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

Economic & Revenue Forecast

Colorado School Finance Project

March 22, 2019

March 2019 Legislative Council Staff

2

Economic Outlook

3

Employment growth is slowing as the labor market tightens

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.

10.0% 8.2%

15.7%

6.3%

17.1%

2008 2010 2012 2014 2016 2018

95 100 105 110 115 120 125

2008 2010 2012 2014 2016 2018

Total Nonfarm Employment

Index 100 = January 2010

U.S. Colorado Underemployment (U6) Unemployment (U3)

7.3% 3.8% 3.7%

4

$23 $24 $25 $26 $27 $28 $29 $30 $31

Wages are rising, yet consumer activity has slowed

Colorado

United States

$27.55 $30.00

Real Average Hourly Earnings

2019 Dollars

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.

$350 $375 $400 $425 $450 $475 $500 $525 $550

Real Retail Sales

Billions of 2019 Dollars

United States

5

Business activity remains elevated, but is expected to slow on labor market shortages and rising wages

$0.6 $0.8 $1.0 $1.2 $1.4 $1.6 $1.8 $2.0 $2.2 $2.4 2007 2009 2011 2013 2015 2017 2019

Source: Bureau of Economic Analysis. Profits and income with inventory valuation and capital consumption adjustments.

Business Investment, Income and Profits

Trillions of Dollars Corporate Profits after Tax Equipment & Intellectual Property Investment Proprietors' Income

6

Home price appreciation has slowed considerably in the higher-cost areas of the state

FHFA Home Price Indices

Index 100 = January 2008

Source: Federal Housing Finance Agency (FHFA). FHFA data are seasonally adjusted data through 2018Q4.

70 80 90 100 110 120 130 140 150 160 170 180 2008 2010 2012 2014 2016 2018

Grand Junction

United States

Pueblo Colorado Springs

Colorado

Denver Greeley Boulder Fort Collins

7

The value of oil and gas production remains low

Source: Energy Information Administration, weekly average prices (left) and three month moving averages (right).

West Texas Intermediate Crude Oil Price

Dollars per Barrel

$57.81

$0 $40 $80 $120 $160

120 160 200 240 280 320 360 400

007 2009 2011 2013 2015 2017

U.S. Crude Oil Production

Millions of Barrels per Month

8

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

9

General Fund Budget Outlook

10

$4 $6 $8 $10 $12 $14 $16 LCS December 2018

LCS March 2019

OSPB December 2018

OSPB March 2019

Revenue expectations were reduced on lower than expected collections to date and a slower economic outlook

Source: Colorado Office of the State Controller and Legislative Council Staff (LCS) and Office of State Planning and Budgeting (OSPB) forecasts.

Gross General Fund Revenue

Billions

11

$4 $6 $8 $10 $12 $14 $16 LCS December 2018

LCS March 2019

OSPB December 2018

OSPB March 2019

Revenue expectations were reduced on lower than expected collections to date and a slower economic outlook

Source: Colorado Office of the State Controller and Legislative Council Staff (LCS) and Office of State Planning and Budgeting (OSPB) forecasts.

Gross General Fund Revenue

Billions

FY 2018-19 -$260.4M FY 2019-20 -$249.4M FY 2020-21 -$168.9M Change in the LCS Forecast

12

Growth in wage withholding remains strong, while sales tax collections growth has slowed

$100 $150 $200 $250 $300 $350 $400 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.

Millions Millions $200 $300 $400 $500 $600 $700 $800 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY 2018-19

FY 2017-18 FY 2016-17

Monthly State Revenue Collections

Wage Withholding Sales Tax Collections

13

$0 $200 $400 $600 $800 $1,000 $1,200 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

FY 2018-19

FY 2017-18 FY 2016-17

Estimated payments of individual income tax are the largest source of General Fund forecast volatility

$0 $200 $400 $600 $800 $1,000 $1,200 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun

Estimated Payments

Source: Colorado Office of the State Controller and Department of Revenue. Monthly collections shown on a cash basis. February data are preliminary. *Wage withholding, estimated payments, and cash with returns, minus refunds.

Millions Millions

TCJA Impacts: Income shift into 2017 tax year

Monthly State Revenue Collections

Net Individual Income Tax*

14

$4 $6 $8 $10 $12 $14 $16

Revenue growth is expected to moderate throughout the forecast period

Gross General Fund Revenue

Billions of Dollars

14.1%

4.0% 3.7% 2.8% Year-over-year growth

Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecast.

4.7% 6.0% 4.7%

15

7 8 9 10 11 12 13 14 15 16 $7 $8 $9 $10 $11 $12 $13 $14 $15 $16

TABOR Outlook

Source: Colorado Office of the State Controller and Legislative Council Staff March 2019 forecasts.

Revenue Subject to TABOR

Dollars in Billions

Referendum C Cap TABOR Limit Base Expected TABOR Surplus

$18.5M

$64.8M

$169.7M

16

$0 $10 $20 $30 $40 $50 $60 $70 2017-18 2018-19 2019-20 2020-21

TABOR Surplus & Set Aside: Refunded in Fiscal Year:

2018-19 2019-20 2020-21

No Surplus

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.

$39.8M* $64.8M No Surplus Reimbursements to Local Governments for Property Tax Exemptions

Expected TABOR Refunds & General Fund Budget Impacts

17

TABOR Refund Mechanisms

Reimburse Local Gov’ts for Property Tax Exemptions Up to ~$140 million

TABOR Refund Obligation

If ~$400 million+ Temporary Income Tax Rate Reduction Next ~$250 million If the refund is large enough to fund the first mechanism and the rate reduction Sales Tax Refund Any remaining

#1 #2 #3

18

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

19

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

20

Questions?

Kate Watkins

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