Below you will find a brief summary of March Revenue forecast. Attached you will find a more detailed summary of the forecast. The March forecast is what Joint Budget uses to set the 2020-21 budget. In light of the uncertainty in revenue forecasts, Office of State Planning and Budgeting suggested that the Joint Budget Committee budget to a range of possibilities. This would allow the JBC to set contingencies on appropriations so that if revenue did not hit a threshold an appropriation would not be made. The JBC will meet again next Monday to decide on next steps. Under Colorado law the Legislature has to pass a balanced budget by June 30th as well as a school finance act.
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March 2019 Revenue Forecast
Overview of Economic Outlook
In the days preceding the March 2020 revenue forecast public leaders announced drastic measures to combat the spread of the coronavirus pandemic, restaurants were ordered to close, travel agencies announced layoffs, restrictions on travel were announced, and schools closed. Economists and legislators said the word “uncertainty” dozens of times during the revenue forecast hearing today when the Legislative Council Staff and the Office of State Planning and Budgeting presented their estimates for available state revenue and the economic outlook. Due to the extremely recent and quickly evolving economic conditions, neither LCS or OSPB were able to provide hard data, such as employment data, on the economic impacts from the coronavirus. There were several comparisons to the 2008 financial crisis, however the economic impacts because of the coronavirus are due to an unprecedented issue, not due to structural issues in the economy. Because the economic challenges caused by the coronavirus are due to a global pandemic and not structural issues with the economy, both forecasts predict a short term economic contraction for the next few months, but that the economy will bounce back by the end of the year. The economists presenting the forecast shared that they believe that social distancing will slow the spread of the virus and allow the economy to reboot due to early aggressive actions. The areas of the economy most hard hit will be tourism, leisure, hospitality and restaurants. Oil is also taking a hit globally. The most direct impact on the state budget of the drop in oil prices is through reductions in severance tax revenues. After Russia and OPEC couldn’t reach an agreement on oil production levels, the price of oil plummeted last week. Oil prices dropped 31% in one week and now domestic oil production in many cases is unprofitable. Another way that oil prices will impact the state budget is due to revenues from oil and gas property taxes. In FY2020-21 there will be a limited impact on the local share of school finance. In future years, beginning in FY2021-22 there will be an impact on the non-residential side of local property taxes due to the drop in oil prices. This doesn’t hit the current year’s local share of K-12 education funding because property taxes are calculated on January 1, 2020 for this year’s budget.
Governor Polis press release
Economic Forecast Shows COVID19
DENVER - Today, the Office of State Planning and Budgeting released the March economic forecast showing the significant economic impact of COVID-19. The overall economic impact is difficult to anticipate and depends on both the extent to which the epidemic can be slowed or contained and the effectiveness of federal fiscal and monetary policy interventions.
“COVID-19 has impacted the global economy and is having a significant impact on our state’s economy as well. I would call the economic situation in complete flux, and until we have a much better idea what’s going on I wouldn’t put much stock in any economic forecast, although we know the news isn’t good,” said Governor Polis. “My top priority during this time is protecting the health and safety of Coloradans which also minimizes damage to our economy. We’re doing everything we can to minimize the long-term economic impact of this global pandemic and ensure that Colorado is prepared to come back stronger than before when this crisis is over.”
While Colorado’s economy has expanded since the December forecast, the rapid spread of the COVID-19 virus poses a significant risk to the state’s economy. Economic activity is expected to slow sharply over the coming months as schools and businesses close and consumers stay home in an attempt to slow the spread of the pandemic. While this forecast projects that consumer and business activity will return to normal levels relatively quickly once schools and businesses reopen, there is an increasing risk that extended closures could trigger a recession as consumers stay home and workers and businesses lose income.
As in Colorado, the economic outlook for the U.S. has deteriorated since December due to the recent expansion of COVID-19 into the country and the economic losses associated with widespread emergency closures of schools and businesses. Despite strong economic momentum in recent months, a sharp decline in economic activity is expected but there is still uncertainty.
General Fund revenue is expected to grow 1.2 percent in FY 2019-20 after growing by 7.2 percent in FY 2018-19. The General Fund revenue projection was revised down from the December forecast by $301.2 million in FY 2019-20 and $400.5 million in FY 2020-21 due to the expected impacts of the COVID-19 pandemic. The primary General Fund revenue streams affected include individual and corporate income taxes and sales taxes.
With these updated revenue projections, the General Fund reserve now is projected to be $225.8 million below the Governor’s requested statutory reserve amount of 7.5 percent of appropriations in FY 2020-21 under the Governor’s budget request, as amended January 15, 2020.
Cash fund revenue is projected to remain flat in FY 2019-20 after growing by 5.8 percent in FY 2018-19. The forecast for FY 2020-21 is lower than the December forecast by $52.8 million, due largely to lower expected severance tax collections caused by lower oil prices after Saudi Arabia’s March 9th announcement that it would increase production volumes. Cash fund revenue is projected to grow by 1.5 percent in FY 2020-21 and 1.6 percent in 2021-22.
Revenue subject to TABOR is not expected to exceed the Referendum C cap in either FY 2019-20 or FY 2020-21 after exceeding the cap by $428.3 million in FY 2018-19. TABOR revenue is not expected to exceed the Referendum C cap again until FY 2021-22, when the projected surplus is $216.6 million.
To see the forecast presentation, click here.