More state budget cuts looming as economists lower estimates for tax revenue for 2012-13
Colorado faces another round of potentially deep budget cuts in the 2012-13 fiscal year as the Colorado Legislative Council Staff (LCS) recently lowered its projections for state revenue.
The LCS projections for revenue, when combined with other factors driving the state budget, mean Colorado is facing budget cuts of at least $173.3 million in 2012-13.
In its September report, LCS lowered its projections for General Fund revenue for this year (2011-12) and next year (2012-13) by $311 million from what it estimated in June. When other critical factors are included — inflation, the almost certain rise in demand for services and the loss of one-time sources of revenue that were used to balance the current budget — the new estimate means the state will again have insufficient tax revenue to continue providing the same level of services. If the economy continues to struggle, the expected shortfall could worsen.
General Fund revenue expectations lowered
For 2011-12, the state is expected to bring in $64 million more than has been appropriated, which equals less than 1 percent of the General Fund portion of the budget. The revenue cushion has been lowered by $109.6 million from three months ago. Any further downturn in the December forecast could force lawmakers to cut programs in mid-year again.
However, the lower forecast for this year, means less unspent money will be carried over to next year. For 2012-13, the LCS projects 4.8 percent growth in General Fund revenue. The General Fund is expected to reach $7.58 billion, but that would still be $201.4 million lower than the June estimate. The combination of the reduced revenue from both years means LCS expects $311 million less for next year’s budget than it had previously anticipated.
Size of shortfall still in flux
The LCS estimates focus on revenue but do not try to calculate the budget shortfall facing the state. Natalie Mullis, chief economist for LCS, told the Joint Budget Committee that based on recent history a ballpark estimate on the cost of inflation and the rising demand for services for 2012-13 is roughly $300 million. Complicating the shortfall is one-time money the General Assembly used to balance this year’s budget. The legislature spent $294.4 million from the expected reserve account for Fiscal Year 2010-11, which ended July 1, and used it to cover some of the cost of the 2011-12 budget. It’s the equivalent of dipping into a savings account to pay a monthly mortgage. It works once, but it’s not a sustainable solution. The following table details how the budget shortfall reaches $173 million based on the LCS revenue projections.
The shortfall estimates are even larger when the more conservative revenue projections from the Office of State Planning and Budgeting (OSPB), an Executive Branch agency, are taken into account. OSPB estimates the state will collect $307.5 million less what LCS expects between now and June 31, 2013. Using the OSPB projections, the shortfall grows to $480.8 million.
Cash Fund revenue growing, but at a slower rate
Cash funds account for an increasing portion of the state budget. Just as LCS has lowered its estimates for General Fund revenue for this year and next, it also reduced estimates for Cash Fund revenues in both years. Cash Funds are separate funds received from taxes and fees that are earmarked for the programs or purposes for which the revenues are collected.
LCS projects Cash Fund revenue for this year will be $98.2 million lower than what it estimated in June, and the Cash Fund revenue for next year will be $24.2 million lower than the previous estimate. Still, largely due to previously planned increase in the Hospital Provider Fee, total Cash Fund revenues are expected to grow 8.7 percent this year and 9.8 percent next year.
The projections have been lowered due to changes in the estimates for severance taxes, gaming taxes and some transportation-related revenue. Severance taxes are probably the most difficult revenue source for state economists to predict, resulting in more volatile forecasts than those for other taxes. The Highway Users Trust Fund, which gets more than half its revenue from gas taxes, is expected to experience a 0.8 percent decline in revenue this year. Finally, projections for Gaming Tax revenue have been lowered, in part because the Colorado Limited Gaming Control Commission lowered the tax rates on the profits made by casinos.
Colorado economy uncertain
Economists for both the LCS and OSPB expressed concern about the future of Colorado’s economy. “Although the chances of a recession are rising, evidence appears to point to a continued but very slow expansion,” LCS wrote in its Sept. 20 report.
The pace of economic growth varies throughout the state. Higher agriculture and oil prices are helping some regions. However, low natural gas prices have slowed production on the Western Slope, and reduced federal spending is expected to hurt the Colorado Springs area, where defense spending plays a large role in the local economy.
If Colorado’s economy veers toward recession, or even slower growth, that would likely hurt the state budget more because most General Fund revenue comes from the income and sales taxes.
General Fund transfers expected to be delayed
Next year, Fiscal Year 2012-13, is the first year that the changes brought about by Senate Bill 09-228 could potentially direct money from the General Fund to transportation, capital construction and the reserve fund. However, those transfers are not expected to happen because they are dependent on state personal income growing at least 5 percent. In 2012-13, personal income is expected to grow by just 4.1 percent. If personal income growth is sufficient to require the transfers, that would mean $224.4 million being moved out of the General Fund. While that transfer could exacerbate the shortfall, it would probably correspond with income tax revenue would be bolstering the General Fund, so it is difficult to measure exactly how that would affect the state budget.
More revenue could prevent budget cuts
Gov. John Hickenlooper will propose his 2012-13 budget in November, using the September OSPB estimate as his guide. Both OSPB and LCS will revise their forecasts again in December, giving legislators more timely data to consider as they amend Hickenlooper’s proposed budget during the 2012 General Assembly session. Regardless of whether the shortfall is closer to $200 million or $500 million, the only way for the state to avoid another round of budget cuts that hurts health care, child protective services, public safety, schools and colleges, is for voters to increase revenue.
Contact: Terry Scanlon
Fiscal policy analyst
303-573-5669, ext. 311
Released Sept. 29, 2011
