September 2018 Legislative Council Staff Economic & Revenue Forecast Presentation to the Joint Budget Committee September 20, 2018
U.S. and Colorado economies are in very good shape • Overall, most U.S and Colorado economic indicators remain strong – Healthy levels of job creation – Robust consumer demand – Rising incomes – Solid business investment 2
Colorado’s economy is among the nation’s strongest Percent Change in Real GDP by State, 2017Q4 over 2018Q1 Seasonally Adjusted at Annual Rate 46 1 50 9 8 36 28 41 29 21 27 48 35 23 40 3 5 19 25 7 26 38 44 30 34 33 31 37 2 12 4 32 13 18 47 15 16 22 20 49 10 42 24 39 45 6 14 17 11 U.S. = 2.0% CO = 3.0% 43 2.7% - 3.6% 1.8% - 2.6% 0.1% - 1.7% -0.6% - 0% Data Source: U.S. Bureau of Economic Analysis. Map prepared by Legislative Council Staff. 3
Most Colorado industries are contributing to economic growth Contributions to Real Colorado Gross Domestic Product, 2018Q1* Seasonally Adjusted Annual Rates Information Agriculture Manufacturing Mining Retail Trade Construction Finance and Insurance Transportation Health Care Wholesale trade Professional, Scientific, and Technical Services Accommodation and food Services Educational Services Government Administrative Management Utilities Arts, entertainment, and recreation Real estate and rental and leasing Other services -0.2% 0.0% 0.2% 0.4% 0.6% 0.8% Source: U.S. Bureau of Economic Analysis. Real GDP is inflation adjusted. 4 *Contributions to percent change reflect annualized quarter-over-quarter growth.
Amid a strong near-term outlook for the U.S. economy, risk to economic outlook remains sizeable • Tightening labor markets • Rising inflation • Trade disputes 5
Both U.S. and Colorado labor markets are extremely tight Unemployment & Underemployment Rates 18% 16% 14% Underemployment (U6) 12% 10% 8% 7.4% U.S. 6% 6.1% Colorado 4% 3.9% U.S. Unemployment (U3) 2.8% Colorado 2% 2008 2010 2012 2014 2016 2018 Source: U.S. Bureau of Labor Statistics. Underemployment rates for Colorado are shown as four-quarter averages, while data for the U.S. are monthly. Data are seasonally adjusted. 6
Interest rates are on the rise Effective Federal Funds Rate 4.5% 4.0% 3.5% 3.0% 2.5% September 05, 2018 2.0% 1.91% 1.5% 1.0% 0.5% 0.0% 2008 2010 2012 2014 2016 2018 Source: Federal Reserve Board of Governors. 7
Rising trade tensions and uncertainty • Retaliatory tariffs continue to escalate • Near-term impacts are expected to be minimal • Full impacts of tariffs on Colorado have yet to be seen 8
Summary of Economic Forecast Expectations • U.S and Colorado economies are expected to accelerate this year • Continue to expand in 2019 and 2020, although at slower rates – Tightening labor markets – Rising inflation – Trade disputes 9
General Fund Budget Outlook 10
Revenue continues to exceed expectations Gross General Fund Revenue Change Relative to June Billions of Dollars $14 + $82.7M FY 2019-20: $13 FY 2018-19: + $103.7M FY 2017-18: + $130.1M $12 $11 $10 $9 $8 $7 $6 $5 $4 Source: Colorado Office of the State Controller and Legislative Council Staff September 2018 forecast. 11
Following double-digit growth in FY 2017-18, revenue growth is expected to moderate Gross General Fund Revenue Year-over-year Billions of Dollars growth 14.1% increase in FY 2017-18 $14 2.8% • Wage gains and business profits 4.7% $13 • Rebound in energy and manufacturing 4.9% $12 • Federal tax policy distortions • $113.3 million in one-time Tobacco $11 MSA payments $10 $9 $8 $7 $6 $5 $4 Source: Colorado Office of the State Controller and Legislative Council Staff September 2018 forecast. 12
Last Year FY 2017-18 General Fund Reserve Dollars in Millions September 2018 June 2018 Preliminary Forecast $1,400 $1,400 12.3% Reserve 11.7% Reserve Change relative to June: $1,200 $1,200 +$55.1 million attributable to stronger $599.5 M $1,000 $1,000 $544.4 M than expected income Surplus Above and sales tax collections $800 $800 Required Reserve $600 $674.9M $600 $674.9M 6.5% Reserve Requirement $400 $400 $200 $200 $0 $0 Source: Legislative Council Staff forecasts based on current law. 13
Current Year FY 2018-19 General Fund Reserve Dollars in Millions September 2018 June 2018 Forecast Forecast 9.3% Reserve $1,000 $1,000 8.1% Reserve Surplus Above Change relative to June: $229.5 M $900 $900 Required Reserve +$136.9 million $92.6 M $800 $800 attributable to stronger $813.3M 7.25% $813.3M expectations for income $700 $700 Reserve and sales tax collections $600 $600 Requirement in both FY 2017-18 and $500 $500 FY 2018-19 $400 $400 $300 $300 $200 $200 $100 $100 $0 $0 Source: Legislative Council Staff forecasts based on current law. 14
Next Year FY 2019-20 Budget Outlook General Fund available above FY 2018-19 appropriations to spend, save, or return to taxpayers $1.16 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 September 2018 forecast based on current law and FY 2018-19 appropriations. 15
TABOR Outlook Revenue Subject to TABOR Dollars in Billions Expected TABOR Surpluses $16 $174.8M $209.4M $15 $16.2M $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 September 2018 forecast. 16
TABOR refund mechanisms are triggered in the order below based on the size of a TABOR surplus 1) Up to the full reimbursement amount to local governments for the senior homestead and disabled veteran property tax exemptions. * 2) Subject to sufficient revenue, a reduction in the individual income tax rate from 4.63% to 4.5% (would require at least a $400 million surplus). 3) Any left over is distributed via the six-tier sales tax refund mechanism. These refunds are paid when taxpayers file their income taxes and are based on a taxpayer’s filing status and adjusted gross income. *Pursuant to SB17-267, the TABOR refund is first allocated toward reimbursements to local governments for the senior homestead and disabled veteran property tax exemption. Local government reimbursement amounts are not affected. 17
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 $209.4 $174.8 $37.5* No Surplus 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 September 2018 forecast. *This amount includes the $16.2 million FY 2017-18 surplus and $21.3 million in under-refunds from the 18 FY 2014-15 surplus.
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 $209.4 $174.8 Six-Tier Sales Tax $62.4 Refunds $20.1 Reimbursements for Property Tax Exemptions $147.0 $154.6 $37.5* No Surplus 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 September 2018 forecast. *This amount includes the $16.2 million FY 2017-18 surplus and $21.3 million in under-refunds from the 19 FY 2014-15 surplus.
Risks to the Forecast • Near-term (FY 2018-19) risks are skewed to the upside – Strong economic activity – Oil and gas activity – Federal tax policy distortions – Out-of-state tax collections …Larger TABOR refunds? • Longer-term risks are skewed to the downside – Slower growth and rising risk of recession as the economic expansion matures • Higher than usual uncertainty clouds the outlook – Unknown impacts of federal tax law changes – Out-of-state sales tax collections 20
Questions? Kate Watkins Chief Economist • Legislative Council Staff kate.watkins@state.co.us • (303) 866-3446 www.leg.colorado.gov/lcs 21
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