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The shortfall between revenue and demand for state services approaches $2 billion next year

Recent news from state officials that modest increase in revenue will mitigate the degree of budget cuts for the upcoming year, 2011-12, generated some sense of relief among policy makers at the Capitol that the state’s fiscal crisis may be improving. But a closer look at the numbers reveals of bevy of ominous news:

  • Colorado still faces a $450 million shortfall for 2011-12
  • Cuts to public sector jobs, like those that will be included in the 2011-12 budget, will slow, not help, economic growth.
  • Even before those looming job cuts are factored in, the budget is facing yet another $720 million shortfall in 2012-13.

Even worse, an analysis of the gradual erosion of support for key state services shows the funding gap is much larger.

  • The state would need to spend $1.8 billion more than the 2011-12 budget proposed by former Gov. Bill Ritter and amended by Gov. John Hickenlooper to meet the increased demand that resulted from the recession.
  • To keep pace with increased demand the next year, 2012-13, the state will need to spend $2 billion more than the revenue expected to be generated from taxpayers.

Those facts underscore the need for comprehensive fiscal reform that will not only address the structural problems in the state budget but also generate more revenue. Even though the projections from the Office of State Planning and Budget (OSPB) and the Legislative Council Staff (LCS) call for economic growth that will boost tax revenues in 2012-13, the growth will not be sufficient to even keep up with inflation and caseload growth for the recession-induced, trimmed-down version of the state budget.

Spending cuts adding up
For the past three years, Colorado lawmakers have cut spending repeatedly to balance the budget. Not only did the recession cause revenue to decline, but the state also maintained an unsustainable budget formula that made it impossible to continue meeting the demand for government services. The cuts have come in several forms. In some cases, programs, units within institutions and specific positions have been eliminated. But more often, the cuts have come in the form of underfunding – asking state workers to do more with less. Although overall spending has increased in certain areas of the budget each year during the recession, the spending has not risen at the same pace as inflation and caseload growth. As a result, the state is spending less, in terms of General Fund spending, per client or caseload in kindergarten through 12th-grade education, colleges and universities, Medicaid and prisons. Figure 1 shows the difference between the actual and projected levels of General Fund spending and the amount of General Fund money that would be needed to keep spending at pre-recession levels, taking into account inflation and caseload growth.

As the chart shows, for the current year, the state is underfunding services by nearly $1.6 billion. That number is expected to grow to nearly $2 billion for the 2012-13 budget. By that point, the state will have underfunded services that protect Colorado families by $6.8 billion during the four-year period.

 

Economic growth predicted
The LCS and OSPB forecasts project a variety of economic indicators through 2013. Both agencies project steady improvement for nearly every economic indicator they measure. The OSPB forecast includes a few more indicators than LCS. The OSPB forecast offers encouraging signs for the next three years.

  • Inflation-adjusted Gross Domestic Product and per-capita income are expected to exceed to pre-recession highs for the first time in 2011 and grow each of the two years after that.
  • Personal income and retail trade are expected to grow all three years.
  • Unemployment is expected to decline each year.
  • Housing permits are expected to grow each year and exceed 2008 levels by 2013, although the number of permits expected in 2013 would still be far fewer than the high of 2006.

However, the positive economic indicators need to be taken with a note of caution. The LCS chief economist, Natalie Mullis, told lawmakers in a recent hearing that layoffs to public sector workers at the state and local government levels will hinder economic growth. And spending cuts being considered by the General Assembly could mean the loss of at least 3,600 positions in schools and state government offices throughout the state.

Tax revenue remains insufficient
One of the tricky facts about Colorado’s revenue crisis is that even when General Fund revenue grows – basically sales and income taxes – it can still be insufficient. By insufficient we mean revenue falls short of what is needed to continue providing the current level and quality of services to the growing population and growing demand for those services.

 

The LCS March forecast projects the state budget faces a $450 million shortfall for the 2011-12 budget. That takes into account – and this was the good news from the legislative hearings – that the state will collect $215 million more in the next 15 months than had been expected. Even with the increased revenue in the short term, and the projection of an extra $500 million for 2012-13, LCS projects a $720 million revenue shortfall for 2012-13. That shortfall represents the difference between projected revenue and essentially flat spending.

Gov. John Hickenlooper has cautioned the increased revenue for this year, while being good short-term news, will not provide a sustainable solution. Much of the revenue increase projected for the current fiscal year, about $126 million, will result from one-time revenue collections that should not be expected to carry forward into future years, according to Todd Saliman, an adviser to the governor and a former OSPB director.

Solutions
The spending cuts for the 2011-12 budget year are almost unavoidable at this point, given the state’s fiscal constraints. But the looming 2012-13 cuts can still be avoided. If voters appprove a revenue increase there could be enough revenue to not only avoid the $720 million in cuts projected by LCS, but also to begin making up for years of dwindling services.

Contact: Terry Scanlon
Fiscal policy analyst
303-573-5669, ext. 311

Released March 31, 2011 

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