Forecast predicts $3.3 billion shortfall in 2020-21 State budget

A forecast on how much the State has to spend — or doesn’t — rocked State lawmakers in the past week and showed that the 2020-21 State budget will be short some $3.3 billion.

It’s the largest single-year drop in State revenues in history, greater than the Great Recession and the recession that followed 9/11.

Members of the Joint Budget Committee, who are writing the State budget in the coming weeks, had little to cheer from an updated May 12 forecast.

They sought an updated forecast after one in March showed the State revenues had dropped more than $800 million between December and March. Given the growing pandemic, they feared the news would be worse in another month.

It was.

The only good news: there will be a balanced budget for 2019-20, which is required by the State Constitution. That’s due to the cuts the JBC made to the 2019-20 budget a week earlier, combined with suggested cuts from the administration of Governor Jared Polis and what’s available from a one of the State’s rainy day funds, a general fund reserve. The reserve will have about $256 million left over to put toward the 2020-21 budget and $700 million in cuts made in the past two weeks means the shortfall is around $2.5 billion.

“We can’t cut our way out of this,” said Senator Dominick Moreno, a Commerce City Democrat and JBC vice-chair, after hearing the new forecast numbers.

The $3.3 billion is a direct hit to the State’s general fund, the largest pool of discretionary funds in the budget. General fund revenues come from corporate and individual income tax and sales and use taxes. The other two pots of money: federal dollars, with Medicaid the largest pool; and cash funds, which directly support State programs, such as driver’s license and motor vehicle fees, which fund the Department of Revenue or State park admissions, which directly fund the Division of Parks and Wildlife.

Several factors contributed to the shortfall. A significant drop in severance tax revenues, largely from the decline in oil and gas activity and the drop in oil prices, plus declines in tourism activity, contributed. But the biggest hit is from income and sales tax, which contribute 95 percent of general fund revenue. The biggest hits, according to the forecast, are in incomes taxes tied to declining wage, business and investment income, as well as individual income taxes.

The Coronavirus Aid, Relief and Economic Security Act, which has provided loans and direct aid to taxpayers, also is causing problems for State tax collections. That’s because one of its provisions reduces federal taxable income from 2018 to 2020, meaning about $121 million less in tax revenue in 2019-20 and $135 million in 2020-21. The numbers are bigger for corporate tax revenue, expected to drop $772.9 million in 2019-20 and $447.6 million in 2020-21.

Businesses that incur losses don't owe income taxes and don't make estimated tax payments, said Greg Sobetski, an economist with the General Assembly’s Legislative Council.  

Revenue collections are expected to fall 7.2 percent in 2019-20, due to the pandemic, and another 11.2 percent in the following year, marking a “deep recession,” the forecast said.

Another issue for the State: Colorado unemployment insurance fund will be insolvent before the year is out, short some $2 billion in 2020-21 and $2.5 billion the following year. More than 400,000 Coloradans have filed for unemployment since the stay-at-home executive order was issued on March 10.

But much in the forecast is still uncertain, according to State economists. That is due to unknowns, such as when normal consumer activity will come back and whether a COVID-19 vaccine can be developed and distributed. Unemployment was the lowest in the State on the Eastern Plains, at 9.2 percent.

The JBC has been looking in the couch cushions for cash and cuts to mitigate the downturn, but their biggest hope is for federal assistance.

Last week, Gov. Jared Polis went to Washington, D.C. to meet with President Trump, to discuss federal aid to states and Colorado’s need for tests and other supplies tied to the pandemic. In a news conference held during the visit, however, Trump lauded interest-free loans to states rather than direct federal aid. Interest rates could be below zero, the President said, calling it a dream of his whole life.

An aid package passed by the United States House over the weekend would provide as much as $4 billion to Colorado and cover the entire shortfall. However, Trump has called that package, promoted by Speaker of the House Nancy Pelosi, a California Democrat, “dead on arrival.”