Colorado faces $3.3 billion hit to 2020-21 budget due to COVID-19, analysts forecast

LCS: Unemployment rate expected to rise to 10.1% this year, fall to 7.1% in 2021
colorado capitol colorado state capitol 2015 ap
Posted at 12:29 PM, May 12, 2020
and last updated 2020-05-12 19:54:47-04

DENVER – Colorado lawmakers are looking at a budget shortfall of about $3.3 billion for the 2020-21 fiscal year including carryover from this year due to the effects of the coronavirus outbreak, according to a Legislative Council Staff economic forecast released Tuesday.

State lawmakers said Monday they had expected to slash between $2 billion and$3 billion from the budget – about a quarter of the General Fund spent last year.

But the shortfall reported Tuesday by the nonpartisan Legislative Council to the Joint Budget Committee is forecast to be $3.3 billion, which includes nearly $900 million from FY19-20 – though that number is actually slightly lower since Gov. Jared Polis cut more than $200 million from this year’s budget last month.

How COVID-19 has affected the state's budget

The vast changes to the budget outlook from when forecasters estimated in December that lawmakers would have $832 million extra to spend this year have been caused by the steep economic downturn seen during the COVID-19 outbreak. In March, analysts forecasted a $27 million surplus.

Colorado lawmakers will have to cut about a quarter of the budget for next year compared to this year’s budget, which will also see cuts – a reduction of about $2.42 billion from the March General Fund forecast.

“Colorado is facing what may be the most dire budget situation in our state’s history, but I know that we will join together and meet this challenge,” said JBC Chair Rep. Daneya Esgar, D-Pueblo. “The JBC has been working hard to protect vulnerable Coloradans and soften the impact of these cuts, as we prioritize education and critical health and safety services. We’re exploring every possible option for how we can best support our state’s recovery, but it’s critically important that Congress provide additional aid if we are to minimize the impact of these cuts on our schools and essential services.”

Some of the shortfalls in tax revenue going to the General Fund are being driven by decreases in individual income tax payments, forecast reductions in corporate income tax payments and slightly lower sales and use tax revenues. Analysts also forecast steep declines in severance tax collections from mining and oil and gas industries.

And forecasters say that the delayed dates for tax filings implemented by Polis and the federal government make the forecast surrounding tax revenue collection more uncertain.

Provisions in the federal CARES Act give businesses additional deductions and delay taxes for others. Forecasters say those provisions are estimated to decrease state revenue by $256 million this fiscal year and in FY20-21.

But the Legislative Council Staff said that the federal stimulus packages have “helped to stabilize and soften the impact of economic contraction.”

Legislative Council Staff built some assumptions into their forecast: That businesses will gradually reopen throughout the year; that there will be an effective treatment for COVID-19 within 12 to 18 months; and that there will be limited regional resurgence of the coronavirus but no additional stay-at-home orders or widespread outbreaks.

“The pace of the economic recovery in Colorado and nationally will heavily influence revenue streams, including income and sales tax revenue. These two sources of revenue have historically accounted for about 95 percent of General Fund revenue,” staff wrote in the forecast. “Longer or repeated periods of reduced economic activity to control the spread of COVID-19 will cause more severe and longer lasting revenue impacts.”

Legislative Council Staff wrote they expect labor markets to remain week in 2020 and 2021. The unknowns they assumed in the forecast include how quickly and well COVID-19 can be contained and other fiscal and monetary policy stimulus packages that might be passed.

But a double-dip recession if COVID-19 sees a resurgence could make the situation worse, while a stronger near-term economic recovery would improve the forecast, Legislative Council Staff wrote.

Unemployment trust fund likely to become insolvent in coming months

The Legislative Council Staff is also forecasting that state’s Unemployment Insurance Trust Fund will become insolvent before July because of the vast amount of regular unemployment benefit payments. Forecasters estimate that the fund will pay out $1.6 billion this fiscal year and $2.5 billion in FY20-21.

Colorado Department of Labor and Employment officials have said that they will borrow from the federal government to pay unemployment benefits once the trust fund becomes insolvent as the state did during the Great Recession. Nearly 420,000 have filed regular or pandemic unemployment assistance claims over the past seven weeks.

Legislative Council Staff say they expect the unemployment rate in Colorado to rise to 10.1% this year before declining to 7.1% in 2021. It was 2.8% in 2019. They are forecasting the U.S. unemployment rate to hit 11.3% this year and to fall to 7.8% in 2021.

“When we reach insolvency, it means that a tax is initiated on businesses to help shore up that fund. That’s not something businesses can really afford right now,” said Sen. Dominic Moreno, D-Commerce City.

He’s hoping that with this economic forecast in hand, Gov. Polis will be able to convey to President Trump during their meeting at the White House Wednesday the dire situation Colorado and other states are in.

“Now he has numbers to put to the president to show this is what’s happening in Colorado, this is the economic devastation that is being caused by this pandemic and we are going to need federal help to get out of this,” Sen. Moreno said.

Regardless, Sen. Moreno believes this historic recession will have a long-lasting impact on how Colorado’s economy functions.

