Budget shortfall Archives - Colorado-based Business and Economic Research

Great Recession Continues to Play Havoc with State Finances

July 20, 2012July 20, 2012 horvath Leave a comment

The Great Recession has taken its toll on state and local governments. Three years after the end of the Great Recession state and local governments continue to face significant fiscal challenges. In mid-July The State Budget Crisis Task Force released a report headed up by Richard Ravitch and Paul Volcker that examined the challenges to financial stability for California, Illinois, New Jersey, New York, Texas, and Virginia. Just over 36% of the country’s population lives in these six states.

There are a number of variables (policies, economic structure, demographics, etc.) that differentiate the states; however, the report identified six fiscal threats common to each:
• Medicaid spending growth is reducing funds for other needs.
• Federal deficit reduction will result in lower funds for state coffers.
• Underfunded retirement accounts are a risk for future budgets
• Eroding tax bases and volatile tax revenues jeopardize state finances.
• Local government fiscal challenges may impact state budgets.
• State budget laws and practices hinder fiscal stability.

To show the seriousness of the problem the report evaluated changes in tax revenues generated from the peak-to-trough, the trough to 2011, and peak-to-2011. The changes in percentages are adjusted for inflation; however, they are not adjusted for policy changes. In some cases policy changes have been made that have or will positively impact revenues.

The change from peak-to-trough follows:
• U.S.  -12.0%
• California -14.9%
• Illinois  -18.7%
• New Jersey -17.2%
• New York    -4.3%
• Texas  -15.4%
• Virginia -15.9%

The change for the recovery, or trough-to-2011, follows:
• U.S.  + 5.7%
• California +11.9%
• Illinois  +12.9%
• New Jersey + 2.7%
• New York + 4.3%
• Texas  + 7.4%
• Virginia + 3.9%

The change from peak- to-2011, follows:
• U.S.  – 7.0%
• California – 4.8%
• Illinois  – 8.2%
• New Jersey -15.0%
• New York – 0.2%
• Texas  – 9.2%
• Virginia -12.6%

Colorado was not included in the report; however, the challenges faced by the state are similar. Data from the Colorado Legislative Council’s quarterly reports (June) show the following levels in the state’s gross general fund, expressed in billions:
• FY ending June 2008 $7.7
• FY ending June 2009 $6.7
• FY ending June 2010 $6.5
• FY ending June 2011 $7.1
• FY ending June 2012 $7.6
• FY ending June 2013 $7.8
• FY ending June 2014 $8.2

The Colorado data is not inflation adjusted. On an inflation-adjusted basis the level of the state General Fund will not return to the FY 2008 level until FY 2013 or 2014. The Colorado State Demography Office projects that the state population will increase from 4.9 to 5.4 million people for that period. In other words the state will add half a million people and have the same level of funding as five or six years ago.

It is truly a challenging time to be working in the public sector.

Links to the State Budget Crisis site and the Colorado Legislative Council site are:

Colorado Legislative Council – Outlook for the State Improving

March 23, 2011May 31, 2014 horvath Leave a comment

The Colorado Legislative Council (CLC) recently released its quarterly update of the state economy Focus Colorado: Economic and Revenue Forecast. The report was released in mid-March, at a time when it appears that Q1 2011 employment will be approximately 15,000 jobs higher than Q1 2010. It is great to hear that net employment is again trending upward; however, state employment remains below the peak 2001.

Increased employment is good news for the state coffers!

The Q4 2010 forecast pointed to a budget shortfall of $1,015 million. Because Colorado is required to have a balanced budget, it became necessary to significantly reduce spending for K-12 education and other programs.

Over the past year, there has been an increase in consumption and private sector employment that now appears to be sustainable, hence justification for adjusting the revenue forecast upward. Projections for FY 2010-11 were raised by $116 million, while revenues for the subsequent two years were upped by $99 million and $105 million respectively.

The combination of budget cuts and revenue increases point to a much lower projected shortfall, $450 million, for FY-2011-12. This is good news, but…

Nationally, CLC is calling for real GDP growth of 3.2%, similar to Q4 2010. After three years of net job losses, employment will increase by 0.4% to about 130.3 million jobs. Unfortunately, average annual unemployment for the year will be 8.7%.

At the state level, CLC projects population growth of 1.6% or about 78,000 people. This reflects a reduction in net in-migration to less than 40,000.

Wage and salary employment will post gains of 0.7%, or about 16,000 workers. While this growth is encouraging, it is not enough to significantly lower the rate of unemployment. Unemployment of 8.8% will be slightly higher than the national rate.

Retail sales are projected to record gains of 4.2%; however, inflation (2.3%), will account for more than half of that gain. Retailers will remain challenged to maintain profitability. Finally, single family building permits will be 15,300, slightly higher than in 2010.

The risks to continued growth remain significant. Consumer confidence is fragile and talk about a double-dip has resurfaced. Constraints facing Colorado include a painfully slow housing recovery, rising food and energy prices, and continued concerns about the banking system.

While the picture painted by CLC is certainly not a bright one, it is clearly much more encouraging.

The Colorado Budget Challenge 2011 – Where to Cut?

February 6, 2011May 31, 2014 horvath Leave a comment

For the next two months Colorado legislators will be dealing with the two-edged sword known as the balanced budget amendment.

During lean fiscal times, the amendment forces state senators and representatives to make difficult choices in this zero sum game. They have been faced with similar challenges since 2001 as growth in General Funds Revenue has not kept pace with increased demand for services.

For example, if you were a legislator, which of the following would you eliminate or reduce funding for?
• Social Service – Would you reduce or eliminate funding for single moms and lower income individuals to help them defer transportation costs so they can travel to work?
• Economic Development – Would you reduce or eliminate an incentive program that would retain or bring jobs to Colorado, foster growth in state output, and generate revenue for government entities?
• Health Care – Would you cut back or eliminate funding for a health-care program that would reduce services to elderly? The reduction in state funding would also decrease federal funding by a similar amount. It is a tough time to be a state legislator.

On a positive note, the balanced-budget amendment means that Colorado is not having to borrow money from the Federal government to continue basic operations.

The table below, highlights the source and magnitude of the challenges facing the state government as it is forced to deal with increased demand and reduced revenue. The table compares key data sets for 2001 and 2009. Highlights of the table are:
• The Colorado population increased by about 700,000 people.
• K-12 enrollment is up 76,000 students.
• Despite tuition increases, enrollment at the state’s colleges and universities has grown by more than 21,000 students.
• The prison population is up by about 6,000 inmates.
• The number of Medicaid recipients almost doubled, up 226,000.
• Employment levels were very volatile. The 2009 average was only slightly higher than the 2001 average.
• General fund revenues remained virtually flat (not inflation adjusted).
• Growth of general funds will be constrained by the severity of the Great Recession.

Clearly, the state does not have a stable fiscal model for being competitive in the global economy. The rough ride will continue well into the future.