Jeffrey A. Roberts is a research analyst at the University of Denver's Center for Colorado's Economic Future.
It is heartening to know that Colorado's economy is finally showing some signs of recovery. As you may have read in a recent article in The Denver Post, more than 30,000 jobs have been added since the start of 2011, and employment growth in the state from September to October was at its highest level since March 2007.
For state government, a healthier employment picture should boost the collection of sales and income taxes – the revenue that finances major General Fund programs including K-12 education, Medicaid and higher education. But this bit of good news hardly spells the end of Colorado's fiscal troubles – which will persist in both the short- and long-term.
In the short-term, General Fund revenues for fiscal year 2012-13 are projected to be 5 percent lower than the pre-recession peak of fiscal year 2007-08. That doesn't sound too bad until you consider that the demand for state services has grown substantially since the recession began. For example, Medicaid enrollment will have increased 72 percent through next fiscal year, the Children's Health Plan Plus (CHP+) caseload grew by 19 percent and higher education enrollment swelled by 20.5 percent.
As the name implies, the Center for Colorado's Economic Future looks at the long-term – and that is where you will find state government's most confounding fiscal problem. It is a structural problem that requires a structural solution.
According to "Financing Colorado's Future: An Analysis of Fiscal Sustainability of State Government," the combined growth rate of the General Fund's three largest programs (education, Medicaid and prisons) will far outpace the growth rate of revenues through fiscal year 2024-25.
Authored by the Center, the report also shows that even a strong economic recovery will not help the state avert the inevitable. Furthermore, absent sweeping policy changes, total state expenditures in fiscal year 2024-25 will exceed tax collections by 20 percent – or $3.5 billion. Expect that gap to widen even more beyond our forecast horizon as the aging baby boom generation causes Medicaid long-term care costs to skyrocket.
An additional and potentially expensive factor that our study did not account for is the impact of the Dec. 9 court decision in Lobato vs. State of Colorado. In that case, a Denver District Court judge ruled that Colorado's school finance system is not as "thorough and uniform," as the state's constitution requires. The decision could increase the state's education funding obligation by billions of dollars a year, depending on the outcome of a likely appeal to the Colorado Supreme Court.
How can we address the $3.5 billion structural imbalance that the Center projects? Cuts alone would drastically change the very nature of state government. We modeled a long-term scenario that protects health care programs (so as not to risk leveraged federal dollars) as well as the prison system and functions required by the state constitution including the governor's office and court system. Balancing the budget this way (and putting the Lobato ruling aside), public school funding by the state would be cut by nearly 20 percent in most years. By fiscal year 2024-25, funding for 10 departments – including higher education, public safety and public health – would be reduced by more than 90 percent.
The magnitude of the projected revenue/expenditures gap suggests that a combination of cuts and tax increases is necessary. But to illustrate how it could be bridged with new revenues alone, we developed a package of taxes designed to grow in step with future spending, limit volatility and better reflect the economy, among other criteria. It includes a sales tax on personal services, a graduated individual income tax and a phased-in uniform mill levy aimed at reducing the state's share of total K-12 education costs.
Our latest effort involves demonstrating how such a package, if fully implemented, would affect median households in each school district. Understanding that most people don't match the median, we are redesigning interactive features on the Center's website so that any Coloradan may calculate how the package might affect his or her own household.
Meanwhile, we continue to brief policymakers and the public on our findings. So far, we have made – or are scheduled to make – more than 80 presentations. A narrated version of our PowerPoint presentation is online.
How can the state solve its long-term and short term budget quandary? Post your thoughts in the comment box below.
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