Podcast: State Financial Forecast

Logan Finney, Idaho Reports   

So we’ve got you here today to talk about the latest round of revenue numbers from the state, including the general fund report for October. Can you tell us generally, what’s the overall takeaway from this latest round of numbers? 

Alex Adams   

Well, I think it’s first important to put it in context, what what we’re looking at. So every state has a balanced budget requirement, ours is constitutional. So when the legislature sets a budget, usually by March each year, they’re looking ahead to the fiscal year, that’s going to start in July, and they have to predict revenue. The revenue and expenses that they set have to be balanced. But it’s just that: It’s a prediction of revenue, because there’s a lot of moving parts. State revenue in Idaho is driven by income tax, corporate income tax, and sales tax primarily, and those can ebb and flow with the economy and a lot of external factors. In-migration, things like that. So then, usually, each month, we track revenue to see how good was our guess? Are we on target? Are we behind target? So we just reported in October, the first three months of the fiscal year, and we’re trending a little behind target, about 3% behind target. In round numbers that represents about a $39 million miss behind target. What does that mean, at this point? Not much. It’s early, and we can certainly talk about that. 

Logan Finney   

Sure. And when you say on target, you’re referring to the predictions that your division puts forward?  

Alex Adams   

That’s correct. So we’re measuring relative to predictions. There’s a predictive element to revenue. Like I said, how many people are going to move here? What’s the unemployment rate going to be? How many new jobs are going to be created? What’s going to happen with with wages? So when the state is setting its budget, you’re using a crystal ball and looking into the future and guessing what revenue is going to be for a time period that you have not yet entered. And then once you enter that time period, you measure monthly, how good how good was our guess? 

Logan Finney   

And like we’ve referenced, these are monthly reports that you guys put out, this report for the beginning of the fiscal year was delayed. Why was that? 

Alex Adams   

Well, the state is transitioning to a new statewide accounting system. So many of your viewers are probably familiar with what the state controller’s office is doing with Luma. And basically, they’re upgrading the state’s budget system, finance system, procurement, payroll, and HR. And they’re taking us, you know, essentially, from Cold War era technology to a pretty modern system. Certainly, when you undertake an effort that large, there’s always going to be growing pains. But one of the things that’s always impressed me about the controller is he’s built a team around him of problem solvers. And as problems are identified, they are able to resolve them relatively quickly. This was one of those. We’ve had quite a bit of conversation with them to work through it, and we’ll be able to get back to our monthly releases on revenue. 

Logan Finney   

And what is the value of doing these month by month? You know, people file income taxes once a year, of course, and sales tax has happened throughout the year. Why measure this on a month-to-month basis rather than quarterly or annually? 

Alex Adams   

All good questions. And states use different frequencies for reporting. I think a lot of budget nerds like myself are very type A, so having twelve different data points where you can recalibrate your expectations throughout the year is helpful. But what the economist will tell you is that it’s generally easier to forecast revenue annually than it is monthly because monthly, you’re trying to apportion income and sales and corporate income into monthly increments. And small changes in timeline of when people file or when purchases are made can adjust those monthly numbers. So we rarely make any decisions based off of the monthly numbers. You’re using them to look for trends and predict out how things are trending. 

Logan Finney   

Let’s talk about how some of those trends are going right now. Combined income tax collection, that’s combined corporate and individual — that’s down about 3.5 percent from your prediction, but your individual income tax is above prediction. What’s that tell you about the economy? 

Alex Adams   

Yeah, I refer to individual income, corporate, and sales as the big three sources of revenue for the state, but individual income and sales drive the vast majority of revenue for the state. So having healthy individual income tax collections is a sign of Idaho’s resilience. Income tax withholding for individuals is the single greatest economic determinant that we look at. On a short-term basis, we’re ahead of forecast on individual income, and we’re ahead of last year on individual income, even though this is the year where the flat tax took effect, where we cut the top rate to 5.8%. So when I look at these numbers, I look at the positive, which is the individual income tax withholding being up above last year and above forecast. Corporate, there’s known finicky-ness to it. Every state forecaster will tell you that corporate is bar none the hardest to predict. Corporate profits, refunds, things like that. So it does not yet give me concern that that one is running behind. When you look at where we were the same time period last year, we were actually behind on individual income, corporate and sales. In the same time period last year, we were behind by $49 million, and we ended up ending that year $100 million ahead of forecast. So I recommend interpreting these with caution, resisting the temptation to act or overreact on any individual data point, but look at it in the broader context of trends. And I think you also have to look at it in the broader context of how we’ve been budgeting as a state. I mean, we already talked about how states have balanced budget requirements. So Idaho tends to budget relatively conservatively. We leave large ending balances to account for some of the uncertainty that accompanies revenue forecasting. And then we maintain rainy day funds so that if if our forecast falls below that ending balance, you do have the ability to dip in rainy day funds. So just for context, if this $39 million miss this first quarter manifests throughout the year, and we don’t make up any of that ground, our ending balance for the year would be a $280 million surplus. That’s about a 5% cushion. If somehow we got beyond that, we have $1.2 billion in the rainy day fund. So I think we’re well prepared to weather any economic storms that may be ahead. But when I look at this, compared to where we were last year, it’s early. What we’ve been doing is working, and I feel very good about the trajectory that we’re on. 

Logan Finney   

And speaking of that $280 million cushion, one could call that a surplus, because it’s over what the state is projecting to bring in. In past years, we’ve had a massive surplus up to in the realm of $2 billion. And the legislature passed, as part of their property tax relief bill, a surplus eliminator to dispense out some of those funds. How has that affected the picture? Is the $280 million that much smaller because of better predictions, or because we are spending some of the surplus? Tell me that story. 

