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February 1, 2021

Smith's Research & Gradings

KBRA: State Revenues Beating Predictions

KBRA: State Revenues Beating Predictions

Kroll Bond Rating Agency's (KBRA)review of state revenue was lead by Paul Kwiatkoski, Managing Director.  The State revenue losses show the results may be much less severe than originally estimated. In the months following the onset of the Coronavirus Pandemic, "the expected economic knock-on effects were severe due to the near cessation of economic activity throughout parts of the nation," with conditions only gradually improving through 2020 and beyond. Many states based their 2021 estimated revenues based on these early forecasts.

Estimates of national unemployment rates played a large roll in the miscalculations, Mr. Kwiatkoski explained. The Center on Budget and Policy Priorities (CBPP) based its state revenue estimates of May 2020 on Congressional Budget Office (CBO) forecasts of national unemployment rates that were expected to hit 11.5% at year-end 2020,before falling to 8.6% at year-end 2021.

"Other observers forecast even more dire economic conditions," Mr. Kwiatkoski said. "Goldman Sachs forecast a peak unemployment rate of 25% in the second quarter 2020. The actual level of unemployment was not this severe,having peaked at 14.8% in April 2020 before dropping to 6.7% at the end of 2020. In light of economic performance faring better than originally forecast and the strong link between state revenue collections and economic performance, state revenues were underestimated in many budget forecasts."

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