Economic & Revenue Forecast Update

Presentation to the Joint Budget CommitteeMay 12, 2020

May 2020 Legislative Council Staff

2

Economic Outlook

3

The events that have transpired over the past two month

were unimaginable, even in March

Economic Activity

$

This figure is for illustrative purposes.

December Expectations

March Expectations

Actual Conditions to Date

4

Shape of Recovery

$14

$15

$16

$17

$18

$19

$20

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

201

6

201

7

201

8

201

9

202

0

202

1

202

2

Real U.S. Gross Domestic ProductDollars in Trillions

Source: U.S. Bureau of Economic Analysis and Legislative Council Staff projections, including projected 2020Q1 revisions.

Real GDP is inflation-adjusted to chained 2012 levels and shown at seasonally adjusted annualized rates.

Projected

GrowthGreat

Recession

Current

Contraction

2008: -0.1%

2009: -2.5%

2020: -5.6%

5

22.5%

12.8%

10.9%

14.8%

28.0%

8.7%

6.7%

4.0%

6.5%

7.0%

7.9%

14.1%

12.2%

4.7%

11.9%

0.5%

4.7%

1.7%

No industry has been left untouched. Many will regain jobs

with reopening, but additional waves of layoffs are expected

Source: Colorado Department of Labor and Employment, U.S. Bureau of Labor Statistics, and Legislative Council Staff calculations.

65,463

35,380

33,936

16,742

15,554

14,141

11,614

10,048

9,824

7,738

7,313

5,962

5,418

3,466

3,329

2,371

2,037

1,967

Accommodation & Food Services

Retail Trade

Health Care & Social AssistanceOther Services

Arts, Entertainment & Recreation

Administrative & Support ServicesConstruction

Professional, Scientific & Technical Services

ManufacturingWholesale Trade

Transportation & Utilities

Real EstateEducational Services

Information

Mining & Logging

GovernmentManagement of Companies & Enterprises

Finance & Insurance

Initial UI Claims

Claims as a Share of

Industry Employment

Colorado Unemployment Insurance Claims,

March 1 to April 25, 2020

6

$1.61

$0.45$0.13$0.06

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

$22

2019 2020f 2021f

Families First CoronavirusResponse Act

CARES Act

Federal stimulus will partially offset deep declines in

economic activity

Source: Congressional Budget Office and Legislative Council Staff projections (f). Estimates subject to change.

*Reflects direct federal government spending. Excludes up to $4.5 trillion in loans to businesses, states, and municipalities via the

Federal Reserve lending facility.

Nominal U.S. GDP and the Federal Stimulus* Contribution

Trillions of Dollars

7

COVID-19-Related Forecast Assumptions

• Gradual reopening of businesses throughout 2020

• Limited regional resurgences of the virus, but no additional

widespread outbreaks or stay-at-home orders

• An effective COVID-19 treatment available in 12 to 18

months

8

Outlook Summary

• Economic activity came to a standstill in March and April, and is

now stirring back to life but from low levels

• Business activity and consumer spending will rise with phased

reopening, but remain constrained by ongoing restrictions,

health concerns, uncertainty, and some permanent closures

• Labor markets will improve relative to April but remain weak in

2020 and 2021, as businesses adjust to a new and evolving

landscape

• Inflationary pressures will remain subdued as low energy

prices, low global demand offset global supply constraints

9

Risks to the Forecast

Unknowns: Rapidly evolving health and economic policy

environment. The outlook depends on:

• Containment and treatment of COVID-19

• Fiscal and monetary policy stimulus

Downside risk: Prolonged economic recovery or a double-dip

recession (COVID-19 resurgence, vicious cycle)

Upside risk: Stronger near-term rebound in economic activity

10

General Fund Budget Outlook

11

$0

$2

$4

$6

$8

$10

$12

$14

General Fund collections will decline with the contraction in

business and household income, and reduced consumer activity

Source: Colorado Office of the State Controller and Legislative Council Staff May 2020 forecast update.

