like Medicaid, K12, higher education, and because there is more spending there is also an increase in the required reserve amount. When you factor all of that in, the amount of money available shrinks to only $23 million.

That number, $23 million, certainly isn’t that good and means it will once again be a tight budget year for new spending, but it’s at least better than the June forecast where the scenario B number was negative $78 million. Keep in mind these forecasts are projections and are snapshots in time based on the data currently available. The JBC will be back for another round of forecasts in December and then again in March, which is when they will select one of the forecasts as the baseline for the budget.

Next up for the budget process is the Governor’s budget proposal, which will come out on November 1.

Links to All Forecast Documents

Legislative Council Staff (LCS)

Office of State Planning and Budgeting (OSPB)

Education & Resources