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NATALIE MULLIS (IN ABSENTIA)CHIEF ECONOMISTCOLORADO LEGISLATIVE COUNCILFEBRUARY 24, 2011

NATALIE.MULLIS@STATE.CO.US303-866-4778WWW.COLORADO.GOV/LCS

The Outlook for the Colorado Economy and State Budget

“Worst Recession Since the Great Depression”

“Freefall”

We’re in Recovery!

Recovery Is Here - ReallyContributions to Gross Domestic Product

Seasonally Adjusted Annual Rate

Source: Bureau of Economic Analysis.

Nation’s Manufacturing Sector ExpandingIndices of Manufacturing Activity

Source: Institute for Supply Management. Source: Federal Reserve. Index 2007 = 100

ISM Purchasing Manufacturer’s Index

Expanding

Contracting

Industrial Production Index

Nation: Business is Doing Better

Source: Bureau of Economic Analysis. Profits and income are with inventory valuation and capital consumption adjustments.

Colorado’s Energy Industry Mending Slowly

Source: Baker Hughes.

Consumers No Longer Running Scared(But Still Cautious)

Source: U.S. Bureau of Economic Analysis. Source: Colorado Department of Revenue.

ColoradoRetail Trade SalesThree-Month Moving Average, Seasonally Adjusted Monthly

Data

U.S. Real Personal Consumption Expenditures

The Job Situation Is Improving

Total nonfarm employment saw small gains in 2010

Source: U.S. Bureau of Labor Statistics. Seasonally adjusted data through November 2010.

CO Industries Losing Jobs Dec. ‘09 to Dec. ‘10

CO Industries Losing Jobs Dec. ‘09 to Dec. ‘10

CO Industries Gaining Jobs Dec. ‘09 to Dec. ’10

CO Industries Gaining Jobs Dec. ‘09 to Dec. ’10

Broader-Based Industries are Doing Better

Source: U.S. Bureau of Labor Statistics. Seasonally adjusted data through December 2010.

However, Challenges Continue…

Financial Sector StrugglesHigh levels of Public & Private DebtHousing market woesLow levels of commercial constructionHigh unemployment Uncertain business climateRising input prices

Debt Will Loom Large for A Long TimeU

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Source: Federal Reserve Bank. Data through 2010 quarter one.

Financial Industry Will Take Time to Heal

Source: Federal Deposit Insurance Corporation. Totals for all U.S. institutions. Data through 2010 quarter three.

The Housing Market Will Also Require Time

Source: Colorado Department of Local Affairs. Seasonally adjusted data through October 2010.

Residential construction remains

at low levels

Colorado Single Family Permits

Total Permits

Unemployment Will Remain High

Source: U.S. Bureau of Labor Statistics and Legislative Council Staff projections based on the December 2010 forecast.

8.8% Unemployed in December

Colo

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Colorado Nonfarm Employment

Sources: History, U.S. Bureau of Labor Statistics. Forecast, Legislative Council Staff December 2010.

Seasonally Adjusted

What Does this Mean for the Budget?

?

Sources of State Revenue

• Transportation taxes & fees• Severance tax• Gaming revenue

Three Major Sources • Medicaid funding• Transportation funds• Stimulus dollars

• Individual & corporate income tax• Sales & use tax• Liquor and alcohol taxes

Individual Income Taxes

Sources: Colorado Department of Revenue. Annualized Data. Cash-accounting basis. Data through December 2010.

FY 2009-10-5.8%

FY 2008-09-12.9%

Sales Taxes

Sources: Colorado Department of Revenue. Annualized Data. Cash-accounting basis. Data through December 2010.

FY 2009-10-5.5%

FY 2008-09-9.2%

General Fund Revenue Outlook

Source: Colorado State Controllers Office and Legislative Council Staff projections based on the December 2010 forecast.

Drop in revenue of 12.9% between FY 2007-08 and FY 2008-09 and a drop of 4.3% between FY 2008-09 and FY 2009-10

FY 2010-11 General Fund Budget

Source: Joint Budget Committee.

Total General Fund Budget: $7.0 billion

FY 2010-11 General Fund Budget Shortfall

Total General Fund Budget: $7.0 billion

Source: Joint Budget Committee and Legislative Council Staff.

$ 348 million shortfall to fill 4% reserve (Governor’s Forecast)Supplemental Package:$156 M Education Refinance$103 M Cash Fund Transfers $64 M Medicaid Refinance $115 M Reduce Reserve($77) M Placeholders

(Medicaid, Human Services & 1% Personnel Reduction)($12) M Gaming Transfer Adjustments$349 Million - Total

FY 2011-12 General Fund Budget Shortfall

Over $1.1 billion shortfall LCS Forecast

Total General Fund Budget: $7.0 billion

Source: Joint Budget Committee and Legislative Council Staff.

FY 2011-12 General Fund Budget Shortfall

Over $1.1 billion shortfall*

Source: Joint Budget Committee, Legislative Council Staff, and Office of State Planning and Budgeting.

Carry Over FY 2010-11 Shortfall $204.2 Replace One-Time Sources of Funding Federal Stimulus for Medicaid $363.6 Federal Stimulus for Higher Education $89.2 Amendment 35 Funds for Medicaid $96.0 Caseload Increases $250.2K-12 Funding $150.0

Budget Shortfall$1,153.

2 *Assumes no salary increases and current levels of services as required under current law

Actions to Balance the Budget

Cash fund transfers to the General FundReserve requirement reductions Increases in revenue

Suspended sales and income tax exemptions and credits Raising fees

Federal stimulus fundsSalary/hiring freezes for state employeesPermanent and one-time cuts to programs

K-12 Education: Budget Stabilization Factor Higher Education Other Programs

Governor’s FY 2011-12 Budget Proposal

Combined Impact of Ritter & Hickenlooper Proposals: -$303.5 million

General Fund Expenditure Change: +$137 million Biggest Cut K-12: -$208 million Higher Education: -$20.3 million Health Care: +$388 million

Revenue Augmentation: +$440 million Cigarette Sales Taxes & Vendor Fee: +$89 Cash Fund Transfers: $193 million Suspend FPPA Payments: $25 million Reserve: $163.7 million

Specific Items in Hickenlooper’s ProposalEliminate various programs:

K-12 Eliminate school leadership academy Eliminate interest on school loans program

Human Services: Pueblo Mental Health Institute Close 20-bed Therapeutic Residential Child Care Facility Close Circle Program

Corrections: Close Ft. Lyon Prison Eliminate Parole Wrap-around Program Cut education and community programs

Parks: “Repurpose” 4 state parks

Total Appropriations

Source: JBC Staff

Does not adjust for double-counted appropriations.

TABOR and Referendum C