Forecast Five: March 2020 revenue forecast
By Chris Stiffler, senior economist
The COVID-19 outbreak is presenting unprecedented challenges for governments across the globe, including the state of Colorado. Adopting behavior necessary to curb the spread of the disease and “flatten curve” of demand on our health care system is having drastic and immediate effects on our economy.
Lawmakers paused the legislative session on Saturday, March 14 in response to the outbreak, but the Joint Budget Committee still met on Monday to hear the quarterly revenue forecast from state economists. Because state revenue is tied to economic activity, this latest forecast will be very consequential for lawmakers when they return to work and pass a budget.
During these unique circumstances, we hope our top five takeaways from the forecast will help you understand the challenges the state is facing:
1. Colorado will have hundreds of millions of dollars less for state priorities in the 2020 budget, and there won’t be any TABOR rebates
In December, forecasts from state economists estimated lawmakers would have $832 million more for next year’s budget (FY2020-21) than was appropriated this year. However, because of increases in inflation and more K-12 students, Medicaid patients, and college students, lawmakers went into the 2020 session expecting to have about $56 million in new money to spend in FY2020-21.
As of Monday, that forecast has been drastically revised downward. Instead of $832 million to spend to keep up with inflation and population growth, now economists believe there will only be $27 million more. Even going by conservative estimates, this means Colorado will be short of keeping up with inflation and population growth by more than $425 million.
This sharp decline in revenue has also dramatically changed the TABOR rebate situation. In December, forecasters expected $367 million in TABOR rebates in FY2020-21. The state is now projected to be $630 million below the spending cap set by Referendum C in 2005.
Because the first TABOR rebate mechanism pays for the property tax exemption for older Coloradans and disabled veterans, lawmakers who were expecting to use those rebates to fund the exemption must now pay for its nearly $162 million cost out of the General Fund — the section of the budget that pays for roads, schools, Medicaid, colleges, human services, and other important priorities. Lawmakers have funded this exemption through TABOR rebates or General Fund spending every year since was zeroed out from 2009-2011 during and immediately following the Great Recession.
2. Our economy’s strength before the COVID-19 outbreak may help us recover
While good news has been few and far between lately, today’s forecast did have the potential for a silver lining: the economic contraction forecasters are expecting is not the same as the Great Recession in 2008. The financial crisis that caused that recession was created by structural issues in the banking and housing markets, which required years of intervention to get back to a healthier place.
Entering the month of March, Colorado’s economy was strong (despite some businesses too exposed to corporate debt). Low unemployment, high consumer confidence, and growing personal income gave the economy a good foundation before COVID-19 ground things to a halt. Retail sales were up 3.2 percent in December over the same period the prior year. Restaurants, bars, car dealers, and retail stores all saw nice growth between 4 and 5 percent compared to the prior January. More broadly, the national economy added 2.4 million new jobs in February, making it the 113th straight month with job growth.
Prior to the outbreak, unemployment rates reached historic lows. The national unemployment rate of 3.5 percent was the lowest level since 1969, and Colorado’s unemployment rate of 2.5 percent continued to be one of the lowest of any state in the country. Going into March, new claims for unemployment were also near historic lows.
Confidence from homebuilders was strong in February 2020 as measured by the House Market Index which recorded a 74 rating (up from 62 the same month a year prior).
While there is still a great deal of uncertainty around how quickly we can and will recover from the effects of the COVID-19 outbreak, forecasters hold out hope we can still bounce back by the end of the year.
3. Will the recovery be V-shaped or U-shaped? We won’t know until at least May
Because the state unemployment survey for the month of March was performed the week of March 9, the figures released in April won’t be able to capture what COVID-19 is doing to Colorado’s labor market. We’ll have to wait until May, when the state releases April jobs data, before we can begin to really access the effects of the outbreak on employment. Economists also look at Unemployment Insurance Claims, but those leave out the gig economy and independent contracts, many of whom will be among the hardest hit by a sharp drop in demand for services like ride sharing.
Legislative Council’s forecast is treating this as a temporary shock to the economy — closer to the recession created by the 9/11 attacks, not a prolonged downturn like the Great Recession. Unfortunately, the Federal Reserve System will not have as many tools available to address the economic downturn as it did at the start of the Great Recession: On Sunday, the Federal Reserve drastically lowered interest rates and announced plans to purchase government debt on Sunday in an effort to stimulate the economy and stabilize financial markets. With the benchmark federal interest rate now hovering between 0 and 0.25 percent, there’s little the central bank can now do to act if conditions worsen.
The federal government is currently considering fiscal stimulus measures like emergency paid leave and other measures, and can act much more broadly than that, but those policies will require Congress to pass a bill and the president to sign it.
All of these national economic policies will have an effect on how quickly our state economy recovers.
4. We can’t respond to the COVID-19 outbreak and the economic downturn ahead by cutting spending
During the heart of the Great Recession lawmakers cut $1 billion dollars from K-12 education by creating the now-infamous negative factor (now called the budget stabilization factor). Lawmakers also made deep cuts to higher education, causing tuition to increase and students to take on more debt in order to afford it. They also passed legislation that temporarily suspended certain tax exemptions like the property tax exemption for older Coloradans mentioned above.
Some of these cuts were restored during the 2012-2019 recovery period, but the impact of those reductions remain. We are still underfunding K-12 education by over $500 million and we only spend about 43 percent on per-student funding for higher education compared to the national average.
While lawmakers might be tempted to turn to more cuts in funding as they did in 2009, it’s critical for everyone in Colorado to understand that we cannot cut our way to prosperity. We have underfunded our public services nearly to the breaking point and more cuts will just mean more stress on our families and our communities, not economic recovery.
5. Lawmakers will need to get creative when they come back to the capitol in order to face the health and economic challenges of COVID-19 head-on
The forecasts state economists provide look only at the revenue side of the budget equation. While it’s clear we are about to experience a sharp decline in money coming in through tax collections, Colorado will almost certainly need to spend more to address the consequences of this unprecedented public health crisis and the economic challenges associated with it.
While the federal government will likely act as well, lawmakers and Gov. Polis will be looking for methods to rapidly inject money into the budgets of Coloradans who might be out of work for a few months.
This is going to be tricky, because the same tax code that limits our ability to adequately fund our public investments like schools, colleges, and roads also limits our ability to quickly navigate a fast-moving crisis like the one presented by COVID-19. This unprecedented challenge will require legislators and the governor to think outside the box in order to come up with options that will adequately address the sudden and potentially months-long drop in the demand for and the supply of goods and services.