Gross General Fund RevenueBillions of Dollars

Percentages show year-over-year changes

-7.2%

-11.6%

13.2%

-15.5%-1.8%

-13.0%-4.4%

Change Relative to March

FY 2019-20: –$892.8 million

FY 2020-21: –$2.42 billion

FY 2021-22: –$1.99 billion

12

General Fund Collections by Source

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

*Based on FY 2018-19 General Fund collections. Income taxes are net of the State Education Fund diversion.

60.7%

27.1%

6.8%

5.5%

Individual Income Tax

Sales & Use Tax

Corporate Income Tax

All other

Share of Total Gross General Fund Revenue*

Income taxes are more volatile that general economic activity.

Collections show outsized declined during downturns due to the

volatility in certain income flows, businesses losses, and the tax

structure.

13

-$1

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11

$12

$13

$14

$15

$16

$17

TABOR Outlook

Source: Colorado Office of the State Controller and Legislative Council Staff May 2020 forecast update.

Revenue Subject to TABOR

Dollars in Billions

Referendum C

Five-Year

Timeout Period

Referendum C Cap

TABOR Limit Base

TABOR Surpluses

14

-$100

$100

$300

$500

$700

$900

-$100

$100

$300

$500

$700

$900

-$100

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

Changes relative to

March:

$892.8 million in reduced

revenue expectations

Slight changes to transfer

and rebate and

expenditure amounts

Does not include

expenditure reductions

from the Governor’s

sequestration order

Source: Legislative Council Staff forecasts based on current law.

7.25%

Reserve Requirement

$876.3M

$4.3M Surplus

Current Year FY 2019-20 General Fund ReserveDollars in Millions

May 2020

Forecast Update

March 2019

Forecast

-$895.8M Deficit

15

Next Year FY 2020-21 Budget OutlookAdditional revenue available to spend above FY 2019-20 spending levels.*

March 2019

Forecast

-$3,500

-$3,000

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

1

$27.3 Million

May 2020

Forecast Update

Changes relative to March:

$895.8 million deficit carried

over from FY 2019-20

General Fund revenue

expectations were reduced in

FY 2020-21 by $2.42 billion

Shortfall amount does not

include inflation or caseload

pressures

Any budget changes for

FY 2019-20 will carry into

FY 2020-21

Source: Legislative Council Staff forecasts based on current law.

*Amounts hold FY 2019-20 appropriations constant and incorporate the revenue forecast, current law transfers, rebates and

expenditures, TABOR refund obligations, and the 7.25% reserve requirement.

-$3,500

-$3,000

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

1

-$3.3 Billion Shortfall

Enough revenue to

hold appropriations

flat, no inflation or

caseload growth

-25.3% of FY 2019-20

Expenditures

16

Risks to the Forecast

Unknowns: Rapidly evolving health and economic policy

environment. The outlook depends on:

• Containment and treatment of COVID-19

• Fiscal and monetary policy stimulus

Downside risk: Prolonged economic recovery or a double-dip

recession (COVID-19 resurgence, vicious cycle)

Upside risk: Stronger near-term rebound in economic activity

17

Income Tax Expectations

18

Income tax revenue will drive General Fund revenue decreases

Source: Colorado Office of the State Controller and Legislative Council Staff May 2020 forecast update. “f” denotes forecast.

*Includes retail marijuana special sales tax.

