State economists are cautious on the economy but bullish on General Fund revenues

State economists presented cautious forecasts for Colorado's future economic growth to the legislature's Joint Budget Committee (JBC) today.

Natalie Mullis, the legislature's Chief Economist, said that Colorado's economy is weak and projected that U.S. economic growth will slow "to a pace barely above recessionary levels during the first few months of 2013."

"Although Colorado is expected to outperform the nation," Mullis testified, "employment, income and wage growth will be restrained and unemployment will rise through the remainder of 2012 and into the first half of 2013."

Henry Sobanet, Director of the Governor's Office of State Planning and Budgeting (OSPB), and Jason Schrock, the governor's Chief Economist, said that indicators pointed to a slowdown in economic growth.  They concurred with Mullis' projection and forecast that a "modest slowdown will continue into 2013."  However, in response to a question, Sobanet was quick to point out that OSPB was not projecting another recession.

Yet even with these rather pessimistic forecasts for the overall economy, both groups project that General Fund revenues will increase in the current fiscal year and next.  In fact, both groups forecast higher revenues than they did in June. This is partially explained by the strong growth over the past two years resulting in budget surpluses that will be carried over into future years.

The Legislative Council staff estimates Colorado ended FY 2011-12 with a surplus of $523 million over the 4 percent required to be kept in reserve. This means that $804 million will be carried over into FY 2012-13, after transferring $59 million to the State Education Fund as required by recent legislation (HB 12-1338).  General Fund revenues came in $125 million higher that they projected in June.

The Legislative Council staff project enough revenue in FY 2012-13, the current fiscal year that ends in June 2013, to maintain a balanced budget, fund the 4 percent reserve and transfer $678 million to the State Education Fund.  Again, they estimate that General Fund revenues will come in $67 million higher than they did in June.

They also forecast that the legislature will have $589 million more in General Funds in FY 2013-14 than it budgeted for the current year.  This represents 7 percent more than total General Fund expenditures budgeted for this year and 7.9 percent more than General Fund operating expenses.  Any growth in caseload or increased costs will come out of these funds, which are forecast to be $95 million higher than they were in June.

The OSPB raised the amount of General Fund revenues received in FY 2011-12 by $97 million over their June forecast and calculated that $804 million will be carried over into FY 2012-13.

They project that General Fund revenues will be $239 million higher in FY 2012-13 than they did in June.  As a result they estimate the legislature will be able to maintain a balanced budget, fund the 4 percent reserve and transfer $717 million to the State Education Fund.

OSPB projects that the legislature will have $371 million more in General Fund revenues in FY 2013-14 than it budgeted for the current year.  This is 5 percent more than it currently budgeted for operating expenses and can be used to cover any increases in case load or increased costs.  This is $100 million more than they forecast in June.

Mr. Sobanet attributed the strong revenue growth over the past two years to a surge in capital gains and a recovery in the oil and gas industry resulting in robust corporate profit growth.  He does not project these trends to continue at the same rate into the future.  Therefore, he cautioned the legislators about setting future spending rates based on revenue increases that he considered to be more one time in nature.

Even with the expected growth in revenue Colorado is not yet back to where it was before the Great Recession hit.  The projected revenue for the current fiscal year tops the $7.7 billion received in FY 2007-08 in nominal terms but still falls short by about $300 million when adjusted for inflation.

While it might be possible to cover this year's growth in the number of students and increases in costs for K-12 education, we have yet to restore the $1 billion in cuts from previous years.

Over the long-term we continue to face a structural problem in which state revenues are not keeping pace with the growth in costs, principally for K-12 education and Medicaid. Unless we address this issue, we will find it increasingly difficult to maintain the same level of services in the future as we do today, let alone restore the cuts made during the Great Recession.

Comparing June and September General Fund Revenue Estimates

($ amounts in millions)