Colorado budget facing massive cuts – and next year likely to be worse

Colorado is facing a budget shortfall measured in the billions to pay for schools, roads and other state services — and history suggests next year will be even worse.

“We are going to have to live with a new abnormal,” said House Speaker KC Becker, D-Boulder. “It’s going to be a while.”

The public will find out just how big the immediate problem is Tuesday, as state analysts release an updated economic forecast for the 2020-21 fiscal year. The state could be short $3 billion — roughly 10% of the state budget overall, and closer to 25% of the budget’s general fund, which covers core services.

Lawmakers are constitutionally obligated to pass a balanced budget, so by the beginning of June, one way or another, some significant percentage of spending will be cut. The state’s Joint Budget Committee has already spent seven days rewriting, nearly line-by-line, the budget for the next fiscal year, and it’s been a painful exercise.

Tears have been shed on multiple occasions. The committee’s chair, Rep. Daneya Esgar, D-Pueblo, said weighing cuts to services for adults with severe disabilities “broke all of our hearts.” Also difficult were discussions on cutting Colorado’s tourism marketing budget and nixing a plan to give state employees pay raises. Those employees could soon face furloughs or layoffs.

This kind of hacking likely won’t be a one-time exercise.

“Recall,” said Carol Hedges, executive director of the Colorado Fiscal Institute, that in the last recession, “the worst budget year was not 2008. It was 2009, 2010. It’s the years that follow the immediate shock.

“I think people can expect more four-day school weeks, more crumbling infrastructure. I think we’ll get nowhere on roads. I think we’ll see a steady increase in fees, where Colorado will become increasingly more pay-to-play. If you’re middle income or poor, you’re going to find yourself getting nickel-and-dimed, and some basic services aren’t going to be available.”

Many states will have to confront the prospect of a prolonged contraction. But none of them have TABOR.

TABOR, or the Taxpayer’s Bill of Rights, bars Colorado governments from raising taxes without voter permission. That barrier has meant that state government spending here has, in many ways, not kept pace with the state’s phenomenal growth; Colorado’s 47th in per-student education funding, for one, and has billions in unfunded transportation plans.

TABOR also means that Colorado does not have a “rainy day fund” in the way other states do. When revenues to the state exceed a limit set by TABOR, the state must return the excess money to taxpayers, which has meant that Colorado cannot stash away piles of cash in good years to be used during bad ones at the same level of the other 49 states.

So now, at the onset of a recession, the people running state government are weighing how to keep Colorado afloat. Just how hard state services are hit depends in large part on three factors:

Federal funding

In the federal CARES Act, about $1.7 billion was reserved for Colorado’s state government. But that money is earmarked for new programs in response to the coronavirus. Leaders do not believe they have the authority to use those billions on plugging leaks in the state budget.

Becker called this “insane.”

If in fact Colorado does not receive flexible federal dollars, it’ll mean even tougher decisions in key areas.

Take K-12 education, for one. It accounts for about a third of the state budget. But that spending is complemented by significant local dollars, which account for about a third of overall K-12 spending in the state. Property tax revenue is expected to decline next year, which means the contributions from local governments will go down, which, Becker said, will shift an even greater burden onto the state.

“That could be huge — over $150 million in new shift of cost,” she added.

And, for now, the state does not expect to be able to plug that hole with federal stimulus money. Ditto for transportation, which receives major funding from the gas tax, plus a slew of fees — on car rentals and registrations, for example — that are also primed to produce much less money at least for awhile.

Emergency tax?

TABOR contains a provision that allows the legislature to pass a temporary emergency tax without seeking voter approval.

This authority has never been used before, so its application is a bit fuzzy even to fiscal policy experts and state lawmakers. TABOR clarifies, first of all, what can not be considered an emergency: “economic conditions, revenue shortfalls, or district salary or fringe benefit increases.”

The phrase “economic conditions” is open to interpretation. Of course, Colorado’s economic conditions are the reason for these present challenges. But the reason for that reason is not economics but rather public health. It’s unclear whether that’d be a satisfactory argument for any General Assembly moved to implement an emergency tax, and Douglas Bruce, who authored TABOR, did not respond to a phone call from The Denver Post seeking clarity on what he meant when he wrote that language.

The Democrat-controlled legislature is being encouraged, largely by liberal fiscal policy groups, to seriously consider exercising this rare flexibility authorized by TABOR, a famously inflexible document.

“It’s a conversation that needs to happen,” said Hedges, of the Colorado Fiscal Institute. “If this isn’t the circumstance under which this can be used, it’s hard to contemplate when it can.”

Among the stipulations written into TABOR’s section on emergency taxation: A two-thirds majority of a state or local body must support an emergency tax for it to pass. Democrats may well be able to find two-thirds support in the House, but they have a much narrower majority in the Senate, and it appears unlikely, at the moment, that many Republicans would entertain the idea.

“I think it’s incumbent on all of us as elected representatives to consider any conversation,” said Sen. Paul Lundeen, R-Monument, who sits on the Finance Committee, “but that’s not to say I’m inclined to seek taxes from businesses. You want to talk cutting meat and bone? Well, the meat and bone of our economy are the businesses, the job creators. Putting a burden on those job creators, on those workers — that, I think, would be a mistake.”

Gov. Jared Polis, a Democrat who has at times clashed with his own party on fiscal policy, seems to agree: A recession is not the time for new taxation, he recently told reporters.

Ballot measures

Well before the virus arrived, 2020 was shaping up to feature a major ballot fight over taxation. Specifically, a slew of liberal groups had organized to try to place a sweeping reform on the ballot: Initiative 271 would lower the state’s flat income tax rate for about nine in 10 Coloradans, and raise income tax rates on people making more than $250,000 a year.

The ballot proposal was unveiled the day before Polis announced the state’s first known cases of COVID-19.

If it passes — a big “if,” given that social distancing has made it very difficult to even collect signatures to qualify for the ballot — it will provide an enormous boost to state government funding, with a projected $2 billion per year. Half would go to educator pay raises, and the other half would go to the general fund, which covers areas such as transportation, housing and water.

That amount of money could go a long way toward offsetting expected budgetary shortfalls to come.

And the proposal is popular, according to a May survey of 600 likely voters conducted by the Democratic polling firm Keating Research. The survey found 69% of respondents supported Initiative 271’s plan and 18% opposed with a 4-point margin of error.

All that support may not matter much this year, since Initiative 271 needs at least 124,632 petition signatures to qualify and the pandemic poses a huge obstacle.

“But we don’t feel like it’s an option to stop,” said Scott Wasserman, president of the Bell Policy Center, which backs the measure. “Look at what’s happening to our budget. We’re frankly the only game in town, in terms of a concrete proposal.”

There is another, opposite proposal for the ballot — though it’s not as far along. Sen. Jerry Sonnenberg, R-Sterling, and the libertarian Independence Institute want to cut the state’s flat income tax rate across the board, meaning rich and poor alike get a lower rate, and meaning less revenue generated. He said by text message that they are still moving forward.

Gov. Polis, who seems to align neither with statehouse Democrats nor Republicans on matters of taxation, told reporters last week that he’d like to see a bipartisan solution.

There may be little space for such a thing. It’s possible there is common ground to be found on cutting certain tax breaks the state doles out. Even that won’t be without some controversy — one person’s tax loophole is another person’s business solvency, lawmakers note — but the House speaker said the legislature is prepared to consider cutting or perhaps capping some of these breaks.

“We’re working on it,” Becker said. “We don’t have a lot of time.”

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