The state of Colorado will end its budget year June 30 with a deficit of as much as $164 million, forcing it to dip into its reserves as it heads into an election cycle fraught with financial uncertainty.
And the budget picture only deteriorates from there, according to revenue forecasts provided to the Joint Budget Committee on Thursday.
Next fiscal year, which starts July 1, the state will start in a $35 million to $86 million hole that budget writers would have to close during midyear budget adjustments, which take place each year in January. That leaves little wriggle room if something unexpected happens in the meantime, like an uptick in health care costs or a slowdown in tax collections.
If current spending trends continue, lawmakers could then face a projected $572 million gap to close in the 2025-26 budget they must pass next spring, according to one of the forecasts, from the Colorado Legislative Council’s nonpartisan staff. That’s up from initial JBC projections of a $380 million spending gap.
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All in an economy that continues to grow — albeit more slowly than in years past.
The deficit news drew the ire of Republican Sen. Barbara Kirkmeyer of Brighton, who said lawmakers were warned in April that they were at risk of dipping into the rainy day fund and didn’t do anything about it before the legislative session ended.
“It’s not because of any rainy day that occurred, it’s actually due to overspending that occurred during the session,” Kirkmeyer said. “We could have curtailed that spending and we chose not to.”
This year’s shortfall stemmed primarily from an accounting maneuver that lawmakers had been planning for months, but was only finalized in the final days of the legislative session.
At risk of losing as much as $1.6 billion in federal stimulus funding before it expires at the end of December, lawmakers passed a bill trading federal for state dollars in operating budgets across the state government. That allowed Colorado to spend the federal money more quickly on general state expenses, while still preserving the pandemic relief programs past the deadline, using state money instead of federal.
Over the two budget years affected by the swap, the money transfers are designed to largely even out, and would actually produce some savings overall for the state’s general fund. The swap, however, was front-loaded in a way that knocked this year’s budget out of balance.
“Cumulatively, this is a bill that puts the general fund in a better financial position,” Greg Sobetski, the chief economist for Colorado Legislative Council Staff told the JBC. “But that’s not clearly represented here because the initial hit in (the 2023-24 budget) is greater than the initial savings.”
The accounting move wasn’t the only thing causing a shortfall, though. An audit in February found that the state owed taxpayers an additional $34 million in refunds, after the state comptroller incorrectly designated some health insurance premium taxes exempt from the Taxpayer’s Bill of Rights. The JBC was briefed on it in late April, after lawmakers had already finalized the budget.
“We already knew that” was coming, Kirkmeyer said. “And we allowed that over-expenditure to keep going.”
The $2B to $3B elephant in the room
The future budget challenges don’t take into account the elephant in the room: two conservative ballot measures that would slash local property taxes across the state and put a cap on their growth.
One is Initiative 108, a statutory measure that would cut local property taxes by an estimated $2.25 billion, according to nonpartisan legislative analysts, and require the state to reimburse local governments and schools for their lost revenue. The other, Initiative 50, would amend the state constitution to limit property tax revenue growth to 4% statewide each year.
The governor’s budget director, Mark Ferrandino, told the JBC that if either one passes, the legislature would have to make draconian cuts to balance the state’s finances.
Initiative 108, which hasn’t qualified for the ballot yet, would post a more immediate challenge.
If it passes, Ferrandino told the state Property Tax Commission last week that Colorado could see the return of the K-12 school funding shortfall, $800 million in cuts to higher education, a $450 million cut to local highway funding and layoffs in the state judiciary. Medicaid providers — far from getting the reimbursement bumps needed to keep clinics open — would be at risk of closures and further consolidation, particularly in rural areas.
And even that wouldn’t be enough to cover the projected budget hole. Ferrandino expects the state to be required to reimburse $3 billion in tax cuts if voters adopt the measure. That’s higher than the legislative analyst’s estimates, because of disparities in how they interpret which school taxes would be affected.
Initiative 108, being pursued by the conservative groups Advance Colorado and Colorado Concern, would reset residential tax assessments to the equivalent of 2022 levels. If voters approve, the measure would be effective in 2025 for taxes owed in 2026.
Supporters of the ballot measures disagree with both of the state government estimates, telling The Colorado Sun they overstate how much of the tax cuts the state would have to reimburse.
The ballot language requires the state to “reimburse local districts for revenue lost as a result of these changes.”
Karen Crummy, a spokesperson for supporters of the ballot measures, said that reimbursement should only apply in cases where a local government actually loses money from one year to the next due to the tax cut. In other words, the state would not have to reimburse communities where property values rise faster than the cut.
But that’s not how the governor’s office, nonpartisan legislative analysts and the lawyers who advise lawmakers on their bills interpret it. In their view, the state would be on the hook for the difference between taxes that would have been collected under current law and the ballot measure, not for the year-to-year difference in property tax collections.
Even if that interpretation were applied to local governments, the state would still be on the hook to fully fund K-12, which could lose an estimated $800 million in local property taxes.
If the budget fallout predicted by Ferrandino sounds like the sort of drastic measures Colorado would only contemplate during a recession, there’s a reason for that. The potential state budget impact of Initiative 108 is remarkably similar to the sort of cuts Colorado faced each of the last three economic downturns.
“These ballot initiatives are trying to take a broad brush that have consequences that are significant,” Ferrandino said. “And I think it’s important that people understand that a cut like this really is going to have recessionary impacts to the state funding of critical state programs.”
Following the 2001 recession, state revenue dropped 16.7% from its peak, according to a Joint Budget Committee staff analysis. In the wake of the Great Recession, revenue dropped 16.6%.
In the pandemic recession, revenue didn’t ultimately fall by as much as expected. But economic forecasters assumed they would, projecting a 16.3% drop in state revenue.
Under the legislative staff estimates, Colorado would face a 13% cut to its general fund budget to cover $2.25 billion in property tax reimbursements. But the cut under those estimates could be as much as 18%, or $3 billion. The higher number would come into play if the state were required to reimburse an additional $750 million in lost school district taxes that don’t count toward educational programming under the School Finance Act.
Brian Eason covers state politics for the Colorado Sun. His work frequently appears on-air at KUNC 91.5 FM and online at KUNC.org. Contact Brian at brian@coloradosun.com.
