Colorado’s fiscal deficit picture less bleak than expected

Colorado’s fiscal deficit is just a little less bad than it was a few months ago.

Meanwhile, there are signs that Colorado’s economy is slowing, even as unemployment is trending up.

The December forecast from the General Assembly economists showed lightly improved revenues — the deficit for the 2025-26 budget year would be in the $672 million range rather than being more than $1 billion.

That slightly improved situation assumes the Joint Budget Committee drafts next year’s spending plan similar to the current budget, taking into account caseload increases in prisons, Medicaid and school funding, for example. The general fund revenue forecast did show $109 million more available than the forecast in September, but that came as little comfort to lawmakers.

Add in the $350 million required by the voter-approved Proposition 130, which allocates money toward law enforcement, and “we’re back at a billion dollars,” bemoaned JBC Chair Sen. Jeff Bridges, D-Greenwood Village. The legislature has about $100 million to spend if the budget panel does everything the governor has suggested in his budget, Bridges noted. Some of those recommendations are already drawing challenges from lawmakers. Much will depend on how the Joint Budget Committee addresses the shortfall in the coming months, according to Greg Sobetski, the chief economist for the Legislative Council.

One potential source of funds — the state’s 15% reserve — only solves the problem for one year, Sobetski noted. The reserve has already been tapped in 2024-25 to cover overspending in Medicaid, leaving the rainy day fund at around 13.8%, a one-percentage point improvement over September’s forecast. But that leaves the current fiscal year’s budget out of balance.

Sobetski told the committee’s members they have a hole to fill that will have to be addressed through supplemental appropriations beginning next month, totaling about $194 million. The improved picture is due to reductions in cash revenue subject to the Taxpayer’s Bill of Rights, as well as some transfers. The reduction in cashflow, about $95 million less than was estimated in September and largely due to less revenue from oil and gas severance taxes, creates less pressure on the general fund, which is used to pay TABOR refunds.

Meanwhile, Colorado’s economy is slowing, economists said on Thursday.

• While inflation ticked up a bit in November, Colorado’s rate remains at 2%.
• Transportation remains the biggest driver in this forecast, with housing prices in Denver down about 3% over the past two years.
• Unemployment remains low but is beginning to trend upwards, now above 4%, economists said.

The forecast anticipates a continued, slowing expansion, with downside risks more disruptive, such as high prices that hurt consumption, deteriorating conditions in the labor market, the poor global economy and the big unknown — the potential for significant federal policy changes with the new administration coming in next month. Mark Ferrandino, director of the governor’s Office of State Planning and Budgeting, told the committee that if the Tax Cuts and Jobs Act, passed in 2017 and which is due to expire next year, is extended, it could have a small positive impact on individual income. But without taxes on tips or overtime, that could be a downside for state revenue, he said. During the campaign, President-elect Donald Trump said he favors eliminating taxes on tips.

The issue of trade and tariffs are also a worry, he said. Tariffs could have an inflationary effect on prices, depending on how broad-based the tariffs are that are proposed by the incoming Trump administration.

Another risk is immigration, which could have “concentrated effects” in the labor market for the agriculture and construction sectors, he said.  Then, he said, the fiscal policy of the next Congress and the Trump administration could take the form of limited access to Medicaid dollars or other matching grants — or impact the federal workforce.

Ferrandino told the committee the uncertainty of changes at the federal level in the new administration could impact the state more significantly than usual. “Maybe it’s nothing, but maybe it’s huge and we just don’t know yet what that is going to be with the rumors that are out there and the conversations. It could be pretty minimal to significance in the hundreds of millions of dollars,” he said.

The governor’s Office of State Planning and Budgeting, as is often the case, offered a somewhat rosier forecast, at least for Colorado. “It doesn’t mean we’re out of the woods,” Ferrandino said. “Just a little less worse off than before.”

OBPB’s revenue forecast was revised upwards by $278.3 million, compared to September’s numbers. The bottom line is that there could be $74 million of “additional capacity” within the general fund, assuming the Joint Budget Committee adopts the governor’s “perfect” budget, he quipped. “This is positive from an economics perspective,” Ferrandino said.

The economy, as determined by gross domestic product, is improving, according to OSPB Economist Bryce Cooke, due to stronger overall consumer spending and fewer barriers to investment. The labor market is healthy and not as tight as it’s been in the two previous years, he said. At the same time, the number of jobs per unemployed person is down to 1:1, which he said is indicative of a normal labor market environment.

The housing market is improving slightly, with new listings beginning to tick up, but the downside is that the demand isn’t there, both for buyers and for builders, Cooke also told the committee. That’s due to interest rates, he said. Because those rates are still so elevated, it’s not enough on the demand side, where there’s be an expansion in sold homes or permits, he said, adding that could pick up if interest rates fall over time.

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Article from Colorado Politics