09-20-16 CO’s State revenue forecast shows solid performance…

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State revenue forecast shows solid performanceState revenue forecast shows solid performance

DENVER — Tuesday, Sept. 20, 2016 The Governor’s Office of State Planning and Budgeting (OSPB) today released its quarterly economic forecast. State General Fund revenue is projected to increase 4.5 percent in FY 2016-17; the forecast is lower relative to June’s projections by $160.6 million, or 1.5 percent.

“Economic expansion is expected to continue for Colorado at a moderate pace,” said Gov. John Hickenlooper. “Colorado’s favorable economic attributes have made the economy resilient to the many headwinds it has faced the past several years.”

General Fund revenue increased 1.7 percent in FY 2015-16, a sharp drop from the robust 9.2 percent growth rate one year earlier. The oil and gas industry’s contraction, along with weaker investment gains and lower corporate profits, all combined to reduce General Fund revenue growth. With these factors largely behind us, General Fund revenue will increase 4.5 percent in FY 2016-17 and a 5 percent increase is forecast for FY 2017-18. Notably, these growth rates are lower compared with most of the previous years of the current expansion; economic growth is forecast to continue to be more moderate for the state, and growth in corporate income tax revenue and investment gains are expected to be constrained.

Relative to June’s forecast, General Fund revenue for FY 2016-17 was reduced by $160.6 million, or 1.5 percent, due mostly to lower expectations for sales and use taxes and corporate income tax collections. The FY 2016-17 ending General Fund balance is projected to be $226.5 million below the required reserve level. The governor is required to take budget-balancing actions when the ending balance is projected to be under half of its required amount. For FY 2016-17, under current law, half of the required reserve amounts to $317.4 million, $90.9 million less than the ending reserve projected by this forecast.

Under this forecast and current law, General Fund appropriations subject to the limit in FY 2017-18 can increase only 1.2 percent over the FY 2016-17 amount. Total General Fund and State Education Fund expenditures combined can grow just 0.3 percent in FY 2017-18, assuming that the negative factor in the School Finance Act is maintained at its current level.

Cash fund revenue in FY 2016-17 is projected to be $189.9 million, or 6.3 percent, lower than FY 2015-16, as a decrease in revenue from the Hospital Provider Fee and miscellaneous cash funds will offset modest growth in revenue from many of the other major categories of cash funds. Cash fund revenue will increase 14.5 percent in FY  2017-18 as the budget restriction on the Hospital Provider Fee expires and severance tax revenue increases.

TABOR revenue came in $26.7 million below the cap in FY 2015-16 and is projected to be $158.8 million under the cap in FY 2016-17. TABOR revenue is expected to be above the cap by $175.4 million in FY 2017-18 and $221.8 million in FY 2018-19. The FY 2017-18 refund amount of $195.0 million expected in this forecast includes the projected $175.4 million exceeding the Referendum C cap plus $19.6 million that needs to be refunded from FY 2014-15 due to the reclassification of the revenue transferred to the Adult Dental Fund from the Unclaimed Property Fund.

Urban areas along the Front Range have among the lowest unemployment in the country, with the Denver metro area having the lowest unemployment rate among large U.S. metro areas. The oil and gas industry’s deep contraction that contributed to slowing in the overall economy appears to have reached a bottom, though industry activity is expected to remain at subdued levels. Even so, the absence of the large decline in spending in the economy going forward will help overall economic conditions. Further, data shows renewed growth in new business formation in Colorado, a key ingredient for economic and job growth. Sustained growth in housing construction and home sales, albeit still at comparatively low levels, will also add to employment and spending in the economy. However, due in part to continued tight labor market conditions, the state’s economic growth will remain at a more moderate pace than earlier in the expansion.

Economic growth for the nation overall continues to be modest. Persistent weakness in business investment and industrial production, along with subdued gains in business formation and productivity continues to result in lackluster growth. On the positive side, consumer spending and the labor market have been solid. In addition, the labor market recovery is broadening, with middle-wage industries adding jobs at a faster pace and lower wage workers seeing more wage growth. Further, although the industrial sector is not expected to generate a boost to economic growth going forward, an end to its downturn will at least present a smaller drag on economic activity.

Although there are no clear indications of an economic downturn, there is heightened uncertainty related to developments in Europe, the upcoming presidential election, and the stance of monetary policy. Such uncertainty, especially when combined with adverse shocks to the economy, can lead to a pullback in spending and investment, and on a large enough scale, losses in jobs and income and a subsequent decline in revenue to the State.

Click here for the full forecast report from the Governor’s Office of State Planning and Budgeting

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