Legislative Council Staff project U.S. GDP to shrink by 5.6% in 2020. In 2008 and 2009 during the onset of the Great Recession, GDP shrank by a combined 2.6%.

LCS expects many people will regain their jobs but wrote in their analysis that additional waves of layoffs are expected.

The largest share of unemployment claims across an industry sector were in arts, entertainment and recreation, where 28% of the industry filed an initial unemployment claim between March 1 and April 25. That was followed closely by accommodation and food services, where 22.5% of workers filed initial claims over that same time period. More than 10% of people working in mining and logging, educational services, real estate, health care, retail trade and other services sectors filed initial unemployment claims during the period.

The forecast from the governor’s Office of State Planning and Budgeting estimates that revenue forecasts will be down by $5.5 billion through FY21-22 and that $11 billion will be available for the general fund next year, compared to a $10.3 billion estimate from the Legislative Council Staff.

“Just as families across Colorado are tightening their belts because of this pandemic, so is our state. I know this is a difficult time for many hardworking people and Coloradans are doing all they can to make ends meet,” said Gov. Polis. “This pandemic is affecting the global economy, and Colorado is not immune to this economic crisis. This is a challenging budgetary environment and everyone is working hard to ensure Colorado remains on the right path. We are all in this together and we will get through it together.”

What's been cut, will be cut?

So far, the Joint Budget Committee has made $700 million in cuts to its budget, but it has billions more to slash in state spending before being able to present a balanced budget in accordance with state law.

“Up until today, we’ve been looking at reversing some of the low-hanging-fruit decisions to get us to that $700 million mark. But we really deferred as some of the bigger items for this forecast so that we could really have a good understanding of how much more we need to go,” said Sen. Rachel Zenzinger, D-Arvada.

Some of the biggest planned cuts so far are coming from the state’s capital construction fund, which includes projects to renovate or construct new buildings. That could result in upwards of $200 million in cuts.

A planned 3% pay raise for state employees was also eliminated, resulting in $72 million in cuts.

The Judicial Department is seeing a $30 million cut so far while Agriculture, Local Affairs and Regulatory Agencies have already had $38 million slashed from their budgets. Health and Human Services is set to lose $90 million.

The committee has tried to spare essential services as well as health and safety programs. It’s also tried keep the cuts away from education as much as possible. However, with billions more to be cut, everything is on the table, lawmakers said.

“For education, obviously with a $3 billion decline in state revenue, education is 40 percent of the state budget. There’s no way that I think they can be spared throughout this process, unfortunately, even though we’re going to try to mitigate those impacts as much as possible," Moreno said Tuesday.

Colorado Education Association President Amie Baca-Oehlert implored lawmakers to keep education cuts off the table.

“Public school students and educators are worthy of public support and investment, even during a crisis. While difficult budget decisions are required, they can’t continue to be made on the backs of students and educators,” she said in a statement. “The legislature did that 10 years ago and public education has never recovered. More than $8 billion in debt from the Great Recession is still carried by students and educators. We cannot dig the hole even deeper for our students and expect they will overcome this burden and thrive as adults.”

Western States Pact asks for $1T in federal money for states, local governments

Polis, along with House Speaker KC Becker, Senate President Leroy Garcia, Majority Leader Steve Fenberg and governors and representatives from California, Oregon, Nevada and Washington, wrote to U.S. House and Senate leaders Monday calling for $1 trillion in federal support for states and cities to respond to COVID-19 because of the economic toll it has taken nationwide.

“It is now clear that COVID-19 will be with us for the foreseeable future, and the worst of its economic impact is yet to come,” the lawmakers wrote to the House and Senate leaders.

They said in the letter that states are being forced to make deep cuts to programs and are facing staggering deficits as costs for combatting the pandemic continue to grow.

“Without federal support, states and cities will be forced to make impossible decisions – like whether to fund critical public healthcare that will help us recover, or prevent layoffs of teachers, police officers, firefighters and other first responders. And, without additional assistance, the very programs that will help people get back to work – like job training and help for small business owners – will be forced up on the chopping block,” the lawmakers wrote.

They called for $1 trillion in “direct and flexible relief” to states and local governments, saying that even though that amount wouldn’t replace the forecast revenue declines, it would make a difference and “preserve core government services like public health, public safety, public education and help people get back to work,” they wrote.

“Without additional flexible aid from the federal government, our state will be forced to make the deepest budget cuts we have ever seen. Congress must help our communities, both big and small, avoid the devastating impacts of these cuts,” Speaker Becker, D-Boulder, said in a statement. “These cuts would hurt vulnerable populations and further impact our already underfunded schools and institutions of higher education, which still haven’t recovered from the last recession. We are going to prioritize education and critical public health and safety programs as we work to ease how painful this budget may be, but without federal support there’s only so much we can do.”

The Colorado legislature is expected to return to the Capitol the week of May 25 after suspending its session in March at the beginning of the COVID-19 pandemic in Colorado. The Colorado Supreme Court ruled last month that the legislature does not need to serve 120 consecutive days. When they return, there will be 52 days left on the legislative calendar.