March 2019 Legislative Council Staff Economic & Revenue Forecast Presentation to the Joint Budget Committee March 15, 2019
Economic Outlook 2
Economic activity continues to expand, but momentum has slowed Contributions to Real U.S. Gross Domestic Product (GDP) 8% 6% Real GDP 4% 2.6% 2% 0% -2% -4% Gov't Consumption & Investment Net Exports -6% Gross Private Investment -8% Personal Consumption Expenditures -10% I III I III I III I III I III I III I III I III I III I III I III 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 3 Source: U.S. Bureau of Economic Analysis. Seasonally adjusted annual rates.
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. 4
While labor force participation rates have risen, labor shortages persist in many industries Colorado Labor Force Participation Rates by Age 25 to 34 years 90% 35 to 44 years 45 to 54 years 80% 20 to 24 years 70% 55 to 64 years 60% 50% 16 to 19 years * 40% 30% 65 years and older 20% 10% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018p Source: U.S. Bureau of Labor Statistics. Annual data through 2018. Labor force as a share of the civilian population over age 16. 5 p = Preliminary. *Data are not available after 2014.
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. 6
Manufacturing activity has slowed considerably on lower crude oil prices and the global economic slowdown Manufacturing Activity Diffusion Indices 80 70 Expanding 60 54.2 ISM (U.S.) 51.0 Tenth District (Includes CO) 50 February 2019 40 30 Contracting 20 2007 2009 2011 2013 2015 2017 2019 Source: Institute for Supply Management and Federal Reserve Bank of Kansas City. The Tenth District composite index is adjusted to the ISM scale. 7
Trade tensions pose ongoing uncertainty for several industries, impacting supply chain, demand, and prices Colorado Exports U.S. Exports Millions Billions $900 $180 2018 2018 +3.3% +7.6% $800 $160 $700 $140 $600 $120 $500 $100 $400 $80 $300 $60 $200 $40 $100 $20 $0 $0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: WiserTrade. Monthly exports, three month moving average. 8
Tariffs and the global economic slowdown are dampening Colorado export activity -7.1% in 2018Q4 over Contribution to Change in Colorado Exports year-ago levels Year-over-Year Percent Change, 2018Q4 over 2017Q4 +2.0% -3.0% Source: WiserTrade. 9
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. 10
Economic Summary Economic activity remains elevated but has slowed • Growth will continue to moderate through 2021 – Labor market shortages will dampen business growth – Global economic slowdown Uncertainties remain elevated • Trade tensions, policy uncertainty, and slower economic activity have led to a shift toward more cautious optimism among investors and consumers 11
General Fund Budget Outlook 12
Revenue expectations were reduced on lower than expected collections to date and a slower economic outlook Gross General Fund Revenue Change Relative to December Billions of Dollars - $168.9M FY 2020-21: $14 - $249.4M FY 2019-20: $13 FY 2018-19: - $260.4M $12 $11 $10 $9 $8 $7 $6 $5 $4 Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecast. 13
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. 14
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 Oct Nov Dec Jan Feb Apr Jun Sep Mar May Source: Colorado Office of the State Controller and Department of Revenue. Monthly collections shown on a cash basis. February data are preliminary. 15 *Wage withholding, estimated payments, and cash with returns, minus refunds.
Revenue expectations were reduced on lower than expected collections to date and a slower economic outlook Gross General Fund Revenue Change Relative to December Billions of Dollars - $168.9M FY 2020-21: $14 - $249.4M FY 2019-20: $13 FY 2018-19: - $260.4M $12 $11 $10 $9 $8 $7 $6 $5 $4 Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecast. 16
Revenue growth is expected to moderate throughout the forecast period Gross General Fund Revenue Year-over-year Billions of Dollars growth $14 2.8% 3.7% $13 4.0% $12 14.1% $11 $10 $9 $8 $7 $6 $5 $4 Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecast. 17
TABOR Outlook Revenue Subject to TABOR Dollars in Billions Expected TABOR Surpluses $16 $64.8M $15 $18.5M $14 $13 Referendum C Cap $12 $11 $10 TABOR Limit Base $9 Referendum C $8 Five-Year Timeout Period $7 Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecast. 18
TABOR surplus revenue is set aside in the year in which a surplus occurs to pay refunds in the following budget year Expected TABOR Refunds & General Fund Budget Impacts Dollars in Millions $64.8M $70 $60 Reimbursements to $50 $39.8M* Local Governments $40 for Property Tax $30 $20 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. 19
Current Year FY 2018-19 General Fund Reserve Dollars in Millions While revenue expectations December 2018 March 2019 were reduced, the budget Forecast Forecast situation improved. 10.6% Reserve $1,200 $1,200 9.9% Reserve Changes from December: +$76.0 million $1,000 $1,000 $372.7 M Surplus Above $296.7 M +$13.7 million in TABOR Required Reserve exempt Wells Fargo $800 $800 $811.9M $813.3M 7.25% settlement moneys Reserve $600 $600 -$19.3 million spending Requirement from FY 2018-19 $400 $400 supplemental package -$41.7 million TABOR refund $200 $200 obligation on lower cash fund revenue expectations $0 $0 Source: Legislative Council Staff forecasts based on current law. 20
Next Year FY 2019-20 Budget Outlook General Fund available above FY 2018-19 appropriations to spend, save, or return to taxpayers $1.18 billion* *Reflects revenue expectations and transfers required under current law for FY 2019-20. Since a budget has not yet been set for FY 2019-20, this amount assumes FY 2018-19 appropriations and reserve requirements. Any changes to current law, including FY 2018-19 appropriations, will result in changes to this amount. Source: Legislative Council Staff March 2019 forecast based on current law and FY 2018-19 appropriations. 21
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 22
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