Forecast Five: September 2020 Revenue Forecast
By Chris Stiffler
1. The economy fell off a cliff, but it would have been much worse without federal stimulus
As we’re all acutely aware, the economy has been in rough shape due to efforts to curb the spread of the coronavirus. 2020 saw the worst quarterly drop in Gross Domestic Product (GDP) on record. A 31.7% drop in the second quarter was four times greater than the Great Recession and largely driven by a collapse of consumer spending (which typically drives two-thirds of the economy). Stimulus checks and boosted unemployment insurance payments kept consumer spending from falling even more drastically than it would have otherwise. With an additional round of stimulus is still uncertain right now as Congress and the White House struggle to come up with a deal, a lack of additional stimulus will mean a much weaker 2021.
2. The budget picture is getting rosier, but ballot measures could change that
The FY2019-20 budget finished up $900 million than where we thought it would in June. Due to better-than-expected economic activity in the last several months, as well as 2019 income tax collections that were stronger than originally anticipated, the current budget (FY2020-21) has $540 million more than we thought it would at the last revenue forecast. Add those together and we have about $1.4 billion more than we thought we would back in June. This is welcome news since the 2020-21 budget was filled with historic cuts to schools and colleges after an 11.6 percent drop in General Fund revenue due to the COVID recession, and next year won’t be any easier.
Despite the brighter budget outlook, schools could take another big blow in funding after the November election depending on the outcome of two ballot measures. Proposition 116, which will lower income taxes (with most of the benefits going to the wealthy) could reduce the General Fund by $158 million and force more cuts to schools and other important services. Voters will also be considering Amendment B, which will repeal the property-tax-limiting Gallagher Amendment. If voters don’t approve it, the residential assessment rate will drop 18 percent, and schools will have $500 million less.
3. Colorado has regained 39% of the jobs lost since the pandemic began
Colorado lost hundreds of thousands of jobs in March and April during the stay-at-home order, and though we’ve regained nearly 40 percent of them, we still have a long way to go before we get back to where we were in February and early March. To put that another way, this recession has still negated a full four years’ worth of job growth. Part of the reason it will be tough to get back to full employment is because state and local government employers are still cutting jobs to help balance their budgets. Colorado’s unemployment rate dropped to 7.4 percent in July from 10.6 percent in June (the jobless rate never got above 9 percent during the Great Recession). It’s encouraging to see more jobs being created, but we’re still at a level that’s about three times the 2.5% rate we enjoyed prior to the pandemic.
4. Continued high unemployment is creating a huge strain on the Unemployment Insurance Trust Fund
Colorado as seen unprecedented increase in unemployment claims during the COVID-19 recession. In the year before the pandemic, Colorado paid out paid $365.5 million in unemployment benefits. In FY2019-20, the trust fund paid out $1.27 billion and in FY2020-21 benefits paid are expected to peak at $2.62 billion. The drop in fund balance in the UI Fund triggered a move to the second-highest premium rate schedule starting January 2021. The fund is currently insolvent and will remain there for several years. While that sounds bad, the state exhausted the fund during the Great Recession as well, and will be borrowing from the federal government to ensure continued payment of benefits.
5. A ‘square root’-shaped recovery is emerging
The economy fell farther and faster than state economists thought when they released their June forecast, but the initial recovery was also stronger than they originally anticipated according to economic data from May and June. While that was welcome good news, economic activity did appear to be slowing down in August. However, because the initial COVID recession was so pronounced, on a per-capita inflation-adjusted basis, General Fund revenue isn’t projected to get back to pre-pandemic levels before 2023.
