May 2020 Revenue Forecast
Overview of Economic Outlook
Legislative Council Staff and the Office of State Planning and Budgeting presented updated revenue forecasts this morning to the members of the Joint Budget Committee, confirming the suspicion that the state faces incredible revenue shortfalls in the current year and upcoming year due to the recession triggered by the coronavirus. This revenue forecast replaces the March projections and members of the JBC will use it to set the budget for the upcoming fiscal year 2020-21 that starts on July 1, 2020. The state and nation face a severe recession. In 2008 there was a 0.5% contraction in GDP, and in 2009 there was a 2.5% contraction. Legislative Council Staff forecasts a total 5.6% decrease in GDP due to the current recession. Both Legislative Council Staff and the Office of State Planning and Budgeting expect the current recession to be a sharp decline in economic activity followed by a slower recovery but they also warned that another wave of the coronavirus could cause a double dip recession.
Across industries, unemployment claims are up as coronavirus restrictions have forced businesses to close. Food services and retail represent the highest unemployment numbers with roughly 25% of the food service industry receiving unemployment. Layoffs in other industries are expected in coming months. Some of the counties with the highest unemployment rates are in the mountain communities whose local economy relies heavily on tourism. Tourism spending has decreased by over 80% in the month of April.
Another factor that will slow economic growth is low oil prices. There is a contraction in oil and gas activity and high global supply in oil leading to lower prices. This will compound the coronavirus related downturn. Oil and gas markets have taken both a supply side and a demand side hit. Saudi Arabia increased global supply in March, leading to an immediate 25% price drop. Oil demand dropped soon after with the coronavirus related restrictions. Oil prices have neared $0 on some days. Between the first week of March and the first week of April, there was a 39% decline in oil consumption in the US.
The federal stimulus will partially offset the downturn. Families First Coronavirus Response Act and the CARES Act has boosted economic activity in the United States by $1.7 trillion but it was not enough to stave off a contraction in economic activity. Labor markets are expected to improve slowly as businesses adjust to the new landscape and face additional requirements as a precaution against the coronavirus. Inflationary pressions remain low in the near future.
The economic forecasts presented contain a high amount of uncertainty. Much of how the recession actually plays out depends on the course of the coronavirus. The economic forecasts assumes that businesses in the state and nation will gradually be allowed to open but also that coronavirus will come back in some communities, causing local closures. If a treatment for COVID-19 comes sooner, there could be a less intense recession.
General Fund Forecast
Legislative Council staff revised their General Fund forecast down $892.8 million in FY2019-20, $2.42 billion in FY2020-21 and $1.99 billion in FY2021-22 all relative to the March Forecast.
OSPB revised their forecast down by $1.1 billion in FY2019-20, $2.4 billion down in FY2020-21, and $2.0 billion in FY2021-22 relative to the March forecast.
Over the last two downturns, in 2001 and the Great Recession, the state’s General Fund revenue decreased 17% across the span of each recession. Legislative Council staff projects that the current recession will lead to a total 18% drop in General Fund revenue.
In March, Legislative Council expected the state to have enough General Fund to fund current expenditures with a small surplus of $27 million. Now an $895.8 deficit General Fund is expected at the end of FY2019-20. This deficit assumes current law.
For FY2020-21, assuming state spending is held constant from FY2019-20 levels, the General Assembly is expected to have a $3.3 billion shortfall in revenue. This deficit number does include the $895.8 million deficit from FY2019-20. It does not include any caseload adjustments that will happen in the next year and doesn’t include the sequestration order from the Governor that lowered spending by $228 million in FY2019-20. OSPB projects a $635 million deficit in FY2019-20 and a $3.4 billion deficit in FY2020-21.
The General Fund is comprised of sales taxes and income taxes. Individual income taxes comprise of about 63% of General Fund. Legislative Council expects individual income tax collections to be the main driver in the decrease in General Fund revenue. Corporate income taxes also comprise of a large portion of General Fund revenue. Businesses that incur losses do not owe income taxes and this will also suppress the amount of tax collections. Provisions of the CARES Act will also reduce state income taxes. Legislative Council expects that the CARES Act will decrease state income taxes by $121 million in FY2019-20 and $135 million in FY2020-21. The federal legislation created additional tax deductions for businesses through changes to net operating losses and the deductibility of business interest income. The act also delayed taxable income for retirees.
Cash Funds Outlook
Due to the impacts on oil and gas prices, severance tax revenues are expected to be hard hit by the recession. In FY2020-21, severance tax collections are expected to be $15.8 million, down from $133 million in FY2019-20 and $241 million in FY2018-19. In FY2021-22 severance tax revenue will tick up to $47.2 million. Prices will remain low for several years because of the high supply of oil alone.
