Forecast Five: December 2020 Revenue Estimates
By Chris Stiffler, Senior Economist
#1: The K-Shaped “Recovery” Has Been Uneven
It may seem hard to believe given the year we’ve just experienced, but in many economic measures, Colorado is back to pre-pandemic levels. Retail sales, state GDP, and personal income have all seen a sharp recovery, the type of which economists normally call “V-shaped.” But like most things this year, there’s nothing normal about the economy right now. Continued difficulty for workers and businesses in the food service and hospitality sectors mean that while some Coloradans have recovered from the disruption caused by the pandemic, others are struggling to meet even basic needs.
#2: (Some) Jobs Are Back
Colorado has now regained 63 percent of jobs we lost at the start of the pandemic. And though total jobs in Colorado are still down 4 percent since February, the leisure and hospitality industry is still down 14 percent. High-wage employment is back above pre-pandemic levels while low-wage workers remain severely affected. For instance, low-wage jobs (those making less than $27,000/year) are still down 17.6 percent since January 2020 levels while jobs making more than $60,000/year are back to January levels.
While there are positive signs for the overall economy, the economic effect the pandemic is having on the group of people who are bearing the brunt of the pain cannot be understated.
#3: Unprecedented General Fund Performance During a Downturn
Just looking at Colorado’s elevated unemployment rate, we’d expect some dire news for the state’s General Fund revenue collections (nearly all of which comes from income, sales, use, and excise taxes). Yet this isn’t the case. The General Fund is projected to end this budget year with a 23.7 percent reserve. Lawmakers will have about $3.75 billion more to save or spend for next year’s budget than what is spent this year. While that might sound like a lot, keep in mind legislators made about $1.5 billion in cuts to balance this year’s budget, and they’ll still need to account for population growth and inflation when they write the budget in 2021.
The strong General Fund revenue growth is related to the K-shaped recovery discussed above. Stronger-than-expected income tax collections, particularly from higher-wage earners, should help keep state funding from falling any further than it did in 2020.
Because the COVID recession is affecting people who work low-wage service the most, what we’re seeing in the economy and fiscal picture cries out for a policy response targeted at the workers and families whose livelihoods have been hurt the most.
#4: Federal Stimulus Helped, And More Would Help Too
The latest personal income data really emphasizes the boost that the large federal stimulus had on overall spending. Figuring in money the state got directly from the federal government this year, we’re actually above pre-pandemic levels—compare that to the 2008-2009 recession, where it took a few years to get back to pre-recession levels. Thanks to large federal stimulus checks, boosted unemployment insurance payments, and forgivable business loans, it only took a few months for revenue collections to stabilize.
Given this, it stands to reason that more federal stimulus would be another big help to the state as we wait for vaccine distribution.
#5: K-12 Enrollment Dip Brings a Wave Next Year
The pupil enrollment count for the 2020-21 school year of 845,916 students is down 22,280 (2.6 percent) from the previous school year. A decline in student enrollment is unprecedented, particularly given the increase in Colorado’s overall population. The drop is driven largely by parents of new kindergarten students deciding to wait until after the pandemic to enroll their children in school.
This decline presents challenges for school districts because school funding depends on pupil count. With a decline in students, the school finance formula will give schools less funding. Though this year’s kindergarten cohort is down, next year’s class will be much larger. Those kids didn’t go away. And because schools hire next year’s teachers with this year’s budget, districts are worried about losing funding this year with the enrollment dip and then getting hit by a huge wave of backlogged kids once the pandemic has started to ebb.
The state should consider tweaking the school finance formula in anticipation of a bulge of students coming next year.
