Economic & Revenue Forecast Colorado School Finance Project - PowerPoint PPT Presentation

March 2019 Legislative Council Staff Economic & Revenue Forecast Colorado School Finance Project March 22, 2019

Economic Outlook 2

Employment growth is slowing as the labor market tightens Total Nonfarm Employment Index 100 = January 2010 Underemployment (U6) 17.1% 125 Colorado 15.7% 120 115 10.0% U.S. 110 7.3% 8.2% 105 6.3% 3.8% 100 3.7% Unemployment (U3) 95 2008 2010 2012 2014 2016 2018 2008 2010 2012 2014 2016 2018 Source: U.S. Bureau of Labor Statistics. Seasonally adjusted. Data are through February for the U.S. and January for Colorado. Colorado U6 rates shown as four-month moving averages. 3

Wages are rising, yet consumer activity has slowed Real Retail Sales Real Average Hourly Earnings Billions of 2019 Dollars 2019 Dollars $31 $550 $30.00 $30 $525 Colorado $29 $500 $28 $475 $27.55 $27 $450 $26 $425 United States United States $25 $400 $24 $375 $23 $350 Source: U.S. Bureau of Labor Statistics and U.S. Census Bureau. Data are inflation adjusted using the CPI-U average for all U.S. cities. Data are seasonally adjusted and through January 2019. 4

Business activity remains elevated, but is expected to slow on labor market shortages and rising wages Business Investment, Income and Profits Trillions of Dollars Equipment & Intellectual $2.4 Property Investment $2.2 $2.0 Corporate Profits after Tax $1.8 Proprietors' Income $1.6 $1.4 $1.2 $1.0 $0.8 $0.6 2007 2009 2011 2013 2015 2017 2019 5 Source: Bureau of Economic Analysis. Profits and income with inventory valuation and capital consumption adjustments.

Home price appreciation has slowed considerably in the higher-cost areas of the state FHFA Home Price Indices Index 100 = January 2008 Denver 180 Greeley Boulder 170 Fort Collins 160 Colorado 150 Colorado Springs 140 Pueblo 130 120 United States 110 Grand Junction 100 90 80 70 2008 2010 2012 2014 2016 2018 Source: Federal Housing Finance Agency (FHFA). FHFA data are seasonally adjusted data through 2018Q4. 6

The value of oil and gas production remains low West Texas Intermediate U.S. Crude Oil Production Crude Oil Price Millions of Barrels per Month Dollars per Barrel 400 $160 360 320 $120 280 $80 $57.81 240 200 $40 160 $0 120 007 2009 2011 2013 2015 2017 7 Source: Energy Information Administration, weekly average prices (left) and three month moving averages (right).

Economic Outlook Summary Growth will continue to moderate through 2021 • Weaker than expected growth over the past 4 months • Labor market shortages will dampen business activity • Global economic slowdown will mute demand and put downward pressure on commodity prices Uncertainties remain elevated • Shift toward more cautious optimism among investors and consumers 8

General Fund Budget Outlook 9

Revenue expectations were reduced on lower than expected collections to date and a slower economic outlook Gross General Fund Revenue $16 LCS December 2018 Billions LCS March 2019 $14 OSPB December 2018 OSPB March 2019 $12 $10 $8 $6 $4 Source: Colorado Office of the State Controller and Legislative Council Staff (LCS) and Office of State Planning and 10 Budgeting (OSPB) forecasts.

Revenue expectations were reduced on lower than expected collections to date and a slower economic outlook Gross General Fund Revenue $16 LCS December 2018 Billions LCS March 2019 Change in the LCS Forecast $14 OSPB December 2018 FY 2018-19 - $260.4M OSPB March 2019 FY 2019-20 - $249.4M $12 FY 2020-21 - $168.9M $10 $8 $6 $4 Source: Colorado Office of the State Controller and Legislative Council Staff (LCS) and Office of State Planning and 11 Budgeting (OSPB) forecasts.

Growth in wage withholding remains strong, while sales tax collections growth has slowed Monthly State Revenue Collections Millions Millions Wage Withholding Sales Tax Collections $800 $400 $700 $350 FY 2018-19 $300 $600 FY 2017-18 $500 $250 FY 2016-17 $400 $200 $150 $300 $100 $200 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Source: Colorado Office of the State Controller and Department of Revenue. Monthly collections shown on a cash basis. February data are preliminary. 12

Estimated payments of individual income tax are the largest source of General Fund forecast volatility Monthly State Revenue Collections Estimated Payments Net Individual Income Tax* Millions Millions $1,200 $1,200 FY 2018-19 $1,000 FY 2017-18 $1,000 FY 2016-17 $800 $800 TCJA Impacts: Income shift into $600 $600 2017 tax year $400 $400 $200 $200 $0 $0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Source: Colorado Office of the State Controller and Department of Revenue. Monthly collections shown on a cash basis. February data are preliminary. 13 *Wage withholding, estimated payments, and cash with returns, minus refunds.

Revenue growth is expected to moderate throughout the forecast period Year-over-year $16 growth Gross General Fund Revenue Billions of Dollars 4.7% $14 6.0% 4.7% 2.8% 14.1% $12 3.7% 4.0% $10 $8 $6 $4 Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecast. 14

TABOR Outlook Revenue Subject to TABOR Dollars in Billions Expected TABOR Surplus 16 $16 $64.8M 15 $15 14 $14 $18.5M 13 $13 $169.7M 12 $12 Referendum C Cap 11 $11 10 $10 TABOR Limit Base 9 $9 8 $8 7 $7 Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecasts. 15

Expected TABOR Refunds & General Fund Budget Impacts $64.8M $70 $60 $50 $39.8M* $40 Reimbursements to Local $30 Governments for Property $20 Tax Exemptions $10 No Surplus No Surplus $0 TABOR Surplus & Set Aside: 2017-18 2018-19 2019-20 2020-21 Refunded in Fiscal Year: 2018-19 2019-20 2020-21 Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecast. *This amount includes the $18.5 million FY 2017-18 surplus and $21.3 million in under-refunds from the FY 2014-15 surplus. 16

TABOR Refund Obligation TABOR Refund Mechanisms Reimburse Local Gov’ts for #1 Property Tax Exemptions Up to ~$140 million If ~$400 million+ Temporary Income Tax Rate Reduction Next ~$250 million #2 If the refund is large enough to fund the first mechanism and the rate reduction Sales Tax Refund #3 Any remaining 17

Changes to the Budget Bottom Line FY 2018-19: $76M more in the excess reserve • Relative to December, $19.3M less spending, less in TABOR refunds (due to lower cash funds) • $372.7 million excess reserve FY 2019-20: $158M less than expected in December due to lower revenue expectations • Instead of the Referendum C cap, revenue limiting spending 18

Risks to the Forecast • Elevated uncertainty in FY 2018-19 and FY 2019-20 – Expect surprises as taxpayers adjust to federal tax policy changes – Out-of-state sales tax collections pose upside risks • With close proximity to the Referendum C cap… – Upside surprises mean (larger) TABOR refunds – Downside surprises mean fewer funds available • Longer-term risks are skewed to the downside – Slower growth and rising risk of recession as the economic expansion matures 19

Questions? Kate Watkins Chief Economist • Legislative Council Staff kate.watkins@state.co.us • (303) 866-3446 www.leg.colorado.gov/lcs 20