Sunny forecast a boon for state budget, but long-term outlook uncertain, state economists warn

Colorado State Capitol. Photo by John Herrick

Consumer spending is up. Businesses are investing more. The economy is hot, state economists say — but now they’re warning it may overheat.

The strong economic growth will be a boon for the state budget, generating an approximate $1.3 billion revenue surplus for the fiscal year that begins on July 1, according to the latest economic forecasts from the Legislative Council and Gov. John Hickenlooper’s budget director.

Monday’s forecasts prompted Gov. Hickenlooper to up his ante on transportation funding to $500 million next fiscal year. He also proposed spending an additional $200 million on K-12 education to help offset lower property tax revenue expected next year.

The reason for the added revenue growth, state economists say, is that businesses are investing more and wages are starting to rise, giving consumers confidence to spend more. Also, the federal tax law enacted in December capped state and local tax deductions, which means some residents are now paying more to the state.

Nonetheless, the economists said that lawmakers, who will use the revenue projections to write a balanced budget this year, should take all this with a grain of salt.

“All signs point to positive growth,” Kate Watkins, Legislative Council’s chief economist, told the Joint Budget Committee. “But that’s in the near term. That could turn on a dime.”

Watkins said the forecast has a larger than normal margin of error due to the recent passage of federal tax overhaul. She warned that there is the risk of inflation, which could cause the Federal Reserve to increase interests rates to cool the economy, resulting in fewer investments.

Republicans hope the added revenue will boost support for a bill that would pay for road and bridge repairs. Republicans want to use about 10 percent of the money in the General Fund each year to pay off $3.5 billion in bonds over the next 20 years. The bonds would help pay down an estimated $9 billion in unfunded highway project costs over the next ten years.

But it’s this type of long-term commitment that Democrats and the Hickenlooper Administration are concerned about. Twenty years of bond payments, they say, will come at the expense of other state programs in less prosperous years. 

The governor’s budget director, Henry Sobanet, said there are already long-term pressures on the budget.

This includes paying off bond-like certificates of participation to fund transportation projects, paying for taxpayer contributions to the Public Employees’ Retirement Association, or PERA, pension, and paying down the state’s debt to K-12 schools.

He said the revenue coming in this year may be one-time money. 

“I think you have to be careful about building up ongoing programs in the base budget,” Sobanet told The Colorado Independent. “We’re gonna have a recession at some point.”

Earlier on Monday, Senate President pro tem Jerry Sonnenberg, a Sterling Republican, told reporters that some of this surplus should be returned to residents to help stimulate the economy even more. Sonnenberg is backing legislation that would lower the state income tax rate from 4.63 to 4.43 percent, which would reduce state revenue by $365 million next year.

Sonnenberg is also considering legislation that would help pay for environmental and conservation programs that rely on an unstable tax on oil and gas, known as the severance tax. Lawmakers have used severance tax money in prior years to patch up deficits in the state budget to the tune of $322 million since 2001, according to a February memo by the Joint Budget Committee, and this year, programs that rely on this money are at risk of not having enough. Sonnenberg’s plan, yet to be drafted into legislation, would pay this money back. 

Data from Legislative Council shows oil production in Colorado is nearing a record high, with an estimated value around $10 billion. This will provide a boost to severance tax revenue in the next two years.

This comes as lawmakers consider a proposal by the Department of Natural Resources to use General Fund money instead of severance tax revenue to pay for some of its regulatory agencies, in part because the tax is so unpredictable.

Colorado State Capitol. Photo by John Herrick