Colorado Could Face Budget Imbalance for Many Years

Colorado could face a persistent structural budget imbalance for many years to come despite a recovering economy, according to Wells Fargo economists.

Governor John Hickenlooper submitted his budget proposal for FY2012-13 to the Joint Budget Committee Nov. 1. The proposal calls for a total budget of $20.09 billion, an increase of 1.7 percent from FY2011-12, and a general fund budget of $7.39 billion, an increase of 3.2 percent.

However, with the forecast expenditures of $7.98 billion and just $7.60 billion available, the result is a general fund shortfall of $371.92 million. This, combined with a reserve requirement of $307.09 million, means a $679.01 million gap needs to be closed.

Under the governor's proposal, the gap will be closed with $73.2 million in new revenues, $586.3 million in spending cuts and a reserve savings of $19.5 million based on a recalibration of the reserve requirement due to the spending cuts.

Once again, the spending cuts will largely fall on education. By holding K-12 education funding steady at $2.83 billion, the state will save about $350 million. Higher education funding will also be reduced by $60 million.

Another source of significant savings will come from continuing the suspension of the Senior Homestead Exemption, which allows those 65 and older who have lived in their residence for at least 10 years to exempt 50 percent of the first $200,000 of value from their property taxes.

Continuing the suspension of this exemption will save the state $97 million. Healthcare funding will also be cut by $32 million, primarily from cost containment measures for Medicaid such as rate adjustments, service restrictions and financial efficiencies.

Education will once again bear the brunt of budget cuts for FY2012-13, as there are hurdles to balancing the budget in other ways, economist Scott Anderson wrote in a note to clients.

Twelve years from now, Colorado will generate only enough sales, income and other general-purpose tax revenue to pay for the three largest programs in the General Fund - public schools, health care and prisons, according to a University of Denver study released in September.

There will be no tax revenue for public colleges and universities, no money for the state court system, nothing for child-protection services, nothing for youth corrections, nothing for state crime labs and nothing for other core services of state government.

The study says Colorado will likely face a persistent structural budget imbalance for the next 12 years and added that in 12 years Colorado will only have enough revenue to pay for its three largest programs in the general fund, those being public schools, healthcare and prisons.

Restoring the state's graduated income tax, expanding the sales tax to cover services and raising property taxes are some of the study's recommendations. The study also reveals that at some point further cuts to education will violate constitutional mandates.

Colorado's budget is suffering from the aftermath of the Great Recession which, along with the loss of federal economic stimulus funds, is pushing up Medicaid costs. At the same time, a growing population is straining the education system. However, the savings from Medicaid service restrictions in the proposed budget faces hurdles.

On the one hand, some lawmakers do not want to restrict access to Medicaid. On the other hand, the new federal healthcare law prohibits states from reducing the number of people on Medicaid. To do this, the state would need to seek a waiver from the Medicaid provision, which 26 other states are doing.

However, in mid-November the governor rejected calls for requesting a waiver. Complicating matters is the fact that since the Senior Homestead Exemption is a constitutional amendment, congress would need to pass legislation to suspend it, something that is unlikely to happen.

All of this has set up a far-reaching debate about whether to balance the budget by reducing care for poor children, suspending tax breaks for the elderly or freezing education spending. The choices are difficult and, not surprisingly, the differences of opinion run deep.

Furthermore, election results in November showed that tax increases are not too pleasing to Coloradans. Proposition 103, which would have raised income and sales taxes in order to raise nearly $3 billion for education funding for five years, was soundly defeated by an almost 2-to-1 ratio.

Thus, beyond the current budget battle, it appears that Colorado faces years of fiscal struggles, said Anderson.