Economic & Revenue Forecast

Presentation to the Joint Budget CommitteeJune 19, 2019

June 2019 Legislative Council Staff

2

Economic Outlook

3

We are at the top of the business cycle

Real U.S. Gross Domestic Product (GDP)

Source: U.S. Bureau of Economic Analysis. Seasonally adjusted annual rates.

$14

$15

$16

$17

$18

$19

$20

2009 2011 2013 2015 2017 2019

$18,912.3

4

2009 2011 2013 2015 2017 201995

100

105

110

115

120

125

2009 2011 2013 2015 2017 2019

And employment is growing

Source: U.S. Bureau of Labor Statistics. Seasonally adjusted. Colorado U6 rates shown as four-month moving averages.

Total Nonfarm EmploymentIndex 100 = January 2010

U.S.

Colorado Underemployment (U6)

Unemployment (U3)

7.1%

3.6%3.4%

6.5%

17.1%

10.0% U.S.

Colorado

5

$24

$25

$26

$27

$28

$29

$30

$31

2007 2009 2011 2013 2015 2017 2019

Wages are increasing

Source: U.S. Bureau of Labor Statistics. Seasonally adjusted. Adjusted for inflation using the CPI-U for all urban areas.

Real Average Hourly Earnings

2019 Dollars

U.S.

Colorado

$27.83

$30.17

6

1.8%

2.0%

-0.5%

2.0%

2.8%

-3.1%

0.6%

2.1%

1.2%

3.2%

1.6%

Headline

Core

Energy

Food

Housing

Apparel

Transportation

Medical Care

Recreation

Education

Other

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

2009 2011 2013 2015 2017 2019

And inflation is in check

Source: U.S. Census Bureau. Seasonally adjusted.

U.S. CPI-U InflationYear-over-Year Change in Prices May 2019 over May 2018

Headline

Core

7

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

I II III IV I

2018 2019

Gov't Consumption & InvestmentNet ExportsGross Private InvestmentPersonal Consumption ExpendituresReal GDP

3.1%

4.2%

GDP components are weakening

Contributions to Real U.S. Gross Domestic Product (GDP)

Source: Bureau of Economic Analysis. Seasonally adjusted annual rates.

8

30

40

50

60

70

2007 2009 2011 2013 2015 2017 2019

Contracting

Expanding

So is manufacturing and business activity

Source: Institute for Supply Management.

U.S. Institute for Supply Management Indices

Diffusion Index

Manufacturing

Business Activity

9

$100

$200

$300

$400

$500

$600

85

90

95

100

105

110

115

With slower growth in industrial production

Source: Federal Reserve Board of Governors & U.S. Census Bureau.

U.S. Industrial Production Index

Index 2009 = 100

Durable Goods

Industries

All Industries

U.S. New Manufacturers’ Orders

Billions of Dollars

10

-

50.0

100.0

150.0

200.0

250.0

300.0

Jan 2017 Jan 2018 Jan 2019

Employment growth is slowing

Source: U.S. Bureau of Labor Statistics.

Change in Total U.S. Nonfarm Employment

Three-Month Moving Average, Thousands of Jobs

Jan 2019

253,000

May 2019

127,000

11

Economic Summary

Economic activity remains elevated, but has slowed

• Growth will continue to moderate through 2021

– Peak of the business cycle with low inflation

– Tight labor market and rising wages

– Slower business investment and consumer spending

Uncertainties remain elevated

• Growth may continue to slow due to trade tensions, lack of demand, or weak global economy

• Uncertain if economic conditions are sustainable or driven by one-time policy changes

12

General Fund Budget Outlook

13

$4

$5

$6

$7

$8

$9

$10

$11

$12

$13

$14

Revenue expectations were increased on strong income tax

collections in FY 2018-19

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

Gross General Fund RevenueBillions of Dollars

Change Relative to March Expectations

FY 2018-19: +$459.4M

FY 2019-20: +$388.6M

FY 2020-21: +$438.9M

7.9%3.0%

3.1%

14.1%

Year-over-year

growth

14

Changes to the General Fund revenue forecast relative

to March expectations

• Upward adjustment to each year due to stronger than expected income tax collections in FY 2018-19

– However, it is uncertain whether this growth is one-time or ongoing

• Corporate income tax refunds and settlements

– FY 2018-19, net +$78.1 million resulting from the Oracle and Agilent decisions, refunds expected to mute growth in subsequent years

• 2019 legislative impacts will boost revenue beginning in FY 2019-20

– HB 19-1240 sales tax administration changes +$40.5M

– HB 19-1245 vendor fee changes +$23.1M

See the General Fund revenue section of the June forecast document for additional information.

