SUBMITTED BY JEFF KEENER
PRESIDENT & CEO OF SMDC
It’s that time of year again… March Madness! And the March Forecast! While your bracket is probably already busted, the state budget is bursting at the seams.
March 17, just hours after the start of the NCAA Basketball Tournament, the Joint Budget Committee heard the March Economic and Revenue Forecast. The March Forecast is always the last piece of information before the committee makes their final decisions on the budget. As a reminder, these forecasts are presented quarterly by nonpartisan legislative economists and the Governor’s economists. Principally, the forecasts provide updated predictions for the economy as a whole and state revenue.
The takeaway is that Colorado’s economy is doing great. So great in fact that the state is expected to take in far more money than they are allowed to spend. Enter TABOR refunds, which are expected to be big within the forecasted period. However, it’s not all positive news. Inflation loomed large over this forecast and is compounding with lingering disruptions from the pandemic and with uncertainties from the war in Ukraine.
The Colorado economy shrunk by 3.4 percent in 2020 and then rebounded with 5.7 percent growth in 2021. Currently, the economy is expected to grow by 2.5 percent in 2022. The unemployment rate is down to 4.1 percent, nearly as low as it was pre-pandemic, and the state has regained 98.4 percent of the jobs lost since the pandemic began. However, many have called this a “K” shaped recovery where top earners are growing much faster than everyone else.
Inflation continues to be high and is expected to average 7 percent for 2022. Right now, headline inflation is 7.9 percent (which includes oil prices) and core inflation is 6.4 percent. The biggest drivers of inflation are transportation, housing, and food. Inflation is projected to drop to 3.8 percent in 2023.
Slower growth in the General Fund is expected, due in part to strong wage gains being offset by inflation eroding business products. The forecast projects the General Fund to grow by 11.6 percent in fiscal year 2021-22 and then by only 0.6 percent in 2022-23 and 1.9 percent in 2023-24. But despite that slower growth in the General Fund, revenue will still far exceed the Referendum C Cap (essentially the TABOR cap) and will generate billions of dollars in refunds for the next few years.
Revenue above the cap was $525 million for fiscal year 2020-21, and those refunds are being paid out this year. The forecast projects revenue above the cap to be $2 billion in 2021-22, $1.6 billion in 2022-23, and $622 million in 2023-24. That’s a lot of money over the cap to go out as refunds in coming years.
Higher inflation will eventually cut into TABOR refunds because the cap grows by adding population growth and inflation. However, this lagging calculation and high inflation this year will impact future years. As a rough indicator, every 1 percent higher inflation will equate to approximately $170 million added to the TABOR cap.
As a reminder, when we are in a TABOR surplus situation more money in just means more money going back out. Any additional dollar of General Fund coming in will be paid out by a dollar of General Fund going out to pay for the refund. Moreover, any additional dollar of Cash Fund in (and there are a lot of cash funds) means a dollar of General Fund will need to go out to pay for the refund.
There are multiple mechanisms to pay out TABOR refunds. The first approximately $165 million goes to reimburse local governments for senior and disabled veteran property tax exemptions. The next approximately $130 million goes to a temporary income tax rate reduction (4.55 to 4.50) for everyone. Finally, all of the remaining surplus goes to a six-tier sales tax refund mechanism. While this mechanism refunds sales tax revenue, it appears on income tax forms and the amount refunded is based on the taxpayer’s adjusted gross income.
Even though billions of dollars will be set aside for future refunds, the General Fund will still have a lot of money to spend. Holding appropriations constant at the current year (2021-22) levels, there will be $3.2 billion excess reserve to spend or save this year. However, including all of the budget actions taken so far, the number shrinks and there is actually $1.22 billion excess reserve to still spend or save in this year’s budget (2022-23) and $1.94 billion excess reserve in next year’s budget (2023-24). If we spend it all this year then the forecast projects there would only be $715 million for next year.
To spend or to save? That is always the question coming out of a forecast.
The Joint Budget Committee, in consultation with legislative leaders and the Governor’s office, answers that question with the decisions they make on the state budget. The process is ongoing but getting very close to the end. The JBC worked late into the night on March 18 revisiting a number of comebacks and delayed decisions. The JBC got close but did not officially close out the budget and will likely finish their work early this week.
You’ll hear a lot more about the budget in the coming weeks as it works its way through the legislative process. The budget has a fairly routine legislative process, some bills move very quickly through the legislative process (just wait until the very end of the session), and then some bills are great examples of how slow and grinding the legislative process can be. Enter House Bill 1279 about protecting abortion rights.
Debates can often go late into the night, sometimes even into the early morning hours the next day. However, the debate in the House on this bill went past even that. The debate did not end until later the next morning, after 24 hours of debate on that single bill. This sets the record for the longest floor debate in state history.
Then had a lengthy final vote before the House finally passed the bill on a party-line vote. Not to get too into the legislative weeds, but on second reading debate is essentially limitless as long as someone wants to keep talking or offering amendments. Conversely, on third reading before the final vote is taken each member can speak for up to 10 minutes each. And after 24 hours of second reading debate, you know they largely took up the maximum time on third reading too.
On March 17 it was the Senate’s turn in the time-warp. The Senate committee nearly matched the 14 hour hearing in the House committee and passed the bill on a party-line vote just after midnight on Friday morning. More than 200 witnesses testified on the bill, with the majority of them opposed. The bill now goes to the Senate floor to see how Senate Republicans stack up against House Republicans in filibustering.
Another long committee hearing took place last week during a House committee hearing on House Bill 1064 about banning flavored tobacco products. There were over 150 witnesses split about half for and half against. The hearing went on for seven hours culminating with several amendments. The most controversial was one which allows age restricted vape shops and cigar bars to continue to sell flavored tobacco and vaping products. The bill sponsors detest the amendment and will possibly try to remove it on the House floor. Next stop is the House Finance committee where they will have to evaluate the bill based on its $35 million cost in lost revenue.
Not all controversial bills stay controversial, or at least not as controversial. Senate Bill 138 about greenhouse gas emission reductions was heard in committee this week. The bill saw significant amendments added to address many of the concerns that stakeholders had with the introduced version. One amendment aligned reporting requirements the insurance industry has to do with regards to their investment portfolios with requirements in other states, providing consistency for the industry. Another amendment added clarity to a carbon capture and potential carbon credit program for regulated industries tasked with reducing emissions through carbon sequestration. Finally, the part of the bill that had garnered the most public attention was amended as well. As introduced, the bill would have banned the sale of certain small engines in the non-attainment area (basically the Front Range from Wyoming to Colorado Springs) by 2030. The committee decided that was too controversial and changed the bill to focus on providing incentives for consumers to voluntarily exchange their gas powered lawn mowers and weed wackers for ones that are electrically powered. The bill now awaits further discussion in the Senate Finance Committee.
This week, long and contentious committee hearings will continue. House Bill 1278, about rent control for mobile home communities, will be in House Transportation & Local Government. House Bill 1277, about allowing credit unions to hold public deposits,will be in House Business Affairs. And much, much more!
Get your popcorn ready for the show, there’s more than just college basketball going on.