[PPT] - Economic & Revenue Forecast Presentation to the Joint Budget PowerPoint Presentation

SLIDE 1

Economic & Revenue Forecast

Presentation to the Joint Budget Committee

September 20, 2018

September 2018 Legislative Council Staff

SLIDE 2

2

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

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Colorado’s economy is among the nation’s strongest

6 9 4 5 32 2 3 1 42 10 31 7 21 27 28 48 47 44 50 22 13 11 40 24 33 41 15 49 39 14 45 19 26 12 16 18 34 46 20 37 8 30 29 36 25 23 38 35

U.S. = 2.0% CO = 3.0%

2.7% - 3.6% 1.8% - 2.6% 0.1% - 1.7%

0.6% - 0%

43 17

Percent Change in Real GDP by State, 2017Q4 over 2018Q1

Seasonally Adjusted at Annual Rate

Data Source: U.S. Bureau of Economic Analysis. Map prepared by Legislative Council Staff.

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Most Colorado industries are contributing to economic growth

Source: U.S. Bureau of Economic Analysis. Real GDP is inflation adjusted. *Contributions to percent change reflect annualized quarter-over-quarter growth.

0.2%

0.0% 0.2% 0.4% 0.6% 0.8%

Other services Real estate and rental and leasing Arts, entertainment, and recreation Utilities Management Administrative Government Educational Services Accommodation and food Services Professional, Scientific, and Technical Services Wholesale trade Health Care Transportation Finance and Insurance Construction Retail Trade Mining Manufacturing Agriculture Information

Contributions to Real Colorado Gross Domestic Product, 2018Q1* Seasonally Adjusted Annual Rates

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Amid a strong near-term outlook for the U.S. economy, risk to economic outlook remains sizeable

Tightening labor markets
Rising inflation
Trade disputes

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Both U.S. and Colorado labor markets are extremely tight

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.

2% 4% 6% 8% 10% 12% 14% 16% 18% 2008 2010 2012 2014 2016 2018

U.S. 6.1% 3.9% 2.8%

Unemployment & Underemployment Rates

Underemployment (U6) 7.4% Colorado U.S. Colorado Unemployment (U3)

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Interest rates are on the rise

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

2008 2010 2012 2014 2016 2018 1.91%

September 05, 2018

Effective Federal Funds Rate

Source: Federal Reserve Board of Governors.

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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

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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

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10

General Fund Budget Outlook

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$4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14

Revenue continues to exceed expectations

Source: Colorado Office of the State Controller and Legislative Council Staff September 2018 forecast.

Gross General Fund Revenue

Billions of Dollars FY 2017-18: +$130.1M FY 2018-19: +$103.7M FY 2019-20: +$82.7M

Change Relative to June

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$4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14

Following double-digit growth in FY 2017-18, revenue growth is expected to moderate

Gross General Fund Revenue

Billions of Dollars

14.1% increase in FY 2017-18

Wage gains and business profits
Rebound in energy and manufacturing
Federal tax policy distortions
$113.3 million in one-time Tobacco

MSA payments

4.9% 4.7% 2.8%

Year-over-year growth

Source: Colorado Office of the State Controller and Legislative Council Staff September 2018 forecast.

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$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $0 $200 $400 $600 $800 $1,000 $1,200 $1,400

Last Year FY 2017-18 General Fund Reserve

Dollars in Millions

6.5% Reserve Requirement

June 2018

Forecast

11.7% Reserve $674.9M Change relative to June: +$55.1 million attributable to stronger than expected income and sales tax collections

Source: Legislative Council Staff forecasts based on current law.

$544.4M

Surplus Above Required Reserve

September 2018

Preliminary

$674.9M 12.3% Reserve

$599.5M

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$0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000

Current Year FY 2018-19 General Fund Reserve

Dollars in Millions

Source: Legislative Council Staff forecasts based on current law.

8.1% Reserve $813.3M 7.25% Reserve Requirement

June 2018

Forecast

Change relative to June: +$136.9 million attributable to stronger expectations for income and sales tax collections in both FY 2017-18 and FY 2018-19

September 2018

Forecast

$813.3M Surplus Above Required Reserve $92.6M 9.3% Reserve $229.5M

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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*

Source: Legislative Council Staff September 2018 forecast based on current law and FY 2018-19 appropriations.

*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.

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

TABOR Outlook

Source: Colorado Office of the State Controller and Legislative Council Staff September 2018 forecast.

