September 2020 Revenue Forecast
Overview of Economic Outlook
During the September 2020 Revenue Forecast presentation to the Joint Budget Committee, Legislative Council Staff (LCS) and the Office of State Planning and Budgeting (OSPB) both stressed that while economic activity has recovered faster and stronger than expected, the recession remains unlike any that the state has seen before. The plunge in economic activity in the second quarter was one of the sharpest declines on record. United States Gross Domestic Product (GDP) declined 31.7% in the second quarter of 2020. Federal spending partially offset the decline in economic activity.
The expectations of the shape of the recovery has changed since June. Now the shape of the recovery appears to be a square root shaped recovery. There was a steep decline in economic activity, followed by a sharp recovery which has started leveling off.
In the second quarter of 2020, employee compensation dropped sharply, particularly in April, but the decline was more than offset by federal disbursements to households. Largely because of federal aid, personal income grew by 6.8%, but without the federal aid, incomes would have dropped 7%. Retail sales rebounded sharply in May and have leveled off. Retail sales have returned to the pre-recession trends. In Colorado tourism continues to struggle. Money spent at restaurants is about 80% what it was last year. July unemployment in Colorado was 7.4%, slightly better than US unemployment of 8.4% at that time.
A significant share of lost jobs has been regained. Across the United States, 11 million jobs have come back of the 22 million jobs lost since February. Colorado has gained back 52% of the jobs lost since February. However, the job loss is disproportionately seen in the lower wage sectors. Higher wage and medium wage sectors have seen far fewer job losses.
General Fund Forecast
The prior year FY2019-20 revenue came in higher than was expected in the June forecast. For the current year, FY2020-21, LCS projects that GF revenue will decrease 11.6%. This would be the largest decline in state history. However, the bounce back is expected to be stronger than prior recessions.
Relative to the June Forecast, LCS revised their FY2019-20 revenue collections up $893.8 million, $549.1 higher for FY2020-21 and $209.4 million higher for FY2021-22. OSPB raised their September forecast by $895 million for FY2019-20, $1.5 billion higher for FY2020-21, and $1.03 billion higher for FY2021-22.
Income taxes came in much higher than anticipated. The higher than expected collections were received in July because of extended filing deadlines and these reflect higher economic activity in FY2019-20. The collections are accounted for in FY2019-20. This reflects stronger economic activity in 2019 and the first two quarters in 2020. The larger than expected collections for FY2019-20 will mean a larger starting balance for the 2020-21 fiscal year. LCS and OSPB revised their General Fund forecast up based on these higher collections.
The June forecast predicted a 5.4% General Fund reserve for FY2020-21. The September forecast projects a General Fund reserve of $1.67 billion or 18.6%. Despite the stronger than previously expected revenue projections, General Fund revenue will still remain lower than pre-recession levels. OSPB presented a General Fund budget gap of $1.6 billion for FY2021-22 and a $2.2 billion gap for FY2022-23 based on spending pressures from paying back one-time cuts, increases in caseload, paying back the TABOR emergency reserve, and inflation. LCS and OSPB predict that the state will be below the TABOR revenue cap for the next three years.
There remains a high level of uncertainty to the revenue forecasts. The risk remains for a double dip recession, there could be another spike in COVID-19 cases, and job growth could take prolonged time to recover to pre-recession levels.
Cash Funds Outlook
Total cash fund revenue of $2.24 billion in FY2019-20 saw a decrease of $201.3 million according to preliminary figures reported by the Office of the State Controller. However, projections for cash funds vary significantly between steep declines in severance tax collections to growth in marijuana tax revenues.
In FY2019-20, cash fund revenue for transportation, including revenue from gas tax collections and vehicle registration fees, fell by 6.1% over the prior year levels. This is mostly attributable to declines in revenue collection between April and June 2020 due to fewer miles traveled related to the COVID-19 pandemic. LCS projected total transportation revenue to increase 0.5% in FY2020-21 and 3.3% in the next year. LCS projects total transportation revenue of $1.2 billion in FY2020-21 and $1.24 billion in FY2021-22. OSPB forecasted slightly higher revenues for the Highway Users Tax Fund and higher revenues for the State Highway Fund. OSPB projected total transportation revenue to increase by 1.2% in FY2020-21, increase 4.2% in FY2021-22 and increase by 2% in FY2022-23.
Limited gaming revenue dropped 35% in FY2019-20 and is expected to drop by 4.1% in FY2020-21 before rebounding to 9.3% growth in FY2021-22 and 17.2% in FY2022-23. In FY2019-20, limited gaming revenue totaled $82.3 million, slightly above the June forecast. The steep drop in FY2019-20 is largely attributable to the casino closure during the height of the pandemic from March through early summer. OSPB projected total limited gaming revenues of $93.1 million in FY2020-21, $111.1 million in FY2021-22, and $127.2 million in FY2022-23.
Total marijuana tax revenue saw a 28.9% increase in FY2019-20 and are projected to see continued growth for the next few years. Total marijuana tax revenue, including the 2.9% state sales tax revenue charged on marijuana, is projected at $421.9 million in FY2020-21, $488.9 million in FY2021-22, and $549.3 million in FY2022-23 according to LCS.