What 10 Charts Can Tell Us About How Recessions Affect Colorado

By Chris Stiffler, senior economist

Here at CFI, we’ve been thinking a lot about the economic impact of the coronavirus pandemic. In particular, we’ve been trying to get a handle on what this incredible disruption will mean for Coloradans in the next few years. As researchers, we are most comfortable evaluating historical data, so we turned to the last two recessions to see how economic indicators performed and what happened with state revenue. This analysis will inform our consideration of what lies ahead.

By looking at past data, we don’t want to imply the economic fallout will resemble either the 2001 or 2009 recessions. The economic disruption from the COVID-19 recession is truly unprecedented. There will, however, be similarities in terms of the fiscal effects: state revenue will fall, and at the same time demand for public services will increase. 

The following ten charts show what happened the last two times we were faced with a contracting economy. We’ve also included a few that demonstrate some differences between now and then that suggest that the trajectory for recovery may be different this time around.

We think it’s important to provide this data so we can all share the same starting point when, inevitably, our attention turns to the kinds of policies we need to get Colorado back on track. At CFI, we will be looking for policy solutions to address the short-term economic chaos and, equally as importantly, we will be laser-focused ways to more equitably allocate the long-term costs of the outbreak.

During the last two recessions, revenue in Colorado’s General Fund, a majority of which comes from sales and incomes taxes, fell by 13 percent. Most of that revenue funds schools and healthcare. Other important services receiving funding from General Fund sources include colleges, human services, courts, and prisons.

The federal Earned Income Tax Credit (EITC) is a powerful tool for boosting incomes of families and workers who earn low incomes when they file their tax returns. Many states, including Colorado, have adopted state-level EITCs that augment the federal credit. For Coloradans who qualify, the state credit is 10 percent of the federal. In 2009, during the height of the Great Recession, the federal EITC was worth $703 million. While Colorado did not have a permanent state EITC until 2013, if the 10% state credit existed during 2009, it would have been worth $70.3 million. 

Absent a recession, the estimated cost of the EITC is represented by the gray dotted trend line. Under that projection, the cost would have been $60.1 million. As you can see, the actual experience of Colorado tax filers was not a straight line. Instead of an anticipated $60.1 million, the 10 percent state credit would ended up being $70.3 million, an increase of 15.5 percent created by falling incomes during the Great Recession. Applying that 15.5 percent increase in the state EITC to last year’s figures, we would be looking at an increase of around $12 million.

Medicaid gives people who earn low incomes and children of parents who do not have their own health insurance the ability to see a doctor and get other health care services. Colorado expanded eligibility for Medicaid under the Affordable Care Act starting in 2014, but only those who earn below a certain income level are able to enroll. The federal government covers a portion of Medicaid costs depending on age and other factors. Children get a 50 percent federal match, while adults without dependent kids, who were added in the expansion, get a 90 percent federal match.

During the Great Recession, there was a a spike in Medicaid child enrollment. After a slight drop in the number of Medicaid-eligible children from 205,390 in FY2006-07 to 204,022 in FY2007-08, enrollment rose sharply to 302,410 in FY2010-11.

General Fund revenue fell by 13 percent in 2009, followed by another 4 percent drop in 2010. That meant there wasn’t enough money for K-12 funding to keep up with inflation and growth in the number of students, which meant there were big cuts for K-12 schools. In FY2012-13, the state cut 15 percent from its school budget — resulting in the loss of a full $1 billion in annual revenue for schools. As the economy began to recover, the state slowly reduced the annual shortfall to $572 million for the FY2020-21 school year. Even though legislators cut the school funding deficit nearly in half, we still enter the COVID-19 recession with the state underfunding schools by hundreds of millions of dollars.

In 2000, Colorado voters approved a property tax exemption for homeowners over the age of 65 (and later extended it to disabled veterans). The funding for it came from the General Fund until 2017 when it became the first TABOR rebate mechanism. The legislature has the power to zero out the exemption, which it did for for years during each of the last two recessions. Older Coloradans who have lived in their home for at least 10 years save a little over $600 a year on average, but a 2019 CFI analysis found the exemption inequitably distributes benefits along racial and economic lines.

During good economic times, the General Assembly is usually able to transfer General Fund revenue to the fund that pays for our roads. During the last two recessions, state general fund collection reductions cause those transfers go away, forcing us to rely almost exclusively on Colorado’s gas tax to fund transportation. That tax, which is a set per-gallon amount and isn’t tied to inflation or fuel prices, has stayed the same for nearly 30 years.

Colorado’s public colleges and universities are vital institutions, and a college education is widely seen as a way to open doors to economic opportunity. During recessions, workers who have experienced layoffs or find it difficult to get hired often turn to higher education as a way to develop and hone their skills to make themselves more marketable to employers.

Over the last 25 years, Colorado resident enrollment in colleges and universities averaged a 1.25 percent increase each year. But after the Great Recession, there was a 9.5 percent jump in resident enrollment in 2010. That same year, growth in community colleges enrollment was nearly double that of four-year colleges at 18.9 percent.

Because more than two-thirds of the US economy is driven by consumer spending, the way people are feeling about spending money is typically a good bellwether for whether we’re heading towards continued growth or entering a recession. In the chart above, it’s clear that while sales tax collections were still increasing in 2008, consumers were anticipating hard times in the near future. They were right. The consumer sentiment index fell to 74.5 in 2008, and sales tax collections in Colorado fell by 9 percent the next year. The Consumer Sentiment Index didn’t return to pre-recession levels until 2014. 

In January 2020, Consumer Sentiment was very robust at 132.2. State economists forecasted that sales, use, and excise taxes would make up 30 percent of General Fund revenue in September of 2019.

During past recessions, the unemployment rate typically spikes quickly compared to the time it takes for employment to return to pre-recession levels.

In August of 2001, Colorado’s unemployment rate was 4.1 percent. Joblessness was slowly increasing at that time, rising from its lowest point of 2.7 percent in December of 2000. By June of 2003, the unemployment rate in Colorado peaked at 6.1 percent. 

In August of 2008, unemployment stood at 5 percent in Colorado, rising to 7.6 percent by August of 2009 before peaking at 8.9 percent in September 2010, two years after the financial crisis of 2008. Those job losses took two years to peak, but it took Colorado’s economy nearly six years to return to the pre-recession level of 5 percent unemployment in June of 2014.

The amount of money individuals can sock away for a rainy day, or the lack thereof, is one way to tell how long they might be able to weather a job loss. In August of 2008, the national savings rate was 3.8 percent. While that rate peaked in 2012 before leveling off, heading into 2020 people were saving was more than double what they were prior to the Great Recession.

The sluggish recovery following the Great Recession was, in part, because people were paying back debt and adding money to their savings rather than consuming. Though it’s encouraging to see the national savings rate increase to a higher level, it’s important to remember most of the increase comes from people who earn the highest incomes. Those same high income earners received much larger income gains since the Great Recession and then garnered disproportionately large federal tax cuts in 2017.

Despite the rise in inequality, savings rates among people who earn low and moderate incomes are still higher. For instance, 40 percent of Americans said they were unable to absorb an unexpected $400 cost in 2018 according to the Federal Reserve’s Report on Economic Well-Being. That’s still an alarming statistic, but it’s substantially lower than the 50 percent of people who said the same thing in the 2013 edition of the report.