$7.6 $7.1$6.2

$7.3

$0.9$0.7

$0.4

$0.5

$3.6

$3.4

$3.2

$3.4

$0.5

$0.5

$0.5

$0.5

$0

$2

$4

$6

$8

$10

$12

$14

FY 18-19 19-20f 20-21f 21-22f

Individual income tax

Corporate income tax

Sales and use tax*

All Other

General Fund Revenue by Source

Dollars in Billions

19

Income tax decreases are economic, but there are

complicating factors

Economic factors will suppress collections

• Wage withholding: No decrease yet, but it’s coming

• Estimated tax payments reflect expectations for full tax year

• Business income is a significant portion of individual income tax revenue

• Businesses that incur losses do not owe income tax

FY 2018-19 benefitted from one-time revenue boosts, which

makes for a steeper decline in FY 2019-20

• TCJA accelerated economic activity in 2018 and 2019

• Oracle and Agilent cases

Distortions exacerbate forecast uncertainty

• Delay of filing deadlines and accruals across fiscal years

• Change to state wage withholding tables

20

The CARES Act will reduce state income tax revenue

Tax relief in the CARES Act

• Additional deductions for businesses

• Delayed taxable income for retirees

• Preliminarily estimated to decrease state revenue by:($121 million) in FY 2019-20 and ($135 million) in FY 2020-21

21

Energy Outlook

22

Twin supply and demand shocks tanked oil prices

$0

$20

$40

$60

$80

$100

$120

$140

2008 2010 2012 2014 2016 2018 2020

Supply shock

March 6: $45.60

Source: U.S. Energy Information Administration. Weekly average prices. Data are not seasonally adjusted.

Crude Oil Price, West Texas Intermediate

Dollars per Barrel

Demand shock

May 1: $15.71

23

U.S. oil demand plummeted with stay-at-home orders

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

2014 2015 2016 2017 2018 2019 2020

36.9% decline in

oil consumption

Week of March 6

Week of April 10

U.S. Petroleum Products Supplied

Thousands of Barrels per Day

Source: U.S. Energy Information Administration. Weekly product supplied. Data are not seasonally adjusted.

24

Severance tax collections are expected to remain

depressed through the forecast period

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0 Metals & Molybdenum

Coal

Oil & Gas

Millions

Source: Colorado Office of the State Controller and Legislative Council Staff May 2020 forecast update.

$241.7

$133.1

$15.8

$47.2

$132.8

$11.1$10.3

$271.5

$199.4

$140.0

$291.8

$319.1

$259.3

25

Unemployment Insurance Outlook

26

Current State and Federal UI Benefits

* States are normally required to cover half the costs of extended benefit programs. However, this requirement was suspended

during the Great Recession and has currently been suspended through 2020, allowing full federal funding should extended

benefits be triggered.

** Expires July 2020.

Funding

Source State

State &

Federal* FederalBenefits Regular Extended Temporary

Description

Partial

wage

replacement

for up to 26

weeks

Not yet available.

Extended benefits

are triggered by

persistently

elevated state

unemployment

rates*

Extends eligibility to self-employed

workers and independent

contractors; Additional $600 per

week for up to four months;** up to

13 additional weeks of benefits

after others are expended

Expires December 2020

27

Colorado Initial Unemployment ClaimsFour-week Average, Thousands of Claims

Source: Colorado Department of Labor and Environment. Data are not seasonally adjusted.

0

10

20

30

40

50

60

70

2006 2008 2010 2012 2014 2016 2018 2020

2009-2010

Weekly Average:

4,800

2019

Weekly Average:

1,900

April 2020

Weekly Average:

56,800

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Unemployment Insurance Trust Fund

Revenues, Benefits Paid, and Fund BalanceDollars in Millions

Actual

FY 2018-19

Estimate

FY 2019-20

Estimate

FY 2020-21

Estimate

FY 2021-22Beginning Balance $922.3 $1,104.1 ($7.0) ($1,994.8)

Plus Income Received

UI Premium $523.0 $531.5 $692.0 $676.1

Solvency Surcharge $0.0 $0.0 $147.2 $143.8

Interest $23.3 $21.1 $0.0 $0.0

Total Revenues $546.3 $552.6 $839.2 $819.9

Less Benefits Paid ($365.5) ($1,663.7) ($2,827.1) ($1,302.9)

Ending Balance $1,104.1 ($7.0) ($1,994.8) ($2,477.8)

Solvency Ratio* 0.87% -0.01% -1.36% -1.61%

Source: Legislative Council Staff May 2020 forecast update. Totals may not sum due to rounding.

*Fund balance as a share of total annual private wages.

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Questions?

Kate WatkinsChief Economist • Legislative Council Staff

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

www.leg.colorado.gov/lcs