Revenues trending upwards
But recovery will be slow paced, budget forecasters predict
By Marianne Goodland
Lawmakers took a collective sigh of relief on March 19, when the quarterly revenue forecasts came out showing the state doesn’t have to make any more cuts to the 2009-10 budget.
But the good news that revenues were up $230 million from the December forecast was tempered with concerns over the slow pace of the recovery, painfully high unemployment levels that are expected to last for at least two more years, and a $579 million general fund shortfall predicted for 2011-12.
Higher-than-expected corporate profits and increases in individual income taxes led the good news for the March 19 forecast issued by the economists from the General Assembly’s Legislative Council.
The good revenue news, however, was no match for news about the state’s recovery from last year’s recession. Fiona Sigalla of the Legislative Council told lawmakers that the economy is recovering but its expansion is fragile. The most encouraging news, she said, is that businesses are hiring temporary workers, considered a leading indicator for hiring in the broader economy.
But the recovery is likely to take much longer than usual, Sigalla estimated. Debt levels and unemployment remain “painfully high.” Many workers laid off from manufacturing and information services will need to find jobs in other industries, she said. In addition, the unemployment rate has stopped rising but it is expected to worsen when those who have stopped looking for work return to the job market.
Sigalla also issued warning about the health of the banking sector in her remarks. More than 700 banks are at risk of failure and many of them are in Colorado, she said, with one in three Colorado banks unprofitable in 2009. Half of small banks, with less than $100 million in operations, also were unprofitable last year. Small businesses, which create two-thirds of new jobs, turn to small banks for capital, but “reduced access to credit will restrain the recovery,” she said.
On the bright side, Colorado has a lot going for it, she said: a well-educated workforce, lots of high tech industries and energy resources.
Chief Economist Natalie Mullis told the JBC that of the $230 million increase in revenues for 2009-10, $170 million was from increases in sales and incomes taxes, including $47 million more in corporate income taxes.
The next year, 2010-11, will look even better: economists are predicting a $335 million increase in revenues above what was forecast in December.
As a result of the improved revenue picture, the state’s budget for 2009-10 is now balanced, Mullis said, and the state has about $35 million in breathing room based on current law. But most of the state’s revenue will be collected during the next quarter and “there’s still a chance for [revenues] to go up or down,” Mullis said. “You should consider this [$35 million] to be zero.” If economists incorporate the last three budget-balancing bills that are not yet finished, the revenue in excess of expenditures for 2009-10 is almost $148 million, she said.
For 2010-11, the Legislature will have $262 million to spend, which Mullis said, “looks really great compared to the last forecast.” But she warned that the forecast did not include the federal stimulus dollars, about $382 million, and that money comes to an end at the end of the 2011 fiscal year. “While it looks a lot better, there will still be a shortfall to deal with in 2010-11,” Mullis said. And there will be a significant shortfall in 2011-12, about $575 million, according to Legislative Council figures. “It’s still ‘gloom and doom,’” Mullis added.
The state also should expect an improvement in severance tax and federal mineral lease revenues, according to Jason Schrock. Those revenues took a big hit in 2009-10 due to falling energy prices and high tax credits in 2009-10, he said, but energy prices, especially in natural gas, are picking up.
“That was good news,” said JBC Vice-chair Sen. Moe Keller, D-Wheat Ridge.
The JBC also heard revenue estimates from the Office of State Planning and Budgeting, whose figures were close to the Legislative Council figures. OSPB Director Todd Saliman estimated the state had a buffer of $17.6 million above what was spent in the 2009-10 budget. The buffer in 2010-11 is expected to about $252 million, he told the JBC, so “we will not recommend any changes to the balancing plan that has already been proposed.”
But projected general fund shortfalls for 2011-12 will create a “highly challenging” situation, Saliman said.
Saliman also pointed out that personal income would recover faster than employment, referring to it as a “jobless recovery.” Employers will be more likely to boost the salaries of employees who didn’t get raises during the recession before they take on new workers, according to Mullis.
But what made legislators gasp was predictions on when employment might pick up. Mullis said the unemployment rate would likely stay at around 8.8 percent through at least 2012, and that doesn’t include workers who are underemployed, which in 2009 was about 13 percent.
Senate Republicans leaped on the improved forecast news to ask the governor and legislative Democrats to reverse recent repeals of tax exemptions and credits. “Let’s roll back the Denver Democrats’ tax hikes this year, so that we don’t throw kill the goose that’s laying the golden revenue egg,” said Senate Minority Leader Josh Penry, R-Grand Junction.
Gov. Bill Ritter told reporters that the forecasts were the best he’d seen in two years and showed his strategies are working. But “one improved forecast does not stability make,” Ritter said. Fiscal year 2011-12 will be a “very difficult year…we’re not out of the woods.”
As to Republican suggestions that Democrats reverse the repeals of tax exemptions and credits, Ritter said, “it is responsible for us to maintain the different things we’ve done” to balance the 2009-10 and 2010-11 budget and to prepare for 2011-12.