December 21, 2022
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#1 — Monetary Policy Trickles Down
With inflation still well above the Federal Reserve’s goal of 2%, the US central bank has been raising interest rates in an effort to cool rising prices. Over the course of 2022 the Fed has approved seven interest rate hikes, with more, albeit smaller, hikes still expected in the months ahead.
These rate hikes, along with other factors like significantly cheaper gasoline, inflation has started to cool, but the cost of borrowing has skyrocketed. This has a particularly strong impact on hopeful homeowners, who saw their purchasing power dip 25% this year primarily because of rising interest rates.
In addition to inflation, Fed policies also affect employment. Though competition for workers has remained high — there are 1.8 job openings for every job seeker in Colorado — and nominal wages have increased as a result, inflation has wiped out almost all wage gains made from the strong labor market. While wages have increased as much as 7.6% in parts of Colorado, that’s about the same percentage increase as headline inflation.
#2 — A Recession is still a Possibility
It remains to be seen whether the Fed’s effort to cool inflation will wind up pushing our economy into a recession, but inflation (and rate hikes), along with global events like the continued war in Ukraine make it a distinct possibility.
For Coloradans who are working hard but seeing their wage gains eaten by inflation, savings rates are taking a hit. Because consumer spending drives 70 percent of the economy, less spending is usually a recessionary warning sign.
For the state, which already operates fairly leanly and is required to spend set amounts on priorities like health care and education regardless of the economic climate, a recession can be devastating. For instance, Colorado’s General Fund Revenue saw a 17 percent drop during the 2001 and 2008 recessions.
The difference this time is our current 15% General Fund Reserve, which is significantly higher than the past, and should put Colorado in a better position to weather a recession without having to make giant cuts like in 2009-2011. The large TABOR surplus, also acts as a cushion against a recession since falling revenue would first come from those rebates instead of General Fund money available for the discretionary budget.
#3 — General Fund Revenues are Down because of the 2022 November Ballot Measures
Gross general fund revenue, which impacts the discretionary budget, is expected to fall by 3.8% between FY2021-22 and FY2022-23 largely driven by 2 ballot measures that passed in November.
The reduction of the income tax rate to 4.40% from 4.55% reduces revenue by $440 million each year. There was a 1.5 year impact on FY22-23—reducing revenue by $670 million—to account for the books on FY2021-22 already being close). Proposition 123 diverts $300 million to a fund for affordable housing. The half-year impact was $150 million for FY2022-23.
The bottom line for budget writers to consider as they write the next year’s budget: There’s $1.3 billion more than last year’s budget, but after inflation, caseload, reserve requirements, and some budget placeholders, revenue is still $58 million short of the governor’s proposed budget.
#4 — Still need to make TABOR Rebates Fairer for Working Coloradans
Although TABOR rebates were revised downward relative from the September forecast, a whopping $2.47 billion will be returned to Coloradans next year. The first $400 million of that will cover the Senior Homestead Property Tax Exemption and the reduction in assessment rates from SB22-238. That leaves $2.2 billion to be refunded through the six-tier sales tax mechanism.
Last year, lawmakers decided to change the rebate mechanism for one year by issuing identical $750 checks (SB22-233). If lawmakers decide to do it again, every Coloradans will get around $600 refunds. If we don’t extend the identical payments, and sent the surplus through the six-tier sales tax mechanism, those in the top income category (making over $250,000) would get up to $2,600, while those in the bottom income category (making under $44,000) would get as little as $413.
#5 — Not Great News on Ability to Pay Down Budget Stabilization Factor in K-12
The biggest question for the education community is whether the annual shortfall in funding known as the budget stabilization factor will shrink in next year’s budget. The answer from the December forecast is: “Probably not by much and there’s a lot of maybes.”
K-12 enrollment was down 4,182 students from last year, but total assessed valuations for property tax are up 5.5% from 2021. Rising mortgage interest rates are dampening residential property value but they won’t be a school finance burden until FY2025-26 because of the gap in the reassessment 2-year cycle.
That means $92 million more in the local share than expected, which could be used to pay down the debt owed to K-12 education. Either that, or the state could just decrease the state share. Paying down the BS factor today might mean raising it again in the future if property taxes are lower or we dip into a recession.
