Forecast Five: December 2021 Revenue Forecast
By Chris Stiffler
#1 – Remarkably strong General Fund growth
The General Fund is projected to grow by 11.7% next year, coming off an equally strong 10.7% growth last year. That’s well above the normal trend line. The major components of the General Fund (income taxes and sales taxes) are exceeding expectation. Wage pressures, strong business activity, and employment growth are fueling these strong revenue numbers. Revenue is also being bolstered by consumers shifting toward buying more tangible goods, which are taxed, and away from less-often-taxed services. This results in a $791 million upward adjustment in revenue expectations from the September forecast, which means there will be $3.2 billion above what was spent in last year’s budget. That increased revenue is more than enough to cover the costs of the Governor’s budget proposal.
#2 – Record-breaking TABOR rebates
Stronger-than-anticipated revenue projections mean a large upward revision to the size of TABOR rebates next year. In September, a $1 billion FY 2021-22 TABOR surplus was projected, now we are looking at a $1.9 billion TABOR surplus next year. These would be the largest TABOR rebates ever (the previous largest was $941 million in 2000). It amounts to $410 for a tax filer making $50,000. Over the next three fiscal years, TABOR rebates are estimated to be $5.6 billion. This money won’t be available to modernize government services or restore reductions forced by the last three recessions.
#3 – Lower inflation for Colorado than nationally
The national year-over-year inflation rate in November was 6.5% with the energy and transportation components leading the spike. Legislative Council projects the final annual inflation rate at 3.7% for Colorado. Our state’s inflation percentage is lower than the national number for a mix of reasons. The index used to calculate Inflation has a mix of components, but one of the biggest parts of the index (44 percent) is the housing component. It may seem counterintuitive, but since Colorado has seen such large housing price pressure over the last few years, our housing prices are cooling down now on a percentage basis. In essence, housing inflation was already “baked in” to the overall number.
The calculation of inflation has significant implications for state spending. Inflation is a factor in the school finance formula and the TABOR revenue cap (Referendum C cap). For example, the inflation rate directly affects the amount of TABOR rebates required. Every 1 percent increase in inflation rate means that the state can keep an additional $160 million. While it is a big factor, revenue growth is so strong right now that even if the Colorado rate were to catch up with the Federal inflation rate, TABOR rebates would still top $1 billion.
#4 – The virus is tamping down school enrollment
Compared to the 2020 December forecast, actual public-school enrollment was 2.6 percent lower (about 22,500 students) than expected. Last December’s forecast assumed a strong increase from the steep decline from 2020, however that bounced back didn’t occur. Total kindergarten enrollment did increase by 6.2 percent from the cohort of new students who delayed enrollment in kindergarten in the fall of 2020 and instead started in fall 2021.
Housing affordability is also contributing to a shift in the distribution of school enrollment as the high housing costs in the Denver Metro area and the resort communities are pushing more families to school districts in more affordable places. The combination of fewer students and more local revenue collections than originally projected will create an opportunity for real progress toward reducing the Budget Stabilization factor, a number that tracks per-pupil funding compared to inflation over time.
#5 – Workers are rethinking their careers
Colorado’s unemployment rate fell to 5.4% in October, still higher than the national unemployment rate of 4.2% and much higher than Colorado’s 2.5% pre-pandemic rate. Colorado has regained 83% of the jobs we lost since February 2020, which means there are still 62,700 fewer jobs in Colorado today than there were before the pandemic. Many jobs that haven’t returned pay low wages, while jobs that pay more than $60,000 a year are up 8.6 percent. There’s been a noticeable drop in the number of part-time jobs, which also tend to pay lower wages.
While employment has actually recovered more quickly than during the Great Recession, what’s different this time around is the number of job openings exceeding the number of people who are unemployed. The number of employed workers ages 25-54 is below the level of other aged workers, which is likely due to many workers reconsidering the work they are doing and their work-life balance in the wake of the pandemic.
