Economic growth is up but the state budget remains tight | The Bell Policy Center

Economic growth is up but the state budget remains tight

Date: Dec 20, 2016

The Legislature’s Joint Budget Committee received a briefing this morning projecting the amount of revenues the state will receive over the next three years.  Below are four things you need to know about the projections made by economists from the Legislative Council Staff (LCS) and the Office of State Planning and Budgeting (OSPB)

1. The Colorado and U.S. economies are projected to grow, albeit at a moderate pace.The slump in Colorado’s industrial sector, which includes oil and gas, manufacturing and export industries, has ended and business activity has improved in recent months.  Corporate profits have increased, exports have grown and manufacturing activity has expanded.  Colorado’s Leading Economic Indicators point to future growth although risks remain.  The recovery in these industries is fragile and dependent upon stronger global demand and higher commodity prices.

2. Revenue projections are up but the state budget remains very tight.
Stronger economic growth in the third quarter caused both sets of economists to up their forecasts for state revenues.  Revenues came in bit stronger than expected last year (FY15-16), giving the state an additional $49.7 million that is carried over to this year (FY16-17).  This year’s budget is projected to fall between $118 to $169 million short of fully funding the 6.5 percent statutory reserve.  The lower amount is based on the legislature adopting the governor’s November 2016 budget request.  For next fiscal year, the legislature can fully fund the 6.5 percent reserve and increase appropriations by $215 million or 2.1 percent over this year’s budget, according to the legislative economists.  However, funding for school finance alone is expected to require $380.8 million just to keep the negative factor where it is and maintain a $100 million fund balance in the State Education Fund.

3. TABOR Rebates expected in FY17-18 and FY18-19
Economists from both offices project that state revenues will exceed the Ref C cap and trigger TABOR rebates.  OSPB projects the rebates will be $248 million in FY17-18 and FY18-19, while the LCS puts them at $279 million in FY17-18 and $287 million in FY18-19.  The LCS projections show that most of the money will be rebated through a reduction in the income tax rate from the current 4.63 percent to 4.5 percent in 2018 and 2019. This will provide a rebate of less than $100 for taxpayers with incomes below $130,000 but more than $500 for those with incomes over $220,000.  The rest will be rebated through a sales tax rebate of about $14 per taxpayer.

4. Demographic changes are driving the state’s economy and budgets
The aging of Colorado’s population is expected to moderate the state’s economic growth over the long-term.  Income and consumption tend to decline as people age, and Colorado’s population aged 65 and over is projected to grow from 13.4 percent of our population to 17 percent over the next 10 years.  Economic growth is also affected as many of these workers retire and leave the workforce.  This is consistent with recent projections made by the Colorado Futures Center at CSU.  Going forward “demographic changes are the new reality,” according the Natalie Mullis, the LCS chief economist.  She sees future state revenues holding steady, not growing, after adjusting for inflation and population growth.