September 2024 Forecast Five: Back to the Fiscal
It’s time for another Forecast Five, where CFI gets down in the details so you don’t have to. Check out our top five takeaways from the Legislative Council’s presentation on the economic and fiscal outlook for Colorado.
1. Twists in the New School Finance Formula Trigger
For 30 years, Colorado has used the same formula to distribute revenue among its 178 school districts. However, in 2024, , the formula received a significant update due to HB24-1448, which will add an additional $95 million into schools. But the bill also included several conditions that could delay implementation of this new formula. One such condition was related to potential cuts in property taxes which could have occurred if Proposition 108 passed in the upcoming ballot this November.
Fortunately, the special session agreement led to the withdrawal of Proposition 108 allowing the implementation of the new formula to proceed. However, another condition which could postpone the new school finance formula might now come into play. This condition stipulates a pause if a five percent drop in the State Education Fund revenue occurs. It appears there will indeed be a five percent drop, not because of falling income tax revenue, but because of an accounting adjustment. So some statutory clarification may be necessary in January 2025 to keep the implementation of the new school finance formula on schedule.
2. The Impact of the Upcoming Election
Business confidence has recently dipped with the uncertainty of who will win the White House. The election could mean changes to the Tax Cuts and Jobs Act (TCJA)which could impact Colorado’s budget since Colorado’s income tax revenue is coupled with the federal tax base. Changes to the tax base at the federal level could flow to Colorado. While the TCJA lowered income tax rates, it actually expanded the tax base causing Colorado to collect more state income tax revenue. That would change if TCJA changes. This could also impact revenue for Prop FF, which funds school meals but capping the amount of tax deductions tax filers making over $300,000 can take. That could result in $30 million less in Prop FF revenue.
3. General Fund Outlook: Can’t Keep Up in Real Terms
Next year’s budget isn’t expected to keep up with caseload growth, inflation, scheduled capital maintenance while maintaining a 15% General Fund Reserve. Next’s year’s budget will fall short by $921 million, resulting in a 9.2% reserve instead of the target 15%. This situation illustrates how revenue available below the TABOR cap is insufficient to meet demands. Revenue was also adjusted downward due to less optimistic income tax collection data.
Although the state remains in a TABOR rebate scenario, the anticipated TABOR rebate amount of $365 million for 2025 is well within forecast error range. Concerns such as deteriorating household budgets, slowing global economic conditions, high borrowing costs, and deteriorating labor market conditions present the heaviest downside risk to the forecast. Though the General Fund was revised downward for the next three years, the newly established Family Affordability Tax Credit (FATC) and expanded Earned Income Tax Credit (EITC) will be funded in full through 2027.
4. Economic Growth Surpasses Expectations this Year, but Shows Signs of Slowing
Economists expect 1.7% GDP growth in 2025 after 2.7% in 2024 and 2.5% in 2023. Consumer spending has been resilient in the face of a high interest rate environment. Though the household savings rate of 2.9% is well below the historical average of 5.7%, households are tapping into savings to cover the costs of rising inflation. Colorado’s unemployment rate of 3.9% continues to creep up in recent months but it is below the 4.2% of the nation as a whole. However, revisions to the jobs numbers after additional survey data comes in is expected to show an actual unemployment rate that’s worse that the currently reported figure.
5. First Interest Rate Cut after Two Years of Rate Increases by the Federal Reserve
The Federal Reserve cut rates by an unusually large half a percentage point this week in response to signals that the inflation is under control and worries about a deteriorating labor market. That reverses 11 rate hikes by the Federal Reserve since 2022. Inflation continues to fall, and Denver’s inflation rate is now below the U.S. after being above the nation all of 2023. Colorado’s rate is below 2% recently after peaking above 9% in 2022. The housing and transportation components of inflation are coming down in Denver. As expected, the tight monetary policy has been putting a damper on home construction.