Revenue Subject to TABOR

Dollars in Billions Referendum C Five-Year Timeout Period

Referendum C Cap TABOR Limit Base Expected TABOR Surpluses $16.2M $209.4M $174.8M

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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.

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Expected TABOR Refunds & General Fund Budget Impacts

TABOR surplus revenue is set aside in the year in which a surplus occurs to pay refunds in the following budget year

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 September 2018 forecast. *This amount includes the $16.2 million FY 2017-18 surplus and $21.3 million in under-refunds from the FY 2014-15 surplus.

Dollars in Millions $37.5* $209.4 $174.8

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Expected TABOR Refunds & General Fund Budget Impacts

TABOR surplus revenue is set aside in the year in which a surplus occurs to pay refunds in the following budget year

$147.0 $154.6

$62.4 $20.1 2017-18 2018-19 2019-20 2020-21

TABOR Surplus & Set Aside: Refunded in Fiscal Year:

2018-19 2019-20 2020-21

No Surplus Six-Tier Sales Tax Refunds Reimbursements for Property Tax Exemptions

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 FY 2014-15 surplus.

$37.5* $209.4 $174.8 Dollars in Millions

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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

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 …Larger TABOR refunds?

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21

Economic & Revenue Forecast

Presentation to the Joint Budget Committee

September 20, 2018

September 2018 Legislative Council Staff

U.S. and Colorado economies are in very good shape

remain strong – Healthy levels of job creation – Robust consumer demand – Rising incomes – Solid business investment

Colorado’s economy is among the nation’s strongest

Most Colorado industries are contributing to economic growth

Amid a strong near-term outlook for the U.S. economy, risk to economic outlook remains sizeable

Both U.S. and Colorado labor markets are extremely tight

U.S. 6.1% 3.9% 2.8%

Unemployment & Underemployment Rates

Underemployment (U6) 7.4% Colorado U.S. Colorado Unemployment (U3)

Interest rates are on the rise

2008 2010 2012 2014 2016 2018 1.91%

Effective Federal Funds Rate

Rising trade tensions and uncertainty

seen

Summary of Economic Forecast Expectations

accelerate this year

slower rates

– Tightening labor markets – Rising inflation – Trade disputes

General Fund Budget Outlook

Revenue continues to exceed expectations

Gross General Fund Revenue

Billions of Dollars FY 2017-18: +$130.1M FY 2018-19: +$103.7M FY 2019-20: +$82.7M

Change Relative to June

Following double-digit growth in FY 2017-18, revenue growth is expected to moderate

Gross General Fund Revenue

Billions of Dollars

14.1% increase in FY 2017-18

Last Year FY 2017-18 General Fund Reserve

Dollars in Millions

June 2018

Forecast

11.7% Reserve $674.9M Change relative to June: +$55.1 million attributable to stronger than expected income and sales tax collections

$544.4M

September 2018

Preliminary

$599.5M

Current Year FY 2018-19 General Fund Reserve

Dollars in Millions

June 2018

Forecast

September 2018

Forecast

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*

TABOR Outlook

Revenue Subject to TABOR

Dollars in Billions Referendum C Five-Year Timeout Period

Referendum C Cap TABOR Limit Base Expected TABOR Surpluses $16.2M $209.4M $174.8M

TABOR refund mechanisms are triggered in the order below based on the size of a TABOR surplus

income taxes and are based on a taxpayer’s filing status and adjusted gross income.

Expected TABOR Refunds & General Fund Budget Impacts

TABOR surplus revenue is set aside in the year in which a surplus occurs to pay refunds in the following budget year

TABOR Surplus & Set Aside: Refunded in Fiscal Year:

No Surplus

Dollars in Millions $37.5* $209.4 $174.8

Expected TABOR Refunds & General Fund Budget Impacts

TABOR surplus revenue is set aside in the year in which a surplus occurs to pay refunds in the following budget year

$147.0 $154.6

TABOR Surplus & Set Aside: Refunded in Fiscal Year:

No Surplus Six-Tier Sales Tax Refunds Reimbursements for Property Tax Exemptions

$37.5* $209.4 $174.8 Dollars in Millions

Risks to the Forecast

– Strong economic activity – Oil and gas activity – Federal tax policy distortions – Out-of-state tax collections

– Slower growth and rising risk of recession as the economic expansion matures

– Unknown impacts of federal tax law changes – Out-of-state sales tax collections …Larger TABOR refunds?

Questions?

Kate Watkins

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