15

$7

$8

$9

$10

$11

$12

$13

$14

$15

$16

TABOR Outlook

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

Revenue Subject to TABOR

Dollars in Billions

Referendum C

Five-Year Timeout Period

Referendum C Cap

TABOR Limit Base

Expected TABOR Surpluses

$169.7M

$574.7M

$18.5M

$310.0M$342.1M

16

TABOR Refund

MechanismsReimburse Local Gov’ts for

Property Tax Exemptions

Up to ~$150 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

17

$0

$100

$200

$300

$400

$500

$600

$700

2017-18 2018-19 2019-20 2020-21

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: 2018-19 2019-20 2020-21 2021-22

Source: Colorado Office of the State Controller and Legislative Council Staff June 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.

Dollars in Millions

$39.8M*

Income Tax Rate Reduction

Reimbursements to Local Govts for Property Tax Exemptions

$574.7M

$310.0M $342.1M

Sales Tax Refund Mechanism

18

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400Changes relative to March:

-$69.3 million

Current Year FY 2018-19 General Fund ReserveDollars in Millions

Source: Legislative Council Staff forecasts based on current law. For more detail, see Table 2 of the June forecast document.

10.6% Reserve

$811.9M 7.25%

Reserve

Requirement

$814.2M

Surplus Above

Required Reserve

$372.7M

10.0% Reserve

$303.3M

June 2019

Forecast

March 2019

Forecast

Revenue

Higher revenue expectations (+$459.4M)

Net transfers TO the General

Fund (+$21.1M)

Higher operating

appropriations, reserve

requirement (+$32.3M, +$2.3M)

Expenditures

Larger TABOR set aside ($509.9M)

19

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

Next Year FY 2019-20 General Fund ReserveDollars in Millions

8.1% Reserve

$870.3M 7.25% Reserve

Requirement

Surplus Above

Required Reserve $97.5M

June 2019

ForecastChanges relative to March:

Higher revenue expectations ($388.6M)

Larger net transfers FROM the General Fund($306.6M, primarily to transportation and capital

construction)

Revenue

Smaller beginning balance (-$67M)

Larger TABOR set aside ($310M, partially

offset by $75M reduction in spending obligation)

Source: Legislative Council Staff forecasts based on current law. For more detail, see Table 2 of the June forecast document.

Expenditures

FY 2019-20 Budget Package

20

-$100

$0

$100

$200

$300

$400

$500

$600

$700

$800

1-$100

$0

$100

$200

$300

$400

$500

$600

$700

$800

1-$100

$0

$100

$200

$300

$400

$500

$600

$700

$800

1

Out Year FY 2020-21 Budget Outlook ScenariosAmounts above or below the required 7.25% reserve.

Incorporates the revenue forecast, current law transfers, rebates and

expenditures, TABOR refund obligations, and the reserve requirement.

$763.1M

Source: Legislative Council Staff June 2019 forecast.

*2020 projections. **Appropriations growth over the past two economic expansions.

Hold FY 2019-20

Appropriations Constant

Grow Appropriations by

Inflation + Population

Growth (3.3%)*

Grow Appropriations by

Historical Expansionary

Growth (6.0%)**

$338.2M

-$13.0M

21

Revenue trends in the late stages of economic expansion

Overheating

EconomyRevenue

$

Near-term

Recession

Slowdown(Current

Expectations)

This figure is for illustrative purposes and does not reflect actual state revenue collections.

We Are

Here

22

Risks to the Forecast

• Upside risks

– Stronger-than-expected economic activity

– Ongoing income tax base-building from federal tax law changes

– Out-of-state sales tax collections

• Downside risks

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

matures

• In the current TABOR refund situation…

– The TABOR limit will constrain revenue growth

– Upside surprises mean larger TABOR refunds

– Downside surprises mean greater budgetary pressures

23

Questions?

Kate WatkinsChief Economist • Legislative Council Staff

kate.watkins@state.co.us • (303) 866-3446

www.leg.colorado.gov/lcs