Posted November 12, 2024 by Colorado Fiscal Institute
Governor Jared Polis has unveiled his budget strategy for the 2025-2026 fiscal year, which begins on July 1. This proposal is generating buzz due to some noteworthy cuts aimed at addressing a significant state budget shortfall nearing one billion dollars. You might wonder, what caused this gap? It’s a mix of increasing caseloads, inflation, capital maintenance needs, the ending of one-time money, and some other unexpected cost drivers. Here’s our thoughts on what Governor Polis is planning to mend this financial shortfall. The Governor will present his budget to the legislative Joint Budget Committee on Wednesday, Nov. 13, 2024 at 9:00 a.m. in LSB-B. Tune in here: https://leg.colorado.gov/watch-listen.
Budgeting to the TABOR Cap Doesn’t Allow the State Budget to Keep Up
The year after returning $1.6 billion in TABOR rebates to tax filers, the state budget is dealing with a $920 million funding shortfall. This means the state can’t keep up with inflation and caseload growth each year while budgeting to the current TABOR cap (population + inflation). Or to say that another way, if it weren’t for the TABOR cap, we could have an additional $500 million in next year’s budget for critical services, like K12 and healthcare.
A Sleight of Hand in K-12 Funding
After 15 years of funding schools below the levels that voters mandated in our state constitution, the state finally got the budget stabilization factor paid down to zero in 2024. And after 30 years, the legislature passed a bill to modernize Colorado’s school finance formula. HB24-1448 was set to change how we fund students while adding about $500 million extra dollars to schools over the next six years as it ramps up to full implementation. The Governor’s budget suggests the new school finance formula be pushed to an implementation schedule of seven years instead of six.
Schools have a program called Building Excellent Schools Today (BEST) that uses predominantly marijuana tax revenue to fund capital improvements, like heating and air conditioning and other building improvements. This money is not used for program enhancements or improving teacher pay and benefits. The Governor’s budget suggests tapping into the BEST fund to pay for operational school funding, proposing to shift $60 to $80 million a year that should be used for new school maintenance and construction to pay for the school finance deficit the state is facing.
The biggest impact to schools in the Governor’s proposal is a change to how Colorado counts students. The state currently uses a four-year average of enrollment, but under the proposal, schools would only receive funding based on one year’s pupil count. This will lead to less funding for districts with declining enrollment. So while the Budget Stabilization Factor isn’t technically coming back, changing how we count students in the formula will reduce funding for schools by about $190 million.
Decreasing Car Registration Fees to Free Up General Fund Dollars
Here’s an intriguing paradox: to address the budget deficit, the Governor’s proposal recommends cutting $65 million in car registration fees. How does reducing revenue alleviate a budget shortfall? The answer lies in the nuances of TABOR. Under TABOR, both taxes and fees—including car registrations, are subject to the overall revenue cap. When revenue exceeds these limits, we are obligated to refund money to taxpayers from the General Fund. By lowering car fees, we effectively decrease the TABOR rebate amounts owed from the General Fund. While this may reduce funding for road maintenance, it provides the state General Fund more flexibility.
Other Tricks to Free Up General Fund Revenue
The budget shortfall has been exacerbated by the fact that Medicaid, a health insurance program financed with state and federal money, has grown faster than health officials expected. This added $150 million in costs to last year’s budget. The state budget is already dealing with the wind-down of pandemic relief funding, and there’s now an elevated risk of losing more federal Medicaid spending due changes that could be made by the new Congress. The Governor’s proposed budget calls for no annual increase to the Medicaid provider reimbursement rate.
The plan also suggests privatizing the state’s workers’ compensation insurer, Pinnacol, and moving interest earned on cash funds into the General Fund. It scales back maintenance projects for higher education and recommends diverting some severance tax into the General Fund.
Other Items We’re Watching
Last year, the Colorado Legislature passed HB24-1311, which established the Family Affordability Tax Credit (FATC), providing targeted tax relief to 45% of Colorado families. The extent of the credit’s funding–whether fully or partially–relies on state revenue growth. With a projected revenue growth of 4%, significantly surpassing the necessary 2% growth, the credit is set to be fully implemented in the upcoming year. In the coming years, growth will have to meet a higher threshold of 3.75% to send the full amount to qualifying families.
Current law says a portion of the TABOR surplus will be returned via an income tax rate cut that disproportionately benefits the wealthy. We could restructure that TABOR rebate mechanism into a targeted tax credit to benefit those who will be hurt by the upcoming budget cuts.
The plan doesn’t dip into the rainy day fund, and maintains a 15% General Fund Reserve… though with the passage of Proposition 130 at the ballot, which directs the legislature to provide $350 million of state funding for local law enforcement, the budget crunch got even crunchier, and will require a few more tricks up the sleeve to help with that.
A detailed overview of the Governor’s budget request by Joint Budget Committee Staff is available here.