Limited gaming revenue is expected to decline by 38.4% in FY2019-20 to $65.9 million and rebound in FY2020-21 to grow at a rate of 5.3%. Limited gaming revenue is collected from casino earnings. Casinos were ordered to close on March 17, 2020, just after the March forecast was issued, and have not reopened yet. The forecast assumes that casinos will have half of one month of revenue in March, and no revenue for April through mid-June. According to the OSPB forecast, limited gaming revenue will come in slightly higher at $76.4 million in FY2019-20 and $72.3 million in FY2020-21. These revenue projections are not enough to fund the current statutorily required transfers of to the General Fund beneficiaries of limited gaming revenue.
State revenue for transportation projects, comprised mostly of motor fuel taxes and vehicle registration fees, is expected to decrease 6% in the current fiscal year and 2.8% in the next fiscal year. For FY2019-20, Legislative Council Staff expects transportation revenue to total $1.19 billion and in the next year to total $1.16 billion. OSPB predicts a slightly less dire drop of 4.7% in the current year and growth of 1.5% in the next year.
The pandemic’s effect on the number of people currently unemployed will lead to the Unemployment Insurance Trust Fund being insolvent by the end of June 2020. Over the past few weeks, the CARES Act has expanded unemployment benefits, providing an additional $600 per week for all beneficiaries, 13 additional weeks of benefits, and expanding who is eligible for benefits. These expansions are all paid for by the federal government. The typical unemployment benefit for partial wage replacement for 26 weeks is what directly hits the state Unemployment Insurance Trust Fund. Since the pandemic hit in Colorado, over 400,000 people have filed for unemployment. This is more than 16% of the labor force. In April 2020, the average weekly unemployment claims totaled 56,800. In 2019, in an average week, 1,900 Coloradans filed unemployment claims.
The Unemployment Insurance Trust Fund is projected to see a $1.9 billion deficit by the end of FY2020-21 and a $2.4 billion deficit in FY2021-22. When state unemployment fund becomes insolvent the state is required to borrow from the federal government in order to continue paying claims. This loan will be repaid by employers through a solvency surcharge. Legislative Council Staff expects changes to the solvency surcharge to take effect on January 1, 2021. This will not be a hit to the General Fund, but it will be a cost to employers for the foreseeable future. The expenditures from the Unemployment Insurance Trust Fund do not impact the General Fund.
It’s not yet clear if CARES Act can be used to support the state Unemployment Insurance Trust Fund. If that is a possibility, there are some members of the legislature opposed to using federal funds to backfill the unemployment system.
Property Tax Administrator JoAnn Groff presented to the JBC on the expectations for property taxes in the future years. Due to the coronavirus effects on the economy, the residential assessment rate is expected to decrease to 5.88% from 7.15%. This change in the residential assessment rate would lead to a $490 million reduction in revenue for school districts.
Colorado has a two-year process for establishing home values for the purpose of levying local property taxes. In 2021, property will be reassessed. The cut-off date for establishing the value for 2021 is June 2020. Assessors use this information to determine a total of property values for residential and non-residential property. These values are used to determine the residential assessment rate. The residential assessment rate is set in accordance with the Gallagher Amendment, which requires that the residential assessment rate be adjusted to maintain a ratio of 45:55 between the assessed values of residential property and non-residential property. Colorado’s average property taxes for residential property are some of the lowest in the nation, but commercial property tax rates are in the top third compared to other states.
Schools, counties, cities, and special districts receive property taxes. About half of the property tax revenues collected provide funding for K-12 schools. In 2019, property tax revenues increased 15%, mainly because of increased valuations, not because of changes in tax rates. Residential property values increased 17.3% for tax years 2018-19. Oil and gas property values increased 35% for the same period.
Home sales have slowed since the beginning of the coronavirus pandemic, but home values have not been impacted. Commercial property and oil and gas property sales have come to a halt. This leads to very little data being available for the valuation of this type of property for the upcoming assessment cycle.
The State Property Tax Administrator estimates that for the 2021-2022 cycle, oil and gas property values will drop by 36%, commercial property value will drop by 20% and residential property value will increase by 10%. The residential assessment rate under this scenario would drop from 7.15% to 5.88%. This change in the residential assessment rate—if property values and mill levies are held constant—would lead to a $246 million decrease to total program funding for K-12 education and a $490 million total decrease for school districts. A 5.88% residential assessment rate would lead to a $203 million decrease for county revenues. Due to the two-year assessment cycle, the impact of a changing residential assessment rate will not be felt in the FY2020-21 budget but will hit the state budget in the FY2021-22 budget. This change is not accounted for in the Legislative Council Staff forecast.
TABOR refunds were not a focus of this economic forecast. Since revenue is expected to be significantly lower, no TABOR refunds are expected in the next three fiscal years. Legislative Council Staff predicts that state revenue will fall $3.2 billion below the TABOR cap in FY2020-21 and $2.1 billion below the cap in FY2021-22. Similarly, OSPB does not project any TABOR refunds in the next three years. The Senior Homestead Exemption is a TABOR refund mechanism, so in years without a TABOR refund, the state will still have to pay these reimbursements to local governments to make up for forgone revenue from property tax exemptions for seniors.