Falling revenues will lead to deeper cuts this year, while an even bigger crisis looms in 2011-12
The September revenue projections produced by the Colorado Legislative Council staff (LCS) and the governor’s Office of State Planning and Budgeting (OSPB) underscored how the state’s revenue crisis continues to worsen. The bad news from the reports can be broken into two easy-to-understand parts:
- First, Colorado is facing another round of cuts to the current budget as Gov. Bill Ritter announced he will outline a plan in October to close a $256.9 million gap in the 2010-11 budget.
- Second, a much larger revenue problem for 2011-12 persists, as the difference between expected revenue and the amount needed to continue services at current levels grew to more than $1.1 billion, $139 million worse than the gap identified by the Colorado Fiscal Policy Institute in July.
The 2010-11 budget: $256.9 million shortfall
The OSPB revenue projections are the most valuable measure for the current fiscal year because the governor will use the OSPB forecast to develop his October budget-balancing plan.
Revenue for 2010-11 is projected to be 4.3 percent, or $307 million, less than what it was projected to be in March, according to OSPB. The March revenue report is significant because it provides the basis for the 2010-11 budget.
OSPB estimates the state faces a $256.9 revenue shortfall this year, even after taking into consideration the measures employed by the governor in August, in his first mid-year budget-balancing plan for 2009-10.
The 2011-12 budget: $1.1 billion shortfall
The shortfall for 2011-12 grew by more than $139 million as the LCS projections for the amount of General Fund revenue available for the 2011-12 budget has declined 3.5 percent from March to September.
The decline in projected revenue, combined with the loss of federal aid, inflation, caseload growth, and the absence of other one-time revenue used in the 2010-11 budget, means the shortfall for the 2011-12 budget has grown to nearly $1.1 billion, as is outlined in Figure 1.
The two shortfalls are not necessarily cumulative
It is not appropriate to add the shortfall for the current year to the shortfall for 2011-12 to develop a total revenue deficit. Whether that is possible depends on how the governor proposes closing the 2010-11 shortfall. If the governor suggests transferring money from cash funds, leaving vacant positions unfilled or other “one-time” solutions, the two shortfalls can be added to identify the cumulative shortfall. If the governor suggests eliminating positions or programs permanently, that would reduce the level of services provided by the state and would therefore reduce the shortfalls in both fiscal years.
No end in sight for Colorado’s revenue crisis
During the next three years — the total forecast period used by LCS —General Fund revenues are not expected to return to pre-recession levels (Figure 2). Even though the total General Fund revenue is expected to rebound this year by 8.9 percent as it grows from $6.5 billion to $7 billion, the total General Fund is expected to increase by just 1.3 percent the following year, 2011-12.
Part of the continued stagnant growth in General Fund revenue is due to the expected slow economic recovery. But it can also be attributed to the state’s upside-down tax system that creates inequalities and allows for inefficient loopholes.
Corporate income tax is the strongest General Fund revenue source
As we consider alternatives for solving the state’s revenue crisis it is, to some extent, helpful to understand how various sources of tax revenue are performing.
Of the three major sources of General Fund revenue — individual income tax, corporate income tax and sales tax — the corporate income tax is expected to grow at the fastest rate during the next two years. Corporate income tax revenue, which accounts for 6 percent of General Fund revenue, is expected to grow 13 percent in 2010-11 and nearly 6.5 percent in 2011-12, while the General Fund as a whole grows just 8.9 percent and 1.3 percent, respectively. Sales tax revenue and individual income tax revenue are both expected to grow by less than 2 percent in 2011-12.
Another significant source for the state budget, especially in terms of establishing the revenue limit allowed by TABOR, is the Cash Fund portion of state revenue, which accounts for 29 percent of the total state budget. Cash Fund revenue is expected to grow at a slightly faster pace than General Fund revenue in the next two years. Cash funds that are subject to the TABOR limit are projected to increase 11.4 percent in 2010-11 and 6 percent in 2011-12. The Hospital Provider Fee and the severance tax account for most of the expected growth in Cash Fund revenue.
The dramatic size of the revenue shortfalls facing the state means deep cuts to state services are almost inevitable, whether the cuts occur as Gov. Ritter offers a budget-balancing plan next month or when the General Assembly meets next year. Regardless, policymakers need to take a balanced approach to balancing the budget that includes considering measures that would raise revenue in order to mitigate cuts to services. But even if lawmakers enact some revenue enhancements during the next General Assembly session, state law would prohibit them from making changes that are significant enough to fund state services at the appropriate level. Ultimately, regardless of what the elected officials do next year, the long-term solution for the state’s revenue crisis needs to come from a grassroots movement of Coloradans and approved by a majority of Colorado voters.
Contact: Terry Scanlon
Fiscal policy analyst
303-573-5669, ext. 311
Released Sept. 29, 2010