The economic and revenue forecast council (ERFC) is required to prepare three separate forecasts of state revenues: a baseline forecast, a pessimistic forecast and an optimistic forecast. The pessimistic and optimistic forecasts help to quantify the ERFC’s uncertainty concerning the baseline. The ERFC further quantifies this uncertainty by assigning probabilities to the three forecasts.

The baseline forecast gets most of the attention because it is used by budget writers. This year it’s important to look carefully at the pessimistic forecast.

The ERFC issued new forecasts on February 16. The new baseline forecasts are $60,238 million for 2021–23 and $64,047 million for 2023–25. These forecasts are up considerably from the baseline forecasts at the time the original 2021–23 budget was adopted: $56,615 million for 2021–23 and $59,906 million for 2023–25.

Responding to the increased baseline forecasts, the Senate Ways and Means Committee chair and the House Appropriations Committee chair proposed supplemental budgets that would dramatically increase spending in the second year of the current biennium. Emily has written on these proposals here, here, here and here.

Under the pessimistic forecast adopted on February 16, revenue falls short of the baseline forecast by $2,314 million during 2021–23 and by $5,222 million during 2023–25. Under the optimistic forecast revenue exceeds the baseline forecast by $2,534 million in 2021–23 and by $5,546 million during 2023–25. The ERFC assigned 50% to the baseline case, 30% to the pessimistic case and 20% to the optimistic case.

Over the last four days, the likelihood of the pessimistic forecast has risen significantly. At the ERFC’s February 16, meeting, Executive Director Stephen Lerch cited three primary negative risks: a Russian invasion of Ukraine, inflation and the emergence of a new covid variant. In the week since the meeting, Russia has invaded Ukraine, while the U.S. and other nations have imposed economic sanctions against Russia. These sanctions, particularly those related to oil and natural gas, are sure to exacerbate inflation. While we have yet to see the emergence of a new covid variant, I wouldn’t bet against that happening.

A healthy dose of pessimism is in order.