April 2015 Monthly Briefing
REVENUE: FUND SWEEPS, FEDERAL SOURCE GAINS, AND HIGHER THAN EXPECTED INCOME TAX RECEIPTS PRODUCE JUMP IN APRIL REVENUES
Jim Muschinske, Revenue Manager
Overall general funds revenues grew an impressive $1.354 billion in April. The significant improvement in receipts was made possible in large part to $1.074 billion in fund sweeps per recently enacted P.A. 99-0002. This infusion of cash into the State’s coffers allowed for payment of a large amount of federally reimbursable bills i.e. Medicaid. The byproduct of those reimbursable expenditures resulted in a sharp reversal of what had been lagging federal source revenues, as receipts grew by $396 million, and are now close to being back on pace to meet expectations.
In addition, despite the current lower tax rate, April’s personal income tax receipts experienced unexpected growth as receipts actually posted a modest gain. While it was always assumed that April would experience a more moderate falloff compared to recent months due to final payments still reflecting the earlier 5% tax rate, the actual increase in gross receipts was unanticipated. In fact, as late as midway through the month, receipts had experienced a decline fairly close to expectations. Then suddenly receipts gathered strength [coinciding with April 15th filing deadline] and jumped into positive territory. While the rate of growth did slow in the closing days of the month, the 3.8% increase in gross personal income tax was unexpectedly strong. The component breakdown of the monthly income tax receipts will not be known until the data are available mid-May. At this time, the abrupt turnaround experienced in the second half of the month is assumed to have resulted from strong final payments, likely the result of nonwage income such as capital gains and dividend earnings. If later confirmed, that would mean that the spike experienced in the second half of the month should be viewed in terms of one-time revenue, with exceptional market and investment returns in tax year 2014 the likely driver.
COMMISSION REPORTS UPWARD PRESSURE ON FY 2015 REVENUE ESTIMATE—DOES NOT TRANSLATE INTO CHANGE TO THE FY 2016 ESTIMATE
On March 10th, the Commission released a revised forecast of FY 2015 general funds revenue totaling $34.099 billion, which was $30 million higher than the forecast released by the Governor in February. During the closing days of March, in order to address the budget gap that had developed in the current fiscal year, the General Assembly passed and the Governor signed into law P.A. 99-0002 which called for execution of approximately $1.318 billion in fund sweeps, bringing the Commission’s expected revenue total to $35.417 billion.
As discussed above, the strong performance of April’s income tax receipts have resulted in upward pressure on that forecast. During testimony provided to the Senate Revenue Committee on April 29th, the Commission discussed and assigned a value of upward pressure on the FY 2015 estimate in the range of $300 million to $500 million. However, and as discussed during the committee hearing, while revenues are expected to exceed earlier expectations for FY 2015, those additional revenues are considered to be one-time in nature, and as such, cannot be expected to repeat in FY 2016.
ECONOMY: SPRING FORWARD, FALL BACK?
Edward H. Boss Jr., Chief Economist
Late this month the Commerce Department released its first estimate of three on the nation’s economy as measured by its Gross Domestic Product. In this advance report, based on incomplete data, it shows the economy slowed sharply in the first quarter of 2015, barely growing at a modest annual rate of 0.2%.
The pattern appears to be reminiscent of last year. A small rise in GDP initially reported for the first quarter of last year was followed by later revisions ultimately showing the economy actually declined at a 2.1% annual rate that quarter. Much of the contraction was blamed on the severe winter and growth rebounded in the second and third quarters. However, following the growth spurt in spring and summer, the pace of the economy slowed again. As a result, 2014 became the fifth consecutive year in which economic growth remained in a narrow range of 2% to 2 ½%, well below those rates shown in previous recovery periods following a recesiion.
Once again, severe winter weather is being cited as a reason for the weak first quarter. One of the missing ingredients in the advance report are March data on net exports, which have been negatively affected by the strong dollar, and could possibly edge the overall rate even lower. As more March data became available showing weakness, many observers pushed back their expectations of an interest rise from June to September or even later. As the weather warms, the strengthening of the dollar appears to have stabilized, and the decline in oil prices seems to have ceased and even edged up from its low, most observers look for economic growth to rebound in the months ahead. Whether this expected improvement in spring continues through the summer setting the course to a faster growth path or, like last year, weakens again in the fall, keeping growth in the narrow range of 2% to 2 ½% like the previous five years, remains to be seen.