Alex Adams   

Yeah. So we’ve worked very closely with the legislature and budgeting the last couple of years. And we saw a spike in state revenue during COVID. So just for context, in fiscal year 2020, the state was collecting $4 billion in revenue. In 2021, it grew to $5 billion in revenue. And in 2022, it grew to $6 billion in revenue. So went from $4 billion to $5 billion to $6 billion in a three-year stretch. That’s 20% year-over-year growth. I don’t think there is anyone that thought that was sustainable. And a lot of it was driven by heavy debt finance spending at the federal level, when the Fed sent everybody $1,200 or $1,400 checks. You sell a lot of E-bikes, you sell a lot of kayaks, a lot of people eat out meals that they wouldn’t have eaten out otherwise. So we saw that move sales tax collections in a manner that nobody predicted was going to be sustainable. But what we did is we took those one-time collections and used it to pay off state building debt in the bond payment program. We put a record amount of resources into deferred maintenance at state facilities and bridges. So just one example, we’re putting $400 million to repair and refurbish old bridges that had load postings or were restricted or rated as structurally deficient by engineers. So we took a lot of that surplus that accumulated for one-time expenses, things that will have benefits for generations of Idahoans. But we didn’t build that into ongoing spending. We always knew that revenue was going to fall off. And we built this year’s budget around $5.5 billion in revenue. That’s partly because of COVID aid wearing off, but partly because of sequential tax cuts, as you mentioned. So revenue dropping was always predicted, both through rational policy decisions that have been made by the legislature and signed by the governor, as well as a weaning off of record levels of debt financed federal spending. And other states didn’t accurately judge how much of their revenue was one-time in nature. And they’re having to make some pretty draconian moves right now. And we’re just not looking at that right now, because of the decisions that have been made. 

Logan Finney   

And that is panning out in the numbers that you guys are seeing? We are on kind of the downward trend there? 

Alex Adams   

Yes, so it’s starting to come down. We built this budget around $5.5 billion in revenue, and then it is projected to grow. But nowhere at the levels of 20% that we saw during COVID. We’re still seeing in-migration. It’s just closer to pre-pandemic levels than pandemic levels. We’re still seeing housing starts, just closer to pre-pandemic levels than at the peak of the pandemic. So I feel good about how Idaho accurately judged the one-time nature of a lot of that revenue increase, and while other states unfortunately plugged it into ongoing spending, we returned some of it to the taxpayers. And we put it into one-time things that will lower our outyears costs, and build our rainy day funds so that we can hedge for any uncertainty that there might be ahead. 

Logan Finney   

And as you referenced, the legislature moved to a flat income tax rate where everyone, regardless of what would have previously been different tiers of income, everyone pays a 5.8% rate. That’s on top of lowering rates in successive years. Is there any chance of lawmakers perhaps getting a little too tax cut-happy in the good years and possibly digging us into a little bit of a hole? 

Alex Adams   

So that’s something that’s always discussed with the legislature. I mean, I think that’s why it was done sequentially, went from 6.5 percent as the top rate to 6, then went from 6 to 5.8. In doing so, we consolidate brackets. We used to have seven different brackets and consolidate them into essentially two brackets, everyone pays 5.8 percent over $2,500 in unadjusted income. Partly why it was done sequentially was to make sure that we were making wise decisions, that we were accurately judging what the ongoing economic situation was going to be in filtering out those one-time COVID anomalies. And you know, each state gets a scorecard. Each state goes in front of the ratings agencies, Moody’s, Fitch, S&P, and Idaho has been upgraded to triple A status on both Moody’s and Fitch, frankly, at the same time, the US government was downgraded from triple A status to double A status. If you read the reports from the rating agencies, they opine on our tax cuts, and talk about how we did it, and they believe it’s sustainable, and that’s reflected in their rating, 

Logan Finney   

And with the improved ratings, that also leads to savings down the road when it comes to borrowing rates, right? 

Alex Adams   

Absolutely. Any state entity that goes through capital financing is a beneficiary of the state’s improved credit rating. 

Logan Finney   

So that paints a pretty good income tax picture. When it comes to the sales tax revenues, some of those are now being directed toward public defense and school district facilities before that money makes it into the general fund. How is that picture right now? 

Alex Adams   

We’ve been talking most of today, how we’ve performed relative to forecast. If you look at how we performed relative to this time last year, sales tax is down 20% year over year. But that’s misleading because of many of the things that you’re talking about. The legislature passed a bill this year that took 4.5% of sales tax and redirected that to property tax relief. It was one of the largest property tax cuts in the history of the state. In addition to that, online sales tax is sequestered in a fund that pays for certain things. Public defense, that takes it off of the county rolls and therefore provides an additional batch of property tax relief to local taxpayers.  

But also on top of that, the governor had called a special session last year where we took $410 million out of the sales tax stream and redirected that to schools and to post-secondary institutions. It was the largest investment in education in the history of the state. So we have property tax relief, public defense and online sales, and then the education funding that’s coming out of the sales tax, which is the primary driver of that year over year decrease.  

Once you filter that out, and look only at how sales tax is performing relative to forecast, we’re off by about 3% So we’re running 3% under forecast on sales. Is that concerning? Potentially. But as I said, it’s early. We were behind on sales this this time last year. I think everybody that’s watching this knows we’ve been dealing with historic rates of inflation. While it seems to be receding slightly lately, everything is relative. And prices perhaps have pushed up higher than wages. Maybe it’s indicative of people changing their habits. Maybe it’s predictive of them waiting to make all their purchases for Christmas. It might be a timing issue. I don’t know that there’s too much I would read into it at this point. 

Logan Finney   

All right. Alex Adams, administrator with the Division of Financial Management. Thanks so much for joining us this week. 

Alex Adams   

Thank you. 

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Editor’s note: This conversation was lightly edited for clarity.