The all-important March revenue forecast from state economists said Friday that the worst of the recession is over. But the economic recovery has not hit low-wage workers, and job loss in some sectors — hospitality and food service in particular — is still significant.
The March forecast is what budget writers on the Joint Budget Committee rely on for making final decisions about the upcoming fiscal year budget.
Legislative council economist Greg Sobetski explained that vaccine distribution and two tranches of federal stimulus payments have caused revenue forecasts to be revised upward, by about 6.3%.
Retail spending has surpassed pre-recession peaks, Sobetski said. That reflects pent-up demand as well as spending down of high savings for those not impacted as severely by the recession.
The flipside, he said, is employment. The state has regained 57% of the jobs lost during the pandemic, although the biggest job losses are still for low-wage workers, including in the foodservice and hospitality industries.
The state lost 375,800 jobs between February and April last year, he said, and regained 215,500 through January 2021. "We've seen significant declines" in education employment and government, especially local government. "We expect a longer road to recovery in employment," Sobetski said.
High-income employment, defined as $60,000 per year or more, has stayed at pre-recession levels, and even increased modestly during the pandemic. But low-wage jobs have declined by 30%, he said, which shows the impact of the pandemic.
Low-wage jobs don't have the same effects on state revenues because those low-wage earners don't contribute as much in taxes, he explained.
Transfer payments, including government stimulus, has kept the recession from being worse. Weaning off of transfer payments was a significant risk in December's forecast, Sobetski said, but instead, two additional rounds of stimulus payments, as well as additional unemployment benefits and tax credits have boosted spending and saving, though more will go to spending than saving.
The American Rescue Plan, signed into law last week by President Joe Biden, put off some of the risks to the December forecast although adding new ones in March, such as inflation and interest rate hikes. The biggest risk, however, is a resurgence of COVID, as well as its variants, although that's also starting to dissipate, Sobetski said.
As to the numbers: Chief Economist Kate Watkins told the JBC that general fund revenue has remained "resilient." Revenue expectations are considerably higher than expected, which could lead to a much stronger economy than was forecast last year. That's about $570.9 million more in general fund revenue for 2020-21 than in December and $665.4 million more for 2021-22.
But the forecast lacks much of the information needed for the March forecast. We have very little information on tax returns, Watkins said, and given that the Internal Revenue Service has delayed tax filing deadlines this year, that information will lag as well.
Current data shows the state could hit its TABOR revenue caps — and be required to issue refunds in outyears — as soon as 2022-23, the forecast showed.
The bottom line, Watkins said, is that about $2.95 billion is left over from 2020-21, and with stronger than expected tax collections, that leaves $5.29 billion more in general fund dollars available for the 2021-22 budget. That doesn't take into account adjustments for higher caseloads in Medicaid and other programs, and inflationary growth. Any changes made to the 2020-21 budget from one-time dollars will lessen that amount.
That improved outlook is largely predicated on excess revenue available from the 2020-21 budget and improved expectations for revenue, including tax collections.
The American Rescue Plan could add to that total, according to the Legislative Council forecast.
It's not all rosy, though. There are still risks, Watkins said, such as increased COVID cases and lasting economic damage. Add to that questions about the ARP stimulus: how much will it boost consumer and business activity, and what happens when that wears off? she asked.
Then there's the unemployment insurance trust fund. It's better than it was in June 2020, according to economist Elizabeth Ramey, but the fund is expected to be nearly $1 billion in the red at the fiscal year's end on June 30, and only slightly less than that for 2021-22. The trust fund has been insolvent since August, Ramey said, when the state started borrowing from the federal government to cover benefits. Those loans are interest-free until Sept. 6, but cannot be repaid with regular employer contributions.
To pay that back, the state will have to come up with a "special assessment," she said.
Economists with the governor's Office of State Planning and Budgeting also had similar optimistic projections about the economic forecast, and the forecast announced the first numbers going to Colorado from the ARP.
Out of the $27 billion that is headed to Colorado, the state and local governments could see as much as $6 billion in aid. An additional $6.7 billion is on its way in stimulus checks; $2.6 billion more for unemployment benefits, $2 billion for child tax credits, $700 million for restaurants and event venues, $500 million for child care and $470 million for housing costs and utility bills.
OSPB Deputy Director Luke Teator said the economic outlook has improved significantly since December. COVID caseloads have declined significantly, the vaccine distribution is progressing with more than 2 million doses now administered, and two major federal relief bills, totaling nearly $3 trillion, have been passed by Congress.
As with the Legislative Council forecast, the labor market, and especially low-wage workers, is still a major concern. But there are signs of a potentially stronger labor market, based on job openings, Teator said.
Despite those higher revenues, the state is still in a structural deficit that could continue through fiscal year 2024-25, a lagging effect of the recession, according to OSPB Director Lauren Larson.
She proposed prepaying, to cover the next several years, PERA contributions, controlled maintenance, bond payments to the National Western complex, and the old age pension fund. "Think about how we can provide flexibility in the tight years ahead, by setting aside funds now," Larson said.
The governor's proposal includes setting aside $1.7 billion for the general fund reserve, which would help address the structural deficit, Larson said.
A side-by-side comparison of the OSPB and Legislative Council general fund forecasts shows the two are nearly identical, with the OSPB estimate showing slightly more in general fund revenues for 2021-22, a total difference of about $88 million (that's about as close as it ever gets). The biggest difference is an expectation by OSPB for higher individual income taxes in 2021-22 of about $55 million.
The 2020-21 pandemic threw the economy, and the state's 2020-21 budget, into a tailspin. JBC members slashed $3.4 billion in general fund dollars, about 25% of the total available, from the 2020-21 budget, which was approved by the General Assembly and signed into law by the governor in June. That included spending down the state's rainy day fund to help balance the budget.
However, in recent months, higher-than-expected income tax revenues showed the budget-cutting was probably more than necessary.
Last week, Polis, surrounded by legislative leaders from both parties, announced a $700 million stimulus package, based on one-time-only dollars available in 2020-21, to help Coloradans recover from the economic pain of the pandemic.