Despite Economic Growth, Colorado Faces Rocky Road to Budget Balance

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DALLAS — Colorado's growing economy should mean rising revenues for state government, but maintaining a balanced budget will still prove difficult for years to come, according to researchers at Colorado State University.

The challenge arises from layers of voter-induced constitutional amendments such as the Taxpayer Bill of Rights that cap how much revenue the state can retain and how funds can be used, said Charles Brown, director of the Colorado Futures Center at CSU.

"Colorado has one of the most complex state budgets in the nation, not by virtue of the dollar figures — other states are much bigger — but due to the many competing financial caps and spending requirements that have been added to the state constitution over the years," Brown said in a statement when the 2013 Colorado Sustainability Study was released in early December.

"For state lawmakers, meeting the long-term needs of Colorado citizens under this web of incongruent constitutional rules is a delicate balance that can easily be upset by outside factors or the unanticipated impacts of their own actions," he added.

In the General Assembly session that begins Jan. 8, Colorado lawmakers will confront long-term growth in demand for funding for public education and Medicaid programs.

The state's Office of Planning and Budgeting reported that Colorado's general fund ended fiscal 2013 with a $1.5 billion balance, representing 19.6% of appropriations before transfers above the state's 5% reserve target to the state education fund. The office also projects that Colorado will end fiscal 2014 with a general fund budgetary balance of $561.2 million, or 7% of appropriations, which is above its 5% target before transfers of excess revenues to other funds.

Gov. John Hickenlooper has released a fiscal 2015 budget proposal that would increase general fund appropriations 4.5% and aim for a 6.5% reserve level, as well as repaying $109.4 million of cash funds previously transferred to the state's general fund.
Colorado estimates a 11.7% increase in state individual income tax revenue in fiscal 2013 and projects a 1.2% decrease in fiscal 2014, before rebounding to 7.7% growth in 2015. Individual income tax made up about 65% of state general fund revenue in fiscal 2013.

The state estimates sales tax grew 5.7% in fiscal 2013 and is projected to increase 4.7% in 2014 and 5.7% in 2015.
The state does not forecast making any refunds to taxpayers under its constitutional TABOR limit in the near term, since revenue will still be about $576 million below the TABOR limit in fiscal 2014.

When TABOR limits do begin to kick in, budget gaps are expected to grow, rising to $1.5 billion in fiscal year 2024-25 and climbing to a $2.9 billion-a-year by fiscal year 2029-30, according to the CSU study.

The study says that a hospital provider fee created in 2009 to pay for the expansion of Medicaid will widen a conflict with Colorado's constitutional revenue and spending limits.

As taxpayers start receiving constitutionally mandated refunds, lawmakers will still be facing a shortage of revenue due to the new commitments, said the CSU study's lead economist, Phyllis Resnick.

"It creates a scenario where lawmakers will be forced to look at deep cuts to public safety, higher education, human services, the court system, and more at the same time the state will be required to deliver substantial tax refunds to citizens," Resnick said.

Colorado voters approved the TABOR Amendment in 1992, restricting revenues for all levels of government in the state. Under TABOR, state and local governments need voter approval to raise tax rates and cannot spend revenues collected under existing tax rates if the revenues grow faster than the rate of inflation and population growth. That means an improving economy does not provide an automatic cushion for state, local and school district budgets.

Standard & Poor's calls voter initiatives "a major factor in state operations."

Referendum C, which passed in November 2005, put a temporary moratorium on TABOR, allowing the state to retain more than $6 billion in revenues from fiscal years 2006 to 2010. The TABOR limits resumed in fiscal 2011, reset at the highest state revenue level of the preceding five years.

Amendment 23, approved by voters in 2000, required the state legislature to annually increase K-12 school funding by "inflation plus 1%" through 2010 and at the rate of inflation thereafter. It required funding for special education and transportation to increase at the same rate.

Another voter approved initiative lowers residential assessment ratios compared with commercial property.

"Combined, these two initiatives have had the effect of increasing state funding for local school operations, and to some extent crowding out general fund appropriations for other purposes," said S&P analyst David Hitchcock in a November report.

In November 2010, Colorado voters rejected measures that would have prohibited state borrowing and cut income and vehicle taxes. On Nov. 5, state voters defeated a proposed voter initiative that would have raised income tax rates and dedicated the new revenue to increased school spending.

The Colorado Constitution prohibits long-term general obligation debt, but the state has issued general fund appropriation-backed lease revenue debt for a number of general governmental purposes, including school facilities and prisons. The state has not restructured debt other than for ordinary refunding issuances for savings, according to S&P.

On Thursday, Colorado issued $210 million of tax revenue anticipation notes to smooth cash flow to the school districts. School districts participate in the program's note offerings that are typically issued semi-annually each fiscal year, depending upon their individual cash flow cycles.

Economists and ratings analysts generally agree that harsh budget measures that Colorado and other states took during the Great Recession have left governments in a good position for the recovery.

"Many states approach 2014 with stronger budget reserves and, perhaps more importantly, significantly improved structural alignment between revenues and expenditures," according to a separate S&P outlook on state credits issued Dec. 17.

"It's sort of a perverse irony that a recession, which had so many negative impacts for Colorado families and businesses, actually improved the long-term fiscal outlook for state government," Resnick said.

The Colorado Futures Center suggested that the state could partially address the long-term funding gaps by seeking ways to remove the hospital provider fee from the state's revenue and spending caps, a step that would reverse a portion of the potential budget cuts but that would also likely erase refunds for taxpayers. Reforms to the state's sales tax system would boost revenue but would also require a statewide vote, researchers said.

"There aren't any easy answers or silver bullets, and government cannot fix the challenge outlined by this study by simple across-the-board spending cuts or tax rate increases," Brown said. "It's going to take a structural approach to a structural problem, blending thoughtful and creative solutions to really get at the root issues threatening Colorado's long-term fiscal health."

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