Minor improvement to state revenue expected as Colorado braces for more service cuts in 2012
State economists provided a bit of Christmas cheer Tuesday as they told legislative budget writers that slow but steady improvements in the economy will boost state revenue enough to partially mitigate budget cuts for the next year and a half.
Two independent economic reports offered cautiously optimistic assessments of the state’s economy and remarkably similar estimates for state revenue through June 2013. The analyses also expressed serious concern that further troubles in European economies would jeopardize growth in Colorado.
Although the improved revenue estimates mean budget cuts won’t be as severe as anticipated in the coming year, the new projections for state revenue represent relatively minor adjustments to state spending. Revenue is still expected to fall far short of what is needed to offset cuts that have occurred during the recession and cuts that are almost certain to occur in the 2012-13 budget.
Coloradans are getting a more precise picture of the state’s fiscal outlook, though. A closer look at revenue forecasts since the beginning of the recession shows fluctuations in the forecasts have lessened in the past two years. In fact, the Colorado Legislative Council Staff (LCS) prediction for the 2010-11 budget was within 0.5 percent of actual revenue.
General Fund to reach pre-recession level in Fiscal Year 2013-14
General Fund revenue is projected to slowly increase in each of the next three years, reports from Colorado Legislative Council Staff (LCS) and the governor’s Office of State Planning and Budget (OSPB) show. This analysis examines information produced by the nonpartisan LCS.
Even as revenue is expected to grow in the coming years, it is not expected to exceed pre-recession levels until the fiscal year that begins July 1, 2013 – the sixth year after the start of the recession.
Revenue growth is projected to be gradual during the two years budget writers will tackle during the upcoming General Assembly session — the current year, 2011-12, and next year, 2012-13.
General Fund revenue is projected to slightly exceed $7.3 billion this fiscal year. That would be a 3.2 percent increase from the previous fiscal year. In 2012-13, the General Fund is expected to grow an additional 3.8 percent, bringing its total to nearly $7.6 billion. The OSPB forecast offers a remarkably similar outlook. For the two years combined, LCS projects $80.7 million more revenue, a less than 1 percent difference.
General Fund projections stabilizing
Revenue forecasts are based largely on current economic conditions. Economists combine current data with historical trends to anticipate future conditions. Volatile economic conditions surrounding the recession led to tremendous fluctuations in revenue projections in 2008 and 2009. An analysis of the LCS revenue projections of the past four years, shows projections have begun to stabilize. Changes in revenue estimates for the two immediate fiscal years included in the forecast have been relatively minor during much of 2010 and 2011.
For the current fiscal year, LCS increased its estimate by $79.5 million, or 1.1 percent of the expected $7.3 billion General Fund. For 2011-12, LCS changed its forecast by just $15.3 million, or 0.2 percent of the total expected General Fund.
Improved accuracy and guarded optimism in economic forecasts does not mean, however, that conditions for Colorado families and communities have improved. Those minor increases in expected revenue fall far short of closing the $679 million General Fund revenue shortfall Gov. John Hickendlooper identified in November for the 2012-13 budget.
The depth of the recession can be captured by the trend in revenue projections going back further. In June 2008, policymakers expected the state would have $9.8 billion in General Fund revenue to spend in Fiscal Year 2011-12. To say the least, that estimate looks optimistic in hindsight. It was $2.5 billion, or 34 percent more than the resources now available to support public services. Revenue to fund current population and program demands remains severely limited.
At the same time, the return of some predictability can be reflected in the recently completed fiscal year, 2010-11. At one point, in early 2007, LCS expected General Fund revenue for 2010-11 to exceed $9 billion. By the time the General Assembly was putting the finishing touches on the budget in March 2010, LCS projected revenue would be $7.119 billion. As of this week, revenue for that year is $7.085 billion. The $33.2 million difference represents 0.47 percent of the General Fund budget, a remarkably accurate forecast given the economic climate during that two-year period.
Need to provide support grows
The predicted slight uptick in revenue should be viewed in the context of need for public services, which is expected to grow rapidly. More kids will be in Colorado schools and more adults will live in Colorado prisons next year than the state had previously expected, according to new data released by LCS on two key caseloads that drive much of the spending in the state budget.
Public school enrollment this year, 2011-12, reached 794,754 students, which is 3,000 more children than the state initially expected when the state budget was written last spring. In all, the state has 9,918 more children attending public schools this year than the previous year, a 1.3 percent increase. The next two years, the LCS projects similar growth rates in the student population, 1.2 percent in 2012-13 and 1.3 percent in 2013-14. More than 814,000 children are expected to attend Colorado public schools then.
The number of prisoners in Colorado declined in 2010 and 2011 and is expected to continue dropping in the next three years. From 2011 to 2014, the number of prisoners is projected to fall from 22,610 to 21,583, or an average of 1.5 percent each year. However, a year ago, the LCS has projected that the declines in the prison population would be slightly higher.
Separately, the governor’s office reports the number of people receiving health care through the Medicaid program – a state and federal partnership – is expected to continue rising in the coming years. The number of people on Medicaid in Colorado is expected to increase more than 8 percent, from about 620,000 people in 2011-12 to 673,000 people in 2012-13.
Cash Funds provide a limited cushion Cash Fund revenue subject to the Taxpayer’s Bill of Rights is expected to increase 3.1 percent to $2.5 billion in 2011-12. That growth is largely attributed to the severance tax and the Hospital Provider Fee.
The Hospital Provider Fee draws down federal matching money, and the combination of the two sources provides revenue that is critical to helping cover the cost of health care for low-income Coloradans. Revenue from the Hospital Provider Fee is expected to increase 28.1 percent this year, from $442.5 million in 2010-11 to $556.5 million in 2011-12. Revenue is expected to climb another 6 percent the following year, to $601.2 million.
The severance tax has provided a crucial source of revenue to help lawmakers balance the state budget in recent years. Although the severance tax is typically earmarked for specific programs, such as helping communities where oil and gas production occurs, in the past few years much of that money has been diverted to the General Fund to offset lower sales and income tax revenues. The severance tax is perhaps the most volatile source of state revenue, and that is reflected in the forecast for the next three years. In 2011-12, it is expected to increase 14.1 percent from the previous year, reaching $170.5 million. But in 2012-13 the severance tax is expected to drop 3.1 percent before increasing another 10.1 percent the following year.
Risk to Growth While the lead economists for LCS and OSPB offered optimism about the future of Colorado’s economy, both also expressed significant caution that troubles in the European economy pose significant risks to Colorado’s economy and, by extension, the state General Fund. The forecast presented this week is based on the assumption that European leaders are able to agree on solutions to their debt and unemployment challenges. If more significant troubles occur, the ripple effect would harm many Colorado industries and create an unknown negative effect on the state General Fund, the economists said.
Contact: Terry Scanlon
Fiscal policy analyst
303-573-5669, ext. 311
Released Dec. 22, 2011