Colorado's revenue forecast worries legislators, even as Polis administrations paints rosier picture

Inflation, a sharp decline in the housing market, wages that aren't keeping pace and fears of a recession caught the attention of the state Capitol's budget crafting panel, even as legislators prepare to convene next year's session. 

The Joint Budget Committee on Tuesday heard economists' revenue forecast, prompting worries about Colorado's fiscal house, with some noting that state spending will exceed available funds, while governor's fiscal experts painted a rosier picture, with the state collecting sufficient revenue to cover all spending.

Indeed, the difference between the governor and and legislators' forecasts stands at hundreds of millions of dollars.  

"(The) forecast is a reminder that while Colorado’s economic outlook remains strong, we are facing fiscal challenges that will test our limits and put enormous pressure on the state budget," JBC Chair Sen. Rachel Zenzinger, D-Arvada said in a statement. 

"We’ve fought hard for the gains we’ve made in recent years on education, housing, health care, and more. Now, we must work to protect those critical investments while fulfilling our funding commitments and keeping our budget on a sound and sensible path so that Colorado remains strong for generations to come," she added.

JBC Vice Chair Rep. Shannon Bird, D-Westminster, in that same statement, said smart spending is key.  

"As we look at the road ahead, it’s clear that our costs will soon exceed what we are able to spend each year," Bird said. "So, we’ll look to make smart investments that strengthen our economy, prioritize education, reduce crime and protect critical services," 

Zenzinger and Bird made the comments in reaction to the forecast presented by the General Assembly's legislative council economists, who said that, based on the spending plan submitted by Gov. Jared Polis on Nov. 1, the state budget and all its requirements, including a mandatory statutory reserve of 15%, will be short about $57.7 million.

Economist Jeff Stupak of the Legislative Council said the state should expect positive but slower economic growth in the next few years.

In 2022, that growth stood at 2% but will drop to 1.2% next year, Stupak told the Joint Budget Committee and other lawmakers who joined in the Dec. 20 briefing. He said inflation remains the main story of the economy, estimated at 7.1% in November, with core inflation, which excludes food and energy prices, at 6.2%.

It's mostly energy and transportation prices that's driving the inflationary increases, he explained. More recently, the main contributors are from food and housing prices, he added.

Changes in federal monetary policy are causing a drop in home prices, down about 4.5% from the summer in Denver, according to Stupak.

A family who could afford a $550,000 home with 20% down could pay a monthly mortgage of about $1,900 in December 2021. Now, that same person, who wants the same down payment and monthly, could only afford a $413,000 home — a nearly 25% decrease in purchasing power, he said. 

Federal policy has not had the desired effect on the labor market, Stupak said.

The jobs lost in the recession are all back, save for government positions in Colorado, as well as mining and logging, accommodations and real estate — the latter he attributed to the cooling housing market.

There are 1.8 jobs for every unemployed person in Colorado, and that's led to incredibly fast, although nominal, wage growth, he explained. Inflation has eaten up that salary growth, he said, with real wages up only about 0.1% over the last 12 months. 

"We've experienced the fastest increase in jobs over pre-pandemic levels in highly-compensated industries," said Greg Sobetski, chief economist for the Legislative Council.

That growth is largely occurring in the professional, scientific and technical job markets, as well as transportation, insurance and utilities, Stupak added.

Stupak indicated the lack of wage gains point to a more troubling issue: The personal savings people built up during the pandemic and falling "household balance sheets" are just about gone.

"Those are warning signs for the economy" because so much of it — about 70% — is consumer driven, he said. 

More troubling news is that risks to the forecasts — things that make lawmakers and economists nervous — outweigh the upsides. The risks include inflation; even more aggressive monetary policy by the Federal Reserve; steeper housing market corrections, which could wipe out household wealth; and, geopolitical uncertainty, most notably the continued war against Ukraine by Russia.

The upsides include resolution to the war, continued declines in energy prices and resolution to inflation. 

Revenue collections for the general fund in 2022-23, which pays for the "discretionary" part of the state budget, will fall by $828.1 million, largely due to ballot measures approved by voters in the November 2022 election, which Sobetski called "the most important changes" to the forecast since the last one in September.

Chief among them is Proposition 121, which cut the state income tax rate from 4.55% to 4.4%. The effect in 2022-23 — over 18 months — is about $670 million less revenue. In the following year, the effect will be $440 million.

But reducing income tax revenue largely affects TABOR refunds, rather than state spending, so long as a TABOR surplus exists.

Proposition 123, meanwhile, requires a certain amount of tax revenue to go to affordable housing initiatives. Economists put its initial effect at $150 million less tax revenue in the current fiscal year, growing to $300 million the following year.

Again, as long as there is a TABOR refund, the reduction doesn't affect state spending — it just reduces the TABOR refund.

Proposition FF, which provides free meals to public school students and raises taxes on those with incomes above $300,000, will cost about $50 million in the first year and $100 million thereafter to implement. 

Overall, Sobetski said the reduction in general fund revenue in the current fiscal year is $$707 million and about $559 million the following year.

In 2023-24, legislators have $1.32 billion more than in 2022-23 to spend or save, a figure that does not incorporate changes to Medicaid obligations, school finance, or salary schedules for state employees, including raises driven by union contract.

But based on the governor's Nov. 1 budget request, the amount gets whittled away by $202 million for a mid-year adjustment, as well as new suggested appropriations of $858 million and increases to the statutory reserve.

The bottom line, according to a scenario painted by Sobetski, is there isn't enough money to cover everything, which would mean policymakers would need to cut $57.7 million in order to meet the state's reserves mandate. 

"If you were to enact all of the recommendations in the governor's proposal, you would fall short of the 15% reserve requirement by $57.7 million in fiscal year 2023-24," he said.

Another kind of risk exists, emanating from the higher cost of things, he said, adding that, to provide "the same level of services, you would have to accommodate those increases."  

The governor's economists with the Office of State Planning and Budgeting, meanwhile, projected a rosier forecast.

Their numbers claimed there would almost $1.6 billion, with about $4.2 million above the statutory reserve, rather than coming in short, as was projected by the legislative council economists.

OSPB Director Lauren Larson said the two forecasts are about $300 million apart. 

OSPB's Bryce Cooke told JBC members that Colorado has the second highest labor participation rate in the country, and businesses are having to compete more through wage growth. People are also shifting to spending more on services than on goods, he said.

While inflation is declining, shelter inflation is not behaving the way economists would like, he said. Housing demand continues to exceed supply and that's driving higher rents. Meanwhile, housing starts, including the permitting process, are taking longer to generate supply, due in part of labor shortages, he explained. 

OSPB's forecast also noted the decline in personal savings, pointing to a federal analysis that said the savings rates is at a 17-year low, along with higher use of credit.

OSPB also took a look at the potential for recession, concluding that, while the risk is high, Colorado "stands to fare better in the case of a downturn" given reliance on service sectors.

“Colorado’s strong economy continues to outpace other states, with lower unemployment and more job growth here in Colorado than we are seeing nationally," Polis said in a statement. "As we enter the new year, we are committed to saving people money, creating more good-paying jobs, and attracting new businesses to our thriving state."