The Colorado General Assembly starts its 2018 session Wednesday with rising revenues, a growing economy and caution over election-year politics.
“There’s no better time to plan for the future than now,” said lame-duck Gov. John Hickenlooper. “These new resources allow us to take needed strides in bolstering education, transportation and our reserves.”
Democrat Hickenlooper, in the last year of his second term, will see his successor emerge in November from a crowded field of candidates from both parties with no clear favorite.
In the meantime, Hickenlooper is seeking to apply $11.5 billion in general funds to state needs for the 2019 fiscal year that begins July 1.
That represents an increase of 2.6% or $292.1 million over the current budget that ends June 30.
With federal funds, the Hickenlooper spending plan provides $30.5 billion, an increase of $1.09 billion or 3.7%.
The budget request would raise the state’s general fund budget reserve to 7% of spending from the current 6.5% target.
“History tells us to be ready for when times are not as good,” Hickenlooper said. “By building up reserves and shoring our pension plan, this proposal meets the needs of today and provides a buffer for tomorrow.”
Since the budget estimate of last September, estimates have risen based on an improving economy, investor income, and the newly adopted federal Tax Cuts and Jobs Act. The new federal law will increase the amount of taxable income, which is the basis of Colorado’s income tax, officials said.
“It’s not often we find ourselves in a position where resources are available to actually go beyond our initial budget request," Hickenlooper said in an amended budget request. “Education and transportation are grossly underfunded. This new revenue should go to these priorities."
Hickenlooper said the state would also see benefits from Senate Bill 267 passed in the 2017 session. The spending measure increased payments to hospitals and schools and authorized mortgaging state buildings to generate $1.9 billion for transportation. The bill also increased marijuana taxes to the maximum 15%, gave business owners a tax break, and increased Medicaid co-pays for the poor.
However, SB 267 mistakenly halted marijuana sales tax collections for special districts such as the Denver area’s Regional Transportation District and the agency that runs the Denver Zoo and museums. Although legislative leaders from both parties conceded that the oversight was a mistake, efforts to restore the tax to the special districts failed in a special session in October.
With that failure, Hickenlooper is expecting the tax to be restored in the regular session.
Despite that glitch, SB 267 materially and positively changed the state’s financial outlook from the previous year when lawmakers had to close a $500 million funding gap, Hickenlooper said.
Colorado’s legalization and taxation of marijuana is facing a new challenge from the Trump Administration and U.S. Attorney General Jeff Sessions. Sessions announced plans to rescind the “Cole Memorandum,” a measure approved by the Obama Administration to accommodate states that had legalized marijuana.
With the Cole Amendment’s rescission, federal officials can prosecute marijuana enterprises in Colorado, California and 28 other states that have authorized some form of marijuana sales. California’s new law allowing recreational use of pot went into effect Jan. 1.
“Thirty states comprising more than two thirds of the American people have legalized marijuana in some form,” Hickenlooper said in response to Sessions’ decision. “The Cole memo got it right and was foundational in guiding states’ efforts to regulate the production and distribution of marijuana.”
Five years after voters approved legalization of recreational marijuana use, the industry has generated more than $600 million of tax revenue, according to the Colorado Department of Revenue. Sessions’ threat to renew federal enforcement of marijuana laws could disrupt that revenue and roil the banking industry’s involvement.
The initial $40 million collected each year from Colorado’s marijuana excise tax goes toward the Building Excellent Schools Today (BEST) fund that backs certificates of participation for new school construction.
Colorado has no general obligation debt and is among the states with the lowest net tax-supported debt, according to Moody’s Investors Service, which rates the Centennial State Aa1 with a stable outlook. The state's $1.9 billion in outstanding net tax-supported debt places its debt levels 45th among the states as a percent of personal income and 43rd among states on a per capita basis.
Hickenlooper is calling for a total capital construction budget of $312.2 million, with $117 million coming from the general fund. The plan covers $45.5 million for continuing projects, and $71.4 million for new projects.
The proposed budget would increase funding for the Department of Transportation funding by 11%. The net increase is the result of the expected certificate of participation proceeds from Senate Bill 267 passed last year.
With Republicans in control of the state Senate and Democrats leading the House, transportation initiatives and pension overhaul are expected to be political hot potatoes.
With more money available, Senate Republican leaders want to boost transportation funding by $300 million a year, double the amount proposed by Hickenlooper.
“Transportation is going to be key again to see what we can try to get done, to try to get through a split legislature to try to get the funding to bond money to get some of the big projects done,” Senate President Kenneth J. Grantham told Colorado Public Radio in a preview of the upcoming session.
Grantham, who is term-limited, was the chief backer of House Bill 1242 in last year’s session. That bill, which would have raised taxes to provide $3.5 billion for transportation bonds, died in committee in the final days of the session.
House Democratic leaders see transportation as a lower priority than education, affordable housing, child care and consumer financial protections.
Both parties are looking for a politically palatable solution to the state’s pension funding formula. The $44 billion Colorado Public Employees Retirement Association is only 58% funded, according to latest reports. Reducing the $32 billion gap will require more money from taxpayers, public employees or retirees.
Colorado’s term-limited Treasurer Walker Stapleton, who is running for governor as a Republican, said that CoPERA for years based pension coverage on unrealistic investment returns of 8%. Stapleton believes that even the reduced 7.25% should be lowered to 5% or 5.5%.
“A reform package based on the current 7.25% expected rate of return will only lead us back to this very place within the next decade, if not sooner,” Stapleton wrote in a policy statement. “Let’s fix it for good.”