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 , from the Colorado Legislative Council鈥檚 nonpartisan staff. That鈥檚 up from initial JBC projections of a $380 million spending gap.
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All in an economy that continues to grow 鈥� 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鈥檛 do anything about it before the legislative session ended.
鈥淚t鈥檚 not because of any rainy day that occurred, it鈥檚 actually due to overspending that occurred during the session,鈥� Kirkmeyer said. 鈥淲e could have curtailed that spending and we chose not to.鈥�
This year鈥檚 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 before it expires at the end of December, lawmakers 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鈥檚 general fund. The swap, however, was front-loaded in a way that knocked this year鈥檚 budget out of balance.
鈥淐umulatively, this is a bill that puts the general fund in a better financial position,鈥� Greg Sobetski, the chief economist for Colorado Legislative Council Staff told the JBC. 鈥淏ut that鈥檚 not clearly represented here because the initial hit in (the 2023-24 budget) is greater than the initial savings.鈥�
The accounting move wasn鈥檛 the only thing causing a shortfall, though. An audit in February found that , after the state comptroller incorrectly designated some health insurance premium taxes exempt from the Taxpayer鈥檚 Bill of Rights. The JBC was briefed on it in late April, after lawmakers had already finalized the budget.
鈥淲e already knew that鈥� was coming, Kirkmeyer said. 鈥淎nd we allowed that over-expenditure to keep going.鈥�
The $2B to $3B elephant in the room
The future budget challenges don鈥檛 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, , 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鈥檚 budget director, Mark Ferrandino, told the JBC that if either one passes, the legislature would have to make draconian cuts to balance the state鈥檚 finances.
Initiative 108, which hasn鈥檛 qualified for the ballot yet, would post a more immediate challenge.
If it passes, Ferrandino that Colorado could see the return of the , $800 million in cuts to higher education, a $450 million cut to local highway funding and layoffs in the state judiciary. Medicaid providers 鈥� far from getting the needed to keep clinics open 鈥� would be at risk of closures and further consolidation, particularly in rural areas.
And even that wouldn鈥檛 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鈥檚 higher than the legislative analyst鈥檚 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 requires the state to 鈥渞eimburse local districts for revenue lost as a result of these changes.鈥�
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鈥檚 not how the governor鈥檚 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鈥檚 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.
鈥淭hese ballot initiatives are trying to take a broad brush that have consequences that are significant,鈥� Ferrandino said. 鈥淎nd I think it鈥檚 important that people understand that a cut like this really is going to have recessionary impacts to the state funding of critical state programs.鈥�
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鈥檛 ultimately fall by as much as expected. But economic forecasters assumed they would, projecting a 16.3% drop in state revenue.
Under the , 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鈥檛 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.
